"This factory was overbuilt in terms of production capabilities from the day we opened in 2009," president and CEO Francois Olivier said Thursday in a conference call about its fourth-quarter and full-year results.
"We needed to adjust the contract to the new reality of the Chronicle and also this new contract is a lot simpler for the customer to use all the print assets that we have available for a fixed amount of dollars so they can reinvest in the product."
The Montreal-based printer will use the one-time payment expected to be received in a few weeks to pay down its $195 million line of credit while deciding what to do with the proceeds in the longer term.
The changes to the landmark 15-year contract were announced the same day Transcontinental (TSX:TCL.A) reported swinging to a $51.9-million net loss in its fiscal fourth quarter, citing one-time items that included a major impairment charge on a tax asset.
Under the new agreement with Hearst, effective Jan. 1, TC Transcontinental, operator of the company's Fremont, Calif., printing plant, will receive the payment to compensate for $30 million a year in price reductions on future services.
"This means that we have recouped 100 per cent of our investment, therefore we will no longer charge the customer for this," he said, noting that depreciation and interest were the two largest expenses," Olivier told analysts.
The Chronicle will only use two-thirds of the plant's capacity, leaving one machine for exclusive use by Transcontinental to print outside retail printing contracts.
"The key take-away from this new agreement is that it allows us to secure our future cash flows up front, it reduces our risk and it provides us with more capacity to grow our business in California."
The company said the impact on the profitability of TC Transcontinental's Fremont plant would not be significant as the US$200 million up front payment will be deferred and transferred to revenues over the remaining life of the contract.
Transcontinental beat expectations even as it lost $51.9 million in the fourth quarter despite a 12-per-cent increase in revenue, citing one-time items including an impairment charge on a tax asset.
Canada's largest printer posted a loss of 65 cents per share in the quarter compared with $30.8 million of net income applicable to participating shares, or 38 cents per share, in the same period last year.
Revenue rose to $585.1 million from $521.6 million.
Transcontinental noted unusual items totalled $113.5 million in the fourth quarter, including a $57.2-million impairment charge on the carrying value of a U.S. deferred tax asset and $23 million in restructuring costs.
On an adjusted basis, Transcontinental posted a fourth-quarter profit of $61.9 million, or 77 cents per share, compared with $54.5 million, or 68 cents per share, year over year.
Transcontinental was expected to earn 64 cents per share in adjusted income on $598 million of revenue in the fourth quarter, according to analysts polled by Thomson Reuters.
For the full year, the company reported a loss of $183.3 million, or $2.27 per share, compared to net income applicable to participating shares of $120.7 million, or $1.49 per share, in the same period of 2011.
It said the drop was largely due to a $232-million asset impairment related to the media sector, which was non-cash.
"We had a very strong fourth quarter as the synergies from the Quad Graphics acquisition started to ramp up, coupled with the turnaround in the profitability of the media sector."
Olivier said the company's overall profitability should increase next year, but the media segment's growth won't be at the pace set in the fourth quarter.
"We continue to see some headwinds with the soft national advertising market and continued competition in the local market in Quebec."
Drew McReynolds of RBC Capital Markets said the results were "slightly better than expected" on higher media margins, which were a "positive surprise."
Internal revenues grew by 0.2 per cent in the quarter, including a 0.9 per cent decrease in printing and 1.9 per cent gain in media.
Overall margins were better than forecast at 17.2 per cent, helped by a 21.2 per cent margin rate for the printing segment.
Transcontinental completed on March 1 its acquisition of the Canadian assets of Quad Graphics.
It has been consolidating its production in a smaller number of modern plants as it increases its digital media offering. Its printing plant in the Montreal suburb of Lasalle is slated to close later this month, affecting about 150 jobs.
With 11,000 employees, Transcontinental is the largest printer in Canada and fourth-largest in North America. It publishes consumer magazines, community newspapers in Quebec and the Atlantic provinces, and French-language educational resources.
On the Toronto Stock Exchange, its shares closed at $10, up 48 cents, or 5.04 per cent in Thursday trading.Suggest a correction