DBRS Confirms Transcontinental, Inc. at BBB (low), Stable Trend

DBRS Limited (DBRS) has today confirmed the Issuer Rating and Senior Unsecured Debt rating of Transcontinental, Inc. (Transcontinental or the Company) at BBB (low), both with Stable trends. The rating confirmations reflect Transcontinental’s strong market position in its printing and publishing businesses and progress made with respect to recent investments in packaging businesses. The rating confirmations also consider the negative effect of an ongoing structural shift from print to digital media. The ratings continue to be supported by the Company’s modest financial leverage and relatively robust free cash generation.

Transcontinental’s organic revenue (excluding the positive exchange rate effect) declined 4% year over year because of lower advertising spending by print and media customers. The Company’s total revenue, however, increased 0.6% to $2.00 billion in F2015 from $1.99 billion in F2014, primarily because of the positive impact of the USD exchange rate and consolidation of revenues from recent acquisitions.

The Company continued with transformational initiatives in F2015 that included the acquisition of Ultra Flex Packaging, divestiture of some of its magazine businesses, and sale of real estate. The Company used its free cash flow to finance the purchase of Ultra Flex (USD 80 million) and repay approximately $100 million of debt.

Going forward, DBRS believes that the Company will continue to experience modest erosion in organic print revenues, which will be partially alleviated by new flyer and newspaper outsourcing contracts, and non-recurring contracts such as the 2016 census questionnaire. DBRS also expects the advertising market to remain soft and result in modest decline in the Company’s media revenues in F2016. Packaging revenues are, however, expected to more than double in F2016, from about $107 million to approximately $235 million, largely because of the consolidation of Ultra Flex’s acquisition, and marginal organic growth. As such, total revenues in F2016 are likely to grow in the low single-digits. DBRS expects the Company’s EBITDA margins to expand slightly in F2016 because of cost-containment efforts, closure of underperforming printing plants, and increasing proportion of higher margin packaging revenues. As such, DBRS forecasts that EBITDA will range between $390 million and $400 million in F2016.

DBRS expects the Company’s capital expenditure to decrease to approximately $70 million in F2016 ($87 million in F2015), with declines in print and media more than offsetting an increase in the packaging division. As dividends are expected to remain steady, DBRS forecasts free cash flow (before working capital changes) will increase to between $175 million and $190 million. DBRS believes Transcontinental is likely to use free cash flow for investment in growth and/or to reduce debt. Consequently, Transcontinental’s financial profile should continue to benefit from its relatively moderate debt levels and remain stable over the near to medium term. Transcontinental is Canada’s largest commercial printer, with operations in print and digital media, publishing and flexible packaging. The Company has over 8,000 employees in Canada and the United States, and reported revenues of over $2 billion in F2015.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are Rating Companies in the Printing Industry (May 2015) and Rating Companies in the Publishing Industry (May 2015), which can be found on our website under Methodologies.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.

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