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Writedown puts Transcontinental in the hole

Workers check a print run at a Transcontinental printing plant

J.P. MOCZULSKI/The Globe and Mail

Transcontinental Inc. blamed a weak national advertising market for dragging down the value of its newspapers and magazines, taking a $180-million writedown of its media properties and posting a quarterly loss.

The Montreal-based company saw growth in its recently restructured commercial printing operations, but weak national advertising forced Transcontinental to take a permanent writedown on the value of its newspapers and magazines, leaving it with an unexpected $106-million loss for the second quarter.

The company owns 175 newspapers across Canada, the majority of them published on weekly or monthly schedules. It also publishes about 30 magazines, including Canadian Living and Elle Canada. Print advertising has fallen at publications across the country as advertisers increasingly turn to the Internet to reach consumers, cutting into margins and putting pressure on publishers to cut costs.

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"We still see net revenue growth in media for the whole year," said chief executive officer François Olivier, adding the media division was sideswiped by $2-million in unexpected recycling fees after the Quebec government set new rates for printers. "But you can assume continued challenging market conditions, including a volatile national advertising market."

He added that the education publishing division, which has benefited from changes to the Quebec education system for the past several years that have come to an end, may also see reduced profit as a result of the "potential impact of the student strikes" rippling across Quebec.

"I would qualify the [advertising] market as being very volatile," he said. "It's very hard to predict. We've seen a slowdown in the growth of digital properties ... advertisers are still trying to find the right mix between Web, paper, new marketing services and a lot of these guys are still experimenting with the transition of the media industry."

The company posted a loss of $106-million, or $1.31 a share, compared with a year-ago profit of $34-million, or 40 cents. Revenue grew to $529-million from $498.7-million, thanks to the acquisition of Quad/Graphics Canada Inc. and new contracts with advertisers such as Canadian Tire.

The printing segment posted 0.2-per-cent growth, while the media segment saw earnings slip by 2.3 per cent in a quarter RBC Dominion Securities Inc. analyst Drew McReynolds called "a modest negative."

While the company was able to extend contracts with its customers, analysts on the company's conference call questioned why Transcontinental would offer incentives before contracts expire. Mr. Olivier said it made sense to renew six multiyear agreements with about $1.5-billion in revenue because Transcontinental will be able to help guide those Canadian retailers toward new printed products over the life of the contracts.

"This was quite unexpected because all of the customers were under contract for some time," he said. "With these agreements, we've secured cash flow for years to come, and it's a testament to customer relations," he said. "It's also a commitment to print flyers being important marketing tools for years to come."

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