Transcontinental diversifies into plastic packaging to offset printing declines

MONTREAL - Transcontinental Inc. is buying Capri Packaging as it moves into plastic packaging under a diversification strategy aimed at offsetting declines in its traditional printing business and advertising softness in its media division.

The Montreal-based printing company announced the US$133-million acquisition of U.S.-based Capri on Tuesday after reporting net profit increased almost 10 per cent to $17.2 million in its fiscal first quarter despite a decline in revenue.

CEO Francois Olivier said the acquisition of Capri, which provides plastic packaging for cheese and fresh pasta, diversifies Transcontinental's holdings and will add to revenues.

"Printing is not a growth business and media is a transformation business," Olivier said after the company's annual shareholder meeting.

"Packaging for food is evolving, but there's no such thing as a digital transformation and there's growth every year."

Transcontinental is Canada's largest printer and publishes more than 30 magazines including Canadian Living and Elle Canada, as well as books and flyers. It has a network of community newspapers in Quebec and the Atlantic provinces and online portals such as AutoGo.ca and JobGo.ca, and is the owner of the Metro weekday daily in Montreal and co-owner of Metro Halifax.

The company also prints newspapers such as Montreal La Presse and the San Francisco Chronicle under contract.

Transcontinental is also the leading door-to-door distributor of advertising material such as grocery store flyers in Canada, with Publisac in Quebec and Targeo in the rest of the country.

Olivier said the company's printing expertise will help it succeed in the printed plastic packaging business by putting "ink on plastic instead of paper and finishing the product."

"The only thing we have to learn in the next couple of months and years is the raw material. Paper is very different from plastic."

Other companies such as Domtar also have diversified offerings as the Internet disrupts businesses models and consumers use less paper. The pulp and paper company now produces diapers and adult incontinence products.

Transcontinental could eventually make more acquisitions in the packaging business, said Olivier, noting the market is fragmented between big and small players.

"We're not in a rush to do that. We want to learn the business," he told analysts later on a conference call.

Capri Packaging is a division of Schreiber Foods Inc., a US$5-billion, employee-owned dairy located in Green Bay, Wis.

Under the deal, Transcontinental will acquire two plants in Clinton, Mo., which employ about 200 people and generate roughly US$72 million in annual revenue.

Schreiber Foods Inc. has signed a 10-year agreement with Transcontinental to secure Capri Packaging as a strategic supplier of its printed flexible packaging, which represents about 75 per cent of Capri's total revenues.

In Transcontinental's printing division, Olivier said the company recently signed contracts to print the Calgary Herald and the Vancouver Sun, owned by newspaper chain Postmedia Network.

In its media division, the advertising market has been soft for about the last five years, Olivier said, but the situation should start to improve over the next year.

Also on Tuesday, Transcontinental (TSX:TCL.A) announced it will increase its quarterly dividend by 10 per cent, bringing it to 16 cents per share and raising the annual dividend to 64 cents per share from 58 cents.

The company's revenues fell to $499.3 million from $525.6 million in same year-earlier quarter, due primarily to the soft advertising market.

Net earnings applicable to participating shareholders grew almost 10 per cent to $17.2 million or 22 cents per share from $15.7 million or 20 cents a year earlier, boosted by lower expenses but partially offset by higher income taxes compared with the first quarter of 2013.

Adjusted net earnings remained stable at $26.4 million, or 34 cents per share, as did adjusted operating earnings, at $43.5 million. The company attributed those results in part to changes to the company's cost structure and the positive impact of the loonie versus the U.S. dollar.

RBC Capital Markets analyst Haran Posner called Transcontinental's quarterly results "a little soft" but added that the acquisition of Capri Packaging was consistent with its goal of diversifying and using its experience in manufacturing.

Shares in Transcontinental closed down 53 cents or 3.52 per cent at $14.52 Tuesday on the Toronto Stock Exchange.

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