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Edited Transcript of TCL.A.TO earnings conference call or presentation 5-Sep-19 8:15pm GMT

Q3 2019 Transcontinental Inc Earnings Call

MONTREAL Sep 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Transcontinental Inc earnings conference call or presentation Thursday, September 5, 2019 at 8:15:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Donald LeCavalier

Transcontinental Inc. - CFO

* François Olivier

Transcontinental Inc. - President, CEO & Director

* Yan Lapointe

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Conference Call Participants

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* Adam Shine

National Bank Financial, Inc., Research Division - MD, Head of Montreal Research & Research Analyst

* David John McFadgen

Cormark Securities Inc., Research Division - Director of Institutional Equity Research

* Drew McReynolds

RBC Capital Markets, LLC, Research Division - Analyst

* Mark Neville

Scotiabank Global Banking and Markets, Research Division - Analyst

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Presentation

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Operator [1]

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(foreign language) Welcome to the TC Transcontinental Third Quarter 2019 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, September 5, 2019.

I would like to turn the conference over to Yan Lapointe, Director, Investor Relations. (foreign language) Mr. Lapointe, please go ahead.

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Yan Lapointe, [2]

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Thank you, Gabriel, and good afternoon, everyone. Welcome to TC Transcontinental's 2019 Third Quarter Results Conference Call. The press release and the MD&A with complete financial statements and related notes were issued earlier today and are available on our website at tc.tc.

With us today are Transcontinental's President and Chief Executive Officer, François Olivier; and Chief Financial Officer, Donald LeCavalier.

Before I turn the call over to management, I would like to specify that this conference call is intended for the financial community. Media are in listen-only mode and should contact Nathalie St-Jean, Senior Advisor, Corporate Communications, for more information or interview request.

Please be reminded that some of the financial measures discussed over the course of this conference call are non-IFRS. Please refer to the MD&A for a complete definition and reconciliation of such measures to IFRS financial measures.

In addition, this conference call might contain forward-looking statements. These statements are based on the current expectations of management and information available as of today and they involve numerous risks and uncertainties, known and unknown. The risks, uncertainties and other factors that could influence actual results are described in the 2018 annual MD&A and in the latest Annual Information Form.

I would now like to turn the call over to François Olivier.

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François Olivier, Transcontinental Inc. - President, CEO & Director [3]

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Thank you, Yan, and good afternoon, everyone. The quarter marks another step as we continue to progress on our transformation. We continue to optimize our cost structure, to offset lower volume in printing, to realize synergies and our -- in order to improve margins and packaging.

Following the recent announcements, you can see that we have been active in managing our portfolio, and we believe that these transactions will create value for the company. The sale of our Fremont, California facility to Hearst is bringing significant cash, allowing us to accelerate the deleveraging of our balance sheet, in line with our strategy.

As for the acquisition of Trilex, it will nicely complement our activities in Latin America, enable future growth in that region. We will also continue to be active in managing our portfolio in order to be ready when opportunities arise.

Overall, our third quarter results reflect many of the same trends we saw in the first half of the year. Let me highlight some of the key factors that contributed to our results.

In the quarter, the Packaging Sector accounted for 54% of our consolidated revenues and 44% of our adjusted EBITDA. Revenues in Packaging were softer in the quarter due to the anticipated reduction in volume for our consumer and pet food segment, as we have mentioned on our last call, and to a temporary impact of a new European legislation in our agricultural segment in Latin America. In both cases, we expect to see growth next year.

In terms of profitability, we continue to be very pleased with the synergies we realized from our Coveris acquisition and their impact on our Packaging margins in the quarter. Adjusted EBITDA margin continues to improve, moving from 11.7% in Q1, 12.5% in Q2 and now 13.2% for this quarter, and we expect further improvement over the next 2 years.

In addition to our focus on margin improvements, we are also setting the foundations for growth. First, we have a solid portfolio of award-winning products, and we will continue to innovate to ensure we remain ahead of our customer needs. Second, we are also ensuring that we have the right sales team and processes to exceed our customers' expectations and to win new ones. Over the last quarter, we continued to renew multiyear contracts with major customers, giving our business long-term stability.

Overall, we are confident about our investment thesis for the Packaging Sector. While revenues are lower than what we would have liked, margins are trending upward towards our target, and we remain very bullish on flexible packaging as a significant engine of future growth.

Turning to our Printing Sector. The softer results we saw at the beginning of the year continued in Q3, essentially due to a higher-than-expected decrease in printed flyers revenue having direct impact on our profitability. Recently, we took actions to adapt our cost structure to volume to protect our profitability, and our platform optimization initiatives are also progressing well. The first state-of-the-art press from our former plant in Fremont, California is fully operational in Montréal, and the second one in Toronto will gradually be put in service in the next few weeks. The additional capacity from these presses will allow us to complete the closure of Brampton facility at the end of this year as planned. These actions will have a positive impact on our profitability in the fourth quarter of this year with the full impact flowing in 2020.

Recent focus groups with consumers and discussions with our clients continue to confirm that our retailer-related service offering remains a highly relevant and effective marketing tool for Canadian retailers. Looking ahead, we feel confident that the revenues decline over the quarters to come will be lower than what we have seen in the first 3 quarters this year. More predictable revenues combined with our cost optimization measures will help to mitigate the effects of declining volumes on our year-over-year profitability.

Turning to our other verticals. We saw good growth in our premedia and our in-store marketing product offering, a space in which we continue to pursue additional sources of revenues. Regarding our newspaper and magazine printing verticals, the decline in revenues followed the same trends as in previous quarters.

Now for our media activities, once again, we are pleased with our results for the quarter. Our education group drove high revenues growth in the quarter and delivered double-digit EBITDA improvement versus last year.

Let me now say a few words about our sustainability initiatives. In addition to continue investing in R&D to ensure that plastic packaging is effectively managed at its end of life, an important part of our sustainability approach is to work in partnership with others to create a circular economy for plastic as we have done in the past for a circular economy for paper. To that effect, we remain active with our discussions with stakeholders from across the plastic value chain as well as with elected officials from the different government levels.

On that note, I am pleased to announce that we have started to manufacture our new Publisac bags made from 100% recycled plastic. These new bags will remain 100% recyclable and mark a first milestone in the creation of a circular economy for plastic in Québec. They will be rolled out in the Montréal Metropolitan Community in a few weeks and everywhere in Québec by the end of the year.

We would like to also point out that we have released this summer, our latest 3-year corporate social responsibility plan titled Acting Together, which puts down another marker in our sustainability journey by committing to a new set of specific and quantifiable targets. Our 2019-2021 plan features ambitious goal reflective of the ever-evolving and growing environmental and social concerns. Specifically, we set ourselves 11 meaningful objectives along 4 axes: our people, our operations, our products and our communities, including targets to reduce our environmental footprint. Those who have not already read our plan, I would like you -- invite you to check it out on our website.

In conclusion, in our Packaging Sector, we will maintain a strong focus on manufacturing efficiency and make sure to put in place all the required elements to drive long-term growth. We expect the factors that impacted revenues in Q3 to continue in Q4. With that being said, we expect to see good organic growth next year, and we remain committed to continue improving our adjusted EBITDA margin.

On the Print side, we expect to see, in the fourth quarter, the continuation of current trends, but to a lesser extent. Print revenues in Q4 combined with our cost optimization initiative will contribute more going forward and help margins. We will continue to proactively adjust our cost structure to volume trends, and we remain confident that our Print Sector will remain a strong cash flow-generating business for years to come.

Finally, in terms of capital allocation, our top priority is to use our cash flow from operations to continue to deleverage the company.

With that, I'll turn it over to Donald.

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Donald LeCavalier, Transcontinental Inc. - CFO [4]

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Thank you, François, and good afternoon. As you saw in our quarterly reports, our third quarter results reflect many of the same dynamics we experienced in the first half of the year.

In the quarter, both our revenues and our adjusted operating earnings decreased by 4%, mainly due to the decline in our Printing business. For our Packaging business, the combined adjusted EBITDA margin for the sector was 13.2% for the quarter, 100 basis point improvement versus last year. During the quarter, we benefited from cost optimization initiatives, acquisition synergy and lower resin price.

In terms of synergies, we continue to exceed the target set last year, mainly from procurement. In the coming quarters, we should start seeing savings from film and plate in-sourcing and are confident to exceed our USD 20 million of cost savings by May of next year.

Now let me go over some of the elements that affected our profitability in the Printing Sector. The organic decline in our revenues had a direct impact of $12.9 million on our adjusted operating earnings since our platform's structural costs were somewhat flat compared to last year. Note that this amount also include close to $3 million from the transitional service to Hearst, which ended in Q4 last year.

In terms of cash, we had a good quarter for cash flows. We generated more than $64 million of free cash flow before interest and dividend. As planned, we used our free cash flow to repay debt, which declined by $64 million during the quarter, including the effect of the U.S. exchange rate. We also distributed $19.2 million in dividends.

Cash flows from operating activities improved by more than $13 million to about $90 million, net of $13 million of tax payment. We also allocated $26 million to CapEx and paid $18 million of interest expense.

Our effective tax rate in the quarter was 19.2%, which is lower than the 25.8% rate last year. This was mainly due to the Coveris acquisition as we generated more pretax profits in the U.S. and other jurisdictions that had a lower tax rate than our Canadian operations.

At the end of the quarter, our net debt ratio stood at 2.7x, down from 2.8x at the end of Q2 and 3.8x at the end of last year. I would also like to point out that if we include the sale of our Fremont building to Hearst, our pro forma ratio will stand at 2.5x. We are looking at several asset monetization opportunities that could, like the sale of Fremont, help us to accelerate the deleverage of our balance sheet without impacting long-term opportunities. The additional liquidity, in addition to strengthening our balance sheet, will also provide flexibility to pursue opportunities in line with our transformation.

Now to our outlook for the fourth quarter of fiscal 2019. In our Packaging Sector, we expect the decline of revenues in Q4 to be greater than in Q3. You may recall that Q4 last year was a strong quarter for Packaging in terms of revenues. Furthermore, the decrease comes from the same element we mentioned in Q3, lower volume in our consumer and pet food segment, a legislative change having a temporary impact on our Latin America business and also impacted by the lower cost of some resins. We will continue to focus on synergies and manufacturing efficiency to drive our cost down.

In our Printing Sector, we should see a continuation of current trends in most of our vertical, including retailer-related service, but to a lesser extent, for the fourth quarter. It's important to note that we expect some of our cost reduction initiatives, like the transfer of the Fremont presses and the closing of Brampton, to contribute more meaningfully in the fourth quarter, which should help our profitability. We continue to anticipate growth in our in-store marketing product and book printing verticals. As François mentioned, we will continue to carefully monitor print volumes, and we will adjust our cost base accordingly in order to protect our profitability.

We also expect in Q4, the last negative impact of our revenue and profitability of about $3 million related to transitional service that came in last year as part of the Hearst transaction. But as we recently announced the sale of our Fremont building to Hearst, we will recognize and accelerate depreciation of deferred revenues and profit of about USD 10 million in the fourth quarter. These deferred revenues would have been otherwise recognized until 2025 at around USD 2 million annually.

In the Media Sector, we expect continued good performance in terms of revenues and profitability in 2019. For the 2019 P&L, assuming the stock price at the end of the quarter, you should model for full year corporate costs at EBITDA level of about $43 million. As a reminder, a change of $1 in our stock price impacts our result by close to $1 million. Recall that we had a positive impact of the stock-based compensation expense of $13 million in the fourth quarter last year due to the share price movements.

Our financial expense are expected to be between $65 million and $70 million. Our effective tax rate is expected to be in the low to mid-20s range.

In terms of use of cash for the year, you can assume CapEx slightly above $100 million. As for cash tax, for the year, you can assume about $70 million.

To conclude, our priority is to deliver profitable, long-term growth and create value for our stakeholders. In addition to our asset monetization initiative, we expect to continue to generate significant cash flows, which should enable us to allocate capital towards reducing our debt, strengthening our balance sheet and providing flexibility.

On that note, we will now proceed with the question period.

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Questions and Answers

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Operator [1]

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(foreign language) (Operator Instructions) (foreign language) Your first question comes from the line of Mark Neville from Scotiabank.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [2]

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Maybe just the first question on prints. The declines seem to accelerate this quarter. So I'm just curious -- is that specific to the same 2 customers that you spoke to earlier this year. Or is it now a bit more broad-based with the retail services?

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François Olivier, Transcontinental Inc. - President, CEO & Director [3]

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No, it's the same customers. And basically, why we feel more confident going forward is this trend, the strategy of reducing their page count, and all that started somehow in Q4 last year. It was unexpected, but it came. And so when we look forward, we are looking at comparable that a lot less difficult. And we feel that those customer have cut to the level that is -- I don't think it's sustainable for them to cut more. That's what we feel anyway because when we looked at their results in the market, there's certainly an impact on their business of using less flyers. And some have -- some of them have started to push back, again, a little bit more. And that's one thing, easier comparable. And then the other thing is that we have now started to decrease our cost structure. So we're operating with a cost structure that in Q4 that is going to be more effective. And then we are going to complete the shutdown of a huge factory we have in Ontario at the end of the year. So from Q1 and Q2 next year, the cost base will be further reduced. So that's why we feel that the biggest impact of this is -- what was -- is a little bit -- is not going to be as severe going forward than it was in the first 3 quarters of this year.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [4]

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Okay. And in terms of Packaging, I'm just curious just on the legislative changes. Maybe just what they were and why those would have only temporary impacts on the business?

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François Olivier, Transcontinental Inc. - President, CEO & Director [5]

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Yes. Transcontinental is a leader in helping banana producer in Central and South America to protect the crop with plastic bags that have active ingredient in there. And the ingredients varies by regions because the various disease and pest and molds that could affect banana. So we are a very important part of improving yield for farmers. And one of the ingredients that is part of the, I would say, the higher impact, is the market leader, has been banned by European legislation. Europe is a huge export country for our customers. And usually what happen when they do that, they give you a 6-month to a year delay to adjust, and we were aware of that, so we were -- we had already a product that we were working on that we were ready to introduce in the market next year. For reasons that are beyond our expectation and our understanding in one of our customer, they made that effective right away, which forced our customer to move to a product that is less efficient. It's a similar product but with less ingredient, but the value of that product for the customer and for our revenue is about 40% less. So we didn't lose business. We are selling the same number of units. But obviously, our customer are not happy because those bags are not as effective for their yield. And they're working very hard with us to have our new product approved by the authority. You have to understand that every single government, whether it's Costa Rica, Honduras, Ecuador, you need to approve our new product. Our new product is ready, it's been tested in the field. It's actually better than the product that it replace. But we feel it's going to take between 3 to 6 months to have our new product authorized by all these countries and by the European legislator. And when done, it's actually going to be a growth for TC and actually better than the position we were in. But for the next 6 months, we're selling a product that yield about 40% less revenue per bag we sell because this is a bag with less ingredients in there.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [6]

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Okay. And I know you haven't provided 2020 guidance, but I guess, just given sort of this temporary impacts, as some of the declines you're seeing in the consumer and pet, presumably, the first half of next year, you're still seeing some organic declines in Packaging and so you sort of lap this or work through this?

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François Olivier, Transcontinental Inc. - President, CEO & Director [7]

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Not really. Q4 was very strong last year, which mean Q1 was very soft. This year, Q4 is going to be more normal, which mean Q1 will probably be better. So we expect next year to have organic sales growth throughout the year, and we expect our profit and our EBITDA margin to improve next year. So this is what our plans call for. As you know, this business, I've said it many times, is not like printing flyers every week and printing newspaper every day, where quarter-to-quarter, the business is a little bit more predictable. This business, you have some quarters that are fantastic and some others that are less because of the inventory and also the resin price. When the resin price move up and down, that tend to be a big part of what we sell to the customer. So you have to factor that in when you look at organic growth. But all in all, for next year, we're looking at organic growth on our sales and EBITDA improvement and margin improvement.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [8]

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Okay. Maybe I can just ask one last question. The asset monetization opportunities, I'm just curious if you can give us maybe an order of magnitude how significant those could be. Maybe not exact numbers, but maybe just ballpark at first?

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François Olivier, Transcontinental Inc. - President, CEO & Director [9]

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Well, as you know, Mark, we have some few buildings in Canada that we own. Most of our footprint in Canada that we had for print is owned by us, and we closed some of those plants in the recent years. So we have a few buildings that we can monetize. Obviously, not the same value of what we just announced for Hearst, but I will say, maybe about 50% of what we had from Hearst can be achievable over the next few years for sure.

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Operator [10]

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And your next question will come from the line of Adam Shine of National Bank Financial.

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Adam Shine, National Bank Financial, Inc., Research Division - MD, Head of Montreal Research & Research Analyst [11]

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François, maybe just to elaborate on the earlier question. On the Q2 call, you had talked about the nature of Packaging and Q4 revenues to be relatively similar potentially to the Q1 '20 revenues, and you alluded earlier to some of that dynamic. Given the nature of the legislation issue, does that sort of nuance a little bit at least what Q1 '20 could look like based on your prior expectations? Or puts and takes, contract wins sort of mitigate that out?

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François Olivier, Transcontinental Inc. - President, CEO & Director [12]

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Yes. Well, obviously, Q1 for LatAm is not going to be great because of that. We don't expect that to have all the sign-up of all the -- of the various countries. But LatAm is about 10% of our revenue, so yes, we could be suffering there. But we feel that the other 90% is going to perform good in Q1. So yes, it would have been better if LatAm would have not had that issue. On the other hand, when this think is going to get approved, the whole market will want to grab that bag. And then probably in Q3, Q4, you will probably see LatAm overperforming big time. So yes, Q1 and Q2 might be affected by LatAm, but in perspective, LatAm is 10% of our revenue. So that will have an impact, but that's not 40% of our revenue, it's 10%.

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Adam Shine, National Bank Financial, Inc., Research Division - MD, Head of Montreal Research & Research Analyst [13]

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Perfect. Understood. And just, obviously, in regards to the objective of getting at least -- or hitting this 13% on exit F '19. I mean, you went up to 13.2% in the Q3, and you talked earlier about the improvement quarter-to-quarter in regards to margin expansion in Packaging this year. When we get to Q4, and acknowledging perhaps a bit more pressure at the top line, do we still think of potential margin expansion? Or is that sort of 13.2% maybe a bit of a high watermark for F '19? And then obviously, you certainly build going forward at least on an annual basis into '20 and '21?

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François Olivier, Transcontinental Inc. - President, CEO & Director [14]

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Yes. Very hard to give guidance over a quarter, but what I can tell you about Q4 is we expect Q4 margins to be better than the last year. That's for sure. And when we look over the next 2 years, we believe that we will be above the 13%. You need to understand that our plan calls for 13%, 14% and 15% over a 3-year period. And then we believe that we have the ability in the quarters to come, if you look at 2 years in front to continue to move in that direction, all right? It's hard to comment quarter-by-quarter, but we feel pretty good about our ability to improve our margin in 2020 compared to what they were in 2019.

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Adam Shine, National Bank Financial, Inc., Research Division - MD, Head of Montreal Research & Research Analyst [15]

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Okay. And maybe just turning to Publisac. I mean, a lot of stuff over the prior months in terms of efforts on your part in terms of communicating, I think, with the government, certainly, before the provincial committee recently, you launched the micro sites. Have you gotten any traction from the micro sites in regards to consumer support? I know it's very early days. We're probably 2 weeks into that process, but any additional color as to where your thinking is in regards to any potential momentum you're driving towards perhaps a resolution with the city of Montréal?

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François Olivier, Transcontinental Inc. - President, CEO & Director [16]

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Yes. We feel pretty confident about this whole file. We spent a whole lot of time talking to government official, both at the municipal level and the provincial level. And people now understand that the Publisac is a very responsible and useful product, and they understand what it does for the retailer, for the consumer. And for the weekly presses in Québec, that all these weekly paper would not exist without the Publisac. So I think we've made -- shed a lot of light on what the Publisac is and not and have a very favorable reception at all politician or legislator, and we feel pretty good about this issue being resolved. Having said that, we want to make sure, too, that the population understands. But the population understand because 78% of the people in Québec read the Publisac because they save a public $1 acting on it every week. So we feel that this issue needs to go through the process that it needs to go through, but we feel very confident on the model of the Publisac. And we've introduced, like I said in my remark, a lot of improvement. The paper that is in the Publisac is made with waste and is fully recyclable. And we've been able with our plastic division -- flexible Packaging division to create a bag for the Publisac that is fully made with waste as well and fully recyclable. And that has started to have us some conversation about creating a model for circular economy for plastic here in Québec. And we're talking about that with various government official about creating that ecosystem in Québec to start to recycle not only the Publisac but a lot of other plastic to create the same kind of circular economy we did create with paper, with plastic. So it started with a lot of negative vibes, but now we have a lot of positive discussion that could turn out to be positive for Transcontinental overall.

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Operator [17]

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And your next question comes from the line of Drew McReynolds of RBC.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [18]

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A clarification, Donald, just on the corporate cost guidance. I just missed the number.

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François Olivier, Transcontinental Inc. - President, CEO & Director [19]

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About $23 million, EBITDA.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [20]

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Okay. On the long-term contracts within Packaging, François, you've talked pretty regularly about what your strategy is there and how, down the road, it certainly adds stability to the business. Are you able to comment on which of the large, long-term contracts are from new versus existing customers? Maybe provide kind of that dynamic as well as how the sales funnel is building from your perspective?

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François Olivier, Transcontinental Inc. - President, CEO & Director [21]

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Yes. This quarter, we were able to secure our #2 customer that had still 5 year left to his contract, but we talked about our sustainability vision, our product offering in that vertical towards sustainability and what we were doing for the long term, and this customer decided to add 5 years to his existing contract. This is our second-largest customer, and now we have them for 10 years and in a vertical that we feel is -- that could offer a lot of growth for us. So that brings stability for us and stability to the customer. And then we could work on long-term project together to improve the packaging in terms of the sustainability, runnability in their plant and shelf appeal. So we like that because to get new customer, it is a long sales cycle. So that's what we've done last quarter. We secured our second-largest customer for the next 10 years. But what I'm quite pleased about is the type of discussion we had and why they are willing to commit themselves for 10 years with Transcontinental. So it's a testimony of our strategy. So that is positive. And yes, we have worked in the last year on growing with new customers, and some of that volume is going to come to us in 2020. And that's why we feel that next year, we're going to have organic growth, something that we didn't have this year. But you have to understand, this year, that we looked at the portfolio and discover what we buy, and then some customer were not really profitable, and we have decided not to continue with that type of volume. So that's why you see our volume going down this year but our margin and our profit going up. This is a combination of letting go of low-margin business or in vertical that we feel are not long-term place we want to be and the effect of -- like Donald mentioned, of us having more synergies than what we have announced previously.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [22]

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Okay. That's all very helpful. Shifting to Printing. I guess, just depending on what Q4 kind of shakes out, you may come in here in and around 20% EBITDA margin. Not asking for a specific guidance, but I think in the past, you've been fairly confident that you can kind of stay in that 20%-plus Printing EBITDA margin range. Is that still something you target or feel is realistic now that some of that higher-margin Hearst numbers will be out of the equation?

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François Olivier, Transcontinental Inc. - President, CEO & Director [23]

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The answer is yes.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [24]

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Okay. All right. You don't want to get more specific than that, François?

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François Olivier, Transcontinental Inc. - President, CEO & Director [25]

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Well, we feel that a lot of the -- like right now, this year, we have growth in the book segment. To my surprise, in the Q3, the commercial volume was up. Like I mentioned in my comments, some of the people -- some of the retailer where the flyer is less central to their strategy have already started to cut in the last 2 years. And they are at a level, I think, that they cannot cut a lot further, they've cut a lot. But these are people that are below our top 15 list of customers. So the impact was not meaningful. And those who are in the top 15 who have cut this year have certainly felt it in their business and their results. And I think we anticipate that next year is going to be similar to this year, maybe better. But what I know is that we're going to take a lot of cost out of the platform and that we control. And I feel very confident about the cost that we have and we will take out. So when I look at that, all this cost is going into the margin. So that's why I feel that the margin are going to improve. If I have not as much decrease of volume as I have this year and I have a cost base that is substantially lower, then all that translates into higher margins. That's how I see this.

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Donald LeCavalier, Transcontinental Inc. - CFO [26]

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And also maybe, just to complete on that, you can see that quarter-from-quarter, the decrease in margin is lower. Now you see it because the impact of San Francisco is no longer there. And you need to take also that the paper price has an impact also on the margin. And this is something that we don't control, but there is paper price that's been increasing over the last 3 quarter, and that explains part also of the margin going down. So the deferred revenues that were not cash in the paper. So overall, the decrease should be less in the future.

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Drew McReynolds, RBC Capital Markets, LLC, Research Division - Analyst [27]

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That's great. Last one from me. Within the other category, I think, in your opening remarks, you alluded to double-digit EBITDA growth, I think, in the quarter. Just given some of the moving parts in that business, what you're reporting this year, do you get at all to a point next year or subsequent years where you have tougher comps? Or do you see the growth in that segment as somewhat of a normalized or sustainable base to grow from going forward?

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François Olivier, Transcontinental Inc. - President, CEO & Director [28]

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Yes. We have 2 business in Media, just about $100 million of revenue. And about 2/3 of it is producing school text book. We are clearly the market leader in this space. We have the ability to do tuck-in acquisition, which we did this year. And our team has been able over the years to take market share and to do small tuck-in acquisition, and they've been steadily improving their profitability. And we believe that this is still -- going forward, for the next 2, 3 years, we believe that this strategy is still -- we could still continue to follow that strategy. In terms of the other 1/3 of the business, which is based on advertising, to my great surprise, these are specialty product, but this year is a fantastic year. We've grown in advertising, both digitally and in paper, and this division has fantastic results. So Media is overperforming. Our plan is overperforming last year, but unfortunately, it's only $100 million of $3 billion of revenue, but they're having a fantastic year. Unless -- it's harder to predict advertising going forward, but I feel pretty good about our educational business for the next 3 years.

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Operator [29]

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(foreign language) (Operator Instructions) Your next question will come from the line of David McFadgen of Cormark Securities.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [30]

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I was wondering if I can start off with a couple of questions on Coveris. So given the Packaging revenue is down about 3% in the quarter and given the relative size of Coveris to the overall Packaging business, is it safe to assume that Coveris revenue is also down around 3% in the quarter?

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François Olivier, Transcontinental Inc. - President, CEO & Director [31]

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Actually, I think Coveris was not down 3%. I think it's more the legacy TC business that's more down. But you could take that off-line with Donald. He could share that with you. My comment is from my recollection because now we tend to treat the business as one business. We tend not look back because all these plans are mixed for group, so look at it for vertical and they're all mixed, but I would say in the same zone, but maybe Coveris is a little bit better, but...

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Donald LeCavalier, Transcontinental Inc. - CFO [32]

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Yes. Coveris was about 1% down. So it's more on the legacy business that we suffer more.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [33]

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Okay. And in the past, you've disclosed the Coveris EBITDA margin. Would you be able to do that for this quarter?

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Donald LeCavalier, Transcontinental Inc. - CFO [34]

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Well, I can give you a treat. I will give it to you for the last time because we're not -- the Coveris activities were 13.8% this quarter.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [35]

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Sorry, can you repeat that? 13.8%?

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Donald LeCavalier, Transcontinental Inc. - CFO [36]

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Yes.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [37]

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Okay. That's quite good, no?

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Donald LeCavalier, Transcontinental Inc. - CFO [38]

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Well, it started at 11.9% last year. Now it's at 13.8%, so it is a 2% improvement over the last 6 quarter. In every single quarter, it moved from 11.9%, 12.1%, 12.2%, 12.8%, 13.8%. Legacy business is the more we will go -- now we operate this as one business. So there's job that we do -- that we used to do in other plants, so as François mentioned, I think the last time we will go in that details because it's not apple-to-apple because we will put the job in the best plan in the future whatever it's Coveris or legacy business. It's one business for us now.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [39]

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Okay. And then just a comment on the outlook for the fourth quarter. You said that the decline in the overall Packaging business would probably be a little higher than Q3. I was just wondering if we could get a little detail on that. Say, would it be like something in the order of 4%?

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François Olivier, Transcontinental Inc. - President, CEO & Director [40]

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Well, I guess, it's the same thing. Like, it's the same impact -- it's in some business that we are aware of in the pet food segment and it's the impact of the legislation in Europe in banana. What is it going to turn out to be? I don't want to comment. But now we were minus 3.8%. Obviously, it will be more, but how much, but we feel better about our profitability and our ability to have better margin that we had in Q4 last year. And we're not going to give guidance on quarter-over-quarter, especially not in that business, but we're giving you a direction, and we are going to leave it there.

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Donald LeCavalier, Transcontinental Inc. - CFO [41]

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And as I said in my remarks, to start with, Q4 last year was very strong, you remember. So the comparable has softened, but the element in Q3 will be the same in Q4, and the resin might be even higher in impact. So it's all that together that...

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François Olivier, Transcontinental Inc. - President, CEO & Director [42]

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Resin price is going down. So our sales is going down. [We'll get that pass through].

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [43]

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Okay. Right. Okay. And then Donald, just on the accelerated revenue and appreciation from the sale of the Fremont plant, you said it's going to be about $10 million. Is that -- I'm just wondering what the EBITDA impact is. And then I guess, you'll probably separate those out to get the sort of clean number you adjust in there?

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Donald LeCavalier, Transcontinental Inc. - CFO [44]

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Yes. It will be what I call -- I've announced the new term, but it's below the line in the old accounting way. So it's going to be below the line in Q4, and it's the remaining of the used deferred revenues that we had to account when we received the $200-and-something million.

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François Olivier, Transcontinental Inc. - President, CEO & Director [45]

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$200 million.

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Donald LeCavalier, Transcontinental Inc. - CFO [46]

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At the time. Most of it was reversed when we gave back -- sold back the contract to Hearst, but since we were still owners of the building, we have, and again, it's accounting rule that we might go online together on that, but we had to keep part of it depreciate over the value of the term of the rent that we have with them. So this is why we need to reverse it now. So it's 15 -- that's about [CAD 13 million], USD 10 million.

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François Olivier, Transcontinental Inc. - President, CEO & Director [47]

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$13 million of revenue additional, $13 million of EBITDA additional, [your profit]. It's just accounting. It's just like we received that money in 2014. It is below the line.

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Donald LeCavalier, Transcontinental Inc. - CFO [48]

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And in Q4, we have, as I mentioned, the $3 million transition was there last year. So we're starting with minus $3 million regarding that in the adjusted numbers.

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Operator [49]

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(foreign language) Mr. Lapointe, there are no further questions at this time. Please continue.

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Yan Lapointe, [50]

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Well, thank you, Gabriel. And thank you, everyone, for joining us on the call, and we look forward to speaking to you.

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Operator [51]

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(foreign language) Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.