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Edited Transcript of TCL.A.TO earnings conference call or presentation 12-Dec-19 9:15pm GMT

Q4 2019 Transcontinental Inc Earnings Call

MONTREAL Jan 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Transcontinental Inc earnings conference call or presentation Thursday, December 12, 2019 at 9:15:00pm 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

Transcontinental Inc. - Director of IR

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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, Research Division - MD of Canadian Telecommunications and Media Research & 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 Fourth Quarter and Full Fiscal Year 2019 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, December 12, 2019. I would like to turn the conference over to Ya Lapointe, Director of Investor Relations.

(foreign language)

Mr. Lapointe, please go ahead.

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Yan Lapointe, Transcontinental Inc. - Director of IR [2]

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Thank you Gabriel, and good afternoon, everyone. Welcome to TC Transcontinental 2019 Fourth 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 TC 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 Adviser Corporate Communications for more information or interview request. I would also ask that you look at the financial statements on the website.

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 and uncertainties and other factors that could influence actual results are described in the 2019 annual MD&A and latest Annual Information Form that we filed today.

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.

Looking at the results, we finished the year strong in packaging. 2019 was marked by the successful integration of Coveris, a turning point in our transformation. In only 2 years, we grew our revenues by 50% to reach more than $3 billion in 2019, a first in our company's history. We also reported a record adjusted EBITDA of $476 million this year. We executed on our growth strategy and carefully managed risk. I'm very pleased with our company's evolution which position us to create long-term value. In addition to our financial performance, we have done significant progress this year further aligning corporate social responsibility in our strategic planning.

Sustainability is more important than ever before, and our investment in research and development will become a key competitive advantage for years to come. I strongly believe that sustainability requires a balanced integration of social, environmental and economic factors. This is one of the reasons why we are very disappointed with the recent recommendations made by a commission of the city of Montreal regarding flyer distribution control in Montréal. The commission disregards social and economical factors in their recommendations and did not consider all the relevant facts from an environmental standpoint. We are recognized across our industry for our leadership in corporate social responsibility. And what we have done to improve the environmental footprint of the Publisac is a good example of that. As mentioned in the past, no trees are cut to produce flyers, and 86% of the paper used is recycled.

In addition, we want to be a leader in the creation of a circular economy for plastics and the Publisac is part of the solution. Our new Publisac bags are made 100% from recycled plastic, and we are decreasing the use of plastic by 30%, namely by reducing their size. Publisac is a useful, responsible and legitimate service that is very appreciated by our customers. The recommendation made by the commission are politically insensitive, illogical and simply unworkable. We are convinced that the city could not put forward a valid opt-in regulation that would stand in a court of law. This is why no other city has implemented such a ban anywhere else. That being said, we could work with the city of Montréal to improve the current distribution system, and I believe we could find a solution together. But let's be clear, we will stand by our customers and protect our services. We are not a litigious company. But as we are doing with the city of Mirabel, we will defend our rights, and we are very confident about a positive outcome.

As I mentioned earlier, our sustainability approach will give us a key competitive advantage. It is important to understand that flexible packaging plays an essential role in protecting products and extended shelf life, which is one of the best solution to reduce food waste globally, and therefore, improving carbon footprint. To effectively manage plastic packaging and its end of life, we continue to invest in R&D to differentiate our products through technology.

An important part of our sustainability strategy is to work in partnership with others to create a circular economy for plastic, as we've done in the past for a circular economy for paper. We intend to be more actively involved in the coming year. To that effect, in March, we became the first Canadian-based manufacturer to sign the Ellen MacArthur Foundation's New Plastics Economy Global Commitment. We have pledged that 100% of our plastic packaging will be reusable, recyclable or compostable by 2025 and that we will achieve a 10% use of post-consumer recycled content. These targets are included in our new 3-year corporate social responsibility plan titled Acting Together released this summer. In line with these objectives, we launched vieVERTe, our sustainable product portfolio, which include awards-winning proprietary structures that are engineered to provide end-of-life solution for flexible packaging. This is important as our customers need us to provide sustainable solutions, and we want to be a leader on that front.

Let's now review the operations. In the packaging sector, fourth quarter revenues were higher-than-expected due to a strong performance from our meat and cheese and coating segments. As expected, we witnessed a volume reduction in our consumer and pet food and our Latin America segments, as we have mentioned on our last call. In both cases, these impact are temporary, and we expect to see growth in 2020. By exceeding our synergies target in fiscal 2019 and gaining efficiency, we delivered improved margins quarter after quarter from 11.7% in Q1 to 13.8% this quarter and finished the year with an adjusted EBITDA margin of 12.8%. We expect our profitability to continue improving over the next years.

In fiscal 2019, the packaging sector accounted for 53% of our consolidated revenues and 42% of our adjusted EBITDA. More than 5 years after our first acquisition in flexible packaging and the beginning of our transformation journey, I am proud of the packaging business we have built. But this is only the beginning. Our portfolio will continue to evolve as we continue to grow in markets where we have a strong competitive advantage.

Regarding the sales of our paper operations to Hood Packaging, which is expected to close in January. After operating the paper business for 1.5 years, we conclude that paper was less core to our packaging sector's growth strategy and we made the decision to sell the assets. This decision is aligned with our plan to continue building our flexible packaging platform, where we see good growth potential. It will give us the flexibility to continue acquiring businesses that are more complementary to our existing flexible packaging portfolio. I want to sincerely thank all the talented employees who will transfer to Hood Packaging for their contribution and commitment.

While acquisition should be an important growth driver in the coming years, we also expect to see organic growth from our existing portfolio of products. We have built a very solid R&D-focused team, focused on identifying and meeting customer needs. With our talented R&D engineers, our state-of-the-art labs and our extrusion equipment, we have best-in-class innovation processes and capabilities. We will continue to innovate to ensure we remain ahead of the industry. I am very confident about the outlook of our packaging business as we -- as a significant engine for future growth.

In the Printing Sector, in Q4, we started to see some positive impact of the measures we took to partially offset the effect of lower revenues observed this year. We completed the transfer of 2 state-of-the-art presses from our former plant in California to Montreal and Toronto. Both presses will be running at full capacity in early 2020. In addition, we will complete the closure of our Brampton facility later this month and that of our PEI facility by the end of January 2020.

We will also implement new measures to streamline our indirect costs as we optimize our footprint.

We are committed to remain proactive in managing our cost structure in order to protect our profitability. In our retailer-related services, as we mentioned on our last call, we saw a lower decline in the number of pages printed in the fourth quarter compared with previous quarters.

Based on the feedback from retailers and end consumers, I'm convinced that flyer remain a relevant and effective marketing tool to bring people to stores and help Canadians save money. While we expect the market to continue to be affected by the same trends we witnessed in the last quarters, we have seen strong growth in book and store marketing and the pre-media vertical in 2019.

We expect to capitalize on this growth by investing both organically and through acquisitions in these markets. The recent acquisition of Holland & Crosby fits perfectly with our strategy and I'm excited about the combination of our businesses and our long-term outlook for in-store marketing.

Now for our media activities, once again, we are pleased with our results for the quarter. While the fourth quarter numbers were impacted by the sales of our specialty media assets, our education group drove high revenue growth and delivered strong EBITDA performance in 2019.

We in conclusion, I'm very pleased with what we have accomplished in 2019, especially as it relate to overall portfolio of activities. We have acquired Trilex in packaging and Holland & Crosby in printing. While small, these 2 businesses are aligned with our strategy of developing our growth markets.

We also announced the sale of our specialty assets in media, our paper operations in packaging and the Fremont building in printing. These portfolio-shaping transactions are aligned with our transformation, and I am confident that they will create significant value for the company, as they are allowing us to accelerate the deleveraging of our balance sheet and to focus on our growth markets.

Despite lower volume in printing, we generated strong cash flows that we use to strengthen our balance sheets. Going forward, we expect to continue to generate significant cash flow from our operating activity, which will be used to reduce our debt and continue our transformation with targeted acquisitions.

In our packaging sector going forward, 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 will continue to proactively adjust our cost structure to volumes and trends, and we will remain confident that our print sector will remain a strong cash flow generating business for years to come.

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 François mentioned, we generated record revenues and adjusted EBITDA in fiscal 2019. Excluding the $44 million gain made on the sale of our Fremont building and other items, our adjusted EBITDA increased by 3.6% to reach $476 million this year. Looking at our segmented results, revenues for the packaging sector grew by $642 million in 2019, thanks to the acquisition of Coveris. We also benefited from a $22 million positive impact from exchange rates, offset by 2.4% decline in organic growth, mainly due to the -- our consumer and pet food segments and the legislative change having a temporary impact on our Latin America business.

The adjusted EBITDA margin grew every quarter for a full year margin of 12.8%, 90 basis points improvement versus last year. As we continue to benefit from efficiency gains and acquisition synergies, profitability was also positively impacted by lower resin prices.

18 months after the acquisition of Coveris, we are ahead of our target synergies. We are now starting to see early savings from film and plate in-sourcing, and we are very confident to exceed our total original targets of $20 million of cost savings.

Now for the Printing Sector, if we exclude $13 million from the transitional service and rent to others that positively impact 2018, organic revenues declined by around 5.5% of revenues. This decline is mainly due to the lower revenues from our retail-related service as we discussed in previous quarters. Despite the lower volume, we generated an adjusted EBITDA margin of 20.2%. Revenues in media were lower than last year, following the sale of our assets in line with our strategy but profitability remains solid.

Corporate expense for the full year were higher, mainly due to an increase in cost related to our growth in addition to some nonrecurring positive impacts in 2018.

Looking specifically at the corporate expense for the fourth quarter, we have a negative variance caused mainly by the impact of the stock-based compensation expense of minus $13 million due to the share price movements.

Now looking at the full year cash flow, despite the challenge in print, we generated $432 million of cash flows from operating activities in fiscal 2019, up 38% from last year. And that excluded the $100 million proceeds from the sale of Fremont. Even after investing a higher than normal level of CapEx in 2019, we reduced our net debt by $250 million. In addition, we distributed $76 million in dividends to shareholders, which gave a dividend yield of almost 7% at yesterday's share price.

As of October 27, 2019, our net debt ratio stood at 2.5x. If we factor the proceed of the sale of our paper operation, this ratio will be around 2x. This will provide us with flexibility in terms of capital allocation.

Before going into our outlook for 2020. Let me say a few words about the application of IFRS 16. And this change in accounting standard will bring mostly on the balance sheet, therefore, increasing assets and liabilities. In our first quarter of 2020, we expect increased in liabilities of about $130 million and in asset for around $110 million, with the net impact recorded in operating retained earnings.

In addition, we also expect a positive impact in EBITDA of about $20 million in 2020, that should be mostly offset by higher amortization of about $15 million and higher interest of about $4 million. Please note that actual results from the initial application of IFRS 16 may defer as we continue to finalize the calculation.

Now looking at 2020. Excluding the impact of the sale of our paper operation, we expect revenues in the Packaging Sector to grow modestly in 2020. We also expect to see this organic growth more in the second half of the year as we still -- as we are still impacted by a legislative change in our Latin America business. We expect our EBITDA margin to continue to improve as we remain focused on synergies and manufacturing efficiency. Since margin in the first quarter could be impacted by higher resin price, we expect the margin improvement to accelerate in the second half of the year with the recovery of our Latin America business. I'd like to also highlight that the increase in profitability will be on top of the accretion of margins following the sale of our paper operations.

In our Printing Sector, we should see a continuation of current trends in most of our verticals, but to a lesser extent, for our retailer-related services. We also continue to anticipate growth in our in-store marketing products and book printing verticals. The sale of the Fremont building also mean that we will no longer receive revenues and EBITDA of about $1 million per quarter. Many of the measures we announced in 2019 will help profitability in 2020 in addition to new ones that we will put in place to reduce our cost. For the other segment, we expect corporate costs at the EBITDA level, and excluding stock price movement, to be around $30 million. For media, excluding the impact of the sale of the specialty assets, we expect continued good performance in terms of revenues and profitability in 2020, but it will not be sufficient to offset corporate costs. Following reduction in our debt, we expect our financial expense to decrease even after including the impact of IFRS 16 to around $55 million in 2020. Our effective tax rate should be in the mid-20 range.

In terms of use of cash for the year, you can assume CapEx coming down to a more normal level, slightly below $100 million. As for cash tax, for the year, you can assume around $60 million. In terms of capital allocation, we expect to use a significant cash flows from our operating activities to reduce our net debt, distribute a strong dividend and continue our transformation with targeted acquisitions.

To conclude, our financial position is solid, and our priority is clear: to continue generating significant cash flows and to deliver profitable long-term growth.

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

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Questions and Answers

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Operator [1]

--------------------------------------------------------------------------------

(foreign language)

(Operator Instructions) Your first question comes from Mr. Adam Shine of National Bank.

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Adam Shine, National Bank Financial, Inc., Research Division - MD, Head of Montreal Research & Research Analyst [2]

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We'll start with packaging and then maybe 1 or 2 after on printing. But just starting with packaging. You've been pretty clear that there might be a bit more of a recovery in the second half, and that's where maybe more of a margin lift occurs as well. But most of that seems to be focused around agriculture and that whole European regulation dynamic. Maybe, François, you can speak a bit more specifically to the fact that consumer and pet seems to be seeing a bit of an easing of pressure in some maybe resuscitation in other verticals that perhaps allows some degree of traction and how exactly pacing might occur as we get through fiscal 2020?

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

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Yes. I think the margin improvement in packaging in Q4 is driven by a few factor. First of all, our synergies are going to be bigger than what we have planned for, both this year and next year. So that does help margins. Also early in the quarter, resin price was down. So we benefited from that for about half or 2/3 of the quarter. So resin price decrease did help the margin. And we had some verticals that were pretty strong in terms of their performance in Q4. And these verticals are -- tend to be the one that are above average.

For next year, well, obviously, we cannot predict the resin price so that, that is a wild card that does have an impact, both on organic growth and then profitability. And I already mentioned, in terms of synergy, we think we're going to have a similar amount of synergies in terms of dollar, and it's going to be of similar beat, we think last year to -- to our plan. And as far as organic growth that we see in the various vertical, as you mentioned, LatAm, yes, we feel that we're going to probably pick up in Q2, a very strong organic growth there as some countries have already started to approve our new product that would fit with the new European legislation. So at the end of Q1 and starting in Q2, we should start to ramp up country by country. So that should help. But we're looking for organic growth between 1% and 1.5% next year globally on the portfolio.

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Adam Shine, National Bank Financial, Inc., Research Division - MD, Head of Montreal Research & Research Analyst [4]

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I'm sorry, say that again, 1% to 1.5%?

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

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Yes.

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Adam Shine, National Bank Financial, Inc., Research Division - MD, Head of Montreal Research & Research Analyst [6]

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Okay. And then just turning to printing. Obviously, the flyer dynamic was something that was a focal point in fiscal 2019. And I just want to build a little bit on what transpired in the Q4 because as much as there was a, let's call it, a lesser decline in volume versus the Q2, Q3, I thought there was an anticipation that perhaps other customers, albeit smaller, might have explored other measures to reduce some of the revenues. And so I want to extrapolate that into the commentary going into fiscal 2020, where the impression is that it's not as though things necessarily get worse from your perspective, in fact, maybe there's some relative improvement in trend year-over-year?

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

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Yes. What I can say about this is, this year, we were impacted by 3 large customer that got on mainly on their page count and one of them on their circulation. What I can say is the 3 of them felt that in their business, in their sales, in their same-store sales. And I believe -- I don't believe that any of those guys are going to go lower than they went this year. I think, actually, one of them [brings] 2 flyer every week. So it's actually going to go up. So I believe that they are in a zone that they want to be, and we don't expect further decrease from these 3 customers that created the issue this year.

As far as the other group of customer, we think the medium is still very strong. And those who have played with that in the past have suffered the consequence on their businesses. And so we feel that going into the next year, we have a much easier comparable. And we don't see large user of flyers doing the kind of reduction in page count and circulation that the 3 customers that we suffered from, have did in '19. And on top of this, we obviously are going to enter 2020 with a much lower cost structure in our print sector.

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Adam Shine, National Bank Financial, Inc., Research Division - MD, Head of Montreal Research & Research Analyst [8]

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Maybe just as a nuance there then, François. As a result of what you're saying, does that then preclude what may otherwise have resulted in conversations with flyer customers in regards to price adjustments based on reduced volume? Or is that maybe a dialogue that needs to occur at a later date?

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

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Well, each contracts are different. Some contract were already protected, some less protected. But obviously, these discussions happen when we renegotiate our contractual agreement. And as you're -- I'm not sure were aware of, and we did a good job, I think, of spreading out maturity. So we have a couple of those discussion every year. And obviously, when that happened, we will be looking to make sure that they -- the contract takes into consideration the nature that our business is fixed in cost in nature and if volume starts to go down rapidly that both -- the TC needs to be protected, yes.

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Operator [10]

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(foreign language)

Your next question comes from Mark Neville with Scotiabank.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [11]

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Maybe just first on the packaging. And I appreciate the comments around a stronger second half. But sort of just looking at the margin profile of this business over the last year. Is there any sort of seasonality typically to the margin of this business or sort of like the 13.5%, 14% we're at now sort of a good baseline to grow from sort of going forward?

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

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I would not call it cyclicality, like in printing, we know that the spring and the fall are usually very strong quarter, and you have a clear demarcation between Q4 and the other quarter in print. And packaging is not this way, we're packing food. And the variation will happen, and it could happen based on a couple of things. Promotion and the food that the retailer wants to do with the food manufacturer that are our customers. How they manage their supply chain, their inventory. Sometime the customer make some mistakes, they order too much or they order not enough. And then in a quarter, they reorder a lot or they don't reorder at all because they realized they have too much. So we are a -- we are living through some cyclicality, but it's not -- what I'm trying to say, it's not built in, where it's predictable, like in print. So it's a little bit more unpredictable. When there's large movement of resin that are announced ahead of time, some customers tend to try to order more and then they go quiet. So we are incurring some cyclicality, but it's very hard to predict when that happen.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [13]

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Okay. Maybe just, I guess, on the print and the Publisac. Can you just maybe just help us sort of frame or put in the context the size of that business for yourself? And also maybe just from here, sort of the general timelines or sort of what we can expect? Or we're just sort of waiting on an announcement from the city at this point? Just sort of, again, just help us understand where we go from here? Or what happens in between?

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

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Yes, the distribution business for us in Québec is about $130 million of revenue, and that's kind of the size of the business. And what the city did is a group of city consoler who made a recommendation at the city hall. We're very hopeful that city hall will acknowledge that these recommendation are not too practical. It's pretty much unclear on how much time they could take to answer to these recommendation. And so, obviously, we'll be in contact with the cities to see how much time they are planning to take, and more specifically, what they intend to do with those recommendation that we feel are not practical. So the time frame is not too clear.

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Mark Neville, Scotiabank Global Banking and Markets, Research Division - Analyst [15]

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Okay. Maybe just one last one. And just on the balance sheet. I guess, in M&A, the target was, I think, 2x by the end of Q1, you should be roughly there. I guess, just sort of as we move forward, and you do more M&A. Can you just talk about sort of where you sort of anticipate sort of the range of leverage that you sort of anticipate keeping on the balance sheet?

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

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Yes. As you know, the print business generate a lot of free cash flow. So by the time next year-end, we will be more around the 1.6, 1.7x. So obviously, we have the room to continue to do M&A. And we have a bigger portfolio now, so bigger opportunities, which means we could look at more verticals, we are more diversified. Obviously, we will have more synergies going forward. Having said that, we have a size now that enable us to be a little bit more selective on the acquisition that we want to do. But obviously, M&A is a big part of our playbook and packaging in the years to come. And I would even add, in some vertical, in printing, you have seen us acquiring in POP. And we are still looking and we have some vertical in printing we think could be very accretive because we tend to buy at a good multiple and we tend to have a very high level of synergies in the print sector. So we have identified some sector POP book and print, where we feel we could both grow, first of all, organically, but maybe even through acquisitions. So, yes, the acquisition are going to be part of our playbook, but we want to be very rigorous and make sure we buy the right assets. And we have no problem being down around 1.7, 1.6x by the end of the year. So we will do it if it fits our profile, and if it fits our strategy. If not, we've built enough scale now in packaging to have -- the organic growth could mean some profit improvement that are meaningful for the company.

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Operator [17]

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(foreign language)

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 [18]

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A couple of questions. So first of all, I'll just start off with a clarification. François, you talked about growth for the overall packaging business for 2020 of about 1% to 1.5%. If my memory serves me correctly, I think that's probably a little more bullish than you've been in the past because I think you're a little guarded, in year 2 to maybe get, hopefully, 1% out of Coveris. So to get that, things must be going, I guess, fairly well at Coveris. And I was wondering if you could provide a little clarity on that? What's going particularly well to give you that level of optimism?

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

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Yes. I think we finished the year very strong. Because if you look at the sales that we knew was already going to hit us in Q4, which is the LatAm situation and the pet food situation, we did better. And we think that, like Donald said in his prepared remarks, maybe you will see less organic growth in Q1 and then Q2, but we feel that Q3, Q4, I mentioned already that the LatAm should give us a good push towards the back end of the year. And we have other -- some other vertical where we feel we have the ability to win some business. And in this business, raw material has a big impact. So we -- when we look at the raw organic growth, we will need to tell you what is the impact of the resin because 1.5% could disappear or become 3% depending on where the resin price is going. So when I say 1% to 1.5% is net of the impact of resin. And we think we could accomplish that with the portfolio we have. And remember that we've sold the paper business, and then the paper business was not a growth business for us. So now we have something out of our portfolio that we were not positioned like Hood to grow that business in 2020, and this business is going to be out of our portfolio by the end of Q1. So that should help the organic growth number as well.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [20]

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Okay. And can you tell us at the end of Q4 '19, what's the annualized run rate of synergies that you've achieved so far with Coveris?

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

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It's about -- in U.S. dollar, it's about just about $12 million.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [22]

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$12 million, okay. And you expect to still exceed the $20 million number. Correct?

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

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Yes. Very confident. Very confident.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [24]

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Yes. By what time frame would you hit that number on an annualized rate?

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

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We expect that by mid-year that's 2020, we should be at this run rate and achieve above this run rate.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [26]

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Okay. Can you give us any idea how much above you may achieve it? $5 million? $10 million?

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François Olivier, Transcontinental Inc. - President, CEO & Director [27]

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Well, we're above, and if we say above, it's not like, yes, so we were confident that we will beat the USD 20 million, let's put it this way. There's things to Consider that will move over the year, but we're very confident to be above the USD 20 million.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [28]

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Okay. And you talked about $30 million of corporate costs in 2020. Can you tell us what the corporate costs were in 2019?

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François Olivier, Transcontinental Inc. - President, CEO & Director [29]

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Roughly the same, I will say. Going up, but roughly the same. But we need to exclude the fact of the share price this year, the movement of the share price. So it's not like we have a year-over-year increase. Most of the downturn will come through the share price. So that's the way to look at it.

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

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Okay. But the corporate costs in 2019 were about $30 million, correct?

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

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Yes.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [32]

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Yes?

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François Olivier, Transcontinental Inc. - President, CEO & Director [33]

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No, if you -- what I'm saying is the corporate costs don't increase versus this year other than the fact that there were share movements, but the corporate costs last year were -- in 2019 was $22 million, sorry.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [34]

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They're 22...

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François Olivier, Transcontinental Inc. - President, CEO & Director [35]

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Million.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [36]

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Okay. Anyway, maybe I'll take that offline with Yan. And then the CapEx, you gave a number of $100 million, does that include the spending on intangibles?

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François Olivier, Transcontinental Inc. - President, CEO & Director [37]

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Yes.

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David John McFadgen, Cormark Securities Inc., Research Division - Director of Institutional Equity Research [38]

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Okay. And then can you tell us what growth rate is organically of Holland & Crosby, that acquisition you recently announced?

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François Olivier, Transcontinental Inc. - President, CEO & Director [39]

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Well, it's very -- it's $20 something million of revenue. But what I can tell you is that it's a product extension for us. We are more active in the promotional POP printing, they are more active in the permanent signage business and installation of permanent signage. So obviously, we have some cost synergies as we're going to move work around our platform. But there's obviously a lot of selling synergies. So the customer roster of Transcontinental, which was about $75 million, we didn't sell a lot of permanent signage to these guys. And the customer roster of Holland & Crosby was not selling a lot of promotional POP. So now we're very active visiting both companies, customer and offering the complete package. And we're looking to -- there's 3 areas in POP, there's promotional printing, for point of purchase printing, there's permanent signage, and there's display and decor, and we're looking to have the whole portfolio of product to cross-sell that to all the customer they have and that we have.

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Operator [40]

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(foreign language)

(Operator Instructions)

Your next question will come from the line of Drew McReynolds of RBC.

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Drew McReynolds, RBC Capital Markets, Research Division - MD of Canadian Telecommunications and Media Research & Analyst [41]

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First question, maybe for you, Donald on following the divestiture within the media segment. Just for modeling purposes, can you just remind us what the run rate revenue base is roughly and what that margin profile looks like for the residual business?

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Donald LeCavalier, Transcontinental Inc. - CFO [42]

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I'm sorry, I missed following the -- you mean the paper business?

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Drew McReynolds, RBC Capital Markets, Research Division - MD of Canadian Telecommunications and Media Research & Analyst [43]

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Within the media segment. Yes, as you divested recently, some of those assets, just used to be $100 million segment with the very kind of 20%, 25% EBITDA margin. Just wondering what it looks like now.

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Donald LeCavalier, Transcontinental Inc. - CFO [44]

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The business, we -- now we're about $70 million of run rate remaining in media. And I would say -- and I was saying that the EBITDA margin of the remaining business was higher than the average business. So we -- you can model higher margin than what we had with the business that we sold.

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Drew McReynolds, RBC Capital Markets, Research Division - MD of Canadian Telecommunications and Media Research & Analyst [45]

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Okay. Okay. Super. On the Coveris synergies. Interesting to still see a good chunk of that to come. Also, on the printing side, a lot of moving parts with the 2 presses coming online and as well as broader consolidation printing platform. Where are you in terms of the run rate kind of savings in that whole kind of bucket of efficiency here?

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François Olivier, Transcontinental Inc. - President, CEO & Director [46]

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Well, even in Q4, the first month of the quarter was different than the last month. I would say, in the last month and October, maybe in terms of the things you described, the press, the closure of Brampton, we were maybe 75% there. By the end of December, for those particular activity, we'll be 100% there. Then we will close the one in PEI at the end of January. So that will hit Q2. And then we have a big program to adjust our indirect cost structures that will be executed in January. So you should -- a much lower fixed cost and direct fixed cost structure, starting at Q2. So the biggest chunk of all this is the closure of Brampton, and that will be realized by that by the end of December this year. But after that, some other activities are going to be added every quarter. So you could say, for the first 2 quarter of 2020, we will put more and more cost saving in place, and you should be at the true run rate of the new cost structure in Q3 and Q4 in the print sector. That would be my guess.

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Drew McReynolds, RBC Capital Markets, Research Division - MD of Canadian Telecommunications and Media Research & Analyst [47]

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Very helpful, François. Two final ones. On the Holland & Crosby, I know there's some disclosure in your financials on acquisition contribution. Just specifically on the Holland & Crosby one. What is the annual revenue amount that we should model?

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François Olivier, Transcontinental Inc. - President, CEO & Director [48]

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If I recall directly, it's around $21 million that we acquired. Obviously, we're going to try to improve that rapidly. But it's -- on the revenue side, you need to give us 2, 3 quarters to have a substantial impact on the revenue. Where you would see us having a more immediate impact is on the margin and on the EBITDA because we're going to quickly put the right business and the right plans and work to be as efficient as possible working together. And Holland & Crosby have some capabilities that we didn't have. So we're going to send volume their way and usually that tend to convert at a very high rate. And the other way around is true, too. There's some stuff that we were better equipped to do. So we're going to move volume in the right companies and that would have a significant -- great impact on the EBITDA. So first, we will hit the profitability through efficiency and cost. And then, again, going towards Q3 and Q4, we should start to have additional revenue both at Holland & Crosby and our all other facility. And our businesses was already growing at around 14%, 15% organically. So that should improve those numbers by having acquired Holland & Crosby.

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Donald LeCavalier, Transcontinental Inc. - CFO [49]

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And as viewed historically, this business was, in terms of margin, lower than the average margin of the print, but since we're growing in that business with the synergies, margin, even in our own business right now is growing. So we're not at the level of the print sector right now, but we've been increasing the margin year-over-year. So that's very encouraging for us.

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François Olivier, Transcontinental Inc. - President, CEO & Director [50]

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And we start to have scale. We're a $100 million in that space right now, and we feel that we still have a lot of room to grow probably for sure, organically. But probably still true acquisition to product diversification to have a stronger portfolio. And as we get scale, it's easier to sell and I think it's easier to lower your costs.

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Drew McReynolds, RBC Capital Markets, Research Division - MD of Canadian Telecommunications and Media Research & Analyst [51]

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Okay. All very helpful. Last one then for me. On the CapEx for fiscal 2020, you talk about a more normal run rate, just below $100 million. When you acquired Coveris, I recall that being kind of closer to $80 million, $85 million, of course, you had a special project in fiscal 2019. Is the difference here more the R&D? And that kind of type of investment that you're kind of assuming is recurring going forward? Or am I missing something in my numbers?

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François Olivier, Transcontinental Inc. - President, CEO & Director [52]

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You're exactly right. Last year, we probably spent an extra $15 million or $20 million in blown line and then plate in-sourcing. So that's why we still have significant synergies to come in 2020. It's related to the investment we've made in 2019 in blown line -- extrusion blown line and then plate in-sourcing. So that's why our CapEx in 2020 are going to be lower because we're not doing this. And that's why we're going to enjoy some second wave of synergies as we have started one of those line in October and one in late November. So they will start to generate some synergies for us throughout the year as we bring some of the film that we buy outside and internally. So that's the reason.

And you are right, in terms of R&D and our sustainability effort, we have devoted more money both through CapEx and additional expense that goes to the P&L to make sure that we prepare the product of the future and meet our commitment that we've made towards sustainability and help our customers meet their goals. So a little bit more -- a little bit less on equipment, a little bit more CapEx on sustainability. But all in all, it's a decrease of about $15 million, $20 million to last year.

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Donald LeCavalier, Transcontinental Inc. - CFO [53]

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And also, Drew, in printing, last year, one part of the increase was that we had some -- the project bringing the press back from the West Coast and doing some change for the Brampton, and we had to move equipment. But also this year, we we're more close to normal, but we still see some opportunity on the printing side. François did a little talk about the in-store marketing and on the booking side, this business has been growing for a few quarters in a row for us and we have good forecast of that side. We may have to increase some of the capacity. So that's part also of the program this year. So we still have room for new capacity CapEx on the printing side.

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Operator [54]

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(foreign language)

There are no further questions at this time. Please continue.

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Yan Lapointe, Transcontinental Inc. - Director of IR [55]

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Thank you, everyone, for joining us on the call, and we look forward to speaking with you shortly.

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Operator [56]

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(foreign language)

[Statements in English on this transcript were spoken by an interpreter present on the live call.]