Transcontinental's (TCLAF) CEO François Olivier on Q2 2016 Results - Earnings Call Transcript

| About: Transcontinental Inc. (TCLAF)

Call Start: 09:30

Call End: 10:17

Transcontinental Inc. (OTCPK:TCLAF)

Q2 2016 Earnings Conference Call

June 10, 2016 09:30 AM ET

Executives

Shirley Chenny - Investor Relations

François Olivier - President and CEO

Nelson Gentiletti - CFO and Development Officer

Analysts

Adam Shine - National Bank Financial

Paul Steep - Scotia Capital

David McFadgen - Cormark Securities Inc

Drew McReynolds - RBC Capital Markets

Operator

Welcome to the TC Transcontinental Second Quarter 2016 Results Conference Call. During the presentation all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session and instructions will be provided at that time. As a reminder this conference call is being recorded today, June 10, 2016.

I'd like to turn the conference over to Shirley Chenny, advisor Investor Relations. Ms. Cheney, please go ahead.

Shirley Chenny

Thank you, Jessa. Good morning ladies and gentlemen and welcome to our second quarter 2016 financial results conference call. Earlier today, in addition to our press release, we issued our second quarter 2016 MD&A with complete financial statements and related notes. For those of you who are not on our distribution list, the documents are posted on our Web site at TC.TC.

François Olivier, President and Chief Executive Officer will begin this conference call by providing key operational highlights of Q2. Nelson Gentiletti, Chief Financial and Development Officer, will then present with comments on financial results for the quarter, after which the line will be opened for questions. I’d like to specify that this conference call is intended for the financial community.

Media are in a listen-only mode and should contact Nathalie St-Jean, Senior Advisor, Communications, for more information or interview request. Please be reminded that this -- that the information that will be discussed over the course of this conference call may -- might contain forward-looking statements. Such statements based on the current expectation of management and information available as of today, inherently involve numerous risks and uncertainties, known and unknown. The risks, uncertainties, and other factors that could influence actual results are described in the 2015 annual MD&A, the latest annual information form, and have been updated in the MD&A for the second quarter ended April 30.

I’d now like to turn the call over to François Olivier.

François Olivier

Thank you, Shirley, and good morning everyone. It was a difficult second quarter as we face the shortfall in profitability due mainly to timing issues pertaining to optimization initiative put in place in our printing division. Whereas our media sector already begin to benefit from the efficiency measures we implemented during the quarter. And our packaging division, our already solid sales funnel continued to improve and we're confident that our investment to increase our production capacity will bear fruit.

We also remain very active on the acquisition front. We remain focused on our plan to constantly improve the performance of our assets, while investing in flexible packaging, and we are confident that the outcome of our strategic decision will positively benefit future quarters.

So let me take a few minutes to comment further on our quarterly results. The organic decrease in our printing division stop line is comparable to what we’ve experienced in the last few quarters. However, in previous quarters we were able to synchronize our cost reduction initiative with the drop in volumes. For example, in Q2 last year, we fully benefited from initiative such as the closure of our Edmonton and Concord plants to offset the volume declines, whereas this year we marginally benefited from the closure of our Québec city commercial facility which was closed April 1.

On the newspaper segment, we continue to experience volume reductions driven by the transformation of our -- of the advertising market. Since January, we no longer print daily La Presse on weekdays, which create a volume shortfall which will be more than compensated starting in July when we began our five-year agreement to print the Toronto Star. This contract represents a very positive development for our printing division and we continue to work on other opportunities in this market.

Furthermore, we announced after the quarter, the closure of our Saskatoon printing plant as we recently sold our newspaper portfolio in that region. On the point-of-purchase printing that we offer our major retailer customer, it performed very well again this quarter. Growth in this contract based niche, as well as the previously announced contract to print Canada census forms, partially offset the effect of the shift on advertising dollars from traditional to digital platform and the marketing product segment.

As we indicated in the past, we expect the traditional noncontractual commercial print market to continue to decline at above average rate. Within this context, we are continuously reviewing our equipment utilization to better optimize our platform and adapt the customer demand. As such, we closed our Transcontinental Québec plant at the end of the quarter and transfer most of the profitable work to other plants in the network. We will benefit from this decision in future quarters.

We also saw in the quarter continued pressure in our magazine printing segment as the transformation of this business continues to accelerate. However, our book printing business continues not only to be resilient, but has over the last few quarters shown good growth. Finally, our retail flyer segment continue to demonstrate volume stability when excluding the effect of the loss of a U.S customer early in 2015.

This year-over-year comparison will no longer have an impact on our results as of the third quarter. The volume stability indicate that this medium still remain a valuable marketing tool for retailers to drive traffic to their stores. Moreover, during the quarter, we also have the positive contribution from previously announced contracts with retail flyer customers.

Turning to our packaging division, we're pleased and excited about our overall growth prospects. Let me give you some more details on our strategy to grow this division organically and through acquisitions. First, our Ultra Flex acquisition completed in September is performing very well and according to our expectations. Their sales funnel is healthy and is opening up opportunities in new market segments, which require different types of equipment. We will therefore add new capacity to our New York platform in the next couple of months.

Regarding Capri, after a very successful first year, we decided to invest to increase this plant's capacity by 30%. Since the beginning of the year, we’ve incurred additional costs related to starting up this equipment. On the sales front, we lost a customer due to a change of control which resulted in the shutdown of this customer's operation. We have since qualified some SKU with the acquiring company and are slowly ramping up our volume with this new large customer.

In addition, we continue to see lower volumes from one of our large customer as they continue to adjust inventory levels in their supply chain. These elements make this year comparable more challenging for this plant. However, we remain very positive about this facility longer-term prospects both from a manufacturing efficiency and sales funnel standpoint. On the acquisition front, we remain very active and continue to be optimistic about our ability to close certain transaction in the near future.

Finally, on the media side, our portfolio of business titles performed well in the quarter. However, the transformation in the advertising market continued to have a significant impact on our newspapers. Our strategy within this group is to constantly evaluate our portfolio and to assure the long-term success of our best-performing assets. We have taken significant actions in the quarter in order to adjust our cost and our product offering and these measures have already started to have a positive impact on the sector profitability, in spite of a decrease in revenues.

Also in line with our strategy, after the quarter we sold our local newspapers in Saskatchewan, as they have limited synergies with the rest of our portfolio. In conclusion, the market dynamics we face this quarter were relatively consistent with what we have experienced in previous quarters. However, in Q2, we had a timing gap between our three strategic catalysts, revenue, cost, and supply chain, which negatively impacted our profitability.

We are positive that the outcome of our strategic decisions will be reflected in our future results and we continue to stick to our growth principal, stay focused on optimizing our operations, and improving the performance of our best assets, while we grow our in the promising flexible packaging segment.

I'll now turn it over to Nelson, for a review of our financial results for the quarter.

Nelson Gentiletti

Thank you, François, and good morning to everyone. Revenues for the second quarter of 2016 totaled $497 million, an increase of 1.4% over Q2 of last year. Adjusted operating earnings declined from $62 million to $56 million and adjusted net earnings attributable to shareholders of the Corporation were $34 million or $0.44 per share, a decrease of 12%.

Net earnings attributable to shareholders of the Corporation went from $81 million to $5 million. The decline is attributable to several unusual items totaling more than $80 million mainly the gain on sale of the consumer magazine publishing activities and the reversal of the provision for multi-employer pension plans in the second quarter of 2015, and the asset impairment charge related to the newspapers in the Atlantic provinces in the second quarter of 2016.

In terms of cash flow, once again this quarter we generated significant cash flow from continuing operations, which amounted to $95 million. We also invested $20 million in CapEx, including intangibles, a $17 million in taxes and $14 million in dividends. At the end of Q2, our overall financial position remain solid, as our net debt to EBITDA ratio stood at 0.8x. This puts us in an excellent position to execute our capital allocation plan for supporting our M&A strategy, while continuing to return capital to shareholders.

Now let me provide you with some guidance for fiscal 2016. In our printing division, we expect our retail flyer volumes to remain relatively stable. We also expect the growth of our in-store marketing segment to continue over the course of the year. Recall that we will also benefit from our previously announced contract with the Toronto Star, which starts in July.

Finally, the contribution of our nonrecurring contract to print Canada census forms will end in third quarter. That said, the ongoing transformation of the advertising market, particularly the shift to digital, should continue to negatively affect the results of certain of our printing segment. Our continued efforts to optimize our operations through operational efficiency initiatives will help mitigate the impact of market dynamics on our profitability.

In our packaging division, we will have the full run rate from the Ultra Flex packaging acquisition. However, investments to increase capacity and support our growth strategy, as well as the loss of the customer as a result of its sale, will have a negative impact on our results.

In the media sector, we expect that our newspaper publishing activities will continue to feel the effect of the transformation of the advertising market. However, the significant measures we’ve taken should stabilize our profitability.

For the 2016 P&L, assuming the stock price remains at current levels, you should model for full-year corporate costs at the EBITDA level of about $27 million. As a reminder, a change of $1 in our stock price impacts our results by close to $1 million. Our financial expenses are expected to be in line with last year and our tax rate around 30%.

In terms of use of cash for the year, you can expect CapEx at around $75 million including intangibles, and cash taxes of $60 million. To conclude, we continue to generate strong cash flow and maintain a solid balance sheet in order to pursue our transformation and diversification into packaging.

This concludes the formal part of our conference call. Operator, we're now open for questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions] Your first question comes from the line of Adam Shine from National Bank Financial. Please go ahead.

Adam Shine

Thanks a lot, good morning. First of all, maybe we will go back to some of the questions around the Q1 reporting in terms of packaging and see what has changed in terms of the inventory management. I think you said at the time that that was about a $2 million, $2.5 million impact in terms of shortfall in the Q1. So, sort of curious, if we are looking at a similar type of dynamic as that inventory management continues into Q2? Was it the same, was it larger, is it expected to continue through the back half of the year, and then I will follow-up with a few more.

François Olivier

It's about the same Adam in Q2. Obviously, it is not going continue forever. The only reason we're talking about this to be very frank with you is that as you know in the -- in our first factory we acquired Capri, one customer which was the customer who sold us that plant, represents 75% of the volume. So why don't we don’t talk about this and other plants is because we’ve so many customers, some are spending more or less. It’s just depending on how they’re forecasting their sales. So if they’ve been too optimistic then they’re slowing down their order with us using. And if they’ve been wrong in their forecast and didn't order enough, then we print more. I said that in packaging we’ve this new thing to worry about, that is called inventory that we didn't have to deal within the printing. So why we talk about this is, like I said, in the other plants we’ve some going up, some going down. In this specific case, when one customer represents 75% of your sales in the factory whatever he does had an impact. So in the first six months last year they were ordering a lot more than in the previous year, because they were, I guess, wrong on their shortfall and they were introducing new products and they were starting up a lot of new lines and I think they were doing a little bit more waste than this year. And this year I think everything goes the other way like they are -- I think they’ve ordered too much towards the back end of last year, and you have to understand we’re managing hundreds and hundreds of SKU. So, for the first six month of the year it's been about the same. Obviously, we expect that to return to normal in the future. So that’s kind of the story about the inventory. And then we had -- its hard to plan that, but it's something normal. What we did not expect in Q2 is one of our contractual customer in that factory to be sold and usually when customer gets sold, the acquirer acquire the assets and then you keep the business for a little while. What happened in this case is the day they announced the transaction they shutdown the plant. So all the products that were manufactured on that plant moved to the acquiree plant so we lost the volume instantly in one day. Since then what we’ve done is we’ve called the acquiree and requalified some of our SKU there. So we’ve done a lot of work and we are qualified on some product with the new customer. So short-term it’s a pretty bad thing when you run a fixed cost platform and you lose volume and it's not a pleasant thing. And actually that plant in Q2 is not a fixed cost platform, we're adding costs because we’ve installed new equipment and we are in the process of increasing capacity. So in Q2 in that flexible packaging plant we had like the impact of the three lower volume from our main customer, unexpected sale of our customer with direct impact to your volume, while we increased cost in the factory. So that's what happened in that factory.

Adam Shine

So again, should we think of maybe this loss of the customer somewhere in a $2million plus type range, at least as it relates to Q2, maybe continuing a little bit into the Q3 with some mitigating factor as you requalify and bring aboard some of those additional SKUs or like obviously you are no longer splitting printing and packaging as a segment, so any color would be beneficial right for modeling?

François Olivier

Yes, I guess, the impact of the inventory is the same as what we share with you in Q1. On top of it we’ve the impact of the lost customer. So in Q3 -- Q2 we -- you need to add the two, so I guess the impact is bigger than in Q1. What is nice, though, is that we’ve been able to, since then resecure some volume with the seller and secure some volume with the acquirer. And we’ve, in my opinion, a run rate right now replacing about 40% of the volume we lost and through time maybe we’ve the opportunity to get out of this situation in a year from now in a better place than where we are, because the seller of our former customer is still in business with other types of products, so we have ability to grow there and then we’ve been qualified at the new customer. So we’ve been hit hard in Q2, but long-term I think it could turn positive for us, this transaction.

Adam Shine

Thank you, Francois. One last question on the packaging, and that is in that prior quarter you talked about the investment -- incremental investment spending tracking at about maybe $0.5 million per quarter. Have you stepped that up or should we still think in terms of $0.5 million?

François Olivier

I’m not sure I understand your $0.5 million.

Adam Shine

In the last quarter on the Q1, during the Q&A, I asked you about the incremental investments that you’re making to boost capacity and put assorted elements in place for your acquisition, as well as your sales growth strategy. You said at the time that that was an incremental $2 million for the year, call it $0.5 million per quarter.

François Olivier

Yes, this is about the same. This additional cost that we’re incurring now we’ve additional costs at the plant level that I described before, but also management wise it's about the same, actually we're preparing some people. As we expect to do further acquisition in that field, we need to have people kind of on the bench ready to be sent to these acquisition when we do them. So, that have not changed from a management standpoint. Yes, this is how much cost we -- extra cost we carry right now. From a CapEx standpoint, with the decisions we’ve made on both plant this year, we’re going to put about $25 million of CapEx in these two factory. Capri has been executed, so this one is done. The chunk of the activities installing that equipment and getting that going was in this Q2. So this one is done. And now we’ve order, a lot of stuff that is coming into New York in the New York plant this summer, in this fall and we will be installed and fully operational by year end. And this $25 million of CapEx is done within our usual envelope of a $75 million roughly a year. So, this is what we’re doing from a capital standpoint in packaging.

Adam Shine

Great. Thank you for that.

François Olivier

Thanks.

Operator

Paul Steep, Scotia Capital. Please go ahead.

Paul Steep

Good morning. Francois, maybe you could talk just a little bit, I guess, eight months into Ultra Flex, if we got another packaging deal, now that you’ve had some experience with one that isn't a captive deal, what was the initial reaction at the plant? Should we think about when you onboard a new deal, that the pipeline, that you don’t necessarily lose top line, but that the business you buy for maybe a period of what six months loses likely some sales momentum as clients try to get to know you, understand your plans? Is there a sort of -- a bit of a blueprint you can give us as to how things have gone operationally in terms of picking up new business?

François Olivier

Yes. I would say its contrary to what you said. Basically the Ultra Flex acquisition had a healthy sales funnel when we bought them. They had a very large sales force in the U.S for their relative size, so we were impressed by that. That's one of the reason why we like that acquisition. And it's all the contrary when the customer know that -- who have been acquired by a large company and one that sales rep goes to see the customer and say I’m going to introduce you to Transcontinental, and by the way they’ve purchased $15 million of equipment that is on the boat now and coming to New York and we will offer new services, new type of products offering, and we're very excited. It tends to accelerate the sales funnel. So basically we're very happy about the health of the sales funnel at Ultra flex, not only in the vertical that they are active, but we are planning with some equipment that we purchased to introduce new products into new vertical that they were not present. So, I think the fact that we've bought them accelerated that introduction of new products and services. So that’s the case for them. For Capri, our first acquisition it was totally different. They didn't have a sales force. They didn't have a sales funnel. And I would see on top of it the first acquisition is active in the dairy vertical, and this diary vertical is much slower to get the sales funnel to convert into -- to sales and even when the deal is done and it's supposed to come to you, it takes a year to transition because this vertical is much more, I'd say, complex to transition than most of the vertical we're in at Ultra Flex. So Ultra Flex had a healthier sales funnel that converts faster into sales compared to what we’ve known at our first acquisition.

Paul Steep

And you lead into my second question, I guess, we’ve seen some of your equipment orders hit the tape. When do you think that extra capacity would be operational on some of the new lines that you’re adding or new equipment that you’ve brought into the plant? Is it a six month sort of ramp-up period from landing [ph] or is it much shorter lift from there?

François Olivier

Much shorter than our traditional print business. So, the capacity in Capri has all been installed in Q1 and in Q2. It's all debugged ready to go. So all the extra costs, extra stuff that we’ve to incur has been incurred and done and we’re ready to go. So, if you take the $25 million of investment, have of it is done and operational, which is in the first plant Capri. Obviously, this plant has been struggling a little bit more with our financial results in this first six-month of the year, because of that and the loss of the customer. The second $12 million or $13 million that is going to Ultra Flex none of that is installed. It would all be installed in the next six-month and will be fully operational January 1.

Paul Steep

And just one last fairly simple question, when you're bidding these new programs, especially in the packaging vertical, outside of dairy maybe, are they for generally January 1 ramps if we’re bidding now in June or is it a much shorter ramp cycle that we’re actually looking at?

François Olivier

You know you're usually looking at -- it’s a the shorter cycle than the diary, but three -- after you’ve made the deal, you’ve to test and then when you test it usually takes about 3 to 4 months. And then, let's say, the customer wants to give you 72 SKU, then they start to order with the one they need. So you usually ramp-up over a 3, 4, months, 5 months period before you actually -- you run out all of their inventory because most customer don’t operate with one day of inventory. So if they’ve four months of inventory of an SKU, even though they award that SKU to you, they have to go through that inventory. So usually if we say that the dairy is a year, maybe this the other vertical we’re in, you're talking about 6 to 8 months to have the full run rate of the volume even though it's been awarded to you.

Paul Steep

Perfect. I guess the last one for me, so that Nelson doesn’t feel left out. Nelson, can you talk a little bit about the margins, just the actions you took in the quarter. If you want to talk about the magnitude, that’s great, but I’m more thinking, were they all done at the start of the quarter so that when we think about Q3 we can effectively think these actions took place at day one? Thanks.

Nelson Gentiletti

You’re talking about the cost of optimization?

Paul Steep

Yes, the cost actions, yes.

Nelson Gentiletti

I'd say because in the prepared statements, we focused you on two areas, the cost of optimization, the actions we've taken in print, specifically actions taken on the closure of the Quebec facility. And we only had really one month of impact and even in that one month we probably didn't have the full run rate. So you would expect the full run rate of the impact of that closure to start to hit in Q3. From a media perspective, we clearly started the actions. But frankly in terms of magnitude, the big is yet to come in terms of what we’ve done in media as well. Of course there -- and it's mostly of course headcount, but the vast majority will come in Q3 and Q4.

Paul Steep

Okay, perfect. Thank you, guys.

François Olivier

Thank you.

Operator

[Operator Instructions] David McFadgen, Cormark Securities. Please go ahead.

David McFadgen

Hi, thank you. I just have a couple questions on the packaging division. So you say in your MD&A that the packaging division revenue is down year-over-year. So given you are adding in Ultra Flex, it wasn't in the prior year, Capri must be down quite a bit. So, I just want to understand exactly what’s happened. So the big customer that you’ve that represents 75% of your volume, their revenue was down just because of the inventory adjustment, is that correct?

François Olivier

Yes, Yes.

David McFadgen

Okay.

François Olivier

And the lost customer that we talked about.

David McFadgen

Yes. And then you had that other lost customer. So, I'd imagine sooner or later that big customer will correct its inventory volume and it will probably come back to what it was previously, no?

François Olivier

Yes.

David McFadgen

Okay. So do you’ve any idea on timing as to when that would happen?

François Olivier

Well, I don’t run their business, but they’re selling billions of dollar of cheese, so I guess they will come back to their normal position. I think what we tried to describe in Q2 is we had that timing from our main customer. We lost one customer and instead of reducing using costs, we added costs. So for sure that added, because we were installing and preparing all that equipment. So obviously when your revenue goes down and your costs are going up, you have an impact in the quarter. But we feel that as we keep going Q3 is going to improve and Q4 should be much better. So, it's just like in our opinion a bump in the road. Obviously we’ve -- we'd have preferred not to loss -- lose that customer, but like I said, it could turn out over a long period of time that it could turn out to be a positive thing for us.

David McFadgen

Okay. Now you also mentioned that you’ve won a new large customer, Capri, did you not?

François Olivier

Yes, we did and we’re ramping up their volume and it's much slower than what we had anticipated. But it's on track to happen and again it's going to contribute more in Q3, and a little should be the full run rate in Q4. So when it's all said and done, you would have take a little bit more than a year to transfer everything.

David McFadgen

And is that the reason why you made the decision to increase the capacity at Capri by 30% for that new large customer?

François Olivier

No, no. We have the capacity to take over this one, but we anticipate we're active in the sales funnel and we would think that we would win some other businesses and we want to make sure that if customer are looking at giving us some business that they don’t have to wait a year for us to add the capacity, but that the capacity is there. And obviously I said that we are planning to do other acquisitions and run this division as quickly as possible as a network of plant, if you want to run a network of plant and all your plant are at full capacity. It doesn't -- its easy -- its not easy to move work around and to have people work together, because everybody is full. So we expect to run more plants in the near future and we want to prepare the existing plant to be ready to have capacity and to start to contribute in the network. So that’s all part of our long-term vision.

David McFadgen

Okay. Okay. That’s helpful. And then, have you seen any slowing down at all in the declines of advertising on print for your business?

François Olivier

No, actually when we look at the print division or the media division, and we look at the shortfall, I'd say in the last six or seven or eight quarters, it's the same shortfall. So the market is about the same as it was. So we’ve not been surprised in Q2 by the market, it's a bigger shortfall. It's not -- actually I think this Q2 in print, there is a little bit -- the shortfall is not as bad as last year. So it's about the same thing. The only thing that is different to last year, because last year despite the shortfall we’ve shown increased profitability. This year with the same shortfall we show a decrease in profitability. The reason is because of our strategy. Our strategy to compensate the decrease that has been happening for the last two, three years is the same recipe. Can we gain new customer in a declining market? Can we reduce our costs and can we work what our supplier to be more efficient in our supply chain working with our suppliers. What happened in Q2 in the sales is we’ve a gap. We've lost some business and the new business like the Toronto Star is starting for one month in Q3, so we’ve a lag in our strategy. On the cost, I also explained last year we had in Q2 two factory that where -- that we shutdown. So we had a lot less costs year-over-year. This year we only have one and it started to contribute only for a month instead of three. So our catalyst, there was a gap between our catalyst and with our supplier in Q2, the biggest paper we use is newsprint. It's about half of our procurement of paper. Newsprint went up in Q2 by a fair amount, which is a pass-through to our customer. But in some of our contractual agreement we need to give them a 30 day notice, which means that when the paper goes up, we eat the increase for 30 days, when it goes down we keep it for 30 days. In this case it went up. So you could start to see that our three catalysts, sales, costs, and supply chain, they were either -- there was either a gap in our strategy or they were negative in Q2. We expect that to return to more normal situation in the quarters to come.

David McFadgen

Okay. Now you also talked about the fact that you’ve won some new contracts on the printing side, you mentioned the Toronto Star. Can you give us an idea of the dollar value of the magnitude of all these new contracts that you’ve won?

François Olivier

Basically what we said is whatever we’ve lost in newspaper with La Presse not printing in the week and some of the concession we did to the Globe and Mail and other newspaper customer that we’ve to renew contract in Q2. Some of our customer at 15 years contract that ended this year, that we needed to renew. So when we took all the negative impact of the situation I just described in the newspaper business, once the Toronto Star is going to start, it's going to compensate for more than all these situations. So it’s a substantial amount of business for Transcontinental, that contract.

David McFadgen

Okay. All right. Thank you.

François Olivier

Thanks.

Operator

Drew McReynolds, RBC. Please go ahead.

Drew McReynolds

Yes, thanks. Thanks very much. So for either Francois or Nelson, just back to the packaging, and it's more of a high-level question. As you look at the two acquisitions that you’ve done, and you work through some of the customer, kind of headwinds or issues, is that kind of normal course when you are looking at packaging acquisitions or as you continue the acquisition path, will we get near-term noise and volatility and bumps, just as you work through all of the moving parts or are you kind of taking this experience and hope to minimize a lot of that going forward? Thank you.

François Olivier

Well, you know for sure there will be bumps building a new division in Transcontinental. So we’ve said it last year the first acquisition we do is a carve out from a food manufacturer. They sell us a transfer pricing above EBITDA average that is signed through a contract. So last year we were running at above 20% EBITDA margin. I think it was 22, 23. Basically what we do is we buy assets, we run it for about a year to make sure we understand the customer, we understand our team, we understand our position. And usually in that period what happen is we increase profitability, we maximize them, we help them out. And then, once we understand the assets well, then we -- in that that period, we build a growth plan, because we’re not buying these assets to only maximize them, we buy them mainly to grow them. Then we build a growth platform which involve more people, new people, new investment, new equipment, new stuff. And then in year two, we go into the mode where we invest and that's what we've been doing. So last year at Capri the first year we -- the EBITDA from wherever it was when we bought it around 19%, 20%, we ramp-up it up to 22%, 23%. And right now we decreased the EBITDA to probably below 15%, because we are in an investment mode both from a people standpoint, equipment standpoint, process standpoint, to prepare the next wave of growth. What have we done with the first acquisition, Ultra Flex, you see the results. They’re separate. Performing very well. We're learning the business, but now we're doing it a little bit faster. So after six months, we were ready to invest, ready to make some calls, and we made the calls and obviously as they’re going to install all this and get new people and all that, that could disturb the business a little bit, but we never said that we will build this division at 20% EBITDA margin. The average of the industry is 15. Personally if we could build this at 15%, I think we would be doing a fantastic job.

Nelson Gentiletti

And I think, Drew, you need to look at the two assets as very different investments. The Capri investment was the first one like François said, was a carve out. And when we bought it, we said we had one large customer and we had a couple of other customers, and in that case we had no sales force. We’ve decided to increase the capacity in preparation to grow the business and we build the sales force. And now we’ve the hiccup, because one customer obviously has a big impact. However, our proof point there is that since we started our sales activity in terms of the different stages to book sales, is improving quarter-over-quarter. And the films that we have in the market to be trialed are in the millions of dollars. So, that’s normally a precursor to say, if potential customers are testing your films, chances are that you’re going to start to close some deals. I think the Ultra Flex deal is very different. The Ultra Flex deal is going to be more typical of the types of companies we buy, which is, have an existing sales force, have a sales funnel, and in the case of Ultra Flex what you see is we are making decisions to invest in capital, having much, much more visibility on the sales that will fill up that capacity. In the case of Capri, we put it in and we knew it would take longer. In the case of Ultra Flex, we’re putting in this new equipment. We’ve got a pretty good idea of the customers and where that business is going to come from.

Drew McReynolds

Okay. That’s helpful from both of you. Thank you. And I may have missed this, Nelson, but just broadly speaking, when you look at the media business, is there a range of margins that you are targeting for that business? I know in your prepared remarks you talked about achieving stability. Just wanting somebody to may be quantify that for modeling purposes, if possible.

Nelson Gentiletti

Yes. Well, I mean, I think this business, if you look at it, and I don’t know if we’ve an anticipated margin, because I think we’re working through that and trying to estimate. But I think at an EBITDA level these are businesses that I think will be difficult to generate over 15% margin, probably looking at business that are going to generate 10% to 15%, if we optimize -- I think if we optimize very well. But that is not so bad, because I think as we managed the CapEx, I think François talk -- has talked about this when we’ve been on investor tours, is that as we’re investing to mitigate the drop in paper, the capital investment that we -- that we're targeting on some of the digital initiatives is much more targeted. So we think by the time we’ve completed this, the kind of the cost cuts and have paid obviously the cash flow related to the cuts, this is a business that we think can still generate some positive cash flow.

François Olivier

And a lot of the things we’re thinking about right now, Drew, is not so much, what's going to be the EBITDA. I think, Nelson, kind of give you an idea where we think it should end up ballpark. But a lot of the publication we own are on very, very small market, doing ultra local content and we’ve been very active in the reflection in this country about the future of local media. We’ve been active with various level of government in Ottawa and here in Québec to make sure that we do a reflection about the future of local content. And I think that the government authority have a role to play here to help us do this transition from a paper readership to a digital readership and to products that help local businesses reach audience, which is mainly paper to digital way of reaching the local audience. And we've made some representation both in Ottawa and in Québec and then we do hope that these discussion will be heard and that we will have some -- I would say transition, really help. We are not looking for help forever, but as we do this transformation, I think it's important for the content and this country to be supported, so that we -- when we get out of this transformation period, there's still plenty of local newspaper for serve -- service all community in Canada. So this is a file that we're following up on, that could have an impact on the future of profitability in the future numbers of a local publication we have.

Drew McReynolds

That’s helpful. Thank you.

François Olivier

Thanks.

Operator

Ms. Cheney, there are no further questions at this time. Please continue.

Shirley Chenny

Thank you everyone for joining us today and we will speak at the next quarter.

Operator

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

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