Transcontinental chops 460 at U.S. plant after downturn in direct mail market (Transcontinental)

MONTREAL _ Transcontinental Inc. (TSX:TCL.A) is attempting to shore up its U.S. direct mail business in the wake of the global financial crisis, cutting 460 jobs and shutting down a Pennsylvania plant.

The Montreal-based company also said Monday that it will take big related charges against its earnings.

The closure of the plant in Warminster, Pa., will result in Transcontinental Direct USA Inc.'s business being consolidated in its Hamburg plant about 100 kilometres away. The 460 employees being cut in Warminster will be able to apply for available jobs in Hamburg but otherwise will get severance packages, the company said.

The move will result in restructuring and goodwill impairment charges totalling between $139 million and $142 million in 2008 ($1.69 to $1.73 per share) plus $7 million to $10 million (nine to 12 cents per share) in future quarters.

``We will substantially lower our cost base to maintain our profitability,'' said Francois Olivier, Transcontinental's president and CEO, in an interview. Capacity will be reduced by 30 per cent.

``The plan that we have put forward will offer us also some flexibility _ flexibility to reduce further if the market continues to deteriorate and increase the capacity if the market is coming back. That's what we're hoping for because we believe that direct mail and direct marketing are still very efficient ways to reach the target audience and the target customer.''

The company said the turmoil affecting financial markets is having a major impact on the marketing programs of financial institutions, which represent a large portion of Transcontinental's direct mail customers in the U.S.

``It's a very drastic decline and it came very, very quickly,'' said Olivier. ``That's why we had to address the situation very quickly in terms of reducing our cost base and adapting our capacity to what we feel the market is going to be for the next couple of months.''

Olivier said that sales for the last quarter, which ended Oct. 31, are down by 15 to 20 per cent and the mailing volume from the company's top six customers is down by 40 per cent.

The U.S. direct mail subsidiary accounts for about 10 per cent of Transcontinental's consolidated revenues. Sixty per cent of that volume is with financial institutions.

``We're suffering with them,'' said Olivier, who expects much of 2009 to be slow.

The production transfer is expected to be completed by January. Production capacity will be 3.5 billion direct mail pieces per year. About 100 of the 460 workers to be cut at Warminster will be kept on for two to three months to help transition the volume to the other plant.

Olivier said the company hopes to rehire some workers if the market improves but says the situation is too volatile to make any promises now.

Transcontinental will take a pre-tax restructuring charge of between $15 million and $20 million in the fourth quarter, and between $10 million and $15 million in future quarters.

It will also completely write off goodwill associated with the business in the fourth quarter, booking about $195 million in non-cash charges to income, which the company said will ``not affect the corporations' liquidity, cash flows from operating activities or debt covenants, or have any impact on future operations.''

Olivier said that for the most part Transcontinental's Canadian operations are healthy, with only some slowdowns in national advertising and the magazine sector.

``We're not saying we don't anticipate some slowdown in 2009 but so far so good in the rest of the Transcontinental business.''

Analysts said Transcontinental is behaving responsibly considering the dire market conditions.

One analyst who spoke on condition of anonymity said the Warminster plant had been described by Transcontinental as an important facility as little as a year ago

``It gives you an indication of how fast the market has deteriorated,'' the analyst said, noting that Monday's announcement will not have a significant impact from a valuation perspective.

``It's good to see the company taking pretty aggressive steps to control the cost structure given the revenue environment in the U.S.,'' he said. ``It's a terrible environment down there.''

Another analyst, who also did not want to be named, echoed his view.

``I think it shows they're being very responsive to very challenging underlying market conditions,'' he said. ``The bottom, so to speak, has fallen out of the market and they're responding by consolidating plants.''

Shares in Transcontinental closed up 32 cents, or 2.62 per cent, at $12.52 on the Toronto Stock Exchange.

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