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Transcontinental Increases Earnings Before Unusual Items by 6% in Q3, Maintains Annual Objective

Friday, September 15, 2006

Press release from the issuing company

Montreal, September 14, 2006 – Transcontinental Inc., North America’s seventh-largest printer and Canada’s fourth-largest print media group, today posted good growth in adjusted earnings per share for its third quarter, ended July 31, 2006, despite a decrease in revenues. Consolidated revenues were $511.8 million, down $18 million (3%) from $529.8 million in the year-earlier quarter. Variations in the exchange rate between the Canadian dollar and its U.S. and Mexican counterparts had a $18.7-million impact on revenues. Thus, excluding the foreign exchange effect, revenues were about the same as in 2005. Adjusted net income, the non-GAAP (Generally Accepted Accounting Principles) metric used by Transcontinental management to evaluate net operating performance, which does not take into account unusual items, increased by 1%, from $27.9 million in the third quarter of 2005 to $28.3 million in 2006, despite a negative foreign exchange effect of $4.2 million. This effect, which alone represented a 15% reduction in adjusted net income, and softness in the Corporation’s commercial printing segment, were more than offset by strong results in its U.S. direct-marketing, newspaper-publishing and distribution activities, increased volume and efficiency in both its newspaper-printing and Mexican operations, and lower income taxes. On a per-common-share basis, adjusted net income increased by 6% from $0.31 to $0.33, also reflecting the positive effect of the Corporation’s share buy-back program. Unusual items in the quarter totaled $3.6 million. Of that, $2.4 million reflects two unusual adjustments to income taxes. First, following the Quebec government decision to amend retroactively the Taxation Act and other legislative provisions (Bill 15), Transcontinental had to account for an unusual charge for taxes and related charges of $8.4 million in the third quarter. This item was partially offset by the effect of the change in statutory tax rates, which resulted in a decrease in future income tax liabilities, thus reducing income tax expense by $6.0 million in the third quarter. Impairment of assets and restructuring costs accounted for the remaining $1.2 million after-tax in unusual items. Taking into account these unusual items, net income decreased by 10%, from $27.5 million in the third quarter of 2005 to $24.7 million in 2006. On a per-common-share basis, net income decreased from $0.31 to $0.28. “Our results for the quarter are in line with our expectations for the year,” said Luc Desjardins, president and chief executive officer of Transcontinental. “We continue to counterbalance the anticipated yet inevitable effect the strengthening Canadian dollar is having on our bottom line with the benefits we are reaping from important restructuring initiatives, investments in new technology, and other efficiency improvements, which are yielding savings across the Corporation, most notably in our U.S. direct marketing activities. As well, small but strategic media acquisitions realized at the beginning of the quarter contributed to our results, while two significant senior management additions – Natalie Larivière as our media sector president and Zouhaire Sekkat as vice president of digital media – position us well to accelerate our growth. “Based on a constant exchange rate of 1.10 CAD/USD for the remainder of our fiscal year and taking into account the effect of our share buy-back program, we are maintaining our annual earnings-per-share objective for 2006 because of our confidence in our ongoing operations and our plans,” continued Mr. Desjardins. “For the balance of the year, we plan to: focus on sales development efforts; define our strategy to counter competitive market conditions in commercial printing; put more effort into developing organic growth, including newspaper outsourcing projects in the U.S.; and pursue our strategic investment plan to support a number of new non-capital-expenditure initiatives as outlined in our Evolution 2010 business plan.” Recent Developments – Third Quarter, 2006 Between May 1 and July 31, 2006, Transcontinental made a number of strategic announcements. * Thanks to a multi-year licensing agreement with U.S. publisher Meredith Corporation, beginning in spring 2007 Transcontinental will publish the Canadian version of More magazine, which targets women over age 40 and has seen its U.S. circulation triple since its 1998 launch. * The Corporation made an investment in a partnership with Pecunia, an industry-leading provider of webcast and video communication solutions over IP (Internet Protocol) to corporations, governments and other organizations. Pecunia’s tools and expertise had already contributed to the successful launch of Transcontinental Media’s WebTV studio for the French-language news hub LesAffaires.com in April, and will allow Transcontinental Media to leverage the extensive written content from its publications by webcasting high-quality video across its many websites. * Transcontinental acquired the popular recipe website recettes.qc.ca, which presents simple and economical everyday recipes to its audience of close to a million unique visitors per month and 137,000 subscribers to its weekly newsletter. * The Corporation purchased Le Progrès, the weekly community newspaper for Coaticook, in Quebec’s Eastern Townships region, as well as the two regional directories it publishes annually. The transaction brought Transcontinental Media’s Quebec community newspaper total to 94 (annual circulation: 120 million copies), the largest network in the province. * Transcontinental announced a $25-million investment in its St-Hyacinthe flyer and insert printing plant, including a new 8-unit KBA 618 press and related peripheral equipment and an extra 22,500 square feet added to the building. * It installed the world’s first 64-page Goss Sunday 4000 high-speed book-printing press system with Automatic Transfer, at its Transcontinental Interglobe plant in Beauceville, Quebec, a $25-million investment. * To improve efficiency in its commercial printing operations, the Corporation began combining its commercial printing and direct-marketing facilities in the Toronto area. The equipment at Transcontinental O’Keefe Toronto will be transferred to the Transcontinental Direct Toronto facility by the end of September. Financial Review – First Nine Months of fiscal 2006 For the nine-month period ended July 31, 2006, the Corporation’s consolidated revenues were up slightly to $1,612.9 million from $1,602.0 million in the year-earlier period, while adjusted operating income before amortization decreased by 5%, from $257.3 million in 2005 to $245.4 million in 2006. The JDM acquisition completed at the beginning of the second quarter of fiscal 2005 and acquisitions completed in fiscal 2006 in the media sector contributed $26.7 million to revenues and $3.6 million to adjusted operating income before amortization. Variations in the exchange rate between the Canadian dollar and its U.S. and Mexican counterparts resulted in a $37.2-million decrease in revenues and a $15.9-million decrease in adjusted operating income before amortization. Organic revenue growth was $7.4 million in the nine-month period compared to 2005 and comes mainly from the media sector, which had strong performances in its newspaper publishing and distribution activities. Organic growth was also fuelled by stronger sales in the Corporation’s newspaper-printing activities and its U.S. direct-marketing operations. The same factors plus improvements in the Corporation’s Mexican activities helped create a slight increase in adjusted operating income before amortization from existing operations excluding the paper and exchange-rate effects. Net income decreased by $8.1 million (9%), from $94.4 million in the nine-month period ended July 31, 2005 to $86.3 million in 2006, a result of the $10.2-million negative foreign exchange impact. On a per-common-share basis, it decreased from $1.06 to $0.99. Adjusted net income, which does not take into account after-tax restructuring charges of $3.3-million in 2006 and $3.9 million in 2005, nor a $2.4-million net unusual adjustment to income taxes in 2006, decreased by $6.3 million (6%), from $98.3 million in the nine-month period ended July 31, 2005 to $92.0 million in 2006. On a per-common-share basis, it decreased by 5% from $1.10 to $1.05.




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