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Tax Gains Help Boost Transcontinental Profit Up 16%

Friday, December 15, 2006

Press release from the issuing company

Montreal, December 14, 2006 - Transcontinental Inc., North America's seventh-largest printer and Canada's fourth-largest print media group, today posted solid results for the fourth quarter and fiscal 2006. For the 12-month period ended October 31, consolidated revenues were stable compared to fiscal 2005 at C$2.2 billion, despite a $50.7-million negative foreign exchange impact. Net income for the year went from $138.9 million to $137.9 million, down 1%, but was up 16% for the fourth quarter, mainly due to an unusual favourable adjustment to income taxes. On a per-common-share basis, net income went from $1.56 to $1.58, reflecting the positive impact of the Corporation's share buy-back program. Adjusted net income, which excludes unusual items, was down 6% for the year, due largely to a significant negative foreign exchange impact. On a per-common-share basis, adjusted net income was down 4%, from $1.60 to $1.54, which is within the Corporation's publicly stated annual objective of $1.50 to $1.60. "Our results for fiscal 2006 are in line with our annual objective," said Luc Desjardins, president and chief executive officer of Transcontinental. "We executed strongly, controlling costs through many efficiency-improvement and reorganization initiatives to counter the foreign exchange impact and difficult market conditions in our commercial printing and catalogue- and magazine-printing niches. We benefited from a strong overall performance in our Media sector and in our other printing niches. We made strategic investments to expand our digital media platform, developed new products such as the innovative home-renovation publications in partnership with Yellow Pages Group, and the licensing agreement to produce the Canadian version of More magazine. We also acquired the French-language educational resources publisher CheneliËre Education. In the longer term, we are very pleased about the recent signature of a 15-year contract with Hearst Corporation for the printing of the San Francisco Chronicle starting in 2009. Our newspaper-printing segment is promising for the years to come. "In fiscal 2007, we should further benefit from the reorganizations in our book-printing and U.S. direct-marketing operations completed in 2006," added Mr. Desjardins. "We will also continue to leverage our strong media brands across multiple platforms. These positive elements will, however, be partially offset by the continuing negative foreign exchange impact ñ an anticipated $19 million on pre-tax income - and by $5 million in new non-capital expenditure initiatives to support our growth in the Media sector. Based on all of these factors, we are announcing an adjusted earnings-per-share objective of $1.52 to $1.65 for fiscal 2007." Financial review of fiscal 2006 Consolidated revenues for the 12-month period were stable compared to fiscal 2005 at C$2.2 billion. Variations in the exchange rate between the Canadian dollar and its U.S. and Mexican counterparts had a $50.7-million negative impact on revenues, offsetting the revenue contributions from acquisitions and organic growth. Adjusted operating income before amortization went from $360.6 million in 2005 to $342.7 million in 2006, resulting in a 5% decrease. The decrease is attributable to a negative $23.5 million foreign exchange impact, which was only partially compensated for by the contribution of acquisitions realized in the past twelve months and by organic growth to a lesser extent. The adjusted operating income margin before amortization therefore went from 16.4% in 2005 to 15.6% in 2006. Net income decreased by $1 million, or 1%, from $138.9 million in 2005 to $137.9 million in 2006, stemming mainly from a negative $16.1-million foreign exchange impact, partially offset by a positive $7.5-million variation in after-tax unusual items. These two elements represent a 6.2% reduction in net income. However, this negative impact was partially offset by: lower amortization expenses and a lower income tax rate; the benefits of recent reorganizations, especially in the Corporation's U.S. direct-marketing activities; stronger results for its newspaper-publishing and -distribution activities in the Media sector; increased volume and efficiency in its newspaper-printing and Mexican operations; and the results of a concerted effort to reduce costs and improve efficiency across the organization. A $12.6-million pre-tax ($9.1 million after-tax) negative unusual item was accounted for in 2006, related to an impairment of assets for a media publication, the reorganization of its commercial printing activities in Toronto, and the reorganization of its book-printing activities. On the positive side, the benefit related to the tax losses of U.S. subsidiaries was fully recognized during the fourth quarter of 2006 as management now believes it is more likely than not that it will be realized. This gain, amounting to $15.1 million, was partially offset by a negative $2.4-million net income tax adjustment recorded in the third quarter of 2006. In total, therefore, a $12.7-million net unusual favourable adjustment to income taxes was recorded in 2006, for a total positive impact on net income from unusual items of $3.6 million as of the year end. In 2005, the Corporation recorded a negative $3.9-million after-tax restructuring charge. The Corporation's adjusted net income for fiscal 2006, which does not take into account the unusual items described above, decreased by 6%, from $142.8 million in 2005 to $134.3 million in 2006. On a per-common-share basis, adjusted net income decreased by only 4%, from $1.60 to $1.54, reflecting the positive effect of the Corporation's share buy-back program. Transcontinental deliberately pursued its growth in several niches in fiscal 2006 in accordance with the priorities established in its Evolution 2010 business project: -- Since February 2006, Transcontinental Media has announced a number of developments in its digital strategy. They include a co-publishing agreement with AskMen.com's Canadian version; the launch of the classified ad site Merkado.ca for the Quebec market; the acquisition of a majority interest in digital in-store advertising display company Enixa Media; a new Web TV studio and expanded newscast service for LesAffaires.com; the acquisition of the popular user-generated recipe website Recettes.qc.ca; a partnership with Pecunia Communications, an industry-leading provider of webcast and video communication solutions over IP (Internet Protocol) to corporations, governments and other organizations; and the transitioning of TV Guide to a Web-only publication. Transcontinental Media also has 23 online versions of its consumer magazines and 47 community newspaper Web sites across the country, making it a significant online player in Canada. To support the development of its digital media platform, for which $5 million is already earmarked in 2007, Transcontinental Media president Natalie LariviËre appointed Zouhaire Sekkat as vice president digital media Group in August. -- Transcontinental is convinced that newspaper printing outsourcing is an irreversible trend, as publishers can let an expert take care of their physical product and concentrate their resources on their core business - producing top-quality content, leveraging it and developing their brand. In 2006, Transcontinental's unique production model, combining the latest technology with highly skilled, autonomous work teams, led such major dailies as The New York Times and the San Francisco Chronicle to join Canada's The Globe and Mail and La Presse in outsourcing their printing to the Corporation. Also in 2006, The Globe and Mail was named to the elite International Newspaper Color Quality Club for the fourth time in a row since partnering with Transcontinental, garnering the best-printed newspaper in North America honour this time around. -- Local and regional newspapers serve as the voice of their community across Canada, and Transcontinental Media acquired two more this year. These newspapers, both on paper and online, fit very well within the Corporation's global strategy. Transcontinental Media also leverages the classified advertising from its 94 Quebec newspapers on its new website, Merkado.ca. Across Canada, Transcontinental Media now operates 164 local and regional newspapers, including 12 dailies in the Atlantic Provinces. Detailed analysis of fiscal 2006 results For a comparison of the Corporation's financial results for the 12-month period ended October 31, 2006 versus the same period in 2005, please refer to Management's Discussion and Analysis for the year ended October 31, 2006, available at www.transcontinental.com in the "Investors" section. Financial details of fourth quarter results of fiscal 2006 For the fourth quarter of 2006, consolidated revenues were $583.1 million, down 2% from $593.9 million in the year-earlier quarter. The decrease is largely attributable to a $13.6-million negative foreign exchange effect. Adjusted net income decreased by 5%, to $42.3 million from $44.5 million in the year-earlier quarter; however, adjusted earnings per share decreased only 2%, from $0.50 to $0.49, reflecting the positive effect of the Corporation's share buy-back program. The main unusual items in the fourth quarter were a $15.1-million positive effect from an unusual adjustment to income taxes, which was partially offset by a $5.8-million after-tax unusual charge for impairment of assets and restructuring costs. Taking these items into account, net income increased by 16%, standing at $51.6 million compared to $44.5 million in the fourth quarter of 2005. Net earnings per share increased by 20%, from $0.50 in 2005's fourth quarter to $0.60 in the final quarter of 2006, again reflecting the Corporation's share buy-back program. Aa number of factors contributed to the variation between results in fiscal 2006 and fiscal 2005. * The acquisition of the direct marketing firm JDM in 2005, small but strategic acquisitions realized during the year in digital media and newspaper publishing, and the acquisition of educational book publisher CheneliËre Education at the end of fiscal 2006, together contributed $5.4 million to revenues and $1.2 million to adjusted operating income before amortization. The operating income margin before amortization associated with these acquisitions represented 22.2%, above the average margin for the Corporation. These acquisitions should generate strong margins in 2007 as Transcontinental should fully benefit from the integration of JDM and the seasonality of CheneliËre Education ñ especially from the back-to-school period, the high season for this business. Net of financing and other expenses, the contribution from acquisitions to net income was slightly negative in the fourth quarter of 2006, but management expects an overall positive net contribution from CheneliËre Education in 2007, especially in the fourth quarter. * The paper effect had a $3.2-million positive impact on revenues. This effect includes the variation in the price of paper, paper supplied and changes in the type of paper used by customers of our printing operations. Note that for printing operations, these elements affect revenues without impacting adjusted operating income before amortization. For the Media sector, the variation in the price of paper had a positive impact of $0.3 million on adjusted operating income before amortization and a $0.3 million positive impact on net income. * Variations in the exchange rate between the Canadian dollar and its U.S. and Mexican counterparts had a major impact on fourth quarter results, causing a $13.6-million decrease in revenues and a $7.6-million decrease in adjusted operating income before amortization. It is important to note that the spot exchange rate was 1.12 CAD/USD on average in the fourth quarter of 2006 versus 1.20 CAD/USD on average in the year-earlier quarter, a 7% variation. With respect to revenues, conversion of sales by U.S. and Mexican units had a negative impact of approximately $7.8 million. For export sales from Canadian plants, net of the currency hedging program, the negative impact was $5.8 million. The negative impact of the conversion of results for U.S. and Mexican units was $0.5 million on adjusted operating income before amortization. The negative impact of export sales, net of the currency hedging program and purchases in U.S. dollars, was $6.1 million on adjusted operating income before amortization. Finally, the negative impact of the conversion of balance-sheet items related to the operation of Canadian units denominated in foreign currency was $1.0 million on adjusted operating income before amortization. Taking into consideration amortization, financial expenses and income taxes denominated in foreign currencies, the net negative effect was $5.6 million, representing a 12.6% negative variation on net income. * Organic revenue growth, which excludes the paper and exchange-rate effects as well as unusual items, had a negative impact of $5.8 million, or 1%, reflecting the competitive market conditions in commercial printing, which were partly offset by strong results in our book-printing, direct-marketing and Mexican operations. However, organic growth contributed $4.1 million to net income, mainly coming from improved efficiency, lower amortization expense, and a lower effective income tax rate. Reconciliation of Non-GAAP Financial Measures Financial data have been prepared in conformity with Generally Accepted Accounting Principles (GAAP). However, certain measures used in this press release do not have any standardized meaning under GAAP and could be calculated differently by other companies. The Corporation believes that certain non-GAAP financial measures, when presented in conjunction with comparable GAAP financial measures, are useful to investors and other readers because that information is an appropriate measure for evaluating the Corporation's operating performance. Internally, the Corporation uses this non-GAAP financial information as an indicator of business performance, and evaluates management's effectiveness with specific reference to these indicators. These measures should be considered in addition to, not as a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. Below is a table reconciling GAAP financial measures to non-GAAP financial measures. Normal Course Issuer Bid - fiscal 2006 The Corporation was authorized to purchase for cancellation on the open market, between November 21, 2005 and November 20, 2006, up to 3,578,325 of its Class A Subordinate Voting Shares, representing 5% of the 71,566,506 issued and outstanding Class A Subordinate Voting Shares as of November 11, 2005, and up to 887,015 of its Class B Shares, representing 5% of the 17,740,294 issued and outstanding Class B Shares as of November 11, 2005. The purchases were made in the normal course of business at market prices through the facilities of the Toronto Stock Exchange in accordance with the requirements of the exchange. During the fourth quarter of fiscal 2006, the Corporation purchased 486,700 of its Class A Subordinate Voting Shares at a weighted average price of $18.86 for a total consideration of $9.2 million and 64,000 of its Class B Shares at a weighted average price of $18.79 for a total consideration of $1.2 million. Of the total consideration of $10.4 million, $2.7 million corresponds to the book value and $7.7 million corresponds to the premium paid. The premium was accounted for as a decrease in retained earnings. During the twelve-month period ended October 31, 2006, the Corporation purchased 2,895,300 of its Class A Subordinate Voting Shares at a weighted average price of $19.03 for a total consideration of $55.1 million and 639,651 of its Class B Shares at a weighted average price of $18.86 for a total consideration of $12.1 million. Of the total consideration of $67.2 million, $17.0 million corresponds to the book value and $50.2 million corresponds to the premium paid. The premium was accounted for as a decrease in retained earnings. Normal Course Issuer Bid - fiscal 2007 The Corporation purchased 39,600 of its Class A Subordinate Voting Shares at a weighted average price of $20.05 for a total consideration of $0.8 million and none of its Class B Shares between November 1, 2006 and November 20, 2006 in accordance with its Normal Course Issuer Bid. On November 15, 2006, the Corporation was authorized to purchase for cancellation on the open market, between November 21, 2006 and November 20, 2007, up to 3,448,698 of its Class A Subordinate Voting Shares, representing 5% of the 68,973,966 issued and outstanding Class A Subordinate Voting Shares as of November 7, 2006, and up to 852,907 of its Class B Shares, representing 5% of the 17,058,145 issued and outstanding Class B Shares as of November 7, 2006. The purchases will be made in the normal course of business at market prices through the facilities of the Toronto Stock Exchange in accordance with the requirements of the exchange. The Corporation purchased 50,300 of its Class A Subordinate Voting Shares at a weighted average price of $21.99 for a total consideration of $1.1 million and none of its Class B Shares between November 21, 2006 and December 13, 2006 in accordance with its Normal Course Issuer Bid. Dividend At its December 14, 2006 meeting, the Corporation's Board of Directors declared a quarterly dividend of $0.065 per share on Class A Subordinate Voting Shares and Class B Shares. These dividends are payable on January 26, 2007 to shareholders of record at the close of business on January 8, 2007. On an annual basis, this represents a dividend of $0.26 per common share. Subsequent Event On November 17, Transcontinental announced it had signed an exclusive 15-year contract with Hearst Corporation to print the San Francisco Chronicle daily newspaper and its related products, as well as provide complete post-press services. Canada's leading newspaper printer, Transcontinental, is slated to begin production in spring 2009 in a new plant it will equip with state-of-the-art technology in the San Francisco Bay Area. The contract with the San Francisco Chronicle plus the printing of other products at this new facility will surpass US$1 billion in total revenues without paper over the 15-year period. Transcontinental's total investments are estimated at over US$200 million (C$228 million) for this project. Corporate Affairs In March, Benoot Huard, Transcontinental's Corporate Treasurer since 2002, was promoted to Vice-President and Chief Financial Officer of the Corporation. Mr. Huard had been in the Corporation's succession plans for the position since joining Transcontinental. Over the past 20 years, Mr. Huard has held a number of senior positions related to the financial management of large public companies, including Quebecor Inc. and Avenor Inc. He has a bachelor's degree in Business Administration from HEC Montreal and is a member of the Quebec Order of Chartered Accountants. In June, Natalie Lariviere was appointed President of Transcontinental Media to lead the sector toward its strategy of market consolidation, new product and service development, and dissemination of its content across multiple digital platforms. Ms. Lariviere brings considerable experience in the area of consumer needs and an expertise in electronic commerce. Prior to joining Transcontinental, Ms. Lariviere was at Quebecor Media, where she was president and CEO of the Book Publishing Group and president and CEO of Groupe Archambault Inc. Before that, she had been with the National Bank from 1987 to 2000, where her responsibilities included managing the bank's electronic services for businesses and all electronic commerce projects. Ms. Lariviere has an MBA from the Universite du Querbec a Montreal.

 

 

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