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Transcontinental Increases Revenues By 6% In First Quarter

Press release from the issuing company

MONTREAL, March 15 -- For the fiscal quarter ended January 31, 2006, Transcontinental's revenues reached $547.4 million, up 6% over $515.3 million in the first quarter of 2005. The increase stems mainly from the acquisition of U.S.-based direct marketer JDM in February, 2005, as well as from organic revenue growth of 2%, but was mitigated by the negative impact of the Canadian dollar's appreciation and competitive market conditions in commercial printing. These latter factors particularly affected net income, which stood at $27.9 million, or $0.31 per share, in the first quarter of 2006, down 4% from $29.1 million, or $0.33 per share, in the year-earlier quarter. "Our first-quarter results are in line with our expectations, with revenue growth coming both from acquisitions and sales development initiatives while the exchange rate continued to have an impact on our bottom line," said Luc Desjardins, president and chief executive officer of Transcontinental. "Our response to the stronger Canadian dollar has been the implementation of our revised manufacturing strategy, a $53-million investment to replace seven older presses with three state-of-the-art machines and the reorganization of certain operations. This important program is now almost finished and should see its final stages wrap up in the third quarter of this year in our book printing operations. "The combination of a solid balance sheet and strong cash flows puts us in a favourable position to continue to invest in our development," continued Mr. Desjardins. "We will step up our strategic investments relating to our five-year plan, Evolution 2010, in the coming quarters, particularly in the areas of digital media and product and service development in our Media sector. We are also looking at various acquisition opportunities in our target niches and continue to make progress with potential customers for our newspaper outsourcing model." Benoit Huard, vice president and chief financial officer, added: "Taking into consideration a constant exchange rate of 1.15 CAD/USD for the remainder of the year, current energy prices and the positive effect from the share buy- back program, Transcontinental's management maintains its previously stated earnings-per-share objective before unusual items of $1.50 to $1.60 for fiscal 2006". Financial Highlights In the first quarter ended January 31, 2006, Transcontinental reported consolidated revenues of $547.4 million versus $515.3 million in the same quarter of 2005, a 6% increase, while adjusted operating income before amortization(1) decreased by less than 1% to $79.2 million from $79.9 million in 2005. The increases of 2%, or $12.2 million, in organic growth in revenues and 1%, or $1.0 million, in organic growth in adjusted operating income before amortization stem primarily from newspaper printing, catalogue and magazine printing and the publishing of weekly newspapers in Quebec. These activities more than offset competitive market conditions in the commercial printing market and lower book printing sales volumes due to the reorganization and consolidation of the Louiseville plant. The acquisition completed in fiscal 2005 of U.S. direct marketer JDM added $23.1 million to revenues and $3.2 million to adjusted operating income before amortization. The paper effect had a $3.8-million positive impact on revenues but a slightly negative $0.3-million effect on adjusted operating income before amortization. Finally, fluctuations in the exchange rate between the Canadian dollar and its U.S. and Mexican counterparts had a negative effect of $7.0 million on revenues and $4.6 million on adjusted operating income before amortization. Net income decreased by 4%, from $29.1 million in the first quarter of 2005 to $27.9 million in 2006, mainly due to a negative exchange-rate effect combined with slight increases in amortization and financial expenses. On a per-common-share basis, net income decreased from $0.33 to $0.31. Excluding the negative foreign-exchange impact and unusual items, earnings per share would have been $0.36, representing an increase of 9% over the first quarter of 2005. Highlights of Operations The following are the main operating highlights by sector for the first quarter of 2006: - Revenues in the Printing Products and Services sector rose slightly to $171.1 million in the first quarter of 2006 from $170.6 million in the year-earlier quarter, an increase of 0.3%, while adjusted operating income before amortization declined by 11.9%, from $29.0 million to $25.5 million. Organic growth in revenues was generated primarily in the Newspaper Group, stemming from an increase in page counts, increased volume from the federal election and the new contract to print The New York Times for the Ontario and Upstate New York markets at Transcontinental Interweb Toronto, the first time the venerable daily has ever been printed outside the U.S. For the balance of the fiscal year, this Group will continue to benefit from the New York Times contract, plus the Olympic Games coverage in February should also have a positive impact. While Mexican operations continue to face a challenging environment, they did continue to benefit from new sales initiatives. The Book Group is expected to complete the reorganization and consolidation of the Louiseville plant by May, while the installation of the new Goss press in the Beauceville plant is expected to be completed in June. The adjusted operating income margin before amortization decreased from 17.0% in the first quarter of 2005 to 14.9% in the first quarter of 2006. This decrease can mostly be attributed to competitive market conditions in commercial printing and the negative exchange-rate effect. - Revenues in the Marketing Products and Services sector rose from $242 million in the first quarter of 2005 to $267.2 million in 2006, an increase of $25.2 million, or 10.4%, while adjusted operating income before amortization rose 10.9%, from $33.9 million in the first quarter of 2005 to $37.6 million in 2006. The driver of growth was the acquisition of JDM, completed in February 2005. In addition, the new Premedia Group, created following the launch of our Evolution 2010 business plan, was quite successful in the quarter. Furthermore, the Direct Marketing Group in the U.S. completed its reorganization and plant consolidation. The adjusted operating income margin before amortization remained stable at 14.1% in the first quarter of 2006 as organic growth in retail printing operations was offset by the negative foreign-exchange impact. - Revenues in the Media sector rose from $129.1 million in the first quarter of 2005 to $133.8 million in 2006, an increase of $4.7 million, or 3.6%, while adjusted operating income before amortization remained relatively stable at $19.7 million, down 1.4% from $20.0 million. Organic growth was generated in the publishing of daily and weekly newspapers in Quebec and the Atlantic Provinces as well as in the distribution of advertising material. On the other hand, magazine publishing was negatively affected by lower advertising in certain categories, higher postal costs and higher circulation and promotion expenses to increase the subscription base of The Hockey News, which is now approaching its pre-NHL lockout numbers. Promising partnerships with the strong brands AskMen.com and Yellow Pages Group were also signed during the quarter. The adjusted operating income margin before amortization decreased slightly from 15.5% to 14.7%. Investments in the development of new products and services and in the digital strategy should increase over the next three quarters. Strategic Orientation Update: Evolution 2010 Evolution 2010, our new business project launched on November 16, 2005, builds on the achievements of Horizon 2005 but will go one step further. Transcontinental needs to adapt and change to the new realities of increased competition and globalization, a stronger Canadian dollar, technological advances and the emergence of new media channels. We will thus need to invest more than ever in our long-term development. Growth will be challenging in the coming years due to intense competition in some printing segments and increased strategic expenses needed to further differentiate ourselves. Evolution 2010 will put more emphasis on our role as a marketing advisor to our customers, by developing an even greater knowledge of their markets and integrating us into their value chain. We will also aim at improving our content, product and service offering, and technology platform so that we can serve our advertisers, readers and website visitors even better. Furthermore, we will be stressing organic growth, based on innovative and creative initiatives by our people, while continuing to target strategic acquisitions. We will also be investing more heavily in our long- term development. Management believes that the goals of this business project can be achieved in five ways: by introducing new products and services on a multi- channel platform; by offering integrated marketing services with a focus on value-added services; by reducing cycle times in both production and administrative functions; by growing sales organically; and, lastly, by developing our talent. In the first quarter of 2006, on the media side we became the co- publisher of the newly launched Canadian version of the world's number-one online men's lifestyle magazine, AskMen.com, which boasted approximately 10 million unique visitors worldwide in January 2006. We also forged ahead with our partnership with Yellow Pages Group for the publishing of new and innovative guides. The first two issues of these guides will target home improvement consumers, combining Transcontinental's Décormag and Style at Home brands with the Yellow Pages(TM) brand, and will be published in the spring of this year. We also elaborated the profile and started the search to fill the position of Vice President, Digital Media. On the print side, we completed the reorganization and consolidation of our Eastern U.S. direct marketing operations, we installed and ramped up the new Goss press in our Boucherville plant, we continued to work on the reorganization and consolidation of our Louiseville plant, we continued to implement our integrated manufacturing software in our printing plants and, finally, we pursued our discussions with potential customers for our newspaper outsourcing model. Furthermore, we launched our Finance Evolution program, which aims to reengineer our financial processes over the next three years. We also pursued numerous efforts for cross-selling initiatives, our market team approach and the development of our premedia offering. Reconciliation of Non-GAAP Financial Measures Financial data have been prepared in conformity with Canadian Generally Accepted Accounting Principles (GAAP). However, certain financial 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 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 As announced on November 16, 2005, Transcontinental Inc. has been authorized to purchase for cancellation on the open market, between November 21, 2005 and November 20, 2006, 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, and 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. The purchases are 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. As of March 14, 2006, the Corporation had bought back 1,972,200 Class A Subordinate Voting Shares and 382,000 Class B Shares, for a total consideration of approximately $44.8 million. Dividend Increase At its March 15, 2006 meeting, the Corporation's Board of Directors voted a quarterly dividend of $0.065 per share on Class A Subordinate Voting Shares and Class B Shares, which is an increase of 18% over the dividend paid last quarter. These dividends are payable on May 1st, 2006 to shareholders of record at the close of business on April 10, 2006. On an annual basis, this represents a dividend of $0.26 per common share. Additional Information Management's Discussion and Analysis for the first quarter of 2006, along with full financial statements, are posted on the home page of the Corporation's Web site at www.transcontinental.com. Upon releasing its quarterly results, Transcontinental will hold a conference call with financial analysts today at 4:15 p.m. EST. There will be a simultaneous audio broadcast on Transcontinental's website, which will be archived for 30 days. Corporate Affairs During the quarter, Transcontinental announced that it appointed Rob Young as president of Transcontinental Direct in the U.S. Mr. Young now leads Transcontinental's U.S. direct marketing activities from Warminster, Pennsylvania, reporting directly to Guy Manuel, president of Transcontinental's Marketing Products and Services sector. Having climbed steadily through the sales, operations and manufacturing teams of commercial printing and marketing services businesses over the past 20-plus years, Mr. Young has a solid grounding in Transcontinental Direct's business segment. At the end of the quarter, the Corporation announced the departure of two of its senior executives. The position of president of Transcontinental Media, formerly held by André Préfontaine, is temporarily being filled by Luc Desjardins during the ongoing search for a full-time replacement. Also departed is Daniel Denault, the Corporation's former chief financial officer. Benoit Huard, corporate treasurer since 2002, has been appointed interim chief financial officer after is departure and has been official appointed vice president and chief financial officer today. Mr. Huard has over 20 years of experience and held a number of top positions in the financial management of major public corporations over the course of his career. On February 14, 2006, Philippe Huard became corporate controller, replacing James Aziz, who has been appointed vice president, finance of our Printing Products and Services sector. Mr. Huard has more than 20 years experience in finance and accounting in both public and private corporations. Lastly, Transcontinental's Annual Meeting of Shareholders will be held on Wednesday, March 22, 2006, at 4 p.m., at Hôtel Omni Mont-Royal, Salon des Saisons, 1050 Sherbrooke St. West in Montreal. There will be an audio broadcast of the event on the Corporation's website. The meeting will be preceded by a press conference at the same location at 11 a.m.