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Transcontinental Announces Q1 Results, Lower Segment Volume Drives Down Net Income

Press release from the issuing company

MONTREAL, March 15 -- Transcontinental today reported first-quarter results that were lower than the same quarter a year ago. The acquisitions made in 2006, higher volume in certain niches and continued efforts to reduce costs partially offset the expected negative impact of the exchange rate, the weakness in the advertising market in certain segments, and the cost of special investments in brand promotion, title launches and digital initiatives in the Media sector. Transcontinental management is expecting the second half of the year to be superior to what it has been historically, compared to the first half, when the change in its business mix is taken into consideration, driven by the Chenelière Éducation acquisition last year, as well as a trend towards greater seasonality from some of its other business groups. Transcontinental is thus in an excellent position to achieve earnings per share before unusual items within the announced range of $1.52 - $1.65 for 2007, based on a constant exchange rate of $1.10 CAD/USD for the rest of the year. "Given our intensified investment program in our Media sector in the first quarter, we are very satisfied with our results," said Luc Desjardins, president and chief executive officer of Transcontinental. "We have reaped the benefits of our major restructuring initiatives, higher volume in some niches, investments in new technologies and the company-wide focus on continuous improvement. In the remainder of the year, as set out in our Evolution 2010 business project, we will be focusing on sales development, on organic growth including newspaper outsourcing projects in the United States, and on our development plan for our Media sector." Mr. Desjardins continued: "I'm very confident that we will continue to grow over the medium and long term, notably through acquisitions. We have the solid financial base to do so, with a net funded debt to total capitalization ratio of 28% and about $400 million available in existing credit facilities and operating credit margins. As a sign of our confidence in the future, today we are announcing a 7.7% increase in the dividend paid to common shareholders, from $0.26 to $0.28 per year." Financial Highlights In the first quarter ended January 31, 2007, Transcontinental reported a 1% increase in consolidated revenue to $568 million, compared to $565 million for the same quarter a year earlier. Adjusted operating income before amortization was down 4% at $75.7 million, compared to $79.2 million in 2006. The decrease stems from lower volume in some segments, the negative impact of the exchange rate, and additional investment in the Media sector, factors which were partially offset by acquisitions made in 2006, higher volumes in other segments and many cost-reduction initiatives throughout the company. Fluctuations in the exchange rate between the Canadian dollar and its U.S. and Mexican counterparts lowered revenue by $5.1 million and adjusted operating income before amortization by $3.5 million. Net earnings were down $7.7 million, or 28%, from $27.9 million in the first quarter of 2006 to $20.2 million in 2007. The decrease stems mainly from restructuring costs in certain segments, the negative impact of the exchange rate, additional investment in the Media sector and lower sales in certain businesses. On a per-share basis, net earnings declined 23%, from $0.31 to $0.24. In the first quarter of fiscal 2007, the Corporation initiated a restructuring plan for its commercial printing operations in its two printing sectors which resulted in total restructuring costs of $9.2 million before tax, of which $6.7 million before tax was recorded in the first quarter. This restructuring, which includes, among other things, the closing of certain smaller facilities, will allow for a significant reduction in this business segment's operating costs. In total, $7.2 million were booked for restructuring projects in the first quarter of 2007, compared to $0.1 million in the year-earlier quarter. Adjusted net income, which does not include unusual items related to impairment of assets and restructuring costs, decreased 10%, from $28 million in the first quarter of 2006 to $25 million in 2007. On a per-share basis, adjusted net income was down 9%, from $0.32 to $0.29. For more detailed financial information, please see First Quarter Ended January 31, 2007 Results on the Transcontinental website at www.transcontinental.com, under "Investors." Operating Highlights The main highlights for the first quarter of 2007 are as follows: - Transcontinental has identified newspaper printing in the United States as a major area of growth in future years. On November 17, 2006, an important step was announced with the signing of a 15-year contract, worth US$1 billion, in which Hearst Corporation outsources the printing of the San Francisco Chronicle and its related products to Transcontinental. Unlike similar agreements with Canadian newspaper publishers, this contract excludes paper. On a comparable basis, it would be worth about US$2 billion over 15 years. The San Francisco Chronicle is the leading paper in the Bay Area, which is the fifth most-populous market in the United States, and ranks 14th among daily papers overall with an average daily circulation of more than 400,000 copies. - On February 21, 2007, Transcontinental announced that it has established a division that will devote all its time to the development in North America of outsourced newspaper printing and the operation of its newspaper printing plants in the United States. Ted Markle has been appointed senior vice president of this division. The prestige of the San Francisco Chronicle and its owner has enhanced Transcontinental's credibility and heightened awareness of Transcontinental among major daily paper publishers in the United States. Talks are at different stages with a number of these publishers, and the Corporation is optimistic about eventually announcing another contract. - Transcontinental leads in flyer printing in Canada and this segment continues to grow within the company, both in terms of business from major retail chains and from non-traditional advertisers. On December 12, 2006, the Corporation announced that it had signed a five-year contract with the Hudson's Bay Company to print all of its flyers for Zellers, The Bay and Home Outfitters, as well as the material for their loyalty programs. The contract also covers the use of value-added products and services, including a variety of direct mail and catalogue printing services. The five-year contract starts on February 1, 2007 and is valued at about $350 million, of which about $75 million is new business for Transcontinental. To ensure its growth in this niche continues, Transcontinental also invested $25 million to expand its Saint-Hyacinthe plant near Montreal to make room for a state-of-the-art flyer printing press. The new equipment will be fully operational by the spring. - Transcontinental believes that in the future, TV schedules and information about TV programs will be disseminated via digital platforms. Thus, after turning TV Guide into an exclusively online publication last fall, the Corporation announced an agreement on November 30 to make TVGuide.ca accessible via Sympatico.MSN.ca, the most popular website in Canada. The decision announced on November 24 to sell Transcontinental's interest in TV Hebdo to Les Publications TVA inc. reflects this same strategy. - Local and regional newspapers serve as the voice of their communities. Whether on paper or online, these publications are important strategic assets for the Corporation. In December 2006, Transcontinental purchased two more community papers in Saskatchewan, The Radville Star and The Deep South Star, bringing to 165 the total number of papers in its portfolio, including 12 daily papers in the Atlantic provinces and Montreal's primary free daily paper, Métro. - On March 21, 2007, following an exclusive agreement with renowned U.S. publisher Meredith Corporation, Transcontinental will launch the Canadian version of More magazine, which has been highly successful in the United States. Aimed at women aged 40 and older, More mines an under-exploited niche in the Canadian market and rounds out Transcontinental's selection of women's magazines. The first issue received an enthusiastic response from advertisers and future readers.