Transcontinental Generates Organic Revenue and Profit Growth

MONTREAL—Sept. 7, 2011—Transcontinental’s revenues increased 2 percent in the third quarter of 2011, from $481.3 million to $492.6 million. This increase was primarily due to a number of new contracts, most notably from the expanded relationship with The Globe and Mail. Excluding acquisitions, divestitures and closures, the impact of the exchange rates and the paper component variance, organic revenue growth was 2 percent, driven primarily by the Printing sector.

Adjusted operating income was flat at $57.2 million, while the adjusted operating income margin slightly decreased from 11.9 percent to 11.6 percent. The contribution from new contracts coupled with the synergies associated with the use of our most productive assets and continued efficiency improvement initiatives in the Printing sector was compensated by more difficult market conditions in the Media sector, more specifically related to the educational book publishing division, continued strategic investments in the Interactive sector and the negative impact of the exchange rates. However, we generated 6 percent of organic growth.

Net income applicable to participating shares decreased 63 percent, from $28.9 million to $10.6 million. This decrease is mainly due to a net loss related to the discontinuance of our operations in Mexico. Excluding unusual items and discontinued operations, adjusted net income applicable to participating shares decreased 2 percent, from $33.4 million to $32.8 million.

“I am satisfied with our third quarter results, especially with the fact that we have generated organic revenue and profit growth for the sixth consecutive quarter in an industry that faces increasing competition,” said François Olivier, president and CEO. “In the past few months, we pursued our strategy to strengthen our existing assets by making strategic acquisitions, divesting less core businesses and rationalizing certain activities.

“We also developed our offering of products and services on the digital side by expanding our digital advertising representation relationships as well as mobile partnerships. We will continue with our plan to transform Transcontinental to meet our customers’ evolving needs. In the next few months we will launch new digital products and services and make use of our most productive assets in order to continue to grow and transform Transcontinental,” added Olivier.

Other Financial Highlights

Free cash flow from operations increased significantly as cash flow from operations, before changes in non-cash operating items, was stable at $71.4 million and capital expenditures decreased, from $21.4 million to $8.7 million.

As at July 31, 2011, the ratio of net indebtedness (including the securitization program) to adjusted operating income before amortization was 1.59x, as compared to 1.82x as at October 31, 2010 and 1.85x as at July 31, 2010. The ratio of net indebtedness to adjusted operating income before amortization is slightly above the target of 1.5x set by management. Over the next few quarters, it should reach the target given the expected increase in cash flow generation and reduction in capital expenditures.

In the quarter, Transcontinental prepaid and cancelled its five-year term loan of $50 million with SGF Rexfor Inc.

Operating Highlights

Transcontinental announced that it agreed to acquire all the shares of Quad/Graphics Canada Inc. This transaction is currently being reviewed by the Competition Bureau of Canada. Transcontinental was informed by the Competition Bureau that it requires additional information in order to complete its review of the proposed transaction.

Under the Competition Act, the period during which the parties may not complete the transaction has been extended until 30 days after providing the Competition Bureau with the additional information it has requested. Both parties have been cooperating with the Competition Bureau since the announcement of the transaction, and they expect to be able to comply with the request for additional information in a timely manner. Given the scope and complexity of the parties’ businesses, the issuance of a request for additional information is not unusual.

The Mexican Federal Competition Commission has approved the sale of Transcontinental’s Mexican operations to Quad/Graphics, therefore this transaction will close shortly. In connection with the upcoming closing, Transcontinental will also transfer its black and white book printing business, destined for U.S. export, to Quad/Graphics. As a result of this imminent volume reduction, Transcontinental will gradually reduce approximately one third of its workforce in its Louiseville and Sherbrooke plants where this book work is produced.

These transactions combined are expected to generate at least $40 million in incremental EBITDA for Transcontinental, over 12 to 24 months following the closure of the transactions.

Transcontinental announced the consolidation of production activities of two commercial printing plants in Montreal, Transcontinental LithoAcme and Transcontinental Direct Montreal by late September 2011. As a result of this reorganization, the workforce will be reduced.

Transcontinental Media acquired the publishing assets of Groupe Le Canada Français, both print publications and websites. Print publications have a combined weekly circulation of more than 155,000 copies. It also acquired the majority of the assets of Avantage Consommateurs de l’Est du Québec inc., including print publications, which have a combined weekly circulation of 60,000 copies, as well as digital and distribution activities. Furthermore, it significantly grew its digital advertising offering thanks to a new partnership with The New York Times Company for About.com, CalorieCount.com and Netplaces.com as well as with Ziff Davis for PCMag.com, ExtremeTech.com and Geek.com.

Transcontinental Interactive won a number of awards. It was ranked top Canadian vendor by the 2011 Email Vendor Features & Functions Guides from Red Pill Email and was ranked fifth in the United States, the only Canadian company to place in the top five. In addition, it captured a total of 30 top prizes at the prestigious Magnum Opus Awards for 2011. These awards recognize excellence in custom-media editorial, design and strategy and were presented by ContentWise and the Content Marketing Institute. They were judged by leading custom-publishing professionals and professors from the Missouri School of Journalism.

Highlights for the Nine-month Period

In the first nine months of fiscal 2011, Transcontinental’s revenues increased 2 percent, from $1.47 billion to $1.51 billion. Excluding acquisitions, divestitures and closures, the impact of the exchange rates and the paper component variance, organic revenue growth was 2 percent, with all three sectors contributing.

Similarly, adjusted operating income increased 3 percent, from $161.0 million to $166.4 million, while the adjusted operating income margin increased slightly from 10.9 percent to 11.0 percent.

Net income applicable to participating shares went from $122.1 million to $69.8 million. Excluding unusual items and discontinued operations, adjusted net income applicable to participating shares increased 9 percent, from $93.2 million to $101.5 million.

About Transcontinental
Transcontinental (TSX: TCL.A, TCL.B, TCL.PR.D) has 10,500 employees in Canada, the United States and Mexico, and reported revenues of C$2.1 billion in 2010.

Source: Transcontinental.