Business News

Transcontinental Pursues Rationalization Plan, Some Activities Affected by Recession in First Quarter

Friday 13. March 2009 - * Slight growth in revenues, from $596 million in first quarter 2008 to $604.1 million in 2009; excluding acquisitions and positive impact of paper prices and exchange rate, revenues down 10%, mainly due to U.S. direct mail activities, but also magazine publishing and commercial products printing.

– Adjusted operating income before amortization decreased 29%, from $82.4 million to $58.3 million.

– Due to negative organic growth and an unfavourable variance in unusual items, net income declined from $34.1 million to a loss of $6.4 million; on a per-share basis, net income fell from $0.41 to a loss of $0.08.

– Adjusted net income, which excludes unusual items, decreased from $28.4 million to $15.1 million; on a per-share-basis, it declined from $0.34 to $0.19.

– Instituted rationalization plan, with elimination of 1500 jobs, for a total of $75 million in cost-cutting measures on an annualized basis, including $50 million in 2009.

– Financing agreements total $400 million to date, including $100 million in new funds.

– Signing, in December 2008, of a second six-year contract, worth $150 million, with Rogers Communications to produce its marketing products.

– Very high traffic volume following November launch of weblocal.ca, a Canada-wide site for finding and rating local businesses and services, with 1.8 million unique visitors in the past 30 days.

The sharp and sudden onset of the recession affected some of Transcontinental’s activities in the first quarter 2009. On a comparable basis, year over year, excluding acquisitions and the positive impact of paper prices and the exchange rate, Transcontinental’s consolidated revenues were down by 10% and adjusted operating income before amortization decreased by 38% in the first quarter of 2009. U.S. direct mail activities, magazine publishing and commercial products printing were particularly affected by the cancellation, decrease or postponement of promotional and advertising campaigns, mainly by financial institutions and car manufacturers.

To deal with this situation, the Corporation continued with its rationalization plan to protect its financial health and adjust production capacity to demand, particularly in its U.S. direct mail and commercial printing operations, and to address the drop in magazine advertising revenues. It also instituted a series of other cost-saving measures throughout the Corporation. These initiatives are expected to reduce costs by about $75 million on an annualized basis, including $50 million in 2009. Under this plan, certain plants and publications have already been shut down, and others are slated for closure in the future. About 1500 jobs have been eliminated, of which about half are in the United States. Senior managers have decided to contribute to cost-cutting efforts by working two weeks without pay, which amounts to a 4% pay cut. For the Board Chair and the Chief Executive Officer, it will amount to 10%. Board members have agreed to a freeze on their retainers.

“We are confronting a situation that Transcontinental has never had to deal with before,” said François Olivier, President and CEO. “We are determined to protect the financial health of our business even as we continue to integrate the new marketing services and communication platforms that our customers are demanding. The situation is a difficult one in human terms, but we are acting in the best interests of our employees and shareholders. We have asked our people to use their initiative and creativity to help us weather this storm. We are monitoring the situation very closely and will make the necessary adjustments if the situation deteriorates further.”

“These measures, combined with several new contracts that take effect in 2009, will put us in a better position in the second half of the year,” Mr. Olivier said. “This includes our two new contracts to print Rogers Communications’ magazines and produce its marketing products, which took effect at the beginning of the second quarter, and our contract to print the San Francisco Chronicle. Thanks to our sound financial position, strong brands, investments in leading-edge technology for our printing network, and the introduction of new marketing services and new communications platforms, we will be able to seize the opportunities that will inevitably turn up in this environment, while maintaining a prudent balance between our profits, costs, debt and investments.”

As at January 31, 2009, the Corporation’s net funded debt to total capitalization ratio was 43%, midway between the 35% – 50% long-term objective set by management.

Financial Highlights
In the first quarter ended January 31, 2009, Transcontinental recorded consolidated revenues of $604.1 million, compared to $596 million in the same quarter of 2008. The contribution from acquisitions and the positive impact of paper prices and the exchange rate were almost entirely cancelled out by negative organic growth, stemming mainly from U.S. direct mail activities, the decline in magazine advertising revenue and the difficult commercial printing market. Adjusted operating income before amortization was down 29%, from $82.4 million to $58.3 million, for the same reasons as above, in addition to strategic investments in the Media Sector and, following the introduction of new accounting standards, the start-up costs of certain projects in the Printing Sector, which must now be immediately expensed.

Net income declined from $34.1 million in the first quarter 2008 to a loss of $6.4 million, a decrease of $40.5 million that stems mainly from negative organic growth, as well as an unfavourable variance in unusual items, particularly impairment of assets and restructuring costs. On a per-share basis, net income decreased from $0.41 to a loss of $0.08.

Adjusted net income, which excludes unusual items related to asset impairment, restructuring costs and income tax adjustments, decreased from $28.4 million to $15.1 million. On a per-share basis, adjusted net income decreased from $0.34 to $0.19.

Operating Highlights
Here are the main operating highlights for the year to date.

* Early in fiscal 2009, Transcontinental adopted a new operating structure, which primarily involved the creation of the Marketing Communications Sector. The core business for this new sector is the creation and development of services in advertising personalization, new communications platforms and marketing products printing. Transcontinental then enriched its service offering in this sector by making two strategic acquisitions: Toronto-based Redwood Custom Communications, a North American leader in custom communications, which creates turnkey custom publishing and branded content solutions for both print and digital platforms; and Conversys, located in London, Ontario, Canada’s leading print-to-Web provider, which specializes in the seamless transformation of print materials such as flyers into interactive Web content.

* As Canada’s leader in direct marketing, in December 2008 Transcontinental signed a second six-year contract, worth $150 million, to produce all of Rogers Communications’ direct marketing products and print a variety of other marketing communication products. This new contract comes on the heels of another six-year contract, which took effect in February 2009, to print all of Rogers’ magazines.

* In November 2008, Transcontinental launched weblocal.ca, a Canada-wide Web site for finding and rating local businesses and their products and services. Highly interactive, weblocal.ca generates its content from information entered by users. In the past 30 days alone, the site has attracted 1.8 million unique visitors. This is a remarkable achievement that bodes well for its commercialization phase. This initiative will allow Transcontinental to generate new revenue and enrich its multi-channel offering to local advertisers.

* In newspaper printing, work on the plant that will print the San Francisco Chronicle is on time and production will start in June 2009. Also, modernization of Transcontinental Transmag in Montreal is almost finished and the new presses will start up in the third quarter 2009.

Reconciliation of Non-GAAP Financial Measures
Financial data have been prepared in conformity with Canadian 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.

Financing Activities
In February 2009, the Corporation announced financing agreements totalling $400 million. The first was a new private placement offering of $100 million in unsecured debentures underwritten by the Solidarity Fund QFL, a development capital fund based in Quebec. The second extends, to August 2010, the Corporation’s $300 million accounts receivable securitization program set up in 2001.

In this period of tight and expensive credit, management views this as investors’ recognition of Transcontinental’s solid financial situation and as evidence of their confidence in the Corporation’s growth strategy and future prospects. Management expects that it will be able to cover all of its financing needs for 2009 in the near future.

Sustainable Development
In 2007, Transcontinental adopted a forward-looking Paper Purchasing Policy which goes well beyond existing standards and certifications. Since then, managers have taken steps to make our suppliers and customers more aware of this policy and to help them move forward with us. The Corporation is proud to announce the concrete and verifiable results of our day-to-day efforts: from 2007 to 2008, Transcontinental customers’ use of “Gold” ranked papers, which meet the highest standards of sustainable forest management, rose by 37%. This trend intensified in the first quarter.

Furthermore, by the end of the first quarter, Transcontinental’s 45 printing facilities in Canada and the United States had all obtained triple chain-of-custody certifications, ensuring that papermaking processes meet the most demanding standards for sustainable forest management.

Corporate Affairs
On November 14, 2008, Transcontinental announced the immediate appointment of Brian Reid as President of the Printing Sector. This sector comprises Transcontinental’s services to retailers and publishers of newspapers, magazines, books and catalogues, as well as direct mail activities in the United States and operations in Mexico. It reports revenue of about $1.5 billion a year. Mr. Reid joined Transcontinental in 1992 and has been very successful at every stage of his career. From 2003 he was Senior Vice President, Catalogue and Magazine Printing Group for North America. He is also on the Corporation’s Executive Committee.

On January 8, 2009, Transcontinental announced the appointment of Sylvain Morissette to the position of Vice President, Corporate Communications, effective February 2. Reporting to the President and CEO, Mr. Morissette is a member of the Corporation’s Executive Committee. Mr. Morissette brings Transcontinental the benefit of more than 20 years in corporate communications, including eight years as a member of the Rona management team. When he joined Transcontinental, he was President and CEO of the Association of Quebec Advertising Agencies.

Dividend
At its March 12, 2009 meeting, the Corporation’s Board of Directors maintained the quarterly dividend of $0.08 per share on Class A Subordinate Voting Shares and Class B Shares. These dividends are payable on April 24, 2009 to shareholders of record at the close of business on April 6, 2009. On an annual basis, this represents a dividend of $0.32 per share.