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Executives

Jennifer McCaughey - Director of Investor Relations

François Olivier - President and Chief Executive Officer

Benoit Huard - Vice President and Chief Financial Officer

France De Blois – Corporate Controller

Donald LeCavalier - Treasurer

Analysts

Adam Shine -National Bank Financial

Carl Bayard - Genuity Capital Markets

Arivenda Galevendish - [ph] Cormark Securities Inc

Scott Cuthbertson -TD NewCrest

Chris Li -Merrill Lynch

Drew McReynolds – RBC Capital Markets

David McFadgen - Cormark Securities Inc.

Randal Rudniski - Credit Suisse

Transcontinental Inc. (OTCPK:TCLAF) F3Q08 Earnings Call September 11, 2008 4:15 PM ET

Operator

Good afternoon, (speaking in French) welcome to the Transcontinental Inc., Third Quarter Results Conference Call. (Operator Instructions) I would like to turn the conference over the Jennifer McCaughey Director of Investor Relations.

Jennifer McCaughey

Joining me today at our head office in Montreal are François Olivier, President and Chief Executive Officer; Benoit Huard, Vice President and Chief Financial Officer; France De Blois, our Corporate Controller; and Donald LeCavalier, our Treasurer. For today’s presentation Monsieur Olivier will discuss recent announcements and put them in perspective with regards to our strategy as well as review our various businesses. Monsieur De Blois will then conclude with comments on our financial performance before we open the lines for your questions.

I would like to remind you that this conference call is intended for the financial community. Media are welcome to listen but should contact our director of media relations, Nessa Prendergast for information or interview requests.

For a detailed analysis of our results, in addition to our press release we issued our third quarter MD&A with complete financial statements and related notes earlier today. For those of you who are not on our distribution list, the documents are posted on our web site at transcontinental.com

Before we start, I would like to also remind everyone that the information that will be discussed over the course of this conference call may contain forward-looking information. Such information, based on the current expectations of management and information available as of today, inherently involves numerous risks and uncertainties, known and unknown. We caution that all forward-looking information is inherently uncertain and actual results may differ materially from the assumptions, estimates, or expectations reflected or contained in the forward-looking information. The risks, uncertainties, assumptions, and other factors that could influence the results are described in the quarterly and annual MD&A and the latest annual information form, which are available on Transcontintental’s web site. Transcontinental undertakes no obligation to update publicly such forward-looking information to reflect subsequent events or changes in the assumptions, estimates, or expectations unless otherwise required by the Securities Authorities.

François Olivier will now proceed with his comments.

François Olivier

Let me begin by saying that Transcontinental had a solid third quarter. Revenues increased 6% and EBITDA increased 2%. Organic revenue growth for the third quarter was 3.5% and for the first nine months of the year it was 2 to 3.2% ahead of the first nine months of last year at 2%. We are on the right track to reach our objective of 5%, especially with some of the announcements we made in the past few months.

Our adjusted earnings per share, excluding the foreign exchange impact, grew 12% in the third quarter above our evolution 2010 objective of 10%. I am very proud that we were able to achieve these results given the current economic environment. In general, the third quarters at some groups do exceptionally well while others had a more challenging time, as I will describe in just a few minutes.

First I would like to reiterate our strategy and give you concrete examples of how we executed in this quarter.

We have said in the past that our three primary areas of growth are newspaper outsourcing, direct marketing and digital media. Growth will also come and out ability to integrate into new non-print related growth platforms. These will help our existing customers optimize their marketing dollar. Here I am talking about new service such as email marketing, data base management and the internet in general. Our success will also depend to an extent on the execution of our evolution 2010 business project which focuses on four strategic issues, [inaudible], sales growth, operational efficiency and our digital offerings.

In recent weeks we made a number of public announcements that support our evolution 2010 business plan, our niche strategy and our target growth areas. We announced that we were awarded a $1.7 billion contract to print the Globe and Mail in most of its major markets in Canada until 2028. This represents approximately $95 million of revenue per year, of which $25 million are new revenue sources. We will have to invest approximately $200 million and a new platform to execute this contract. In order to make this project more profitable for us, we asked the Globe and Mail to change its format so that we could combine the printing of retail flyers and newspaper to generate greater synergies.

I would like to highlight a few important points regarding this project: First this is an 18-year contract with secure cash flow; second in order to win the contract we had to invest to meet the Globe and Mails printing requirements of color on every page; third, with the Globe and Mail contract alone we will have a rate of return above our cost of capital; fourth, the combination of the retail and newspaper platforms will reduce our forecast capital investment for the years to come; fifth, the increased efficiency of these new presses will benefit both platforms, retail and newspaper; and sixth, any additional businesses we gain is a great opportunity, but is not needed to benefit from increased efficiency because we have the opportunity to transfer existing work on newer, more efficient equipment and close or decommission less efficient equipment.

We also recently announced that we gained new businesses from Shoppers Drug Mart to print its retail flyers and deliver value added services in strategic media opportunities. The multi year arrangement, valued at approximately $25 million per year, took effect at the end of April and represents all new business for us. What is more, this new business required no investment. In fact, that combination of this new business with the Rogers contract we signed earlier this year and multiple other smaller wins in the Canadian printing market will help us reach our evolution 2010 objective of 5% organic revenue growth on average per year.

Finally, we announced last week the acquisition of Rastar, the US based direct marketing company that specializes in interactive database marketing and variable data digital printing, which enabled fully personalized marketing communications. Rastar’s experience, combined with its digital printing expertise, will allow us to further expand our integrated marketing services offering and enable our clients to achieve the best possible returns on their marketing campaigns. This is a good compliment to our current position and direct mail activities. It diversifies our activities away from the financial services vertical, it increases our offering and value added services, and it allows us to gain expertise in managing the end-to-end direct marketing process.

On another note, with regards to our digital strategy, we continue to invest in our online development, launching the revamped website of Style at Home this quarter. We are also working on a number of new websites that should be launched in the fourth quarter around our local newspaper offering and our women communities of interest.

As you can see from this list of recent achievements, we are in a strong position to execute on our evolution 2010 objectives. We are generating new sales, improving our efficiency and investing in our future. We are a company in continuous development and are focused on growth.

Having said this, I would now like to review some of our businesses. First on the media side, our media business continues to invest in its future in the third quarter even thought the advertising market softened as of late. As a result, while organic revenue growth was up 2%, organic EBITDA declined by 6%.

Our magazine grew at a challenging quarter as it was affected by a decrease in national advertising and certain titles of our consumer segment. In fact, the difficult economic environment in the US is having a spill over effect in Canada as large multi national corporations reduce their overall advertising spending; however we have strong brands and are convinced that this positions us better visa vie the market. What’s more, Veta, the French versions of Moore Magazine for the Canadian market, will be launched next week. Preliminary results suggest that it will surpass our expectations such as Moore magazine did last year, reinforcing our view that there is a demand for magazines servicing certain communities of interest.

Our newspaper grew sales organically fueled by higher volume from the weeklies and new products. I would like to reiterate that the newspaper we own, our weeklies, and regional dailies, these newspapers typically derive about 90% of their revenues from local advertising and therefore have been historically less affected by downturns in national advertising.

Our distribution group grew sales organically, driven by national sales. In essence, a large portion of our customers in the distribution groups are fooders [ph] and pharmacies which typically do not reduce their advertising spending to changes in the economic environment.

Our digital media group grew sales in the third quarter driven by the accelerated development of our web properties. We invested about $2 million in the quarter in the development of exciting new products we expect to launch in the near term. We will re-launch at least three other sites before the end of our fiscal year, namely [inaudible] el Québec and el Canada. In addition we will launch a new and innovative site called inmemorium.ca for obituaries.

Overall our unique monthly visitor increased 10% versus the third quarter last year. What’s more, our reach into the total Canadian internet advertising market increased from 13% to 15%. We are extremely pleased with this growth and this internet market penetration. We are supporting our readers and advertisers on the web and at the same time developing new digital readers. We are committed to taking the digital turn and invest to make it happen.

For our printing products and services sector, this sector had a strong third quarter, growing revenues organically by 4% and EBITDA by 13% with great contributions by the book group and our Mexican operations. Our newspaper group had a decrease in revenues in the third quarter due to a slight reduction in page count, color and insert, stemming from a soft advertising market, but it managed to keep its profitability relatively flat.

In the quarter, we focused on executing on the previously announced investment for our Transmag [ph] facility in Montreal. This investment will allow us to add color capacity and improve production quality and efficiency. Furthermore, in the fourth quarter we should benefit from the federal elections.

With regards to the San Francisco chronicle project, we are on track and progressing well. Finally, we continue to have discussions with many newspaper publisher in North America, however given the deteriorating market condition of this industry in the US, even though our model is more interesting than ever, it becomes much more compelling when it includes more than one paper in a given area. As a result, the sales process is that much longer.

Our book group generated strong top line and bottom line growth for the successful sales development efforts, especially in the educational segment, delivering on the planned benefits from our recent capital investments.

Our Mexico group generated strong sales in the retail segment. While only a small portion of our overall operations, the Mexico group has grown over 25% in the past three years and has broadened its margin up in line with our Canadian operations. In fact, we are currently close to full capacity in Mexico and are currently adding capacity to press rebuilds and equipment transfer from our Canadian operation to be able to meet market demand.

Finally, our commercial products group continued to be negatively affected by weaker demand in the market, however we continue to control our costs aggressively.

Now for the marketing products and service sector: this sector had mixed results in the third quarter. While it grew revenues organically by 4% it decreased organic EBITDA by 2% as growth generated in our retail group was more than offset by the catalogue and magazine group and the direct marketing group.

Our retail group grew sales organically in the third quarter as a result of our recently announced new business with Shoppers Drug Mart, which came into effect at the end of April. Our direct marketing group generated marginal organic revenue growth, but negative growth as an increase in volume was partially compensated by pricing pressures and moves into simpler packaging, especially from our financial customers.

Looking forward, the direct marketing group is expected to face a challenging operating environment as the ongoing credit market turmoil in the US has further deteriorated in the last few weeks. In fact, we have seen some of our financial customers substantially reduce their programs and in some cases postpone them all together. In order to mitigate the effect of these market conditions on our operations, we took measures to substantially adjust our capacity. We consolidated some facilities in Pennsylvania and reduced our direct and indirect labor force. We continue to monitor the market carefully and are ready to react with additional adjustments if the environment demands it.

At this point it is difficult to determine when the market will turn around. We do not expect this situation will affect the operations or the prospects of Rastar as it is active in completely different verticals and provides a much fuller array of marketing services.

Our catalogue and magazine group had a challenging quarter and a typically slower third quarter due to the loss of a directory customer already announced at the beginning of the year, which was filling otherwise open capacity in the summer months. However, in the next few quarters we expect this group to grow significantly as it will start benefiting from the Rogers contract and multiple smaller deals we recently won.

To conclude, we are in a good position after the first nine months of the year. We have accomplished many things. We gained significant new business with Rogers, Shoppers Drug Mart, and multiple smaller customers, the measure it gives this organic growth will contribute to fiscal 2009 results.

We invest in our newspaper outsourcing strategy to the San Francisco Chronicle project and our Transmag [ph] facility. We announced a new 18 year contract with the Globe and Mail and a $200 million investment in an innovative, new combined platform to print newspapers and retail flyers,; we invested in our digital media strategy in order to accelerate the growth of our platform. We launched and re-launched a series of new sites and made acquisitions such as acquisition.biz and we invested in our direct marketing strategy with the acquisition of

Rastar and ten data, in order to take advantage of the personalization and the one to one marketing trend. We are growing and are very well positioned for future growth. We are confident that we have the people, the strategy and the financial capabilities to achieve the objective of our evolution 2010 business project.

I will now turn things over to Benoit for a closer look at our numbers.

Benoit Huard

It is now my turn to welcome you all to our conference call. Revenues for our third quarter of 2008 increased 6% to $585 million specifically as a result of the contribution from acquisitions, mainly PLM Group acquired in October of 2007 as well as organic growth.

Organic growth was primarily generated from the retail group and the book group. Adjusted EBITDA increased 2% principally as a result of acquisitions and organic growth in the retail group and the book group. This growth was partially offset by a decrease in volume in the magazine group, the catalogue and magazine group and the newspaper group on the printing side as well as the negative foreign exchange impact. Excluding foreign exchange, adjusted EBITDA would have increased 4%.

I will now describe the main variances in revenues an EBITDA.

Acquisitions completed in 2007 and 2008 net of the divestitures and enclosures, most notably the daily news and Allofax, contributed $25 million to revenues and $5 million to EBITDA. Paper had a negative effect of $1 million on our revenues in our two print sectors. I remind you that the paper effect includes a variation in the price of paper, paper supply and changes in the type of paper used by customers of our printing operations. Paper also had a negative impact of about $1 million on the EBITDA of our media business.

The variation in the Canadian dollar versus the US dollar and the Mexican peso caused a $9 million decrease in our revenues and $2 million decrease in our EBITDA. As previously mentioned, the foreign exchange impact is subsiding, beginning with the third quarter.

Net income increased 9% to $30 million for the third quarter of 2008. This increase is primarily due to the increase in the EBITDA combined with a decrease in financial expenses, income taxes, and a favorable variation in unusual items partially offset by the negative exchange rate effect as well as higher amortization expenses.

On a per common share basis, net income increased 14% from $0.33 to $0.38. Adjusted net income, which does not take into account impairment of assets and restructuring costs and unusual adjustments to income taxes this year increased 7% to $30 million for the third quarter of 2008.

On a per common share basis it increased 12% from $0.34 to $0.38. This higher percentage reflecting the positive effect of the corporations share buy back program. Excluding the negative exchange rate effect in the first nine months of fiscal 2008, adjusted earnings per share would have increased 17.5% over the first nine months of fiscal 2007. This measure gives a good indication of the net operational performance in the first nine months of the year.

We continue to generate strong cash flow from operations which increased 14% to $76 million, a very solid performance. From November 1 2007 to September 10, 2008 we purchased over $2.9 million shares for a total consideration of growth to $49 million. We believe buying back our own stock represents an excellent investment, as it currently trades at a very attractive multiple for a company that is growing and has excellent growth prospects and that generates 2/3 of its year-to-date free cash flow from its media operations.

Year-to-date over 85% of the share buy back program has been completed for the class A subordinate voting shares. We paid $6 million in dividends or $0.08 per share in the third quarter of 2008. This is an increase of 14% compared to $0.07 per share paid in the third quarter of 2007. We are in a solid financial position to pursue our growth to organic initiatives, but also through acquisitions with a net debt to total capitalization ratio of 35% as of July 31, 2008, up from 29% at the end of October 2007. This ratio is at the bottom end of the range of our evolution 2010 objectives to maintain a net debt to total capitalization ratio between 35 and 50%.

I want to highlight a few factors that will likely influence our fiscal 2008 results. For the fourth quarter we estimate the pre-tax exchange rate effect will turn slightly positive using a concentrate of $1.05. For the fourth quarter we anticipate an investment of approximately $2 million relating to a number of new digital initiatives; capital expenditures of approximately $275 million for the full year, including approximately $100 million for the San Francisco Chronicle project.

We expect a positive impact from our share buy back program and a lower income tax rate, about 295 for the full year, excluding unusual items. The current levels of interest rates are much lower than last years fourth quarter. We also expect contributions from acquisitions and contributions from market share gains we have announced in the Canadian printing market.

In addition to this list, I would like to highlight that raw materials such as paper and ink, as well as energy prices, primarily oil, are starting to have an impact, albeit not that significant, on our operations. First paper prices are increasing. While paper is a pass through for our two printing sectors, the increase in the price of paper negatively affects the profitability of our media sector. Second, a recent spike in the price of oil, a core ingredient in the composition of ink, has now resulted in announced increases in ink prices, however in most instances, our contract with our customers provides for escalation clauses based on the fluctuations in the price of ink. But, to keep this in perspective ink costs represent only approximately 2 to 3% of our total operating costs.

Finally the recent spike in the price of oil has resulted in a significant at the pumps. This increase in gasoline prices is negatively affecting our distribution activities in our media sector and to some extent our overall transportation expenses as gasoline surcharges are increasing. As for natural gas, our consumption is rather limited, of which a significant portion is already hedged.

Having said this, we would like to reiterate our commitment to our evolution 2010 business project and related financial objectives, in particular to grow adjusted earnings per share, excluding the foreign exchange impact, 10% on average per year, from 2006 to 2010.

That concludes our presentation; we are now open for questions.

Question-and-Answer Session

Operator

(Speaking in French, Operator Instructions) Your first question comes from Adam Shine with National Bank Financial.

Adam Shine -National Bank Financial

I didn’t see anywhere in the MD&A the explanation for the minority interest line, so if you could maybe touch on that quickly. Also, just looking at the balance sheet, we usually see accounts receivable decline a bit more materially during Q3. There was a slight decline versus Q2 but nothing terribly significant. I noticed that there wasn’t anything unusual about allowance for doubtful accounts, bad debt expense, or anything like that, so maybe if you could just talk to those two items.

Benoit Huard

The minority interest line is not really significant, but the explanation is we add a variable interest entity before and the treatment of that variable interest entity changed so that we consolidate it back now to where it was before, so we did not consolidate it completely and we had to reverse the portion of the minority shareholders that we accounted for previously for our own results.

I don’t know if that is clear, but that is something that is very technical.

The accounts receivable is really timing. There is nothing to read into that. It is only a timing of maybe we received payment for one or two customers the day after the quarter ended or something like that.

Adam Shine -National Bank Financial

I didn’t notice anything unusual, but we usually see things come down quite a bit. If I look to sort or tracking the M&A tracking that you disclose and I look at what, I guess would in theory be largely the PLM margins, it looks as though we have seen a steady decline in that margin during the course of the year. Now I acknowledge that thin data go added to the mix at some point as well, but is there something else that’s driving this contraction margin? Is there under performance at PLM or is there perhaps something else at play, seasonality or some other issue?

François Olivier

I think there is a little bit of seasonality, like Q3 was kind of soft in the marketing and commercial market and in Canada, so they certainly suffer from that, so they were certainly more quiet than Q3 that we anticipated at QLM.

On the other hand we are exceeding our synergy in terms of how much cost we thought we could take out of this operation and we are actually doing better in terms of that and looking into the fourth quarter the activity is back to normal, so that is what I can tell you.

Benoit Huard

On top of that, the line where you see acquisitions is net of divestitures and closures, so it is not the number for PLM per se, so don’t read into that that those are the margins for PLM because it is in that amount of many different acquisitions and divestitures and closures as well.

Adam Shine -National Bank Financial

Francois made some comment just acknowledging what really has been a pretty ugly lineage trend among US newspapers over the past couple of quarters if not much longer than that, but certainly in the first half of this year. Francois you noted that now you probably need more than one newspaper to be added into the mix for the new contract. Has that led to a change in the nature of your discussions?

François Olivier

Obviously we had to make our model evolve as the environment in the market change in the US and if there is one thing that doesn’t change it is that we want to make a good and secure deal going forward and basically our past model was one publisher, one plant, one customer and that Rascont Natale [ph] is supplying all of the CapEx for the whole project. We are looking at a model where there could be more than one player in the plant and maybe model where Rascont Natale [ph] don’t necessarily put up all of the capital up front for these projects.

There might be ways now to share the capital and make this project viable for more than one customer because in the present economic environment it is difficult to justify those investments only on one paper and from a risk standpoint we think that our model needs to evolve and I must add that the amount of people that we feel are secure on a go-forward basis to talk to are shrinking a little bit. There are some people out there that carry a huge amount of debt and they are certainly not people that we would entertain doing business with at the moment.

So we are following the market very closely and we are having a discussion with those who are very healthy from a debt standpoint or financial standpoint, but like I said I think it is not a Transcontinental change it is a market change and we need to react to the market, but we do believe that a strong brand and the daily newspaper in the US will survive, but they need to work differently on the way they do their editorial content, the way they distribute their paper and the way they manufacture their paper and we are certainly there to talk about the manufacturing part of the equation.

Adam Shine -National Bank Financial

For CapEx in fiscal ’09, so next year, are we looking at something closer to 250 or closer to 275?

Benoit Huard

Last time we said it was going to be similar to this year and this year we said is going to be closer to 275, so it is going to be around that. Obviously it could vary by a few million, but it is going to be around that.

Operator

Your next question comes from Carl Bayard - Genuity Capital Markets.

Carl Bayard - Genuity Capital Markets

I was just wondering regarding Rastar how much of their revenue comes from clients that are in areas other than financials?

François Olivier

The bulk of it, almost all of it.

Carl Bayard - Genuity Capital Markets

So what area’s are they strong in?

François Olivier

They are strong in automotive, retail, consumer package goods.

Carl Bayard - Genuity Capital Markets

Maybe you can explain to us the process of those escalation clauses that you mentioned for raw materials other than paper costs and maybe give us an indication as to the lag of those escalation clauses?

François Olivier

Similar to paper, at Cal usually we gave our customer a 30-day notice for the mail or the ink supplier gave us a 30 or 60-day notice of increases coming up. They gave us time to negotiate and agree, but we gave a heads up to our customers about 30 days ahead of time and then most of our contract is a past true, but the paper could be a significant amount of what we’re invoicing the customer. For the ink is roughly 1 to 3% of the overall invoice, in some cases not even, so even if it goes up by 10%, this is not significant. The big piece of the raw materials that have an indirect impact on our business, I am going to say, because direct impact there is not. It is a pass through, but for the customer what is more noticeable is the paper.

Carl Bayard - Genuity Capital Markets

So it is just as easy to pass through ink price increases as it is for paper?

François Olivier

It is the same thing. Obviously this is for contractual business or large contracts on businesses that we quote that are not under contract, we adjusted our ink price to the market and quote accordingly, so there is not a whole of risk for us on that end.

Operator

Your next question comes from Arivenda Galevendish from Cromark Securities.

[ph] from Cormark Securities Inc.

Arivenda Galevendish [ph] - Cormark Securities Inc

I just wanted to check with you about whether you have visibility into 2009. I mean if we assume that the exchange rates are going to remain here, whether you will see some positive effects impact the next couple of quarters. I’m talking about 2009. I mean do you have the visibility or is it too difficult to say right now?

François Olivier

Well if the dollar would remain where it is now and obviously it’s a big if, the FX impact next year would be marginal.

Arivenda Galevendish [ph] - Cormark Securities Inc

So it would be positive?

François Olivier

I am not saying it would be positive, but it would be marginal. It would be very small on either side.

Arivenda Galevendish [ph] - Cormark Securities Inc

You mentioned that for Q4 you are going to have a digital initiative spending of $2 million. Is that going to go entirely through the income statement or is part of it just investments that are going to go into CapEx?

François Olivier

Roughly this year it has been probably half-and-half and I would expect around the same thing for the fourth quarter.

Arivenda Galevendish [ph] - Cormark Securities Inc

Your San Francisco Chronicle project looking at the settings now are you still expecting to stop seeing some revenue from the project in the second half of 2009? I mean is that where you are headed or has that changed?

François Olivier

We are following the plan and the plan is to start to see some revenue in Q3 or in Q4, depending on what the customer will choose to do, but we will be ready to generate some revenue in Q3 next year.

Operator

Your next question comes from Scott Cuthbertson from TD NewCrest.

Scott Cuthbertson -TD NewCrest

I just wanted to get some clarification on your comments on the catalogue-printing group. You mentioned why it was sort of weak. In the summer you had the loss of the directory customer and etc… but I just wanted to hear again what the outlook was for that for Q4 and going into ’09.

François Olivier

The magazine printing business is very quiet in the summer months, which means that most of the plant of the catalogue and magazine were not that busy. In the summer months historically we add a customer in the directory end of the business that was producing a lot of work in those quiet months for us. Basically the fact that they are not there made those months busier, so it’s just a timing thing. When you look at the overall year for the catalogue and magazine group and printing, they will be on our target, they will be on target, they will be on budget and when you look for a 12-month period and when you look at ’09 with the gains we have made with Rogers, which is all going to be in their sector, we expect a lot of growth going into ’09 and into that group and we have also secured a much smaller win, but when you add them all up we feel very positive about this group going forward.

Scott Cuthbertson -TD NewCrest

So what you are saying is that Q4 should look a lot more normal than Q3 in that business.

François Olivier

That is what we are saying.

Scott Cuthbertson -TD NewCrest

I also had a question on the magazine business. If you just look at the industry the magazine advertising volumes have been really challenged so far this year, but there has been haves and have nots. I mean magazines and publications like Moore and I think Hello Canada as well were up sort of double digits and others have really come down a lot. I just wondered if you were planning any changes to your stable, are you going to close any magazine or are you going to make any adjustments? I just wanted to get your thoughts on sort of the macro magazine environment and what your plans are for that business.

François Olivier

There is no question that the national advertising is softer. Having said that, some magazines have performed much better than others. We had some brands of magazines that beat the market or have done very well. We have some others that have not performed that well and that we feel that we could perform better from an internal standpoint and we are looking at that, so we are not looking to close any magazine. We are launching magazines, we are investing in the web site of our magazine, we are launching the French version of Moore next week in Quebec, a magazine called Vita [ph] so quite the contrary, we are investing in the magazine business like I said.

We could have maybe made our number if we would have slowed down our investment into the digital, but we have a long-term view and have this industry so it is not because the market is a little bit soft for a couple of months that we are going to slow down our long-term plan. So we have a long-term view in magazine, we are quite positive about it. We have a strong brand and we feel that that will offer growth going forward for Transcontinental.

Scott Cuthbertson -TD NewCrest

What percentage of the advertising across your magazine stable is national and of that if you could provide further color on sort of what portion of that is really the sort of multi-national advertising you were talking about that was really hit by the US economy.

François Olivier

That is very hard to answer because we have about more than 50 titles and the answer would vary from one title to the other. It is quite different between Canadian Living and Decog [ph] mag here in Quebec, but I would say that most of the advertising is what you would call national advertising. The local advertising is there, but it is not the bulk of what fuels the revenue of our magazine. The number one revenue for our magazine is national advertising, but it is very hard to give a number. We need to give you that by title and we don’t.

And on top of that for the magazines we have revenues that come from newsstands and subscriptions that have nothing to do with advertising.

Scott Cuthbertson -TD NewCrest

I was just trying to get a feel for, you talked about the impact of sort of cross boarder softness, so there is national, and there is kind of continental if you will.

François Olivier

I could see that the top advertiser or those who make up our top ten advertisers are usually a company for a large percentage does our large multi-national that our worldwide operations and that are consumer package goods or a different type of company than our large company and this is what I have been talking about sometimes when it is slowing down in the US or in Europe. The Canadian subsidiaries of these large companies receive a phone call that they need to slow down on their spending as well and that does happen.

Scott Cuthbertson -TD NewCrest

Okay and I also just wondered about, the do not call legislation is coming into effect very soon. Are you seeing any sort of early orders or any sort of color on what you can expect from that change?

François Olivier

It is a little bit early. We did a very nice direct marketing campaign, very well done to a lot of people, reminding them that this is coming and that Transcontinental is there to capture some of their dollar, but it is a little bit early to tell how much traction we are going to get in the short term. If we look at the impact that this legislation had in the US many years ago, it certainly had an impact early on, but it also does take time for the industry to field these changes, reorganize their budget and redeploy the money from the phone to direct marketing and direct mail.

We are certainly on top of that. We are certainly acting as far as at what speed is it going to generate the revenue from us remains to be seen.

Scott Cuthbertson -TD NewCrest

You mentioned the MD&A some change in the product mix in the direct marketing group. I wondered if you could just elaborate on that a little bit and also for Benoit, just any reason why margins in that group will improve in Q4 or any directionality on the margins there?

François Olivier

Basically when I refer to a simpler package, basically big financial institutions are looking to save some money in their marketing budget in the balance of the year and they have done that since the beginning of the year. We have been able to maintain our volume even though the market is down because of our offering, because of our scale, because of our commingling operation, but at the end of the day the customer is buying the simplest package.

So the one that we would, for example sell at $60.00 per thousand that only has one piece, plain black and white printed on one side, as opposed to one that could work 20-30% more because there is color, it is printed on both sides, there is a credit card application on the sheet, so there is more to the package. So not only are they trying to reduce the number, but the number that they are giving us is a much simpler package and it kind of takes away a little bit from us all the value added around the package that makes it much more profitable. So that’s what’s I mean by a simpler package.

Benoit Huard

For the second part of your question, the margins in this sector are much stronger into Q4 than they are in Q3 that is seasonal. They are much busier in the fourth quarter that is there busiest season of the year. The retail business and the catalogue business that Francois was alluding to earlier they will have certainly a better quarter into Q4 for sure. The direct marketing group, we had mentioned that it is going to be a tough environment into Q4.

Operator

Your next question comes from Chris Li from Merrill Lynch.

Chris Li -Merrill Lynch

I wanted to touch base on if you could maybe shed some more color on how you managed to win the Shopper Drug Mart contract. In particular what were some of the key factors that you won the contract over from Quebec or World? Was price one of the factors and if so if you could maybe talk a little bit about if there was any repricing involved?

Benoit Huard

First of all they have not shared all of their reasoning in their decision for moving the business to us, but I like to think that our network across Canada, the investment we have made in the past two to three years and our CapEx and new folder technology across Canada, that I think is quite unique to us and enables a larger product base for the customer was certainly part of that. Customers are always looking to save money.

There are many ways to save money and not only necessarily just lowering your price, but giving a more competitive product that is manufactured in a better weight certainly made a difference. That is basically all I can say. I don’t know if the fact that Transcontinental Natale is also a media company, a company that provides services and distribution and that could be a partner in their overall market think span has played a role, but it is certainly something that we have pitched when we have met them.

I think that we have the ability with retailers in Canada to be much more than a printer, but more of a long-term marketing partner for a lot of their needs, but again you would need to ask a CO of Shopper Drug Marts on their next call. That is about what I can say.

Chris Li -Merrill Lynch

My second question is, given the weakening economy and the decline in print volume overall, are you seeing more aggressive pricing from other printers who try to fill up their capacity?

Benoit Huard

I think I already made comments about that. I think that what you said is a general comment. We have some periods of months like Q4 going in where we are not lowering the price, we are increasing the price because in many of the segments we are in we are totally booked up right now and certain segments of our operation in Canada we are refusing orders because we are totally booked, so I don’t think we can make a statement that there is an overall over capacity. There has been over capacity in printing for 25 years in certain months in certain markets and our job is to be aware of that, to plan for that, and to adjust our manufacturing platform and our assets to play the game so that we are profitable.

There is nothing new under the sun and we don’t see a different market now than it was last year. It is not more competitive. I think the only place in our14 business segment where the pricing is more aggressive, because there is clearly a slow down of volume and an historical slow down in the direct mail business and we are quite clear about that, that looking into Q4 is going to be slow. There is a lot of capacity out there, so that is a potential for a price decrease, but a lot of our large business is under contract. But, besides that the other sector all in all is quite healthy for now.

Chris Li -Merrill Lynch

Do you expect 2009 to be a heavy year in terms of contract renewals for you guys?

Benoit Huard

I think we mentioned that previously, that we don’t have a lot of contract renewals for the next year and even a little bit beyond.

Chris Li -Merrill Lynch

What percentage of your debt is fixed versus floating?

Benoit Huard

Right now considering the swap agreement that we put in place it is about 50-50.

Operator

Your next question comes from Drew McReynolds from RBC Capital Markets.

Drew McReynolds – RBC Capital Markets

Benoit, just back to I guess the contribution from acquisitions, just looking into Q4 obviously it’s not all PLM in that number. If I look historically at PLM going Q3 to Q4, there doesn’t seem to be much seasonality; so I guess my question is with all the ins and outs, is it fair to say that Q4 more or less looks like Q3, perhaps a little bit stronger?

Benoit Huard

In fact in Q4 last year we had PLM for a couple of weeks, which is not that significant, but it was there for a couple of the 13 weeks that we have in the quarter and obviously as you said the fourth quarter is usually much better.

We will also add Rastar to a newly acquired company into the equation so it is going to be certainly higher than you have seen in Q3.

Drew McReynolds – RBC Capital Markets

Back to the CapEx, I think the base run rate annual CapEx that I think I have been certainly using in my model, excluding a lot of the incremental CapEx related to plan expansion or a new business was roughly $130 million. When you look forward past the ramp up in CapEx in ’08 and ’09 and you allude to perhaps that base run rate declining, can you quantify that at all for us?

Benoit Huard

I can certainly quantify it for next year. Beyond that it is going to be tougher, but for next year it is going to be certainly closer to $0 than it is to $120 or $130 with what you would call the regular CapEx apart from the large projects that we have already announced.

Drew McReynolds – RBC Capital Markets

Corporate and other, sequentially just up ticked to $7 million in the quarter. Can you give us a run rate or an annual number that we should be just putting into our models?

Benoit Huard

You could roughly use the same number for Q4; this is not a seasonal number. Q4 should look like Q3.

Drew McReynolds – RBC Capital Markets

Francois, just looking at the US direct marketing segment again, can you maybe give us a little bit of color comment on how the business outside the financial sector has performed I guess in the quarter and what the trend looks like there?

François Olivier

I guess it performed okay, but I would be lying if I am not saying that we are really focusing on what’s happening in the final show as we still have over 60% of our volume coming from that vertical, so what is happening in the financial sector is kind of defining what’s happening in our platform right now. We are making some gain and other segments have certainly not had the type of slow down that the financial had but we are still heavily into the financial segment. We have done quite well so far.

The market, from a volume standpoint, is about 10% down and year over year for the first nine months we have been able to maintain our volumes, so we are gaining some traction with the commingling and like I was saying with our platform, but the packages are much simpler so that is going to put a slow down on our profitability and looking into Q4 we believe the market is going to be around 20% down as opposed to 10 and an extra 10, so we believe that now our revenues are going to be down 5 to 10% compared to last year. So we are still beating the market.

The package is still simpler so it is putting stress on our profitability, but these packages are the heart of customers acquisitions for these financial institutions, or selling more services of their services to their existing customer base, so now they are into cutting the costs, but eventually it is going to show up and their new customers acquisitions, so are the amount of services they are selling to their customers, so eventually somebody in the boardroom at the bank will say, let’s go get some customers and the volume will come back.

Now I cannot predict when that meeting is going to take place, but I believe that what they are doing now is going to impact the amount of new customers they will get in the next couple of months and the amounts of new services they will be selling to their existing customers and usually when these indicators start to go down, usually the spending starts. So we will be ready with a platform that is smaller, that is less costly, that is more efficient, but we cannot predict when this is going to happen. The only thing that we have visibility on is that Q4 is going to be quiet and we will probably be running simple package. That is not a good thing, but that doesn’t make the overall long-term viability of this business fundamentally wrong, it’s just tough right now.

Operator

Your next question comes from David McFadgen with Cormark Securities Inc.

David McFadgen - Cormark Securities Inc.

When you talk about the fourth quarter being down about 5 to 10%, do you think it is going to trend like that heading into the first half of 2009?

François Olivier

You mean in the direct mail business in the US?

David McFadgen - Cormark Securities Inc.

Yes and then when you were talking 5 to 10% you were talking just the financial component or the total direct market, the total direct mail?

François Olivier

I am talking our own personal result and I am talking about our sales figure, not the number of packages, because that is a different number, but it doesn’t mean anything. Basically it is our revenues that we feel are going to be down in Q4. As far as visibility in Q1, right now in this business you are scheduled to do $30 million pieces for a customer next month and it is about to start. Sometimes they call you ten days ahead and we are moving from 30 to 20 or from 30 to 3 or from 30 to 45, so the visibility now, we don’t have much visibility over Q1. This is a very volatile environment and the financial institutions have their own challenges and it is very hard to predict who is going to do what moving forward.

David McFadgen - Cormark Securities Inc.

Just as a matter of clarification, when you gave us some statistics you said that for the first nine months the market was down 10%. Were you talking the direct marketing industry or just the financial component of direct marketing?

François Olivier

I was talking about the direct mail business, which is customer acquisitions via mail and again, this is an estimate, it is not a perfect science. We believe that the industry is roughly down 10%. It is the direct mail business, certainly not the overall direct marketing business. The company we have bought, Rastar, which is in the direct marketing business, is growing their revenue in the vertical that I have mentioned so this is specific to the direct mail business. Not exclusively the financial, but the financial is a big part of the direct mail industry. It is in my view the number one mailer.

David McFadgen - Cormark Securities Inc.

When you talked earlier during the call about ink costing 2 to3% of operating costs, were you referring to your total operating costs or just the media divisions operating costs?

François Olivier

I was talking more about the printing operating costs.

David McFadgen - Cormark Securities Inc.

I seem to recall that Benoit was talking about how ink and paper is passed around in printing, but media you have to absorb those if they go up.

Benoit Huard

I was talking about paper more than ink.

David McFadgen - Cormark Securities Inc.

Oh okay, so what is the percentage of medias operating costs that are

François Olivier

I am going to be very honest with you, this cost increase is so insignificant that all of our titles are printed internally and we don’t bother sending the increase for ink to our own media division. So you could say that for our own title there will be no impact in the media division, it will be absorbed by the print division. This is not that significant.

David McFadgen - Cormark Securities Inc.

Another point of clarification, when you talk about your internet advertising decreasing, you indicated that it has gone from 13% to 15%, your share of the internet advertising market. So if I were to take, just as a simple reference, IABs internet advertising estimate for Canada and just take 15% of that, that’s approximately what your internet advertising is?

François Olivier

I’m not sure I’m following you, David, sorry.

David McFadgen - Cormark Securities Inc.

I am just trying to estimate the actual dollar value of revenue that is generated from your internet properties. When you say you are at 15% of the market, for me that is 15% of the IAB estimate for the internet advertising market for Canada and I just want to know is that the correct way to look at it?

François Olivier

No, no, no, we are not saying that at all.

David McFadgen - Cormark Securities Inc.

Oh, okay so what do you mean by you went from 13 to 15%? Like what exactly does that mean?

François Olivier

It is we went from 13 to 15% in total reach in the probably advertising is not the right word, it is total reach in the internet market itself.

David McFadgen - Cormark Securities Inc.

So it is, say whatever the monthly uniques [ph] are in Canada you would represent 15% of those?

François Olivier

Yes, exactly. It has nothing to do with dollars of advertising revenues.

Benoit Huard

Advertising was probably a wrong word in there. [interposing] number of people that go on the internet, we reach 13 to 15% of them now compared to 13% last year.

David McFadgen - Cormark Securities Inc.

When you measure that are you looking at uniques [ph] are you looking a page views, what metric are you looking at?

François Olivier

It is the number or people that go on the internet; it is the total audience on the internet, the total internet users.

David McFadgen - Cormark Securities Inc.

Okay, so for me that is unique users, but I don’t know if that is the way you would quantify it or.

François Olivier

Yes that is the way we look at it, unique monthly visitors.

David McFadgen - Cormark Securities Inc.

Then on your newspaper business, printing newspapers, I was kind of a little surprised to see that now you would need more than one newspaper per plan and you would require, maybe not in all the cases, but definitely in some instances, the publisher to put up some capital. So what has changed in your vision for that business that you are changing the model now?

François Olivier

I think that is what the industry needs to do. The US newspaper industry has lost anywhere between 15 to 30% of their top line in the last two year so they need to look at their business differently. Before they could look at their business and having their old sets of all have journalists in London and Paris and Tokyo and from an industry standpoint do they need to send 250 reporters to the democratic convention? So this industry needs to ask itself a few questions and the way they product the content, well we have nothing to do there, but there is fundamental changes that are looked at in that industry and it is the same thing into the distribution of the newspaper, they all go to the same street with different trucks every day and they all have their print plant used at about 25to 50%.

So, the fact that their businesses suffer, the industry will need to look at these things and say how could we move forward. How they can move forward in our view is that a lot of this activity needs to be shared so that these assets or these trucks are more efficient and the journalists that travel are more efficient.

That part is not for us, but certainly what the industry needs to do is to make sure that the assets that are bought from an industry standpoint to print newspaper are used to the best use of the industry, because I do not believe that many, many papers, on a stand alone basis, could sustain a lot of $2, $3, $400 million investments and a new print plant. But if it’s shared between the various papers, then maybe it makes sense. So we are just following what’s happening in the marketplace. If most newspapers would not have lost that much of their revenue, we would probably be in our old model. You know one plant, one customer and Transcontinental is not now financing the whole thing. Things are changing and we need to make our model evolve and that’s what we are doing.

David McFadgen - Cormark Securities Inc.

A lot of the things you talked about refer to the operating profitability of a newspaper, which frankly shouldn’t really impact you, because you are just offering them the delineated source to print and not have to put up the capital. So, if you are requiring them to put up more capital it sounds like the number of papers they print and the number of copies is just declining and that is why it is changing the model, is that correct?

François Olivier

I think it is very important to us if our customer is profitable, because their profitability is a strong indication of their ability to pay the bill going forward.

Operator

(Speaking French). Your next question comes from David McFadgen from Cormark Securities Inc.

David McFadgen - Cormark Securities Inc.

If a publisher puts up some capital for you to build a plant, print the paper, are they going to have an equity stake in that plant?

François Olivier

Each of these deals are very different. We have not done one deal that is exactly the same as the one before. What I can tell you is that Transcontinental will not go into this deal taking all of the risk or a lot of risk; so this game is not a game of ownership, it is a game of what security can we get and how can we share the risk, so that’ a question of that. Each deal is different. We are not saying we are going to do that, but we are not saying we are not going to do that.

Operator

Your next question comes from Randal Rudniski from Credit Suisse.

Randal Rudniski - Credit Suisse

In the Canadian magazine publishing group can you outline which segments of that group are experiencing the greatest pressures in terms of national advertising? And the second question pertains to the share buy back program. I just wanted to get sort of an update in terms of your view to the program in light of the rising CapEx this year, it is going to be a pretty significant number again next year. Do you think you will have the capacity to continue to buy back program through 2009?

François Olivier

I’m not sure I got the first part of your question about our media magazine property. What is it exactly that you want to know?

Randal Rudniski - Credit Suisse

The ND they referred to weakness in national advertising in certain segments of the magazine group and I just wanted to clarify which segments were weak.

François Olivier

Mainly our consumer magazine, which mainly our women portfolio of magazines were affected; our very strong run has been challenged with less advertising dollars coming in in Q3. so mainly the women related brand that we have which are in a sense some of our strongest brand.

François Olivier

The answer to your second question, our program is fulfilled at about 85% for our class A shares up to now and considering the current share price we are certainly looking at possibly resuming the program going forward. This program ends in December and it is too late to tell if we are going to renew the program or what, this is something we need to discuss with our board, because this is for the board to decide if we are going to put a new plan in place for next year.

Randal Rudniski - Credit Suisse

In terms of that leverage on a consolidated basis, where are you relative to what you would consider a comfortable long-term range?

François Olivier

Right now we are at 35% at the Cap and as we have said before our target is between 35 and 50, so we are really at the bottom end of the range. We were below the bottom end of our range before, but we finally reached the bottom end but we would be comfortable going up to 50. Obviously at 50 this is the maximum that we would be looking to go to and if we were to go there it would be with the view to getting it down quite quickly after that, but depending on the portion of these that come forward, there is lots of room in front of us if we decide to go there, but it has to be for good sound investments. WE have shown the discipline before and we will continue to show that discipline going forward.

Benoit Huard

I must say that in the present economic environment we are quite happy to be at the bottom of our range and we will be very careful managing our debt and we will remain very prudent.

Operator

(Speaking French) There are no further questions at this time.

François Olivier

I would like to thank everybody for participating in this conference call. We will see you for our Q4 results in December. Thank you all very much.

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Source: Transcontinental Inc. F3Q08 (Qtr End 07/31/08) Earnings Call Transcript
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