Quad/Graphics Inc (QUAD) 2002 Q1 法說會逐字稿

This is an unedited realtime transcript. An edited version with proper case and full speaker names will be available shortly.

Good afternoon, ladies and gentlemen. Welcome to the quebecor world first quarter results. I would like to turn it over to christian paupe. Please go ahead, Mr. Paupe.

Welcome to the conference call at today, 5:00, concerning first quarter. We apologize, we understand this is current with another activity for media analysts. We wanted to be able to respond as quickly as we can post market. I have with me this afternoon charles cavell our ceo and as usual, marc reisch our ceo of our domestic business. As we do, typically, I'd like to remind participants this call is being taped. Forward-looking statements are made pursuant to save harbor provisions of applicable laws. We'll have an opening comment and I'll follow with the key performance indicators. Marc will review our domestic businesses focused on market developments and restructuring initiatives, the status thereof. And finally, just before we open up for the q & a session, I, like usual, will provide an update on guidance on a number of objectives we have for this year. For the first quarter we had earnings diluted 28 cents a shea, exceeded the earnings at 25 cents. This is on a new accounting basis, therefore we are comparing 28 cents to 38 cents last year pregood will. And this is consistent, in fact ahead's indicated of guidance we gave on our last conference call. In the context of year end. Charlie, would you like to make an opening comment?

Yes, christian. Thanks. As you look forward, there are clearly signs that the global economy is starting to come back together. But I have to emphasize that the markets are still weak. And the compression of advertising demand has created an imbalance between the supply side print capacity and the demand side. This is causing for the first time in a considerable period, almost two years, a negative down side pressure on price. But despite all of the issues that we face, we have been able to exceed consensus. I am very pleased with that. Our revenues as the press release indicates are down 7%. But our net income is up by 8%. The reason behind this I think, fundamentally is the management of the cost side of the business and some of the benefits are now starting to roll through from our restructuring initiative. We are on track and we will deliver the 45 million expected for 2002. The restructuring is approximately 307% complete but it will not be fully implemented until early third quarter [ 70% complete. ] I'm very pleased, of course, with the recent performance of our stock where we have outperformed both the s & p and the canadian index. I think this reflects the fact that the investor is seeing that we are making our business more efficient, so that when the marketplace does return, and the demand will be there. It will return, we will be uniquely advantaged by it. To cover some of the geographies specifically, I'll handle as I must latin america and europe and I'll call upon marc to provide details for the north american platform. Latin america, we are having a wonderful time. Our business is expanding. Significantly, our operating margin is up. We are most pleased with the performance in mexico, chile and peru, which have leadership margin positions. We are not without our difficulties. The startup of the greenfield plant has been extremely problematic. And it is receiving full focus of management to get this done and under way. We cannot live with the inefficiencies that we are experiencing and it largely is founded in the fact that we have no availability of skilled craftsmen and everybody is in a learning curve mode. We have had some wonderful successes in the marketplace. Our sales have increased nearly 50% versus last year. And our global strategy of connecting platforms from europe, north america, and latin america, is working. Telephone ca hispanic yeah, has signed a contract with us in peru, argentina and brazil. And we have recently signed with them a supply agreement in spain for approximately 1/3rd of their directory market. We have had exceptional success in growing our book platform and we are extremely pleased with the current position in latin america and what the future will hold for us. In europe, I will partition it into two areas. All of our properties, except france, are suffering from a compressed market. But they are surviving well. And our margins are acceptable and, in fact, we are in a leadership position for comparable companies in europe. In france, I'm very pleased with it because the performance of these acquired entities is extremely good. The base of this is that they are both factories with contract work that is reasonably priced. Insofar as what needs to be done in europe, there are three facilities in france which are not performing. They are diluting our performance within france's consolidation. And management is focusing on implementing restructuring within the parameters of french law, and I'm optimistic that over time it will not be revolved overnight, but over time, we will see significant improvement in europe. Marc, north america, please?

Okay, charlie. I'd like to cover two things with you this evening. First an overview of the business environment and how we performed in the first quarter. And our outlook for the market conditions and second an update on the restructuring plan overall and by business segment. In general, the operating environment remains difficult with sluggish recovery demand and the associated price pressures from excess capacity. Clearly, we were on target last fall in seeing the window and seizing the opportunity to aggressively restructure our operating platform in 2002. Our first quarter finances reflect revenues of $1.2 billion in north america, down 9% from '01. The '02 revenues benefitted from last year's acquisition of retail printing, but were more negatively impacted by lower paper revenues and a weaker canadian dollar. Importantly, our operating margin held up very well, down slightly from last year's record levels but at 9% for the quarter, an improvement versus the first quarter of 2000, which was a far morrow bus marketplace. We find this margin improvement very encouraging as the impact of our restructuring initiatives combined with our platform-wide efforts to lower our costs and improve our efficiencies, are clearly paying dividends. Another curving aspect from our first quarter performance is that all our major business units achieved their first quarterer, targets. Unlike the last third of last year, when business fell off so quickly and dramatically, with little visibility and predictability, in 2002, we are able to much more effectively manage our costs to our revenues. I'm going to briefly review the market conditions by-product and how we have been performing. In retail, our retail insert business performed very well in the first quarter. Our revenues were strong supported by the retail printing acquisition, on balance reasonable unit growth from our customer base and most importantly we are benefiting from our 2001 sales successes. In our offset retail platform in particular we are experiencing price pressures. We are meeting these pressures by improving our equipment rate and significantly reducing our operating costs through our restructuring plan. We have completed the closedowns of our metairie, louisiana, and oklahoma city plants and have redeployed the equipment to better geographies. We're also on track to open our southern california offset plant by year end which will be equipped almost exclusively with redeployed assets. Our coast-to-coast capabilities are ongoing capital developments in the most efficient equipment for this market are market scale advantages, in procurement and deliberation will neighbor us to withstand the near term price pressures and over time meaningfully grow our offset retail to begin to approach our share in retail. Magazines. The advertising market continues to be very challenging and the comparisons for the entire first half will be weak. As you know, with we are the leading producer of consumer magazines doing business with the largest players in the market. First quarter volume with these companies ranges from 7% to 12% down. There are a few exceptions with positive results but magazines with a high dependency on technology, financial and corporate brand advertising are clearly suffering more than the 7 to 12% range. In addition, there continues to be pressure on our publishers to discontinue marginal titles and there is little advertising support for one-shots or special issues. Our ability to serve this market efficiently has been greatly supported by the closedown of our st. Paul and salem magazine print facilities and the redeployment of our best assets to upgrade other locations while eliminating significant fixed costs. In the catalog market, our business held up quite well. The consumer titles are performing better overall than our business-to-business books which were generally down this prior year. Results for the consumer business is very customer-specific. For our top 10 consumer customers, most were either up or down slightly, other than 2 cases where a catalog title was added in one case and cancelled in another. Fueling the strength of our overall catalog business was the very positive impact from new customer business sold last year including breyer lane and victoria's secret. Looking forward, we don't anticipate significant changes in demand, the offset catalog market is under price pressure now but we have an excellent platform to compete. We will continue to benefit in the outquarters from the rollin of last year's sales successes, as well. The book business. Our business performed well in the first quarter. Our trade business showed solid improvement in revenues and earnings versus prior years supported by a general improvement in volume at positive new sales. The educational market continues to be relatively strong and we continue to earn incremental share interest a number of publishers. We are supporting our growth in education with additional presses this year which will be in service in the back half and all of which had been very effectively redeployed through our restructuring. Our most significant plant closure in this restructuring is our hawkins, tennessee, book facility, which in may will have some small ongoing production. But the major redeployment of assets has caused some earnings disruption in the first quarter, but will significantly improve our manufacturing capabilities and book market segment focus in the back half and beyond. Our outlook is fairly positive. Assuming general market conditions continue, as we'll be advantaged by a number of significant sales successes complete during the first quarter.

Our commercial direct business. The overall sector achieved its earnings targets and was close to its revenue target for the quarter. However, the business continues to be under significant volume and price pressure versus prior year. We had a very good annual report season, highlighted by some of the largest books in the market, ge and citigroup. Our direct mail volume has been reasonably steady. Our specialty packaging business is starting to pick up nicely. But on the negative side, we have seen a significant falloff in promotional gains in 2002 versus prior years. Our objective is to have larger, better-equipped, more specialized facilities in this group. And we have completed significant restructuring activity. 5 facilities are fully or substantially closed with 3 de-- redeployment of equipment to be completed during the second quarter. These aggressive steps will significantly improve our cost structure and meaningfully strengthen the market position of the ongoing commercial direct facilities. Our domestic directory business was essentially flat. Most of the revenue climb was due to lower paper. Earnings were consistent with our expectations. And lastly, I want to comment on our other value-added service group. Our logistics business continues to perform well. Again improving upon last year's performance. In prior years, our logistics business has focused almost exclusively on our mail and newsstand product. Today we are building excellent momentum in servicing the newspaper insert market and our commercial business, as well. During the quarter, good progress was again realized in both paper procurement and sales. We continue to aggressively focus on supply chain efficiency opportunities with our suppliers and customers. Our pre-media business had soft market conditions and price pressures. However, our full suite of premedia services continues to be an important component of our full service offering to our customers. Accordingly, we are working aggressively to improve our costs. We have completed the closedown of two pre-media locations and transferred the volume to other sites, and we are in the process of more closely aligning our pre-media and print sales organizations to maximize our success rate in the marketplace. Concluding my comments on the restructuring plan, we're on track. I have highlighted for you the specific locations and the underlying strategy. And we now have clear visibility to achieving the projected 2002 savings in north america. Wrapping up in north america, the business environment is challenging but we are aggressively managing our costs. We are continuing to invest in technology and to train our people. We have an intense focus on process improvement, improving product quality, and increasing our operating efficiencies. We continue to have strong sales momentum throughout the business, and the successful completion of our restructuring plan will advantageous going forward and enables us to effectively compete in today's price-sensitive environment.

Thank you, marc. More specification on our performance on the first quarter. Revenues were a billion five down 7% over last year. It's in line with our guidance earlier this year, late last year it was 6 to 8% decline in organic revenue. Adjusted for currency paper sales and acquisitions, the organic declean in fact was only 4%. In a difficult environment. Consolidating the dollar, our preda cash flow again consistent with guidance at 190 million. A reduction of 13% compared with last year. As we indicated, at our agm, in toronto, a couple of weeks ago through investor meetings, management's focus remains on executing the plan that charlie and marc discussed in reducing bank borrowing. Debt paydown was there in the first quarter to the extent of about $120 million. Through a precash flow and having a marked impact on financial expense. Financial expense for the quarter was down almost 20% to 45 million. A little bit more on our financial condition. We had a record fourth quarter last year in terms of financial condition as precash from operations. We have sustained these gains in the first quarter with the reduction in working capital of more than $300 million with last year. However, to manage expectations clearly, our objective first was to stabilize our financial condition. That's been largely accomplished. As we look into the second quarter, we are investing in working capital to take advantage of the attractive terms with trade. The acquisition of a shed was completed as clearly indicated, the purchase price consideration was 70 million. On that basis, if we remove them pact from the balance sheet, the improvement in long-term debt over last year was closer to 200 million. Our debt-to-cap tend of the quarter was 47%. Compared with 48% last year. In spite of the impact of special charges. at the end of the quarter ]

Before we open up for questions, as we always do, provide a little bit more color on objectives for this year. I indicated again q1 we were 28 cents, 3 cents ahead of consensus. For the second quarter, i looked at the database this morning. First call that projects consensus earnings of 37 cents. With the low of 31 cents and a high of 45 cents. Our guidance for the second quarter, we are cautious in this environment. There is earnings of 35 to 37 cents. As we indicated on many occasions, we expect further pressure in volume in the second quarter. The same level at 6 to 8%, and to grow our earnings again starting in the third quarter. As the benefits from the restructuring hit the p&l in a more meaningful way as charlie and marc indicated. We maintain our guidance for the full year of $1.85 to $2 a share. First call currency is in the middle of the rage, at $1.92. To summarize, our targets for this year generate an operating margin of 10% compared with a peak of 11 in 2000. Our short term objective through restructuring is to protect our margins and position the company for the economic recovery. We maintain our target of precash book from operations of about 300 million and the debt to cap about 42% by year end assuming no further acquisitions this takes into account the ashet transaction that closed in march [phonetic] ]. Any further comments before we open up?

Open up to questions.

Please open up.

Thank you, sir. We will poll for questions today using our quick queue polling feature. If you have a question, please press 1 on your touch tone telephone. You will hear an entry tone once you are in the queue. If you are using a speaker phone, lift the hand set and press 1. Do you wish to can sell your question, press the number sign. Please press 1 at this time if you do have a question. There will be a brief pause while we register the questions. Our first question is from td newcrest, vince valentin any. Please go ahead.

Can you hear me? First of all, chris, I guess, charlie, uhm --

Thank you, vic. It seems like this has been a long time now, france, there is constantly things that are diluteive to the margin and i know it's frustrating getting things done with the unions. But how much more patience do you have before you can just pull the plug or do something dramatic in that market? Vince, we have facilities operating in france that deliver 10% margins. In fact, I cannot accept and will not accept that the three facilities that are problems that are red ink, they will be fixed. We have demonstrated one of the facilities the ability to exit personnel and to reduce our labor coefficient and if i can do it in one facility, i can do it anywhere in the country. I'm located here. France is operated from paris. Obviously, I am providing as much support to them as I can. But he has a serious job to do. And that was a serious point of focus by the full board this afternoon. And it will receive the utmost attention. It is interesting that I have one other facility that is a problem, four out of 160. That one is located in [ indiscernible ] and it is a very difficult startup and it is not meeting expectations and it is dilutive to what is a spectacular performance in latin america. Can we fix it? I have done greenfield's before. This company has the technology. It has the intellectual capital. And we need to get focused and get on with it. So the four facilities that i have are clearly identified at the level and they will be the focus of management's attention. Period. And if we focus, we will get it fixed. No one is more frustrated than I am over these difficulties. But we are -- we have a terrible headwind in the marketplace. That's in both europe and as marc indicated in north america. But the company that is the largest in the world that is market leader in most of its segments, I don't accept nor i would expect my investors to accept, that this has got to last. It is going to get fixed.

Okay. And my question --

Obviously, a little emotional about this one, vince.

Okay. I'm glad you are. My question for christian, i was just on the securitization. I apologize if I wasn't able to get through everything you gave us yet but is there any change in the securityation program in q1?

We measured securityation two ways as we discussed on the last conference call. Short answer is no. There is no net change in terms of total dollars that are off balance sheet n relation to securitization, however, there is a net negative in the first quarter. We are using 130 million less for securitytyization in q1 as a result a record collections of accounts receivable in q4 last year. So we pay the price from a securitization perspective in first quarter vis-a-vis fourth quarter n relation to last year, we are essentially stable. As I indicated earlier, the working capital this investment has been very significant. As we run a tight ship in the first quarter, we wanted to stabilize our condition moving forward, our objectives have changed. We are going to invest in working capital and trade payables specifically. And there is no change in the operating leases level. These are operating leases used in the context of our operating environment.

Okay. Thanks.

Thank you, Mr. Valentin any. Our next question comes from michael millman from salomon smith barney. Please go ahead.

Good afternoon. Could you be a little bit more specific regarding what your capacity is what utilization is and where you expect the capacity to be by the third quarter when you complete the restructuring? And maybe some idea of what kind of incremental profitability is available going forward?

Mike, as far as capacity, even with the assets that are in the midst 6 being redeployed, given current market conditions, there is more than adequate capacity available in our company and the market. As far as the cost impact in 2001, -- I am sorry, in 2002, we have been very public in saying that there is a little over $30 million of cost savings expected in north america and $45 million in global basis from the restructuring this year.

Actually, I wasn't -- maybe I misstated the question. I was looking for some maybe ratio of operating rate, how much your capacities actually coming down. And by incremental profitability, is once you get down the level that I'm asking about, additional production will generate what kind of incremental profit?

Mike, we've been consistent in our presentations with i think is the best indicator and more so than a capacity utilization rate. Our target from a head count perspective is that we will be approaching an 8% reduction in overall head count. With the redeployment of our best assets and the better loading of our plans, the effective capacity reduction is only 1%. So as we move into the back half of the year and as market conditions improve, you are going to have a platform with 8% less people able to produce essentially the same amount of work. So I'll leave the math leverage to you but it's significant.

It helps, mike, as you well know, this is a seasonal business which goes to your question on capacity utilization. Our margin in the first quarter was slightly in excess of 7%. Once we get to the back half, consistently, we have performed in excess of 11%. Clearly, the operating leverage will start coming through this p&l late into the third quarter and cleared into the fourth quarter and the best way to capture that economically is through the gain in margin on revenues. And insisting that you can live as you are well aware.

What is -- what's typically labor content of fox -- cost?

Maybe the best on that to answer would be on occasion, we have examples we use internally and we use those with rating agencies. They need some education on our bills. What I'll suggest is we'll give you a typical p&l for a versus an offset facility. This is about the base process. The direct labor component is different. So why don't we do that. We'll prepare what I call a typical p&l of an offset versus a [ indiscernible ] and the labor dynamics are different.

That would be great. Thank you.

And that model will be applicable across the industry.

That's correct.

A good example.

That's correct.

Thank you.

Thank you, Mr. Millman. Our next questions come from bill gibson from bank of america. Please go ahead, sir.

You know, you did a pretty good job laying this out. Uhm, but this is a question for you, mark. Have we seen the bottom?

Uhm, I'll give you two answers. I'm hopeful from a volume standpoint and a unit standpoint we have seen the bottom. Certainly, in most of our markets. I can tell you that we're seeing that. But it's been a very difficult price environment. So I'm not sure where bottom is. And that's why we very much have taken the focus since last year that we are going to focus on our costs. We are going to implement the restructuring plan. We are going to stay in the direction of becoming the low-cost producer because we have the scale and the capabilities to weather whatever price storms may be ahead of us and certainly, as we look in the environment, we recognize in the marketplace there is going to be excess capacity. And we build as best we could price assumptions into that model. But we are seeing unit improvement. I talked about the bookby, the retail business, the catalog business, the book business, the cal log business being stronger, our directory business being stable where we are hopeful that with a steady economy we are seeing bottom and that we are moving in the right direction.

That makes sense. Do you have any -- christian, any targets on what we ought to be expecting as the year rolls along on receivables and inventory?

What we tried to do is guide you on an overall basis and that's where I was going through my comments earlier. We will invest in working capital in the second quarter to the extent of about $150 million.

I took that on the payables side. Or was that speaking on receivables, as well?

On receivables, we are very aggressive firm. We run a tight ship. Surely charlie and marc have indicated that so on that basis we look at gross receivables balances and we again had a record collection not only in december last year but in march of this year. So that is a consistent focus in management. And it is a difficult economic environment, clearly it's about collecting our cash and that's where profit sits. So we maintain that pressure. The difference now is the trade tables that are working capital. On capital spending, our capital is slightly -- capital spend something lower in the first quarter, will be normalized in the second, and we have been very clear as to where we think we'll end up this year.

Okay, thanks.

Thank you, Mr. Gibson. Our next questions come from winston lee from ubs warburg. Please go ahead, sir.

Thank you. Hello. Marc, we're hearing some evidence of your market share gains in the u.S., and I'm wondering if you can provide some color on this, for example, in which significantments are you seeing your gains books or catalogs, perhaps?

Yeah. I'll be happy to in our supplemental dhis low, your. We posted a schedule that we presented at our annual meeting that lists a number of the major customers. But as far as significant transactions from '01 that are meaningfully impacting us in the first half of '02, i highlight the breyer lane catalog and victoria's secret on the catalog side and we have talked about circuit city and comp usa being very significant transactions on the retail side, in the book market it's a number of publishers and we have had very good success inkre mentally of them. If you check the supplement disclosure, I think he'll see a comprehensive list of our largest successes last year.

Thank you.

Thank you, Mr. Lee. And our next questions come from andrew mitchell from scotia capital. Please go ahead, sir.

Good evening, guys. I wanted to see, marc and charlie, if you could give us a sense when you look at your crystal ball and see what's shaping out in the industry, when you look forward, what do you think the major changes are that you guys are going to see out of the steepest recession you have seen in the print market? And specifically, can you comment on whether you see any long-term shifts in the profitability and growth dynamics in the market segments you're in and whether you think there may be a need for a mixed change as you go forward?

That's a broad question. I'll speak from a north american perspective. Anybody who really believes they have a crystal ball, i would be awfully impressed with them right now. laughter ]

But, weefrl we feel and felt very strongly in 2001 that there was a need to take out capacity in this marketplace. And we have been the leader in doing that and we expect to see others follow as we go through 2002 because right now there is too much capacity in the marketplace and too many presses are running the jobs. As far as the mix of our business, we confirmed at our annual meeting, these are the businesses that we remain very committed tomorrow. There are certainly markets like our magazine platform where we have significant share and there is not a lot of organic growth. And certainly, as we close down certainly businesses like that you have seen us redeploy them into the educational market and other components of our book business which we feel has more dynamic growth. We are very committed to our retail offset platform their being the beneficiary rifs a number of our redoe plied assets and certainly as charlie talks about latin america, it's been an outstanding source for us to redeploy assets, as well. I think the general missing of our revenue streams, you should expect to see the same. You'll see a bigger component of our revenues coming from the growing logistics business but we're very committed to all the markets we're in right now.

The generalitys are -- when you have a compression in the demand of advertising or for credit pages, you wind up with surplus capacity. That's the head wind that we are facing. We have been certain other competitors have had leases that have expired. I guess they elected not that take the assets -- the buyout after the lease because we have been offered the assets and we have elected not to take them, either. One has to be very disciplined relative to the capacity provision within this industry. There is a lot of good news on the horizon. I mean, as marc referred to in latin america, we have signed 100 million u.S. Dollars of recent contracts in books. This is a significant amount of volume. It is a significant capacity increase. But we are redeploying assets that are not market leadership units into a market where they are leadership capable. So I think the -- the the -- very diverse platform that we have we have a unique ability to manage our capital base. And on the market side, we have had winds that have come clearly out of our global positioning. As embarrassed as I am about this company's soft performance in these -- in my plants -- some of the european plants, we have some wonderful customers that bridge the ocean. And there is a -- a value that's coming to us growing every day on what we call our global franchise. Perhaps marc, you want to make a comment there?

Sure. We have had briefly touched on this in earlier meetings, but as I think we have indicated in the last conference call, we have now strictly organized our international sales organization with a dedicated staff. With dedicated target assignments. In the book business in particular, we are seeing advantages from both europe and south america. We think we have a very meaningful group of prospects lined up that will start to pay dividends by the back half of '02 so the global platform finally which has been ready to take on global business, our customer base and quite frankly because of the realities of their business, are starting to look at their buying differently and will be prepared to service -- and we'll be prepared to service them.

Taking one -- adding one quick point to that, you talked about the annual meeting and talked about refraining from the major acquisitions and really looking more at tactical acquisitions where you can build market share. Do you see that being one of the themes coming out of this, or do you think you'll go back on the major acquisition phase when you actually get the markets rebuilding?

The important thing, success, comes from management focus. This is a very large corporation. So we have a very specific agenda as to what we will focus on. And they are prioritized. The priority list at this juncture does not include acquisitions. It is focused totally on making our company more efficient. Everywhere. And that will continue to be the focus. When we get into the back half of this year, and we know better the stability of our platform, the efficiency that we have built into it, we want to see the returns coming out of that efficiency. Then and only then would it be appropriate for us to start looking at what might we do? We have historically been the industry consolidater in north america in europe, clearly in latin america. But this is not the time to be changing the geographical base of the franchise. This is the time to focus on making our business better because there is significant head winds that this company is facing. And I think that the investor support that we have experienced lately is partly based on the fact that we are clearly focused on making this company better so that it will perform better when the market returns. Then we'll look for opportunities. But right now, nothing is going to strike us -- nothing is going to distract us from the focus of making the business better, take the cash that we generate, pay gown debt so we have a balance sheet that's unparalleled [ pay down debt ] and that's where we are right now. We'll stay there until we have a very clear view that we are on top of our -- all aspects of our business and then and only then will we start looking at, all right, where do we go next? What's in the best interests of the shareholders?

Great. Thank you.

Thank you, andrew. Why don't we take two more questions.

Certainly, sir. And our next questions come from carl joy from merrill lynch. Please go ahead d karl choi. Please go ahead.

Thank you. Good afternoon. Couple questions. One, can you quantify the annual revenue impact from your book contract wins in latin america as well as the california directory wins? And second, if you could quantify these costs at the plant in brazil? In the first case, charlie made the comment, 100 million of annualized volume at a recent announcement for books and directories across the latin america platform. But that doesn't count a separate announcement last year.

Is it on an annual basis?

Yes.

That's correct.

Which is significant. Only last year, that business had sales of 150, 160 million that reporting segment. So on that basis this is a very significant market development. 100% growth. indiscernible ] The [ indiscernible ] circumstance, I'll mention it in comparison to mexico. Mexico when we won the, uhm, the full directory contract for tellnex, there was a printer that had a core competency that we were able to acquire. That gave us the intellectual or the -- the intellectual capital that we need to run a facility. The performance of that unit is extremely good. Resefay [phonetic] is a business that do you have the financials?

Well, it's....

It's running --

Currently, it's losing money at the e bit level. Clearly the depreciation charge is significant. We are in operation since late third quarter. We quantified last week through -- last year, I'm sorry, through non-operating expenses about 2.5 million of startup costs. That was disclosed in the queue 4.

But the burn rate of the facility is --

It's a couple of 100,000 a quarter. This is not 3 million dollars.

No.

This is the run rate what we are after.

That's correct. That's disclosed in your supplemental. Look at the non-op line, you'll see 300,000 in consolidation and that's resefay at a quarter basis.

Great. That's helpful. Thank you.

Thank you very much, Mr. Choi. And our last question for today comes from adam shine from cibc world markets.

Couple questions for marc and christian. Marc, you and charlie were talking about the competitive pricing environment. Can you talk a little bit about the flow of new business and renewal activity? I mean, are there a lot of mandates that are just coming out at ridiculous prices of pricing levels that you just are having to pass on and allow some of your competitors to fill up capacity in the process?

... You know, there is a transaction side of the business and there is the strategic customer side of the business. Fortunately, we have been in a cycle the past couple of years where more of the business coming to market from a contractual standpoint as opportunities we can pursue and is not our base business, but those renewal opportunities are certainly a more aggressive price levels than we were seeing in 2000 and 2001. On a transaction base, you know, clearly there is a line in the sand that just does not make sense for to us pass on. To accept. And that's why we have elected to take out the less efficient capacity in our platform. But we are committed to this business long term. We believe we have the capabilities and the platform to best withstand the short-term price pressures so with that we are going to protect our share and the reality is we have been growing our share because to the extent we have large customers and we help in the short term, we are looking to contract extensions and incremental business to support those near-term price pressure

And just zeroing in on the catalog business, you know, we know there is the july postage rate coming in, you know, in about 3, 4 months. Are you seeing your customers possibly line up late into the q2 period where we might see a lift in terms of the incremental order flow which could actually lift up your q2 results towards the higher end of the range?

We're not planning on that I think the reality is this isth has been well enough known information in the marketplace that our customers have been able to well plan for this. And it's not meaningful enough that they are going to adjust their strat it. Certainly, for people who were expected to be in the market right around the window, their ability to move things by a few weeks is certainly something I think we will see some opportunities with. But people aren't going to change their mail strategy in anticipation of this price change.

Super. Christian, just two questions n regards to depreciation guidance, I think previously, the indication was coming out of the q4 call, about 86 million a quarter. You're in an 83 million for q1. Maybe you can just update us on that and then in terms of the tax rate, I think it was 24% in the quarter, again an update for the year? Tax rate specifically, we have had feedback last year objective this year to be consistent. Q1 tax rate of 24 is what you're going to see for most of this year.

Okay.

And in relation to depreciation, don't expect a major change. I think in this environment, we have been slower on deploying capital. And best example is cap-ex in the first quarter was lower than the prior year. So I would expect that trend will continue and then at some point the back half as equipment comes back on stream... Restructuring capital, then that number will you go up slightly. But it's not meaningful.

Okay. But -- so you're still think, you know, an average of around 85, 86 level?

Same guidance.

Yeah.

Okay. Great, thank you very much.

Just to wind things up, i guess management is pleased with the performance in the first quarter. We were able to exceed consensus, and in the operating results we see some positive indications that the value that management expected to harvest from the restructuring initiative is being realized. This restructuring is a major undertaking. And it is clearly a management focus. And that is why, for example, in cap-ex, we have not had market strategic moves in cap-ex because we are spending capital dollars in order to redeploy assets and to get our facilities to be as high-yielding as we can possibly get. Given the marketplace, i believe that management is taking the right approach in focusing on making the business better. We are fighting in the marketplace where appropriate. But we are not known for giving work away. And we think that this very conservative and disciplined approach is the right answer, given the economic circumstances that we're facing clearly in north america and in europe. South america is somewhat different because there is so much opportunity and it is a unique opportunity for us to redeploy acceptable assets that are not necessarily north american high performance competitive devices. So... We thank you for your following. We appreciate your support in the marketplace. And I'm very pleased with the performance of the stock and hopefully, our results will continue to demonstrate that this company not only has leadership in the market position, it's working hard to make sure it has earnings leadership everywhere in the world. Thank you ever so much for attending.