Quad/Graphics Inc (QUAD) 2002 Q2 法說會逐字稿

Ladies and gentlemen, welcome to the Quebecor World's second quarter results conference call. I would now like to turn the meeting over to Mr. Christian Paupe, Executive Vice President of Quebecor World. Please go ahead Mr. Paupe.

Thank you, welcome to the Quebecor World conference call for the second quarter. I have with me this morning Charlie Cavell, our Chief Executive for Quebecor World Bank and Mark Reisch, CEO of our domestic business. Before we start the call I'd like to remind our participants that the call is being taped and web cast and the forward-looking statements are made pursuance to our Safe Harbor provisions and applicable laws. We'll follow our usual format for the call and Shirley will make an opening comment, Mark will discuss our market developments in our domestic business, as usual I will provide you some highlights on the quarter and provide more color on guidance for the back half of the year. On basis Charlie you want to make an opening comment sir?

Yeah, thanks Christian. Well certainly it appears that back in the fall of 2001 when we saw what was happening in the marketplace we developed a very conservative outlook. It would appear that we were well advised at that time of the economic environment in most of the geographies in which we operate. I'm using a word, challenging. It's a difficult market at the basic fundamentals and it is impacting the business of many of our customers and therefore their relationship with us is impacted.

I guess, I'm happy in one way that quarter two of 2002 is what I call the last tough quarter because this is the last time we will compare our post 9/11 results against the pre 9/11 environment of last year. Advertising continues to be slow. US ad pages for the quarter are still down 6.4 percent versus the second quarter in 2001. I think this is the toughest advertising environment that we've operated in, in a decade. Now, the lack of advertising demand, the lack of advertising pages has left a lot of the industry's capacity open and this is now starting to put pressure on price.

The good thing about where we are is that we are offsetting in a very good way this capacity issue by continuing to win market share in the day-to-day operations. Mark will provide some late breaking news in that regard. Now looking back although was a difficult decision I believe this company made the right decision I believe this company made the right decision back in the fourth quarter of 2001 to restructure our business. In the past period our focus has been internal. This restructuring is a major undertaking and we are totally focused as a company to two things; servicing our client base and developing our market share and flawlessly executing our restructuring plans, which will provide us an efficiency from which we expect to harvest significant dividends when the market returns.

Now, the benefits from these restructuring exercises are starting to become apparent in our results. It is basically our cost controls in restructuring that is holding up our EBIT numbers and I think, we are doing extremely well in a very difficult market. If you compare our results to our largest competitor, I think I have all the right to be very proud of my management team for what they have delivered. Now, although we don't provide segment information or any micro analysis, our EBIT to sales in several of our larger operating segments are in fact up and to realize margin expansion in a marketplace such as we are operating in, which is price pressure, I think it tests very clearly to the type of efficiencies we are being able to find in the restructuring.

Europe, clearly this market is down and it is literally a wash with excess capacity from a lot of capital spending that was spent over the past 24 months in both and offset and it is dramatically affecting our results. I want to to add our performance in Europe, in every country, in every facility, outside of France is basically in line with our consolidated global margin. The problem is a local problem in France and we will have some further discussion on this. We will try to give you some details about where we are heading to make this, this problem go away. One needs to recognize it, when we entered the French market in 1993, we have made money on a continuing basis. In France, we have faced some specific issues relative to the way the political industrial platform is managed and I will comment on that when we talk more specifically about France.

We have some specific plans to address our problem plants and we have a vehicle through which we think we can make the implementation. In Latin America, I guess up up up. Our revenues are up 18 percent. Our EBITDA is up 13 percent. We continue to win market share from existing market places and open up new market places and it is only unfortunate that is not as large as I would like it to be because it is certainly is an awfully positive story. So, we will come back to some of the European specifics, but I think at this time, turn it back to Christian who will give you some parameters on the results.

Thank you Charlie. The highlights on the quarter, we had diluted earnings per share for the second quarter of 40 cents or 68 cents consensus that compares for the second quarter consensus earnings of 37 cents according to FirstCom. On the revenues of the billion , they were down two percent on a reported basis over last year. If we adjust for the contribution of acquisitions of about 60 million in the second quarter and lower paper sales by 50 million in the case of paper not volume, but the impact differencing specifically. Results in lower paper sales for the quarter were in fact down three percent. Consolidate EBITDA for the quarter of 211 million is a reduction of 13 percent as Charlie indicated, this is a . We are not going to walk away from that discussion. However this is consistent with our guidance and our own expectations. As Charlie insisted, we have articulated that our focus is management is to execute our cost savings plans to protect margins and to reduce bank borrowings to improve our financial condition. The second quarter financial expense, it was down 20 percent to 42 million and a two-thirds of that variance is essentially volume in the case of bank borrowings in lower investment in working capital and management in capital spending year-to-date and a third of the reduction in rate, this is essentially the impact of rate debt on securitization in bank borrowings. Mark will give you more of an update on restructuring initiatives in his own comments. Concerning the execution of the plan overall, we are ahead of plan as our MBNA indicates, the facilities are listed and we now have closed the 3000 employee positions that have been eliminated. Our rigorous follow-up positions as well as Charlie indicated for benefits accrued to the P&L on an apparent basis starting in the third quarter. An update on our financial condition, we are sustaining our gains, our progress continued into the second quarter. In the second quarter, we had free cash flow of 40 million dollars close to 300 million, on the 12-month trading basis and that is a supplemental package. You will also find in there, we are reconciling the change in debt on the same-store basis versus the impact of recent acquisitions, sold that at the end of June before retail printing, and the asset transaction is done 11 percent compared with the same time last year. We are on track to deliver 300 million of free cash flow for this year, which would lead to a debt decap ratio in the low 40s. By year-end what it, which essentially no bank borrowings left. These are the highlights for the quarter. I am sure the indicator will give you more color as we move forward during the call. Mark you want to talk about the domestic business?

Thanks Chris. Hi, good morning. Today, I have planned to cover three topics with you. First an overview of the business environment and how our North American business performed in the second quarter and the first half. Second, an update on restructuring plan in North America and third, I would like to tell you about two major sales that we have recently closed, which I believe confirmed both the strength of our manufacturing platform and of our products and service offering. Our North American revenues for the quarter were down approximately 5 percent versus prior year. The operating environment remains difficult with sluggish demand and price pressures from excess capacity. Our year-over-year comparisons benefit, from last year's acquisition of the retail printing company in North America. The significant cost benefits from our restructuring and other cost containing efforts are litigating the impact of the revenue shortfall in most of our markets. There are three situations, which continue to be the most challenging for us throughout the first half. First our premier business continues to be under pressure due to both declining pages and prices. Second, our commercial specialty business revenues continue to be soft, as many companies have reduced promotional expenditures, particularly promotional gains. And third, the restructuring benefits from our book-platform has not come on stream as quickly as we had planned due to a difficult startup in our King’s Fort facility. We are addressing the pre-media shortfall by significantly reducing our operating expenses and re-aligning our pre-media sales organization with our print sales organization. The softness in our commercial business is being attacked with rigorous cost-containment efforts and the start up in King's Fort should begin to get back on track by the end of the third quarter. The obvious three difficult issues, which we are actively addressing. Our business in the second quarter was very consistent with our outlook, earlier this year.

I am going to briefly update you on our product routers. Our retail group again was our strongest performer in the second quarter. Our manufacturing plants continue to perform well as a support by good success from our on going best practice initiatives. But the most important driver of our success in this market is due to significant market share gains in 2001, which we are now fully benefiting from in 2002. Our restructuring activity in this group is significantly underway with two facilities fully closed and a startup of our new Southern California facility on schedule for year-end. In our catalog group, the market continues to hold up quite well. Very similar to our print in retail, the major market share gain for 2001 are best in our catalog platform as well, for the full year 2002. Indications from our customers are that their first half sales trends should continue at the back half, which is consistently above budget. The magazine market trends as Charles indicated continues to be very difficult. The comparative performance versus last year is better each month, principally because the comparisons are getting easier, not because the market is strengthening. In addition, the magazine market is where we have seen the most activity of businesses seizing publication of titles. The major restructuring our platform was completed last year. The cost structure proven from these initiatives combined with further cost reductions this year have allowed our magazine, catalog platforms to stay on its earnings projections despite the revenue shortfall. In books, overall our business performed well with solid approval in our trade book facilities and continued to strengthen our education market. But as I mentioned earlier our King's Fort restructuring has significantly impacted our book and total results, as a major deployment of both the and transfer equipment along with a number of our employees being in new positions has resulted in a difficult startup. In our commercial direct group, we have completed restructuring plan, closing three facilities, and transferring work to other facilities within that group. Those steps along with stringent cost reduction had enabled us to significantly offset the impact of the ready shortfalls in the quarter and year-to-date. And finally in our directory and logistics business, both had good quarters again delivering the planned results. So, in summary from an operating standpoint, we have identified specific problem areas, which are being aggressively corrected, our restructuring plans are substantially behind us, and other than the difficulties in King's Fort the execution has been excellent. And we remain very focused on further reducing our expenses to offset the impact of the soft market conditions, we see continuing. But the actual key element to the short, long-term success with any company is winning business in the marketplace. 2001 was an outstanding year for us in gaining market share, particularly in our retail and catalog businesses and in 2002, our success in these markets continues. Last week, we announced a major transaction we completed with Sears, one of our largest customers.

we have been a key print supplier for Sears for over 50 years and last week we signed an agreement to provide Sears the paper for their entire retail program. Both we and Sears believe there will be significant supply chain efficiencies realized from this new program and we are both very excited about the potential this program offers to both of us. And today, I am proud and delighted to announce another major sales win by Quebecor World. We have been awarded the opportunity to print all of the catalogs for L.L. Bean. This is a very very important transaction for our company and I believe a very powerful message to the catalog marketplace. Quebecor World has been a proud supplier at L.L. Bean for a number of years sharing the production with our two premier competitors, although our market share of this work has been the smallest of the three. After a rigorous assessment process, L.L. Bean decided to award 100 percent of their work to Quebecor World as the depth of our manufacturing platforms including the most expensive wide web capabilities in the market gave them the confidence to sole source their catalog production to us.

As we did last year to support our sales acceptance with Victoria Secret and Brylane, we will again be ordering a new wide web press to support this outstanding new sales and on that very positive note, I will turn the call back to Christian.

Thank you Mark and as we usually do, I will provide further financial guidance before we open for questions. The second quarter earnings of 40 cents were 3 cents ahead of consensus and for the first quarter we were 2 cents ahead of consensus. This 68 cents was 5 cents above consensus year-to-date. We are confirming again this morning our guidance of a dollar 85 to two dollars a share on a diluted basis for the current year. Given our performance though in the context of the first six months, the bottom end of the range becomes more like a dollar 90 on the basis of being ahead of your expectations. So, a dollar 90 to two dollars a share, first called as currently at a dollar 95 exactly were it should be, were we are comfortable, even our cautious outlook on the environment. Again to insist, we are confident with our grown earnings in the back half of the year through sustained cost containment and lower financial expenses, and the benefits from the organic growth when they come will accrue further to the P&L. Why don't we open up the questions?

Thank you very much Mr. Paupe, Mr. Reisch, and Mr. Cavell.

If you have a question please press 1 on your touch-tone telephone. If you are using a speakerphone please lift the handset and then press 1 and should you wish to cancel your question please press the number sign. Please press 1 at this time if you do have a question. There will be a brief pause while participants register for their questions; we thank you for your patience and our first question will come from Mr. Douglas Arthur from Morgan Stanley. Please go ahead sir.

Good morning, Doug. Can you hear us well?

Hearing no response from Mr. Arthur's line, we will move on to Mr. Karl Choi from Merrill Lynch. Please go ahead sir.

Hi, good morning. I have a couple of questions. One, I wonder if you could shed more color on your operations in France, how quickly you think you can get their margins up to the rest of your European operations and two, if you could, I will talk about your operating margin goal for the full year whether you are still 10 percent, given your new contract with CS and purchasing paper and the first half results? Thanks.

Karl, the situation we have in France, where we are, we is the result of basically five acquisitions. The legislation in France is designed in a way that if you are profitable in a facility then you really do not have any right to undertake direct restructuring in a material way that would affect the well being of the employees. Where we have fallen to in this quarter is we have some facilities that are actually ready, they are not delivering. This ironically brings us into another dynamic of French law and that is that I am not obliged to offer a business that does not contribute to the shareholders. We intend to walk through that door and a detail-restructuring plan has been reviewed with the board and it will cause the merger of these two facilities and it will cause a right sizing of another facility. I am not at to be specific about which plants are affected because it is premature relative to our communications with our employees, but there is a full awareness in France that we cannot and we will not tolerate this level of performance. We have done the industrial engineering and that is necessary for this restructuring. We are now into the social engineering communication because activities of this nature, we look for assistance from the employees as to how we can best achieve the goals that we must mutually agree, we have to achieve. We are in business to provide wealth for the shareholder and his investment and we cannot and will not tolerate what's going on any longer. I will bring forward to you that last week we completed a full audit of our restructuring. Mark is being modest when he talks about the efficiency of his implementation because we have accomplished what we wanted to do and we have not consumed the amount of money that we had originally expected we would consume. This amount of money will cover what we intend to do in Europe and the updated filings will be made by Christian so that all entities, all necessary entities that need to be aware of this data are clearly aware, so there will be no change to our restructuring charge, but there will be a change in the cost of certain items. We are going to go further in France than we had originally expected. Karl, everybody on this management team is paid, I believe quite well others I believe you not so well, but that's the way we are in here and we are paid to deliver results for the shareholder and there is a clear and absolute focus on making friends better and I am very comfortable that with his long history of relationships with the will be the right guy to lead us forward to making change in a positive way. It is nothing personal with the employees, this is something we have to do because it is our job to perform for the shareholders and Karl, we are not walking away from this. This time, the door is open and this time, we are going to make efficiencies in France, which will allow France to be a reasonable performer. On operating margin, your question Karl, there is only some fine-tuning. We have been very specific in saying we had an operating margin for this year close to 10 percent, we 9.8 protecting margins we last year, we are talking 20 30 change, so essentially not a very significant impact.

Great. Thank you.

Thank you.

Thank you very much Mr. Choi. And our next question will come from Mr. Bill Gibson from Banc of America. Please go ahead sir.

Thank you. Yeah, this question may be for Mark. Back to your book business, I think I understand the issues at King's Fort and I mean that has started up in just execution related, but on the macro sense beyond that, what's the trend in our back sales, say quarter-to-quarter and year-over-year?

Since I..... it's more, you know somewhat similar to the magazine situation. The last year was just a very disappointing year for the trade business in general, so the costs had been relatively easy and through the first half, we are up, are low in the third quarter indicate that that trend will continue. So, we expect to have a pretty good year in our trade book business versus 2001.

Good, thank you. Just a second question, if they have been part of the board level as to expensing stock options?

Yes. We discussed to Chris whether to handle it. It is not a material issue for us.

what we have done essentially is engage with our board in terms of the discussion on this issue. To put this into perspective, our total program is essentially slightly in excess of 7 million shares and currently 3.5 million are reserve but has not been granted. In our notes to the financial statements you will find that in our MBNA package in the full statutory statements, we are compliant with getting GAAP and US GAAP. In the case of US GAAP, we are indicating that starting with 2002, what would be the impact of the potential on what’s been issued this year and that is not a material amount. For the current year, we have issued 174,000 shares. At the two other data points are if we were to expense all of our historical grants and were looking at roughly 3 million or 2 cents a share and if we further award share options in coming years and million share increments, the cost is about the same. Essentially, our message is this is contained as far as we are concerned every million share increment which would be above 15 percent of the total part that has been issued historically, but represent 2 cents a share pretax. So, this is a non-issue. We are going to continue to monitor accounting pronouncements on this issue. Our concern currently is two fold. In moving too quickly on making a decision even though it is not significant. The first one is black that issues with it in terms of valuation methods and it is not necessarily universal, we would prefer that the accounting profession clearly indicate this is the valuation for all companies or there will be something, something else to be used. My second concern, which is more significant, is the way the pronouncement is currently structured and we would expand this at the time of the award using historical information. So, for example, if we assume, there is an average life of 5, 6, 7 years at the time of the grant, we kind of crystallize the assumptions with no opportunities to revisit in the future. That is my concern.

So, like other companies, Coke has announced they are not using black . We have looked at a number of companies and their decisions to move forward. Our perspective is, this is not an issue for Quebecor World. This does not have scope or size and if we expect all of these, in the end, it represents, as I indicated, no more than 2 cents per share for every million shares.

Thanks Christian and I am sure your concerns on that valuation matrix as well.

In terms on that valuation Matrix as well.

Okay, thank you.

Thanks very much Dr. and our next question will come from Randal Rudniski of Credit Suisse First Boston, Inc. Please go ahead sir.

Oh, thanks. I am supposed to ask you a quick question about the acquisitions in the quarter. It looks like acquisitions generated an incremental, roughly 25 million from the first quarter, but the operating income was the same from acquisition in the first quarter, which either indicated maybe an asset with minimal or that there was a down turn in some of the, in the retail or as, can you just comment on that, what we are seeing on the operating income line from the acquisitions?

Well, I looked at it this morning, you know Randal and in fact I have no concern whatsoever in a retail can add more and more specifics since it has been a great acquisition. There is no surprise in fact their performance is in line or better than our own expectations at the time of our due diligence. In the case of , what may not help you understand the numbers is this was effective March. So, year-to-date that's what I looked at this morning to satisfy my self and I can assure you that we're essentially in line in terms of EBITDA contribution, even though sales may be slightly lower currently. I have looked at finishing and the quitting businesses increased in France. is performing according to plan. Belgium is performing according to plan and in the case of finishing; in fact they are ahead of our expectations.

The has shut plant France came with a full load work that had already been pre-established price wise. So, it has performed better, dramatically better than any other facility, because it's got the stable workload which is pre-determined. That's not our issue Randal.

So total purchase price, you'll recall is close to gaining our ND&A for the second quarter. Its just 70 million US. We talked about an EBITDA contribution, it is about 50 million annually and we are on track.

Now, going forward, I guess retail will follow us as, we kind of cycle through there. So, we should have in our models roughly 50 million quarterly for acquisition contribution?

Well, the guidance we gave is 140 million in sales annually and retail about a 100 million. So that 50 number, 50 and we will give that.

And then lastly, I was wondering if you could comment on the performance in Latin America. Kind of, can you give us a local currency in the revenue growth, figure for Latin America?

As a mater of policy Randal, we do not do that, given with the report in US dollars, we have even managed our business on that business. But, you are correct in the current environment, the local currency performance would be ahead of what we see translated into US dollars. There is some interesting anomalies Randal Argentina and its melt down took our business there. Yes, we had some customers that didn't survive in that , but what has happened is that Argentina has become a very competitive entity within the Latin American platform and as such our performance in Latin America, Argentina specific, is dramatically better than it has ever been, because they are extremely competitive versus Brazil and Chile. So, again management, I think handled this situation extremely well and it becomes part of our going forward vision for Latin America. Argentina is not only a wonderful place to visit, it is a very vibrant profitable manufacturing organization force. From an issue point of view on Latin America, our start off in which was a green field. We had made significant progress in the quarter. We were positive, but I am not too old to say it is over. When your problem is essentially true skills and training, it is a slow exit and I am pleased that we are above border now, but it is a long way from being a contributor. Our huge facility in Mexico DF, all the technology is in place, we are operating reasonably well, but they are now coming into their major undertaking, which is the production of the Mexico City directory, which I think the word is humongous, but again, the majority of the work will be done in Mexico DF. We have backup programs using our directory facilities in Latin America and a portion of the work will be supplied out of our facility in Loveland, and this has been done simply to provide a service guarantee, which I think is appropriate to our customer. We are being extremely cautious because we are going to, as is the focus of this company, we are going to deliver what we said we would deliver. The reporting segment overall assured the revenue base was up 27 percent through 6 months. The operating income performance was up 16 and we expect in the back half to convert it better.

Okay, thank you.

It is a nice light to get our global platform in Latin America.

Thank you Mr. and the next question will come from Douglas Arthur from Morgan Stanley. Please go ahead sir.

Yes, it is Craig Huber; I don't know what happened earlier. Charlie, concerning CAPEX, you just talk about it for this year and also as you look out to next year, do you expect to get back to more normalized levels next year as you have to play catch-up there? And my second question has to do with text books Mark, if you just maybe quantify any changes there in your business year-over-year? Thanks.

Yes, on the CAPEX situation, a number of years ago, we started a specific re-tooling program to bring wide web to review our capacity into the marketplace and to expand our wide web shorter cut-off platform to serve the magazine and retail players.

As Mark has indicated, our leadership position in technology has become very, very attractive to certain customers, because our ability to deliver is clearly market leader. We have a wide web being installed, a wide web review press being installed currently to allow us to have the capacity to handle big secrets in and I will order, near term, yet another wide web machine. So, in the process for the past two years, we would, two years, one past and one forward, we would have added three wide web reviewer presses. The power of this network is overwhelming and the customers are being drawn to it and we are very pleased with that because I was extremely nervous back when I started the re-tooling, because we were spending a multiple of our depreciation. I don't expect to ever go back there, because we have I believe the most up-to-date technology in the industry. The best aggregate platform in the industry and we will have a CAPEX number next year, which I suspect will be modestly above what we are currently running. It will be somewhere between 200 this year and 300 next year, which will not strain our financial resources, which will allow us to continue to deliver free-cash flow against debt and to have this company rock solid within a marketplace and an environment that is so much stormy.

Craig, on the question I have, our results of the first half have been consistent with our plans and the back-half also looks strong, as we have indicated on prior call was part of our restructuring plan. We have committed two additional presses, specifically to the educational textbook market in our Dubuque facility, which will be in progress in the third quarter, fully operational in the fourth quarter and we have also committed a third press to that business, effective 2003. So, we have good expectations. Our share has been under whelming in this market segment and we are very focused on building that share aggressively over the next 18 months.

I think Mark it's fair to say that you have had some significant gains in market position.

We have and again I think we have mentioned most of these, but the nice thing about this marketplace is, we are getting solid position with multiple customers storms, but then the additional volume from McGraw Hill, it's spread to all the major publishers that we now have a meaningful position with all of them. But I think in all cases, still room to grow.

Mark it is Douglas with a follow-up. In terms of the excess capacity and I know it varies dramatically by product line, but is a stronger economy and stronger ad demand etc going to take care of that over time or does further consolidation and restructuring have to occur in the printing industry in North America to sort of solve this problem.

Doug, I really do think that it needs to be a combination of both. I mean, a lift in general demand will take care of the problem of filling up again and improving the price structure for all of the quality assets that are in the marketplace. But clearly and I think we had taken a leadership position since 1999. There is capacity in most of the markets in the North American platform where there is still too many inefficient assets chasing work. And we do believe their needs to be further restructuring. We think we have taken the steps that make sense, probably closing over the past four years, the better part of 20 facilities in multiple markets and making sure that our platform is now really built around quality, technology, and efficient assets but we think that needs to be more progressed from some of our competitors and certainly some of the secondary players that are still running very marginal platforms.

Great thanks.

Thank you Mr. Arthur, thank you Mr. Huber. And our next question will come from Mr. David McFadgen from National Bank Financials, please go ahead sir.

Yeah, a couple of questions. I was wondering if you could give us some more details on the L.L. Bean contract how long it is for and the dollar value or the incremental dollar value that you have now and just on the pension expense, I know you were thinking about lowering your return on asset assumption, do you think you will do that sometime this year and if so when that increased your financial expense and I guess that would be incorporated into the new guidance you are talking about. Can you just give some color there?

Maybe I will start with the end, you can reflect on L.LBean Mark?

Yes.

What have we done a couple of weeks ago, we filed the supplemental disclosure with the SEC, our concern was that many of you didn't have necessarily the correct information and we wanted to make sure we were communicating effectively. That's what putting this into context, first is we have not booked in consolidation pension income in the last three to four years. That has not been the case. In fact we have been using the opportunity in a good economic environment to fully accrued pension requirements in the case of Canada and specifically. So just to correct that misperception there has been no contribution through earnings from pension.

The way that we tackled the issue is that Canada should be distinct and separate from the US under separate issues. In the case of Canada we have gone from the surplus of more than 40 percent back in 1998. It was essentially parity, as of the end of June we have looked at those numbers yesterday in the context to the board meeting and the positive returns were mostly reinvested into plans in the form of pension benefit improvement. In the US clearly these are unprecedented times at 2.5 years of negative equity returns. We are aware of the funding issue. It has been fully disclosed and what we are doing as of now is in the process of finalizing the exact amount of an excess cash contribution. Even though legal requirements are low, we intend and we have a policy of correcting the funding exposure over a five-year period, so currently we are looking at 35 million on a cash basis of total cash contribution for the current year. In relation to the year, your last comment on rate of return assumption, we understand these are difficult markets; we are dealing here with long-term assumptions our typical employee is expected to be with us for 14-15 years. We will make a final decision on that, but we have already provided you guidance that every one percent change is 5 million pre-tax impact. So, again to insist a combination of surplus exposure in the case of US having become a deficit and the accounting impact of that change that excess contribution also, and then the impact of changing the rate of return assumption those factors have been taken into account in our guidance for the current year. My comments earlier of a dollar 90 to two dollars a share takes that into account on a cash basis the same. They take into account not the appropriate contributions, but they take into account almost the multiple of that, which is what we intend to do looking at three times of legal requirements maturity.

As far as the question on L.L. Bean, as a respect to our customer, I will be a little bit general in terms of trying to give you a sense of the agreement that we do plan to issue in the next week or so more comprehensive press release describing the transaction, but it will be a long-term open deal agreement. From the size stand point, I would tell you that L.L. Bean is one of the largest consumer catalog companies in the world and given as Charles described the breadth of our platform as it exists today the fact that we do need to support this new contract within an additional wide breadth press, should give you some sense that it is a very significant transaction.

Okay and are the... or I don't know if you could comment on this, but what would be the EBITDA out of the French operations in France, I mean, I imagine it is negative, as far as the goes on, if you can disclose that?

Well, maybe what I can do is give you a little bit of color. When you size your efforts at billion dollar business currently taking into account our shift, France is about half of that revenue base or half a billion and 60 percent is our core platform, sure it is, how do you put it. So, the issues we are discussing are in the context of the 200 million revenue base that combines industrial offset and specialty printing, and in fact for the quarter France was EBITDA positive as well as year-to-date. Its currency earning on an OCE basis is high-single digit. So, it is cash positive, but that is not clearly sufficient, it's clearly not sufficient.

There is a lot of value though in Europe. Germans are very very strong in reviewer. There is one modest reviewer supplier in the UK and in the Central European platform, we are the clear and absolute leader in reviewer technology, which is I think all of you understand that reviewer is probably the most stable and most yielding sector to be in. We have a franchise that is worth fighting for and we will get the cost and get efficiency that we must have and it is a process that we have been at in within the very limited confines of being profitable and now we are going to step it up because we have support. We are not going to operate businesses that do not perform. We have to be careful because I do not want to violate my trust with our employees, but we have some businesses that are very good performers and others that aren't. It is the others category that we are focused in.

It is just as a matter of clarification, the problme is in the platform. Correct?

It is in both.

It is in both, Okay.

The issue is that reviewer has a process, takes a very significant infrastructure. So, when recovery etc. etc. etc. and as such small, very small reviewer platforms have a difficult time and in a bad market, they can get damaged. Consolidating where we are got into in North America, we have significant size reviewer platforms. This indicates the off deal of operating overhead of recovery etc. and allow us to be highly efficient. We have to get to that same type of structure in Europe, there in France. You know, reviewer, we have a very interesting reviewer facility in Finland and it does extremely well. It is literally 100 percent the supply side to Russia. Moscow has become a very vibrant market. We have a very significant sales force in Moscow and we will be expanding the capacity that facility simply to keep up with poor customer demand. It is, the problem is France and we are focused on it.

Okay, thanks a lot.

Thank you very much for and our next question will come from Michael Millman from Salomon Smith Barney. Please go ahead sir.

Thank you. Couple of questions. One, you did mention, I think Mark motioned that there was some price weakness may be you can talk a little bit about that and quantify it possibly. Secondly, could you give us some idea of the outlook for business on a basis so that we can take in to account seasonality and kind of related to that in terms of the 10 plants you have taken out or Mark mentioned 20 facilities over 2 years, how much capacity have you taken out and sort of what kind of operating rates are you averaging today? Then, finally could you give us some idea on the Sears contract for paper supply, what that will do to revenues and operating income?

Well, if we do start with the last thought, Mike we are not willing to get Sears given this is a key strategic relationship to disclose that level of information. I think the question was asked earlier, does it have an impact on margin of course it does, you know resourcing paper not necessarily putting more value and manufacturing in the process and I would like to leave at them in the context of Sears. The price weakness margin , why don't you give us a little bit of an indication may be on a quarter group basis.

Yeah, I will not like to quantify it, but I think it is fair to say that certainly in our more transaction businesses, which are typically or commercial or direct mail or spot book business, smaller of the catalog which tend to be a seasonal buy as supposed to contractual buy, there is meaningful price pressure throughout those markets and that price pressure has been reflected in our first half actuals and estimate as well as our back half guidance. So, we are not telling you something today that is not consistent with our plan, but we do want to make sure you are aware that there is the normal cyclical price pressure that arrives when there is capacity in the marketplace. We think that we have done the right things from the capacity utilization. Our focus has really been too full. We believe from significant operation with efficiencies that we have been achieving through best practices, our Quest programs and a number of initiatives, we created incremental capacity to better operations in our existing facilities. The quality assets that we had available from facility that are closing have all been redeployed. I think we have intelligently moved certain assets that weren't the quality of requirements in the US and we put that to very efficient use now in our Latin American platform. So, we had the ability on a global basis to protect our capacity I think very well. Last quarter in our annual meeting, I believe we articulated that our net capacity change, we believe, is within one percentage point of our pre-restructuring initiatives despite the fact we have reduced our headcount by what now is approximating 3000 employees.

Just to reinforce that the orientation of this company having fewer but larger and more specialized facilities has been a dramatic evolution in our manufacturing efficiency because when you have larger facilities, you can actually schedule much higher utilization with out putting the customer in any jeopardy because these are mechanical devices and things do go wrong. So, we are, as far as I am concerned clearly I'll buy into Mark's figure may be one percent at the most and in fact, if we accomplish the efficiencies that come from these supplemental programs, we will actually have a capacity expansion without spend of money.

Moving on to the next item may be we will take one or two more questions, so we can conclude our call before opening the markets.

Absolutely sir. Thank you gentlemen and our next question will come from the Mr. Vince Valentini from TD Newcrest. Please go ahead sir.

Thanks very much. Christian, I wonder if you can talk about the cost restructuring and the flow through into 2003 and how much will be achieved in the backup of this year and you know the incremental would be next year? Can you quantify that a little?

We have been very specific Vince on a number of occasions indicating the 45 million dollars target is for the current year and clearly going into next year as the point when it is appropriate, we will quantify that again on a run rate basis into 2003. The best way I think that may be look at cost containment is....if we look at the sequential improvement in our business, the revenue base in the second quarter even though seasonally we would get an update that was not the case. It has been roughly the same of the billion in fact more like a billion 460, a billion 470, and we have disclosed the impact where the contribution from acquired business is for the year-to-date and the quarter on that basis, operating income is up 14, 15 percent before we take into account the impact of acquisitions between the first and second quarter. In my mind, that is the best indication of the cost savings coming through this unit.

Okay, on a different , can you just say when did this contract kick in and also on catalogs, can you quantify do you have any real contracts of your own that come up for renewal on the next 6 to 12 months?

The work will begin at year-end 2002 and we have been very focused over the past couple of years on looking at the calanderization of our own long-term contracts, both in our magazine side, catalog side, and retail side, and we are not confronted in the catalog side with any meaningful contract as we move in to 2003 that are at risk.

Okay, would you I mean just thinking about it, if you have taken this much volume away from Donnelly and they have got capacity sitting there. What do you expect them to do with that capacity? Shut down those lines or go out aggressively with lower prices to try to pick up new business?

You know, I can't speak what their strategy is. I am sure that they have their thoughts that they would be happy to share with you. As far as our view, we certainly had taken a long term perspective on looking at the marketplaces, because they your marketplaces is actually what we have very good visibility when there are essentially three suppliers and a limited number of very large customers. As we have laid out at the look-forward, we feel very good about where our position is for the years to come.

Vince one of the ways in which I look at this is that we have over a number of years systematically eliminated our low-yield technology. We have been very aggressive on this. I suggest to you what is happening in the marketplace to a degree is that we are attracting customers because of the strength of our platform and the benefits it yields to them. There is some technology out there that really will never fully satisfy the customers and the level of expectations that they have. So, there will be, I think, out of this compression in competitor's least efficient technology. They will go to what we have been doing for years and years and years.

Okay, thanks guys.

Thank you, Vince.

Only one last question before we close the meeting.

Absolutely Sir. And our final question will come from Andrea Horan from RBC capital markets. Please go ahead mam.

Thanks. One or two back turn .. actually the first question. You talked about what you were going to do in France and I am wondering if you can get some clarity as to the timing and the second question I have goes to the synergy question where you have talked about eliminating 3000 positions and savings of 45 million, which seems low savings on a per-head-basis. Have you added people in other areas or what is the explanation for why the savings per eliminated positions is recently low?

For cost savings in synergy, Andrea with your permission we will leave it at where it is at there. Our target for this year has been very specific and when we feel it is appropriate in the context of guidance for next year to crystallize a high number we will do then. We have got to be careful however, that's my word of caution, as we are talking here about the elimination of employee positions on a gross basis in the case of 3000 and then historically, and it is the same in this case as we prudently redeploy assets, then we meet the higher end of the that are receiving the assets.

Is there a net number that you can give us in terms of headcount reduction.

That is not the case Andrea.

Okay.

I am sorry we are facing market opening and I do apologize, there is people in the queue with questions and I am very sorry ...

Excuse me. The timing in France.

Okay. I am sorry. We are live today okay in what we call right-sizing activities. The process of actually taking plants out of service will be a process, which will probably consume the better part of 18 months, 12 to 18 months.

Thank you very much.

They are multi-step processes Andrea and that is what I can say at this time. I am sorry that we can't handle the questions that are still in the queue, but please we are totally available for the balance of the day at any time. So, those people should feel free to call-in immediately and we will try and answer their questions. Just as a summation, we are not a complicated company. The fundamental is that if you are the best-sold, low-cost provider, you are going to be the winner and I think we can see clearly wins in the marketplace and wins in our yield efficiency. What are we doing with the money? Well we have been focused on paying down debts, because if we have a very strong balance sheet within this company and we have better margins then I think we can, we have positioned the company to have an extremely bright future.

I appreciate the support that we have received from the financial community, I appreciate the support that we have received from our markets and our large customers and our customers throughout the world and I most appreciate the efforts that all of our employees have made because they have handled change, they have implemented change, and they have done it with enthusiasm. And I think we have got a healthier company today than we have ever had in our 10-year history. Thank you for joining us this morning, as I have indicated we are available for any subsequent questions you want to post.

All participants please conference is now over, you may now disconnect your lines.