Quad/Graphics Inc (QUAD) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Quebecor third quarter result conference call. I will turn the meeting over to the executive vice president of Quebecor World.

Thank you Christina. Welcome to the Quebecor World conference call for the third quarter of '02. I have with me this morning in Montreal, Charles Cavell, our chief executive, as well as David Boles. Good morning, David. And John Paloian, the recently appointed chief operating officer for North America. I'd like to remind participants that this call is being tape and webcast, and forward-looking statements are made pursuant to safe harbor provisions of applicable laws. We will follow our usual script. Charles will make an opening comment. I will follow with a review of highlights for the quarter, focusing mostly on financial condition. Both John and David will comment on their respective businesses, including market conditions and customer wins. And then before we open up for Q&A, I'll give more of a prospective set of comments and guidance for the balance of this year. Charlie, over to you.

Thank you, Christian. Obviously, I'm extremely pleased to report that as we promised earlier this year, we have started growing earnings again in the back half of '02. Now, despite the continuing economic difficulty in the U.S. and globally, we are managed into post excellent results this quarter. EPS of 64 cents is actually up 12% on an apples to apples basis. This is a full three cents above consensus, and only five cents below the year 2000 which was our absolutely best year ever.

Now, recognizing our strengthening performance and our very solid financial position right now, I'm pleased that the company's board of directors was comfortable in increasing the dividend to our shareholders by one cent per share, and this represents approximately an 8% increase on a yearly basis. Now, our strong performance in this quarter is not due to strong market conditions. In Q3, ad pages for the industry were flat versus '01 and still down 7% on the year to date basis. Pricing is materially lower than last year. At 72%, capacity utilization for the industry is at the lowest level it has been in the past ten years. And this is data that comes from the U.S. Federal Reserve board, so I guess we have to award it some integrity. Demand in the general commercial segment of our business has been the softest of all our business suits.

Now, our results reflect I think three clear areas of discipline. Restructuring, which as of the end of September was essentially complete in North America, has yielded dividends. Debt repayment, which has been our focus in the past 12 to 18 months actually contributed to a 25% reduction in our interest expense and Christian will expand on that later. Our manufacturing platform in which we have invested over the years, year after year, and that coupled with our unique distribution ability is supporting clear and absolute organic growth. And this I think couldn't be better evidenced beyond the fact that we have won all of the L.L. Bean work in a recent bid. Our core strategy of aligning this company with customers who are market leaders I believe is starting to pay off. I guess to illustrate this, if you consider the AOL Time Warner report that was issued last week, this is one of our top relationships. In AOL Time Warner's publishing unit, it actually increased its market share of U.S. advertising by 1.4 percentage points. This is it's best market share performance in the past 14 years and it now stands at 24.8%. Quebecor World, by having this type of market leader as our customers is absolutely advantaged by having this, and this is fundamental to our ongoing improving performance.

Our international operations showed some significant improvement on virtually all fronts. In Europe, our operating income increased 36%. And if I exclude France, the operating margin that we achieved in Europe of 10.6% was actually accretive to our consolidated margin of 10.4. Hallelujah. I will talk about France in a couple of minutes. In Latin America, our operating income tripled. Our operating margin of 11.6% approaches some of our best performing market segments in North America. In Latin America, we are winning market share literally daily. We have facilities that have performed extraordinarily well, but I would be remiss if I did not mention our operations in Mexico where we have just successfully built an entire directory facility, and produced the Mexico city yellow pages which is 2,912 pages in two volumes and 3.6 million copies. This is 5.3 billion printed pages. And I have to extend my personal thanks to all of our employees in Quebecor World [inaudible] in Mexico for a super job extremely well done. We continue to win global customers from our Latin American platform. Creating communications, a long-term U.S. customer is now our customer in Peru to produce a weekly magazine for Mexico. We also print in Austria. And thanks to our relationship with Telethonica Espana that we developed in Argentina, and we have one-third of the directories produced by Telethonica Espana in Spain that are printed in our plant in Barcelona. Quebecor World is still small in Latin America, but the opportunity is good and we can expand market share even in this unstable economy, and we will continue to grow.

Now, in France, which is I guess one of our, if not the major issue for this company, I'm pleased to announce that we are making progress with our unions and or employees on a daily basis. We have finally articulated an extremely detailed, industrial plan that will call for in excess of 10% reduction in head count through 2003. We will decommission certain non-competitive assets. Now, this effort which can be and will be successfully implemented within the constraints of French law will bring France back to a reasonable level of profitability. This will be done on a pure cost savings basis and I have awarded no increased reflection for volume or increased prices. Now, I must point out that there are certain parts of our operations in France that are very significant contributors to our bottom line. Specifically, the [inaudible] facilities that we acquired from Heshet that are full of Heshet work are performing well and delivering for our shareholders acceptably.

Now, to summarize, we have had an excellent quarter in very tough markets. We have demonstrated our cost containment program that we have been running since we announced the charge is paying off for shareholders. In every market we are in, we are winning customers. And I am intending and will implement meaningful change in France. This company is operating at a higher level of efficiency thanks to restructuring, cost containment and what we call manufacturing platform operation -- optimization. This I believe positions this company to uniquely benefit from the market recovery when it comes, and I think you will all share be me that it's not a matter of if, it's simply a matter of when the U.S. markets return. Now, Christian, can I ask you to go into detail on the financial results?

Yes, thank you Chalie. Charlie made the comment of diluted earnings per share for the quarter of 64 cent. This is consistent with the commitment that we'd grow earnings in the back half. We had four difficult quarters leading into the second quarter of this year. We're back in business growing earnings 12% in the quarter on a comparable basis. Revenues of 1.6 billion are unchanged with last year. Revenues are lower for 2% if we adjust for currency which is a slight positive of 8 million. Paper sales are lower as a result mostly of lower net to cost paper, and an acquisitions contribution about 40 million to the revenue line. The consolidated EBITDA, or gross operating cash flow, was 250 in the quarter. What I find very encouraging even though it's reduction of 3% compared with last year, it's an improvement at 20% over the second quarter. Clearly, that indicates that the benefits from the restructuring initiatives are now accruing to the P & L.

As Charlie indicated, we had two objectives for this year. Charlie made comment about first objective which is focusing on the restructuring activity. On the second front in terms of improving the financial condition, again, we have come through very nicely in the quarter. Debt pay down is fair, free cash flow is significant and for this quarter we have a positive cash flow of 97 million compared with an outflow last year of 58. Year to date, we have improved our cash coverage of fixed charges from 4.7 to five times, and clearly now our long-term debt is lower than 2 billion compared with an equity base inexcess of 2.6. We are well positioned to achieve our objective this year of a debt to cap in the low 40's and an even stronger financial condition going into next year. My last comment on the financial condition at quarter end, we gave you in your package a reconcile of our long-term debt changes. The current portion of long-term debt and convertible notes was down 54% in the quarter. And the total debt was down 13% on a reported basis. We exclude the impact of retail printing which was a Q3 last year acquisition, and except with the first quarter this year, we're down on an apples to apples basis as Charlie alluded to 17% to 1.9 billion. Would you like to introduce David and John, Charlie.

I'm very pleased to have two very important resources that have been with the firm and in the industry for a long period of time. David Boles and John Paloian. With Mark's decision to fulfill his life in other environments, I think it's a good demonstration of the bench strength that this company enjoys and resources that we are able to bring to the table leaders that I think can, in fact, further improve our markets and our relationships in North America. So without further ado, what's volunteer to go first? Mr. Boles.

Thank you, Charlie. To those of you who I have met before, hello again, and to those of you what that I have yet to meet, I look forward to chatting and meeting you in the coming months and quarters. I have responsibility for our Canadian and American retail and Sunday magazine directory book and premedia or Que-Net facilities. I will comment by market sector. I'll start off with retail and Sunday magazines. I'm pleased to report very favorable Q3 earnings on both a budgetary and prior year basis. This reflects favorable and similar year to date results into this sector of the business. I'm also pleased to confirm that the retail insert remains the single largest out let for North American advertising expenditures. This is good news for us at Quebecor because we have invested very heavily in this sector of the business, and our philosophy towards growth in this part of the business very much reflects the philosophy of the company.

Most of you who know our company is one that ostensibly been built through acquisition and we continue to make acquisitions where we sense a strategic fit. And the retail printing corporation which Christian just alluded to is one such example. However, in the absence of such a strategic fit, we will build it ourselves, and this is the case with our ongoing expansion in southern California where we are firing up a 200,000 square foot plant in Riverside county and will be operational in the month of November. And this very much reflects a focus for us in the last two years, and that is to build an offset network that's of a scale that is commensurate with what we have on the road. This puts us in a rather unique and enviable position in the retail and Sunday magazine market in that we are the only ones out there with coast to coast North American offset capacity that is unparalleled and unprecedented. And there are clear advantages to each aspect of the different printing processes that have great appeal to the types of customers that Charlie alluded to earlier, and those are large growing successful North American customers whose growth easily outpaces that of the economy. Companies such as Kohl's and CVS are two such customers. Furthermore, we look for customers that look for a lot more from their suppliers than paper and ink. An example of that is Sears Roebuck with whom we've just entered a paper supply agreement that has the latest and greatest of the supply chain principals applied to it. And my colleague, John Paloian, who has responsibilities for our logistics group will comment on a large logistics deal that we did with Sears Roebuck as well. Now, the vast majority and the lion share of our business is under long-term contract in the Sunday magazine and retail business. But that's not to they we do not feel price pressure in this segment. We do, but the good news there is our restructuring initiatives and our best practices initiatives that Charlie alluded to are going a long way toward offsetting this type of price pressure. So in summary with retail and Sunday magazines very much on strategy and frankly it's kind of nice to see a strategy that one had envisioned five or six years ago coming to fruition.

Moving on into directories, overall, our gross revenues are down year over year. That's the bad news. The good news is value added up and EBITDA is up. In fact, EBITDA is up into the low double digits. Our focus there is on cost containment as the hardships of the telecom are being felt in the price pressure. I believe one or two conference calls ago it was reported that our Verizon contract will be leaving our Pennsylvania facility. While that is still true, there are a number of contract initiatives that are ongoing that I expect to be able to report on next quarter. That will go a long way to offsetting this loss. On the book side of the business, I will segment books into three areas: book services, educational and consumer trade. Revenues are down overall due to a very challenging start-up in our eastern Tennessee Kingsport facility. That's the bad news. The good news is despite this, our EBITDA is up, our operating margins are up and the latest trends are very positive and I expect this to translate into continuingly improving financial performance in this sector of the business. But the lion's share of our book work is under long-term contract to 2007 and beyond. Therefore, it behooves us to concentrate on cost and we'll do so. The educational side of the business, very positive growth trends there. Specifically in the college and the L.I. book segments. This has driven our ongoing expansion in the Dubuque, Iowa, facility. In fact, as I speak, we're contemplating a phase two expansion at this facility with additional case binding to exploit the very favorable growth trends in this market. Lastly with books on the consumer trade segment, a difficult segment to forecast. We do see some softening and increased price pressure, driven principally by two reasons. Number one, our publishing customers are forecasting a modest holiday season, and we see few blockbuster authors being published at this time. Lastly with our Que-Net premedia operations, we've had a great deal of focus on this sector of the business. We've had an awful lot of cost taken out of this side of the business in the past several months. There are technological trends that are impacting Que-Net Media, but I want to be clear. Que-Net Media is here to stay. It is an essential part of print and as such we have realigned Que-Net Media along vertical markets as we have the rest of our business and we have done so to increase and enhance the level of sales focus on this essential part of our business. This effort is being led through the recent appointment of a chap named John Bertuccini who's just assumed this role in the last two weeks. And we'll pass it over to Charles.

As you can see, David, we are blessed that David has a strong knowledge of manufacturing, a detailed knowledge of his customers and markets. And I guess as you noticed a certain passion about his business. Thank you, David. John runs our biggest single platform, Mag Cat and he's recently taken on additional responsibility. John, I can ask you to give everybody an update.

Good morning, everything. I'm glad to be on the call as well and I look forward to meeting with you in the near future. This morning I do want to cover my three primary areas of responsibility, giving you an update on performance of the Mag Cat platform, give you a feel for the operating environment of the commercial and direct mail business and update you on some recent happenings in logistics. As Charlie pointed out, magazine catalog business is our largest business platform in the company and as he's also pointed out earlier, it continues to be challenged by price erosions that's being driven by significant idle capacity in the industry. However, despite a 5% decline in revenue in Q3, I'm pleased to tell you that the magazine catalog platform showed year over year increases in both value added revenue and operating income. This is a direct result of the discipline cost management optimization is driven by the past couple of years. While magazine ad pages have been down 7% in the industry and September has shown signs of life regarding stabilization, I'm still reluctant at this point until we see another month or two to declare a recovery occurring, and, in fact, I would hope for stabilization to occur. But despite this, we continue to offset the ad page decline with significant share growth in the catalog segment and this is evidenced by customers like L.L. Bean who is contracted to put 100% of the catalog business and distribution with Quebecor World.

The customers that we do business in both the magazine and catalog markets are the top 20 in each, and we continue to see growth in all of these relationships across all of our service offerings. Evidence of this lies in the fact that of our top 10 magazine publishing customers, we produce 100% of the magazine print needs for three of them, and between 50 and 90% for the other seven. With our top ten catalog customers we produce 100% of their needs for four and 50 to 70% for the other six. Our message of single source one stop shopping is being heard and it's paying off in new business as our customers are trying to capture their old economies of scale. Now, on the commercial and direct mail side, they continue to be hit by the weak promotional advertising, and if fact sales for the group is down 19%. The impact on earnings has been softened by restructuring with plant closures as well as significant stringent cost reductions put in place earlier in the year. Despite forecasted industry declines of almost 7% for the direct mail market, we feel very strong about the long-term potential. More and more indicators are pointing us in this direction. We're seeing signs of promotional gains being reactivated in 2003. Signs like Adage reporting 4, doubling its ad budget for 2003. Kimberly Clark revising it's earnings growth target in part due to heightened ad promotional spending, and Toyota has indicated they'll increase their ad promotional spending to gain market share. Signs like these make us cautiously optimistic about the signs of the growth going forward.

Now for the logistics group. Plain and simple, the logistics group is delivering above and beyond plan. Scale and performance continue to grow, and in fact as Dave mentioned we were just awarded the contract for all of the Sears retail insert logistics. This is the single largest commercial print related logistics contract ever done. TWL is now the largest retail print logistic operations in the United States with over 7 billion inserts delivered annually. They're the largest drop shipper into the United States postal service and have been recognized by the United States postal service as having the best on time performance into the network. This scale and service combined with our unparalleled manufacturing platform allow us to provide our customers with the lowest system cost from film and files in to delivery at the doorstep. As our customers cost to deliver their products exceeds the cost to print, this bundled approach to driving down costs, while delivering the highest quality with the best on-time performance is what clearly differentiates us as a supplier of choice in the industry today. On that note, I'll turn it back over to Charlie.

Thank you, John. Ladies and gentlemen, I think you can clearly see that this company, its shareholders, and myself personally are dramatically advantaged by having the type of talent that has elected to work at this company. With operators like this, my job is made easy and it allows me to focus on strategy, where we're going next. Christian, over to you.

Thank you, Charlie, John and David. Just a bridge, in terms of John's comments on logistics. If you look at the package on disclosure, other domestic revenues grew 9% in the quarter, and that's a sign for the potential for value added services such as logistics and Que-Net media. On guidance for this year, there's no change to our guidance. We have confirmed guidance on three different occasions this year. There's only one quarter left. I looked at the database with Jeremy. We have the low of 64 cents in the Q4 and a high of 72 cents and the consensus is 67. So on an apple to apple or comparable basis this represents a growth in EPS for Q4 of about 20%. For next year, our supplemental disclosure filed last night also indicates, provides to the full database of earnings estimates. We think it's a nice way for the broader investor base to see where the street is on a sale side basis. According to first calls our a low of 215 and average earnings are coming in at 230, excluding the high and the lows. Some factors you should consider in fine-tuning your estimates for next year. Some are clearly internal. We talked about the benefit of restructuring initiatives. The benefit going into next year will much higher than out indicated target of $45 million. And lower financial expanses accruing through the P&L and earnings per share through debt reduction. The external factors in our mind are those we can't control, but will have a significant impact on our ability to lift earnings into 2003. As we've contained costs, as we've become more efficient, as Charlie indicated we're uniquely positioned to benefit from a recovery in advertising through dramatic operating leverage. However, we expect this recovery in the U.S. will lag expectation. The other judgment call is how quickly this recovery, John made many comments about that, when we open it up on Q&A we can discuss that. To what extent it will extend itself into Europe and other international markets. We're encouraged by more discipline, the balance of supply and demand. There are recent initiatives by ourselves to decommission inefficient assets, to increase capacity utilization, improve loading on a seasonal basis. This should lead in our opinion to a more positive volume in pricing environment going into next year. On that basis, why don't we open it up for questions. Christina?

Thank you very much. We will now poll the telephone lines for questions. If you have a question, please press one on your telephone keypad. If you're using a speakerphone, please lift the hand set and press one. If you wish to cancel your questions, please press the number sign. We will begin polling. Please press one at this time if you have a question. And our first question will come from Mr. Adam Shine from CIBC World Markets. Please go ahead, sir.

Thanks a lot. Good quarter, gentlemen. What you said over a month ago with regards to starting the process with reducing the Greenwich operations, you also indicated today that you will start having jobs in France. It's my understanding that you've got enough of a cushion in last year's restructuring charge to deal with the downsizing in both Connecticut and France without additional charges. Is that correct? And also, just in the context of your 2003 guidance, Christian, you have alluded to the restructuring running ahead of the pretax $45 million in savings. Can you give us any sense of, you know, a new range for expectations pursuant to the savings going into '03? Thanks.

Our preference on restructuring benefits, and at some point that becomes a very academic conversation. I think our job in management is to take into account the factors whether they're positive or negative. Clearly the analyzed benefits will be much higher. The head count though, people need to realize, we're seeing in our MD&A 3,000 positions have been eliminated. Some of our businesses are growing, so the net gain in terms of employee count will be different. And then we take into account volume and pricing expectations.

Yeah, Adam, it will restructuring that carries on T major plant restructuring is essentially over. In France, we will be decommissioning certain individual machines which are not worthy of operating in an environment where prices are down and my labor costs of operations is significant. What we're doing at a corporate basis, we have -- we used to have an office in Toronto that consolidated Toronto, one in Greenwich, one in Montreal. We consolidated Toronto into Greenwich. What we are doing now, because there will always be a Greenwich is we're consolidating certain functions. For example, accounts payable. People don't really care where the check comes from. They'd like it in a timely manner. So we can make efficiencies by pulling together certain activities. But the other side of payables receivables, we will continue to have people in New York, Chicago, Miami, L.A., etc. to make sure that our collections are efficient. The company has -- is never going to be finished with making it run more efficiently. Management can and always will find ways to make this business more efficient so that we can give our customers the best prices. And still deliver for our shareholders the best return. So it's never over.

Okay. Maybe just lastly, am I correct many sensing clearly a more bullish tone coming from you, Charlie? I mean a month ago we were at Quebec city in our conference, we're still in the same sort of environment with overcapacity and pricing pressures but clearly I guess coming out of these results there seems to be a much more bullish tone coming out of you in management?

I have never counted my chickens before they hatch, and although -- and I think I'll pick up on John's words. The market really is a very significant head wind to us. But this company's ability to become more efficient has impressed me. So I am a little more comfortable about our ability to deliver for the shareholders. It's not easy out there, but we've clearly demonstrated that we can make yards against the head wind, and that's why I'm feeling a little better.

Adam, Shine: Thank you very much.

Thank you, Mr. Shine. Our next question comes Mr. Vince Valentini from TD Newscrest. Please go ahead, sir.

Thanks very much. First, Christian, on the pension side you have shown us how your expense will be going up with the lower return assumption which is great. On the funding side if you can talk about when the timing of contributions would be and if there are any big lump sums that have to go in?

Just on the accounting side, we have been very specific in saying you should expect this year about 10 million of incremental cost on an accounting basis. That's been accrued year to date and that's in the TNL as we speak. So there's no surprise. That's largely the result of a decrease in expected returns in the U.S. pension plans of about 200 basis points. On a funding basis, I'm comfortable discussion it. We have talked of that last quarter. We're putting in excess cash contributions into the plans into the U.S. this year. And expect to do the same next year. However, there's a word of caution, these are difficult capital marks. You Guys know that better than us. There's been 2 1/2 years of negative returns. Here what counts is we have a relatively young labor force that will be with us on average for 18 years. This is a long-term decision. But in spite of that, we're contributing more cash to the plants.

Christian, another one for you. On the guidance next year, 215 to 230, last year in October you came out with guidance and you've to your credit stayed with the guidance and looks like you'll hit the midpoint of the range if not the high end. That's despite what everybody I would think would concede is a lower U.S. economic recovery than you may have hoped for this time last year. Given that, I'm wondering if you can frame your guidance for next year. Have you put in your mind a similar amount of buffer so that if the economic recovery is even worse than you can expect there are things you can control in terms of cost that make that --give you a high degree of confidence in that guidance range you put out?

I think my comments, Vince, clearly we're trying to separate internal from external factor, and last year when we worked for Q4, we did deliver as you indicated. We are clearly on track or ahead of expectations for next year. We have the set of external factors and what we would like to suggest is the sell side going into next year has to do more homework and we wouldn't be surprised that the range of expectation will be wider as we go into next year. And as we deliver on a quarterly basis, that range will come in. I'm not uncomfortable having a wider range currently. The whole debate being everything in the media, where's the recovery, what will be the extent of it? I prefer leaving it at that for the time being.

Vince, there are still limited visibility in the marketplace. And as such, I think we're being forthright in not trying to be too refined because in all honesty, we don't have the data that allows us to help you at this juncture.

Nobody does, honestly. I mean, all your firms have their own view of the economy, whether U.S. or international

A quick question for David. Donnelly announced a directories contract. I'm just wondering if you can talk whether some of the business has come from Quebecor?

Well, we have a substantial portion of their business and we have contracts firmly in place. They value two suppliers and we expect them to continue to value our partnership.

Okay. Thanks.

Thank you very much. And our next question will come from Mr. Randal Rudniski from Credit Suisse First Boston.

Thank you. I want to ask, Christian, you indicated in terms of your guidance that you included your expectations regarding cost cutting, et cetera, and certain expectations regarding volumes and pricing and I was wondering if you can be specific about your expectation regarding volumes and pricing for next year?

The best way to answer, when we gave guidance about the same time last year for this year, we talked specifically about an organic decline the first half of 5 to 8% and recovery in the back half. When we exclude acquisitions in Q3, we were down 2%. My answer would not be specific enough to your tastes. This remains a difficult environment. We're cautious on that basis. We are not counting on a revenue increases in this type of environment. We focus internal. The key issue I would argue is pricing, and that's where we have made comments that Charlie and I, we need more stability. We need the discipline in the industry and I think the industry is doing that. Charlie?

Yeah, I think to give it a little finer tuning, we expect volume to be -- to continue to be at best flat. Okay? Through the first half, we believe price pressure will gradually lessen through the year. Relevant in first quarter, relevant -- not so relevant, but still relevant in the second quarter, I don't think we'll be back flat in the second half. The bet is on the U.S. economy and the model that we will work to this year will be similar to the one we -- next year, similar to one this year where we don't see much help from the marketplace in the first half, but we expect it to be more robust in the second half. That fact notwithstanding, we will carry on with the program of making this business more efficient which we hope will deliver a modest strengthening throughout the year. But it will be modest, Randall N the first half.

Thank you. Also I wanted to ask a question -- or I guess maybe reiterate the question asked earlier regarding France. I guess two parts. First of all, would you be anticipating that additional restructuring charge with the implementation of the plan there and second of all, what is the operation going to look like at the end of the year in terms --

I'm sorry. I didn't answer the issue on the charge that was asked earlier. I apologize. We have been more efficient in the implementation of the restructuring in North America than we had anticipated. There is sufficient money in the original charge to address that which we intend to do in France. So we do not at this juncture expect to have to adjust our charge in any manner. What will take place in France and it is taking place today and I'm on a plane later this week, we have worked with each one of our facilities in order to reduce head counts without affecting the basic operations. The difference between Europe and North America is the process to implement is much longer. It's a process of a series of meetings with the employees, with the union, with the national syndicate base, and I must say the industry is not very healthy in France. There have been bankruptcies and asset liquidations, and the union is working with us to try and make our business better. They understand that we must be profitable in order to guarantee what is fundamental to them and that's called you can only have a business that lives together if it's making profit and is it is a legitimate investment on behalf of the shareholders. And we're winning that dialogue. We are making progress. I wish it was faster. But I have to and I will always recognize the law and the process that's necessary.

Another comment, Randall, is the MD&A filing specifically discloses the balance available for restructuring at the end of the quarter. I encourage you to look at that Is that all right, Randall?

Yes. Thank you very much.

Thank you very much. Off next question almost come from Mr. Andrew Mitchell from Scotia Capital. Please go ahead sir.

Good morning gentlemen. I have a question for Christian, one for Charlie. First, Christian, we are seeing the restructuring benefits go through in a number of areas. However, less SG&A has been rising over the past few quarters. I think on some investments partially that you're deciding to continue with, can you provide us with more color? You're alluding to savings there and I'm wondering if you can provide more color and the opportunities you're looking at and how meaningful the reversal on the trend could be.

Sure. If you look at our SG&A reported basis we're up $23 million. Some color first. The contribution from acquisition is $140 million, so there is an SG&A component of a third of that amount comes from Hechet, the retail printing, and then in Mexico, that we spoke about. Increased pension costs, we're running at 9, 10 million dollar clip. That's in SG&A. We have higher insurance risk management expenses. And then the final comment would be in this environment post Enron, and as we have done in the past, we have that much more focus on compliance. And whether it's tax, reporting, that entails external fees. Internal focus. All that to say, though, Charlie did give the indication. We expect in terms of the integration of corporate services, to take out some SG&A costs and we have specific targets on that topic. So we're conscience of that increase. Those are the factors and we're taking another hard look at it going into 2003.

Thanks. Secondly, Charlie, I wondered concerning the leadership change we have seen recently, can you just touch on yourself and just provide with us an update on how much longer you see yourself retaining the CEO role and if there's any succession plans that you can update us on in terms of your thinking?

Can I plead the fifth, Andrew?

Certainly is that suggesting you have made no decision I assume?

Unknown Speaker*: The -- this company, and one of my roles is that you have to have the intellectual capital necessary to run the business. You need bench strength. I think what we've demonstrated with John and David, we have an excellent bench. And we will continue to focus on that. Relative to my own personal situation, it's -- I'm not getting any younger, and I have been running this monthly P&L for an awfully long time. The company is aware of its obligation, as am I, to make sure that leadership is present in this organization. It cannot -- this company cannot allow itself to be dependent on any one individual, including Charlie Cavell, and it will not. And the chair and the board are aware that we have an obligation to provide succession, and it is an active topic. When it happens, who knows. See how I feel tomorrow because health is an issue here, too.

Thanks.

I guarantee you, I hole a lot of stock in this company and there's going to be succession because I intend to hold it long after I'm no longer running it.

Thank you very much, Mr. Mitchell. Our next question come will come from Mr. Tim Newington from Goldman Sachs.

A few questions. First of all, have there been any more departures post Mark, anyone else he was close with at World Color leaving with him? The second question would relate to any comments on expected free cash flow generation for 2003 and the final question is related to expectations of tax rates for 2003. You're about 22.7% for the quarter. You know, it's a range of 23% reasonable for 2003?

Just on the employee side, we have had difficulty with our commercial business segment. It has been the most seriously affected by the outside market pressures. It is not performing well at all. Every other business sector as John and David indicated we have made progress and our margins are in fact up. We have made changes in our commercial management portfolio because we've genuinely believed it was in best interest of the shareholders going forward. Serious change needs to be made, and people who have the appetite to make change need to be in the leadership roles. It has nothing to do with Mark's departure, but it has everything to do with this business being led by the best possible resources to suit the needs of the day.

Tim, welcome aboard. Thank you for your recent coverage. Free cash flow, we haven't changed the cash flow for this year, $300 billion. Going into next year, I expect a similar level. To keep positive on a cash basis will be the absent of significant cash costs to implement restructuring initiatives. In the case of tax, we are in the low 20s. This is sustainable going forward, and that's your guidance. Low 20s is a sustainable tax rate given our international footprint in some of the initiatives we have in place to maximize our condition.

John is responsible for new recently responsible for the commercial an direct mail segments. It has under performed, and when a sector under performs, this company has historically taken action. John, do you have any comments to make?

I think right now we're trying to aggressively review, you know, the cross sellover. Because it's been significant to date and we think that's still a lot of her it in it. But we want to go facility by facility to understand how we can best dove tail and bring synergy between the platforms and see what makes the most sense on a going forward basis. I will say about the entire business right now, we are doing business with customers who are going to the first to feel any recovery that comes through. We have taken the time to put the platform in position from a cost optimization view so that when it does come through, we're going to be able to deliver immediately on it. And that ties into the commercial direct mail from the standpoint that I want to make sure that those facilities are the right facilities to be part of that model.

John used an excellent comment when he received the same question from the board yesterday. And his reply was, I'm looking at this as a business acquisition. I will review it as we would look at any business acquisition. And I will integrate it into our larger business. Expeditiously. And I think that's the right call.

Thanks very much.

Thank you.

Thank you very much, Mr. Newington. And our next question will come from Mr. Karl Choi from Merrill Lynch.

Good morning. A couple of questions. First in France, how would you expect the revenue impact from commissioning some of the equipment there and can you quantify the number of head counts in France there? And I have a follow-up question. Thanks.

We are significantly underutilized in France, so there will be no impact whatsoever on my ability to meet the volume demands. Volume is extremely hard to find, and it's partly caused by the German economic difficulties because they are -- they are -- -- the German print market has a higher excess capacity than any other country in Europe, and they're very aggressive pricewise. So I haven't -- the capacity on decommissioning not competitive within the current pricing algorithm. We have lots of capacity for sale. So that's not an issue. The focus that we're taking is that we have to reduce our costs and we will remove approximately 10% of our total employee compliment, both in min, at the corporate level, at the admin level of the operating businesses, and also on the factory floor. So it's a very detailed program that affects all types of employees. Blue collar, white collar, executive, the entire structure is being look at, Karl. This will -- if we accomplish the cost management, use the charge efficiently, we will bring France into a tolerable level of profitability. When the market recovers, and again, Europe will recover, just like America will recover. We will be ideally positioned to get the lift.

Do you have -- do you have the head count for what that 10% would represent?

I'm hesitant to be too specific because within the context of French law we can -- there is no plan until there is an agreed-to plan between the employee and the company. And it is an individual transaction. It's not a group transaction. So I can't -- I'm willing to indicate what our target is this company normally meets its targets. But I can't go too far because these are individual agreements between our employees and the company.

I understand. Second question is, if you could update on your capex expectations for this year and next year. Thanks.

We have. -- the basic model for capex, we will reinvest in our industrial platform, which both David and John referred to as being our target to win market share for us and serve customers better. We will continue to reinvest in basically in line with last year. There is a variable because we have some lease equipment that is coming due, and it will be financially efficient for us to retire these leases and pick up the spread between our cost of capital and the old lease rates on this gear. So that will be a decision made by the board as to how it wishes to proceed in that regard. So it will -- I have to give you a range. It will be somewhere between 250 and 350 at the absolute max, and a big coefficient is this lease buyback.

Thank you.

Thank you very much. And our next question will come in from Mr. David McFadgen from National Bank Financial.

A couple of questions. If you look at your magazine business, I was wondering if you can tell us what percentage of it is B to B.

I don't have an exact percentage. I can tell you it's relatively small percentage of the overall magazine business.

Would it be less than 10%?

Yes.

Okay. And I was wondering if you could sort of enlighten us on the difference in your catalog business versus Donnelly's?

I want to hear this too. John, go.

Unknown Speaker*: Well, I won't speak specifically to Donnelly-- but I will say in general the manufacturing platform that we have is extensive and incredibly flexibility to address variability and the different nuances that our catalog customers are driving to. The magnitude of that platform allows us to pretty much accomplish all their needs on as rapid a basis as possible. So as there's change on the fly or their dynamics to their programs that they want to change, which in prior years would take longer periods of time to manage that kind of change, we're able to answer just in time. And I'd say our success has been built on that and the fact that we built a platform of service offerings that they are capitalizing on as they're trying to get their own benefits and own buying power. And I think that's the single biggest differentiator right now.

Okay. But if you look at the catalog business, could you sort of describe the difference let's say would you review your competitors in terms of clients? I will be specific, Donnelly said on their call that they see weakness in the catalog business.

I think the fact that we have managed the portfolio business to be a very broad cross section of all types, whether it's a home furnishings, whether it's you know, anywhere ranging from a Sharper Image, to Williams and Sonoma line, we have a broad cross section and we benefit it from. And the fact that we have grown market share has helped as well in this economy.

Okay. Then just lastly for Christian, I guess, will you disclose the results from France? You did it on your last MD & A for second quarter, I was wondering if you'd do it for this quarter.

The context of the MD&A filing, so encourage you to look at it. It's black and white. We were reluctant to do that. But we thought it would be a good thing. We think that rest is performing in line or in excess of expectations. That's clearly indicated the rest of Europe in the quarter had a pretty good margin. It was accretive to our consolidated margin. The problem is France, but the way we've always operated, David is we have a plan and we will execute the plan. It's just that the process is more thorough and therefore takes more time in the French context. Ladies and gentlemen, I'm sorry, but this call has over 100 people and there's a lot of questions still in the queue. Unfortunately, I think in respect of the market opening, we can probably take one more, Christian?

One more, surely.

Thank you, gentlemen. Our final question will come in from Mr. Douglas Arthur from Morgan Stanley.

Yes. This is a quick one. Just on the tax rate, you indicate kind of low 20s I guess for '03. What was the specific cause of the big drop, relatively big drop in the third quarter? It is just a higher percent from international or not?

You have to be careful. There's also an impact of cash taxes in the quarter. In the quarter we received a payment from the IRS as it relates to last year's filing. The September 2001 because of the tax shield associated with restructuring activity in that year. So on that basis, if you isolate that year to date this year, we're running at 23.5 versus a reported rate last year pre-restructuring at 23.4. So there's no gain from tax here to date. As we usually do in Q4, we put the bid in for this year and that's a clear indication of where we go next year.

But there is because the company has a very legitimate global franchise, the company has significant advantage that come through that. Global procurement, global financial structure, global revenue source, all of these dynamics are clearly advantaging the company, and the tax rate is just one of many things. It is clearly easily sustainable at this level.

Charlie, you want to make a closing comment before we move on?

Yeah. I'd like to thank everybody for joining us this morning. I guess just in closing, we are blessed to have the resources that we have within this company and in the parameters of intellectual capital. The company is a good employer, the company clearly is the employer of choice within the industry and our ability to attract the best resources from this industry is demonstrated literally on a weekly basis. The company will continue, especially given that we don't see market uplift. We expect the head wind to continue to the middle of next year. We are going to carry on with our commitment to make this business more efficient. We will carry on winning in the marketplace and creating organic growth, and we will fix France. And when all of this is done, I think we will have a leverage that when the markets come back, we'll deliver extremely good performance for the investors. I'd like to thank everybody for the support that they've given the company, and we look forward to talking to you at the end of the year.

Thank you. Have a good day.

The conference is now ended. Please disconnect your lines at this time. Thank you for your participation.