Quad/Graphics Inc (QUAD) 2002 Q4 法說會逐字稿

Good morning, ladies and gentlemen, welcome to Quebecor World fourth quarter and year end results conference call. I would now like to turn the meeting over to Mr. Christian Paupe, Executive Vice President and CFO of Quebecor World. Please go ahead, Mr. Paupe.

Thank you, Julie, good morning and welcome to the Quebecor World conference call for the fourth quarter of 2002.

I have with me this morning in Montreal, Charlie Clavell, the new Deputy Chairman of Quebecor World. Food morning, Charley. Michel Desbiens, appointed yesterday Chief Executive Officer of Quebecor World and Claude Helie, appointed CFO effective in two weeks from now. Welcome aboard, gentlemen. Both individuals will be properly introduced as we move forward into the call.

I would like to remind participants that this call is being taped and webcast. Forward-looking statements are made pursuant to the Safe Harbor provisions of applicable laws.

Charlie will make an opening comment. I will follow with the review of highlights for the quarter. Michel and Claude will also make comments.

Charlie, over to you.

Thank you, Christian. Obviously, I think everybody is, I am delighted with the succession that has been put in place. I think it speaks extremely well for employees, customers, suppliers and shareholders. Let's get on with the business of the day, um, the results.

I think everybody that follows this industry understands that demand for print, um, is still weak. It's been weak ever since 9/11. Ad pages, volume, they can be up, they can be down, but there is no really clear demonstration that we have a sustainable recovery underway. Uhm, what this has done is that we have got a significant unsold capacity in the industry, and this is the root cause for price pressure, which we hadn't experienced for quite awhile.

It is more material in some sectors than others, okay, now there is good news. I think on the horizon because the Federal Reserve data on the print industry capacity clearly demonstrates the industry is reducing its capacity by about 3% per year and has been doing so since January '01. Um, this I can confirm because of my contact with our major suppliers in technology, um, there is a compression taking place. So, we faced, what I would call less than rosy markets in the fourth quarter. This fact, notwithstanding, if you work through the supplemental information that we have provided in our pursuit of full and total disclosure, I think you will agree with me that we had an extremely good quarter. This comes largely through the company's aggressive cost management and the restructuring activities that have been going on basically following 9/11.

We have been successful in winning market shares, we have made significant, um, moves in strengthening our franchise in most of our sectors. And I am very pleased with this because it would appear that the marketplace recognizes that we have the technology, we have the right geographic platform and they like the fact that we offer a complete service package, so we go from creation all the way to -- logistics putting the print product in the customers' hands. The other thing which I think is boded very well for us is an attitude this company has throughout, and I present it in the following words: Yes, Mr. Customer, sir. And this is the yes, we can help, yes we will find a way to help, and this has been instrumental in allowing us to strengthen our market franchise.

Now, our retail business we expanded in sales and in EBIT. We had a single digit volume increase but a double digit EBIT increase, and this comes partly because we have been able to run more volume with approximately 7% less head count than we used to have.

Now, in this sector, we expect price pressure to continue, but we do expect also to be able to expand our earnings in this sector as we become more efficient.

In magazines and catalogs, we had a wonderful last quarter, we have won in volume which has offset the price pressure and conversion efficiency has allowed us to improve our EBIT margin literally in a double-digit growth mode. Restructuring in these sectors has realized a 20% reduction in our head count since we started our program following 9/11. And it's -- it's many, many things.

It's our digital prepress, it's wide webs, it's bindery automation, it's robotics and it's also the internal management changes we have made that made us more efficient. This drives us to better performance. The better performance becomes a -- a fundamental of this company. We will continue to push to be the low cost provider because, in the history of business, the low cost provider who, also is the best sold, is clearly the winner.

Market gains in '02 were terrific. Uhm, we picked up Teen Vogue from Konty Nast , Lifetime Country Living from Hurst, In Touch [INAUDIBLE] from Bower, catalogs L.L.Bean, United Stationers, William Sonoma -- we have made great strides in strengthening our franchise. In books, volume has been hard to find throughout the year. However, we were able to expand our market share in LI in both EBIT and margins grew in the fourth quarter this year.

Directory, again, we did less volume, approximately 5%, but we grew EBIT and our margins expanded. Now, in North America, commercial direct was a very, very difficult year. We had bad market, we had poor implementation of our restructuring activities, mia copa mia copa, and there were management issues which we had to address. EBIT in the fourth quarter was, in fact, down, almost half of what I earned the previous year. What I have in North America, my eight cylinder car only ran on six cylinders but, in fact, we were able to deliver within the forchet that we said we would.

Latin America, double-digit revenue growth, improved margin, 30% growth in EBIT for the year. I wish it was larger, but we will only expand in Latin America as our ability as a corporation to manage growth allows us. Europe, the market conditions in Europe are, in fact, considerably worse than North America. As the economists refers to it, the doldrums; however, in Europe, excluding France, our volume is up, our margin is up, and our EBIT is up. We have been able to expand our market share and we have been able to reduce our costs. Everywhere in Europe except in France.

Now, France is an event. I think I'm almost qualified now, Michel, to write a book on industrial socialism. We have had strikes, we have had plant seizures, which precluded us from shipping finished product and caused us to print it a second time elsewhere. Now, we set a program to reduce our costs and we are getting labor pushback French-style. I really had to call for help, and that's why my new best friend, Michel, volunteered to get on board and give me a hand. Because, I think as many of you know, Michel worked in France.

Now, this issue in France is a dispute that we can and we will win. In fact, some of our plants in France are performing quite well. We have been able to undertake some restructuring and we have been able to do this in cooperation with our manpower. But we have more to do, and we must do it. We have a plan to improve our labor to output ratio as we have in all other jurisdictions. And this is why we have taken a reserve in order to ensure right up front that we have the financial wherewithall in our books and records to allow us to finally resolve the issue in France.

Now, from a balance sheet point of view, and Christian will elaborate subsequently, we generated over $320 million of free cash flow, and our debt equity is now down to 40 / 60. I think if you look at a supplemental, we have also taken a more conservative assessment in all accounts where we have booked to our results and we have outlined in the supplemental disclosure exactly what we have done. We have been intentionally more conservative. We have gone through a, um, a process where every single plant financial officer and general manager has to sign the statements, and this aggregates to a corporate signing that will be done by Christian and myself. We are on a solid, solid ground. I think it's very appropriate at this time and in this marketplace.

So in summary, I guess we had a tough year, but we had a good year. And what is more important to me, especially at this juncture, is that we have a great base upon which we can move forward.

Christian.

Thank you, Charlie. For the quarter, we had diluted earnings per share of 61 cents, this was before restructuring and other special charges, as Charlie indicated, we endeavored to give you significant supplemental disclosure so you fully understand the quarterly and yearly performance. This represents 11% growth in comparable earnings and this is adjusted for only two aspects, two items, specifically special charges and goodwill charges.

Revenues as reported a $1.7 billion represent an increase of 5% over last year. If we adjust for acquisitions, currency and paper sales, revenues were essentially unchanged from the prior year. The paper was not a big factor in the quarter, only resale, in fact, was where paper sales were significantly higher.

We reported EBITDA for the quarter of $246 million, also an increase of 5% compared with last year. In operating income on a reported basis is up 7% to $160 million.

You will remember our commitments last year, we essentially had focused on two things: execute our restructuring initiatives to protect margins and maximize cash flow to improve our financial condition. Regarding margins in the quarter on a consolidated basis, our margin was 9.5%, compared with 9.3% last year, an improvement of 20 basis points. And when we get the Q&A it will be a pleasure for us to give you a little bit more color about the reporting segments and some of these adjustments that were made in Q4 for presentation purposes.

We had strong free cash flow in the fourth quarter and this had, again, a marked impact on financial expense for Q4, financial expenses up 15% to $43 million. Free cash flow, as Charlie indicated, was up 12% to $320 million and this is in spite of a number of adverse factors, incremental pension expense, not only accounting-wise, but incremental cash contributions in the U.S. position plans of $38 million in cash costs to restructure a business of $72 million. An update on our financial condition, we have been very committed to sustaining our gains, we did it again in Q4.

As of year end, our long-term debt was down to less than $1.7 billion. We had no bank debt at year end. The small level of commercial paper borings of about $135 million and funded debt of $1.5 million. This funded debt of $1.5 million represents between three and four years of free cash flow in comparison with the shareholders equity of $2.7 billion.

Why don't we move forward. Charlie, if you would like to introduce Michel.

It would be my pleasure.

As I mentioned when I started, succession is an important obligation of any company and unfortunately, I guess as my doctor says, you can only drive a car past the redline so long without having some hiccups in the system. Uhm, I am absolutely thrilled with Michel joining us, and Michel was able to get Claude to join him is wonderful.

So, Michel, a couple of comments?

Well, thank you, Charlie, um, you leave some very big shoes to fill, but I'm excited about what I have seen so far, and the -- what we have in front of us, I'll tell you it's a tremendous organization. I am, of course, looking forward to working closely with Charlie in his role as Deputy Chairman, and my personal Sonny boy, strategic planner and [INAUDIBLE] representative -- don't laugh, you even have to be my body guard next month. [ Laughter ] And request with my new colleagues, David Bolds and [Daren INAUDIBLE] in the U.S., in addition to [INAUDIBLE] our international operations who I have been working closely since I joined Quebecor World.

I am also very pleased that Claude would accept my invitation and is joining me as Chief Financial Officer of Quebecor World. I had to twist his arm but he finally agreed to come with me. As some of you may know, Claude and I worked together for six years in Donohue, it was not always easy but I think we've been successful and I'm pleased he's back with me.

Um, it's very comforting for me to know that, I'm a bit surprised that many of the Quebecor World major accounts are all compact me, and with Donohue and the Donohue days, we used to deal with the same people, "Associated Press" only to name a couples. The big guys in the U.S. They're basically the same customer.

While I'm assuming the leadership of the number one printer in the world, like my friend Charlie, and I don't intend to change any basic strategy, so I will dedicate myself to continuing the historic performance of this organization and try to match what Charlie has achieved so far. Thank you.

Surpass, please, surpass.

Thank you, Claude would you like to have a few words?

Thank you, Michel. As Michel mentioned, we worked together for six years at Donohue. When Donohue was sold to be consolidated, I was very happy to accept the invitation to become the CFO of Quebecor Inc and then Quebecor Media.

As you know, my priorities in the last two and a half years has been the integration of Quebecor Media asset and the implementation of the refinancing plan. The new financing at Sun Media, which has been just completed and has been a tremendous success, will result in the substantial improvement and the liquidity of Quebecor Media. I'm very pleased that Michel asked me to join him at Quebecor World, and I look forward to looking with you and my new colleagues as well. Thank you.

I watched him negotiate with Michel. You're the same way with banks, I suppose.

What do we usually do at this point of the call, is, provide a few comments on guidance.

I will do that today. Clearly, guidance has been very topical. In this case, there is a new management team coming in. We did discuss our outlook for this year, extensively in our last conference call. We reviewed the database of earnings estimates with Jeremy, we have a low of 2.20, a high of 2.38, the midpoint of close to 2.30, 2.27, in fact, represents growth and comparable earnings of 18%. We said on our last conference call that we maintain a cautious outlook in this environment. We also fully expect that the advertising and economic recovery will generally lag expectations.

On a personal note, I think what we should do as we move forward is give Michel and Claude as the incoming manage team an opportunity to fully acquaint themselves with the business of Quebecor World. I am confident they will provide their own indications and guidance as the year unfolds.

Why don't we open up for questions.

Thank you, gentlemen.

We'll now take questions from the telephone lines. If you have a question, please press one on your telephone keypad. If you are using a speaker phone, please lift the handset and then press one. If at any time you wish to cancel your question, please press the pound sign. Please press one at this time if you have a question.

Our first question is from Karl Choi from Merrill Lynch. Please go ahead.

Hi, good morning.

Question, I wonder if you could drill down into the cost equation of fourth quarter a bit, looking at gross margins, looks like a decline compared to the third quarter, even though seasonal it still has the highest margin. Trying to find out still what was different in the fourth quarter.

I think the best way to start as we indicated, we had significant supplemental disclosure.

A couple of factors. One is in consolidation our margin was up on an EBIT basis of 20 bases points. Two comments, one is we have chosen Q4 to allocate some of the costs that we had booked in unallocated through the reporting segments. We did that and felt for two reasons, one, it's in accordance to GAAP and two is, these costs, they're recurring in nature, the best example is our pension expense accrual, in consolidation - that was allocated back to the reporting segments back in Q4.

Si, in Q4 there is a full year adjustment. It doesn't change the consolidate EBIT margin. And the second comment, Charlie, alluded to it in the case of our domestic business, commercial direct had a difficult quarter, and on that basis, for example, their decline in organic revenue was high single digits and the impact on margin was significant.

Yeah. I mean if we go by sector, directory margin is up, our book margin is up over last year, our MAG cat margin is up dramatically, dramatically over, um, even 2000 and '01. Where the harpoon comes is we had a disaster on our hands in commercial direct.

Now, to that particular point, um, we have taken commercial direct and in the future, we will not report commercial because commercial plants are being integrated into our MAG cat franchise. They have been adopted and they will be integrated with our most highly performing sector, so problem solved. Direct will continue to be reported as a sector. It is, as far as we're concerned, still an excellent business, but we have to rebuild and expand that franchise and, um, that will enjoy new management in this year.

Will be an incremental data point, Karl, as indicated in Q4 as it relates to North America, about $10 million was shifted from unallocated to the reporting segment in line with GAAP. So we made, in our view , that this is going to be a better way for you to compare results on a going-forward basis.

Thank you.

Thank you, Mr. Choi. The next question is from Megan Anderson from RBC Capital. Please go ahead.

Thank you, good morning. A couple of questions.

I am just wondering if you could give us more color on the restructuring plans in France. How long you think it may take to turn around to reasonable, um, improvement and is there a point, perhaps at which you just maybe start switching volumes elsewhere if you can't make the progress that you want.

Secondly, can you tell us what proportion, or what percentage of your capacity is under long-term contract? What I'm trying to get at is if you have been renewing contracts at the lower rate than you wish, we do have strength going forward, would the spot market make up some of the difference? And finally, this maybe a big one, but for Michel Desbiens, can you give us a sense of what your priorities are for the next six months?

Okay, um, one thing about you, Megan, you don't leave any stone unturned. [ Laughter ]

In France, as I tried to indicate in my opening comments, we've made significant progress in certain plants. We had a -- we had two losers which are now in the fourth quarter, um, turned around, and it's -- we worked successfully with the unions and we have got two businesses that we're really quite happy with, I think Michel, the way it's come along.

We have a facility which is, um, um, -- ill structured from a capacity point of view. It doesn't process enough work in order to, um, to syndicate its overhead operating costs. It is in [Route de Vermeuil] and at the same time, our labor rates are very high and the population structure is, um, inefficient, so we can't justify reinvestment, and this is where we have come into material disagreement with this group of people. I -- I remain convinced that it can and will be resolved. Michel, you're closer than I am.

In 2002, we reduced our labor costs by about $10 million U.S. And our plan, we have a similar reduction for 2003. It's on schedule except for one location.

There was also one where we would be having most of the difficulty, but as you know, there is a lot of capacity edition in European community and it's a tough market. So it's surviving over there is difficult, but we're going through it and, um, you were asking -- I know it's worse for all the markets, but in France, for example, 40% of the Vermeuil business is contractual, and 20% of the offset is also contractual, but still, the Garvir business is still firm and we're progressing very well in that field and offset is more difficult.

Your question on long-term contracts, I think, the challenge has been in remains, the balance between capacity utilization and that balance between supply and demand.

Megan, we have renewed a number of long-term contracts. What percentage of our total base, um, I'm just guessing, but probably 10% of our contract base, which is about 60%, does that make sense, Christian?

. [ Indiscernible ]

Now, in every case, the market price is lower today than it used to be, but in every case, we worked with the customer where we have gotten increased volume. If you want us to help you, then it's fair in the market place, then you help us, and we have won a lot of volume this way.

At the same time, this company has always had a fundamental that if we reduce price, we're going to reduce our costs at least equal, and we have been very successful in doing that, so I don't see any fundamental erosion to take place in margin. We had a specific account yesterday, which Michel and I were going through. es, we have a contract with a reduced price, but we are changing the technology approach, the customer's given us a whole bunch more work, He's changed his schedule so we run more stable. There isn't in the fundamental of the difficult market, an acceptance by this firm that margins will reduce.

Michel, I don't want to commit you, but I just did I think. [ Laughter ]

Well, and back to the priorities, um, my priorities to continue what we have been doing in 2002. I mean, reinforce the sales, I think without sales we -- we -- nobody and reduced costs, and I think the two together worked out. At the same time, acquisition, um, we're not walking away from any changes, but we're going to be more focused on what we do and be more selective. So we have basically the same priorities, I mean sales, costs, and, um, by reputation, you know, I'm very sensitive to cost. We're going to put a lot of the effort into costs.

Those nickels are [INAUDIBLE] like manhole covers, I'm told. He's good investor, Megan, and I know we don't and we never have and I guess we never will divulge margins specifically by-product line, but I -- I will repeat my margins in directory are up, my margins in book are up, my margins in retail are stable.

We would have had a different looking platform in the fourth quarter had we not had this meltdown in commercial direct. But we had a meltdown, I apologize that that happened because it happened on my watch, but as I said earlier, the fix is in, and we don't have a margin problem in this company at all.

Okay, can I just clarify one thing in the French operations? You mentioned there is one plant, in particular, that is problematic. Is it's scale so large that it affects the overall, um, results there, or is this it just a big problem but a minor plant?

It's a minor plant in capacity, but for example, I think I have probably, you know, we had a multimillion loss in that plant. In one month, December, because I was obliged to reprint all of the product that was going through there elsewhere and that had a serious cost affect.

So, it -- it -- it's just -- it's one plant, um, we have, as I indicated, we made good progress elsewhere, Michel. Strasbourg and Torcey, and we have to find a formula that works for the company and also works for the French labor and social contract.

Okay, thanks very much.

Thank you.

Thank you, and our next question is from Randal Rudniski from Credit Suisse First Boston. Please go ahead.

Morning, Randall.

Good morning. I guess two questions.

First of all, um, can you describe the, um, in a little bit more detail, the plan to fix the commercial and direct businesses Charlie alluded to some integration.

It's a good question, Randal. The commercial business, which is a mixture of sheet and web, has followed the -- the -- it's basically a spot market business. Uhm, we have some excellent facilities, some excellent customers, but it's a spot-type business. We need more magazine and catalog volume, what we call our short run MAG cat.

These are repeat businesses, so the strategy is to take a business which is, um, where its volume is up and down and put into it 50% of repeat business because magazines repeat, catalogs repeat, so we're going to stabilize the volume flow-through, which will give us more efficiency still being in the commercial business.

The other thing that will happen because this is now under the MAG cat leadership is -- is the special products that are ordered by our magazine and catalog printer, we want it all. So we will do the special covers. We will do the special inserts, we will do more product in the supply chain for our bigger customers. The customers like, this one-stop shop, allows us to stabilize our business.

This is why I'm so totally comfortable that we had a one year event. It's over. It is over. The fix is in, and I'm totally and absolutely comfortable and willing to bet my humble pension income if somebody wants to. [ Laughter ]

The, um -- so when the integration and the plan proceeds, what kind of impacts are we seeing in the cost structure, the commercial business? Like. will there be anything or is it more of a top-line driver?

It's -- it's both top-line and bottom-line, but the mass improvement comes by having stabilized volume going through facilities so that your manning is stabilized and this is where the efficiency comes. We'll see a dramatic improvement, um, in -- in '03. We'll be -- it will be a contributor better than what we realized in '02. And probably better than '01, I would think, Michel, from where we're looking at.

It's the only business, Randal, that in the fourth quarter in a significant decline in reported revenues, even if we exude vapor sales for down high single digits. Clearly, you add to Charlie's comments on the unstable manufacturing platform, the impact of the general economic environment, and direct as a totally separate conversation. With direct we're convinced strategically that platform will move forward. So it's been a commercial-only issue.

Okay. Just one follow up; um, it looks like you guys had more of a focus on adding, um, additional services, focusing on logistics and procurement. We have seen that in, you know, I guess the Sears contract. Can you, maybe discuss the impact of paper purchases on the revenue line? And also if you could discuss the economics a little bit of paper procurement in terms of the return on capital? It's a low margin business, but I presume you're turning the capital many times in a year? So where does kind of the return on capital for procurement shakeout relative to --

Yes, before Christian gives a quantified answer, you're a hundred percent right in your fundamental assumptions. We are the largest printer in the world, we buy more paper than any other printer, and one of the areas where we intend to look to yield more from the economies of scale is in procurement. Um, again, Michel's history in the industry is going to be a fundamental to planning our strategy to move forward here, and we already have some - some excellent plans underway.

Logistics is a -- is a rapidly growing dynamic for us. It is -- other people are in the business, that business, but we are very pleased with the margins that we realize in the logistic business. It's not a free service. It's a part of our service offering to the customer, and we expect to make money in everything we do. That's the only way we can handle the expectations of the shareholder.

Maybe Christian, I think,you can quantify it a bit.

Maybe a clarification [INAUDIBLE] for the benefit of the broader investor base. The other revenue as reported includes the East group and then specifically logistics. Namely services, supply chain initiatives, all the value ad types of products.

Paper is captured in each of the product lines, the core product lines. In the case of paper for the quarter, it was a nonissue. The $1.7 billion of reported revenue, the biggest impact was acquisitions, we quantified $45 million in the quarter, and about $15 million for currency. So on that basis, there is only a $6 million difference vis-a-vis last year, and it's not paper. Paper was only a factor in retail and the others, um, impact against it.

So, other is clearly value ad, supply chain, logistics, mainly services and we report an 18% growth in the quarter. That's pretty exciting.

At the -- I guess what I have difficulty reconciling is the, you know, margins appear, um, from the comments, from the, um, MD&A, et cetera, that they're improving in most of the categories, commercial direct offsetting, um, I guess a large part of that improvement. But, if we X out some of the other or, um, nonoperating items, it looks like, to me, anyway, that basically the margins actually declined 40 basis points on a consolidated basis while most of the divisions are recording organic improvements, um, in margin. So --

Just to clarify that, then, if it's not fully understood, we can circulate some explanation after the call adjourns. The consolidated margin is up 20 basis points and in the case of Q4, I indicated some costs allocated down to the reporting segments in accordance with GAAP. That is essentially pension expanse, additional accruals for worker's comps and these types of items. So, in consolidation the margin is up.

But in the case of North America, point well taken, if you exclude the impact of those items in the supplemental disclosure does that, then there is, in fact, an increase of 60 basis points for North America. But I -- I agree it's not an easy topic to focus on and it's typical of the external / internal environment we face going forward. More disclosure requires that much more understanding and communication with the investor base.

I think Randal perhaps if you want to come back in after the call, we'll go through it in detail. Because clearly we have had margin expansion.

That will be great. Thank you.

Okay, great.

Thank you.

Thank you, the next question is from Vince Valentini from TD Newcrest. Please go ahead.

Thank you very much. I want to focus on the use of the free cash flow going forward. I guess in two areas.

One; the Cap Ex you obviously maintain at a pretty low level last year at $185 million, only about 3% of revenues. I wonder if you see that as sustainable over the next couple of years or whether that creeps back into the high 200s as one use of cash flow?

And the other one would be on acquisitions. You been pretty quiet for some time now, though probably, aurguably that's the best scenario to pursue given the economic environment. But, um, do you see any light at the end of the tunnel where you can start utilizing that cash flow to go after acquisitions again? And is your debt to capital at 40% sort of plateaued at a level where you're comfortable?

I think in the manufacturing business, especially one with the ability to generate cash, um cash, 40/60 debt equity, we are extremely solid financially. We really are.

Should we keep going further? Of course, we're going to keep going forward. And still we find something that the company, it's management, and it's Board see as more important and in the best interest of the shareholders. So we'll continue to wack away at debt.

On the Cap Ex side, um, we, I don't, I think if you if you just check around the industry, nobody has the industrial platform in place that we have. We have the large majority of live web ROTO. We have the largest majority of live web offset, of high speed offset. We have direct play. We have systematically invested every year, um, are we -- are we going to keep doing it? he answer is yes, but, um, you'll never see -- I don't see the platform facing any major technology shift because we are always on top of technology evolution, we have people that do this full time. We don't see anything on the horizon that we are taking into adoption at this time, so I think Cap Ex, um, will be reasonable going forward for the next few years. Michel, , you know it's

--We don't see any major strategy change. Maybe except for the the lease buyback and things like that.

We don't have any changes in mind except acquisition that to be well, um, organized in the world of study.

And that I have -- they have to pay high dividends that we want. We have a high hurdle rate because we like the way this business performs, but Michel raises a good point. Some of the companies that we have acquired had significant leased assets. It's not a cheap instrument, um, we, as the leases come up, retire them, part of our Cap Ex, and it shows not on my industrial platform but it shows in my financial expense. But it is Cap Ex generating an improved financial yield. So, there is nothing technology-wise that we see that is going to cause us to spend a lot more. We, um, the Board approved during this year further expansion of our wide ROTO reviewer network. We have in fact installed two machines. One is running and the other one is coming up. Um, because we have the customers that need them. It's that simple.

Can I follow up on, that if Cap Ex is going to stay close to where it is now, what center time line would you see for depreciation to start to converge with [INAUDIBLE]. Obviously, depreciation of $335 million is well above what the Cap Ex spending is?

The net book value of the asset base is currently $2.6 billion. As Charlie indicates, it's very moderate. The capital spend premerger was $1.2 billion. We've spent another $700 million. A $1.9 billion on a reported basis of our asset basis, is six, seven years old on average. This is a very moderate PP&E base. Noncash, our guidance for this year, $85 million per quarter as we saw in Q4, is a reasonable level. In capital spend maturity for this year, we talked about that in the last call. Similar level except releases that are coming due and we've been opportunistic in refinancing those needs as capital Ex.

One last thing Claude, if you can just comment on your role at Quebecor, Inc., going forward, are you splitting duties for sometime or as of - I forget the exact date that you are moving to Quebecor World. Are you totally finished at the parent?

Yes, I will be coming on board on February the 17th, and all my time and energy will be with Quebecor World, and I -- my role at Quebecor Media and at Quebecor Inc. will be finished at that time.

I think it's been very professionally structured, Claude is going to finish off his work. A lot of the refinancing and everything, I think, has been masterfully done. He and [INAUDIBLE] have delivered a spectacular restructuring in that sector and, um, Claude asked to finish off his reporting responsibilities properly, um, in Inc., and then he's free to join us.

That's right, we're going to give you the results of Quebecor Inc. on the 13th of February, and then, as I said, I'm going to be on board the following Monday.

Well, welcome aboard and thanks very much.

Thank you.

Thank you, the next question is from Bill Gibson from Bank of America Securities. Please go ahead.

Thank you.

Could you comment on Latin America, it was up pretty nice for the year, but I noticed it was off in the fourth quarter. What was behind that?

Well um, what happened in, um, in Latin America is -- is basically driven, um, by the -- the facility that we put together in Mexico DF. This is a huge start-up facility. We bought a small company, we have quadrupled the capacity, and um, as I told, um, my Board yesterday, who had a very similar question, um, we had a major manufacturing undertaking on on our hands. The Mexico City directory is one of, if not, the largest in the world. The good news is we were able to meet all of the customer expectations. The bad news is we didn't run as efficiently as we would normally, but we got the job done.

So, um, we had an operating problem, um, but I -- I have to tell you I am extremely proud of our, um, of our Mexico plant and all of its employees who -- who took on a huge undertaking and delivered the goods. The fact that we didn't make the money on it that we would have liked to for the first version, I'm okay with that, too. But that's what went on.

Okay, did that impact revenue as well? Because I was looking at a revenue number as well that was down a little.

That absolutely, in fact, on a reported bases, were down 5%? Yes.

Yeah.

That's essentially what Charlie indicated.

Okay. Good. And then a couple of bookkeeping items. What was the fourth quarter share account?

$145 million diluted.

Okay, and then just one last thing, did you reclassify some of the segment information? I noticed in the supplemental disclosure that some of the numbers don't quite match up with the 2001 annual report.

And that was my comment earlier about pension expense and incremental personal injury and medical claims.

Okay, that was bad.

If you look at Q4, you will see the shift in unallocated.

Uh-huh.

Which is the corporate line down to the reporting segment. It doesn't make a difference in consolidation but you clearly can see it there. There is a reversal of about $15 million.

You know, we've been very conservative by taking money aside for the -- the medical costs, but at the same time in the operating business, um, we have been very successful in working with our employees, the union or nonunion, and evolving our, um, medical support system into a legitimate copay environment. Which we did not enjoy in our history.

And I think this has been an evolution that the employee body at large said yes, this is a difficult cost area, yes, we need to participate, yes, we will participate, so although we put more money in there just, again, in pursuit of conservatism in all areas, we have made significant operating evolution, which will help us going forward.

Good. Thank you.

Thank you, our next question is from Adam Shine from National Bank Financial. Please go ahead.

Hi, most of my questions have been asked.

But just, Charlie, [INAUDIBLE] in terms of the pricing environment. Can you talk a little further in terms of, have your seen any inflection point in the last, um, I don't know few months or last quarter, um, and just generally in regards to the pricing declines, is there a way to quantify them on a percentage basis? If you're willing to do that. Thanks.

It's, Adam, it's -- whenever you have, there is a reduction in demand, okay. Fact. That's caused a significant level of unsold capacity in the industry. And it goes, you know, ma and pa shops all the way across the platform. Whenever there is unsold capacity, especially in a capital intensive business, people would prefer to discount to stay running and it's the same in the paper industry as it is in the printing industry.

Now, the industry is taking capacity out, and this is very healthy. I expect that depending again on the demand curve, back half of next year will see a significant improved stability. But it's going to take, not just reducing capacity which the Feds have tracked very, very thoroughly, it's going to take an uptick in demand. But the beauty of this company, is that um, we have found ways to improve our cost base, which has allowed us to protect and, in fact, grow margins, despite the fact that the marketplace is what I call, it's a head wind. It's not a following wind.

So, um, I'm not, given that it's probably the low of the low, I'm not unhappy with the performance of the entity. I don't think you could possibly not be anything but happy when you get inside our numbers, and I think things are going to get easier. I sure do hope so for Michel's sake.

Okay. And just, I don't know if you're willing to do this, but you talked about a few job count reductions in the disclosure's, 545 in, um, '02, 364 scheduled for '03. Are you willing to parse out the elements in France in terms of the reductions?

I think we have been very generous with our supplemental disclosure. and we've given indications, Adam. This is all about social and labor contracts, legislation is involved and we prefer not.

Okay, but all that [INAUDIBLE] going back to Charlie's earlier comments, that for the most part, as per some of the signals he gave in September last year and on to the Q3 call, things are evolving as planned for the most part.

Yeah, I think we should leave it at that.

Okay.

Thank you, the next question is from Tim Casey from BMO Nesbitt Burns. Please go ahead.

Thanks. Couple things.

Charlie, could you just go across the major business platforms and talk about the relative level of price discounting? Sort of give us an indication of where the capacity is, um, the problem is the tightest and where it's, um, a little more benign.

And um, could you give us -- do you expect France to be profitable this year, or are we talking more '04? And lastly, just on pension and health care, I noticed the pension deficit expanded a bit relative to that to last year, and I know how your competitors talked about how medical and pension expenses will be a drag on earnings, '03, can you give us a comment, Christian, on - I think you quantified the number at about 16 cents a share in '02? Do you expect that to expand at all in '03?

Thank you.

Okay, in the North American marketplace, um, books are reasonably stable, um, the -- the -- the supply-demand imbalance is less material in that sector from our point of view. Magazines, catalogs, um, would be the next in line. It's an aggressive marketplace, but it's -- I find it a reasonable marketplace.

Um, the, um, the retail business, it changes by sector based on the -- the availability of capital, um, the very large accounts which are more stable when you get into the -- the small -- smaller accounts, um, it's far more volatile. Um, food and drug is -- is very erratic pricewise, but some of the bigger, um, fixed-good retailers, it's reasonably stable.

Commercial, um, and direct, it's spot business, so everybody wants a piece in the -- the available choice of suppliers is higher than any other sector. Uhm, you don't have an influence of geographic and distribution, is not as significant in the commercial business which tends to be individual hubs, so that -- that's pretty significant pressure. But again, if we convert, if we exit the general commercial and move more of that asset base into magazine-catalog, you're moving from a volatile market price to a less volatile market price.

France, Michel.

Well, France, the -- the Garvir business is still very good. The pricing is not as effective as we had in offset. It's the same -

Absolutely.

There is more competition in the offset side than we have in the Garvir business. Because we are the major supplier in the Garvir.

Now, your question about France, what is going to happen to France in the '03. We are projecting, um, France to be profitable in '03. So, um this, year we -- it was a year where we have to change many things in France, um, we have done most of it. We have made some small investment where returns were very high and we have signed new contracts and we're fighting for the sales. Now France is a place where you have to be very aggressive in the sale side. That's what I meant by putting priorities on the sale. You have a fixed cost, very high fixed cost because you have to pay the labor portion anyhow. So it's a matter, everybody's in the same ball game and everybody's fighting pretty hard in France, but we figure that we're making progress and we should be profitable for the whole year in France.

Concerning your question on other factors that, in fact, the P&L bodes well to and going in on this year, on personal injury claims, our experience has been that when we restructure our production environment, in fact, they do go up, and that's been an issue in '02, and we're confident we have taken the proper measures or provisions in terms of going-forward exposure.

Medical claims is a recurring issue and there, as Charlie indicated, the introduction of co-op programs will have a significant impact going forward to help mitigate that increase in medical costs. Pension is a recurring issue, it will be there this year, and we fully expect an increase in funding contributions in accounting charges, as was the case last year, and that's taken into account in the business planning exercise. And I think we should over it at that for now. There is no further comment to make on pension expense. And as we move forward into this year, as we did last year, what the Board will consider with management is incremental cash contributions and that was the approach through '02. We made excess cash contributions to the pension plans in the U.S. to compensate for adverse equity capital markets.

Thank you.

Thank you, and our final question is from Tim Newington from Goldman Sachs. Please go ahead.

Great. Thanks very much.

Just a couple of questions. First of all, just from the contract perspective, on their quarterly conference call, you know, Donnelly was a little bit more positive with the number of contract wins they were talking about. So, just from your perspective, have they gained back a bit more momentum on a relative basis?

And then secondly, Charlie, with respect to your new role as Deputy Chairman, just kind of seeing what. specifically how you see that role, and um, how active you will be in the role and how long you plan on staying in the role as Deputy Chairman?

Well, you want to handle the first one, Christian?

I'm sorry, I was doing something else.

The first question, more specifically -- .

Yeah, it was just Donnelly was a little more positive on their last conference call with the number of contracts that they were talking about that they have won and renewed, so just in general sense, have they gained a bit more momentum on a relative basis than, I guess, through the first three quarters of 2002 and through most of 2001.

I don't have comparative numbers in front of me, but I don't believe that anyone has enjoyed a -- a growth in revenue other than ourselves. Um, so I am a little taken back with that.

I think Donnelly is facing its issues more aggressively, and I think that's very healthy for the industry and, um, good for our business. But I think we're the only ones that actually had one -- one sufficiently to demonstrate growth despite the fact that the, um, the margin -- the amount of money we get per account is under pressure.

Um, there is a lot of people still in the queue, but we're going to make this the last question just out of respect to the marketplace, et cetera. Um, and I guess it's a good place to end your final question, what am I doing. Um, you know, this is a personal issue, um, and as an individual, I have always looked upon this business as, um, as literally my baby. And I get very emotionally involved with everything that happens in this business.

Unfortunately as the business grows, it has always going to have some warts and some problems and I have historically and more so laterally, I have taken these as a personal issue, and this has wound up hurting me and I can't do that. And I failed to, um, be able to disconnect myself emotionally from the business. So I had to physically disconnect myself from the business. Um, that's why I'm so enthusiastic about the succession. Um, the Board elected to appoint me as Deputy Chair.

I'm not broken, I just have to be a little more careful about how I involve myself. So I will probably work, um, Michel is a tough negotiator, and we -- [ Indiscernible ] Three days a week, but never on Monday and never on Friday, because I need the longer weekend in order to get my little personal act together. Um, I, um, -- a company can only have one CEO. It is, as we speak, Michel, and I will only operate here in support of Michel. Um, Mr. Mulroney and PK and Erik have certain things at the Board level that I will be involved with, but I am basically going to work as requested by Michel to support him.

And yes, I do have a long history of customer intimacy and we will protect that. Be so warned. I know the technology of this industry probably better than any other person in my type of capacity. Um, I will continue to stay abreast and I will make sure that my input, if requested, is there for Michel to make the technology decisions going forward. I'm pleased to do that. Uhm, we have an industry and, um, we have a company that is very strong.

This company, I would like to think, and I am comfortable in thinking, is only half built and there is a huge future in front of this company in virtually every market we're in. I know a lot of these markets, and that knowledge will continue to be available to Michel and to the Board in its decision-making process as to where we will move forward. But it's the Board of Directors of this company that will decide where we will go to. It' is management's responsibility, and Michel and I want to clearly outline the options for where we go next. The value as to where each of these options have & in both near-term and long-term point of view.

We are having a strategic planning meeting in the month of March, um, which I am working on, or will start working on now that we have finally closed this year, um, literally very aggressively and with a considerable amount of time. And, I have to come to Michel with the knowledge base that will allow him to provide the guidance.

Well, it's -- I'm setting this off as next -- [ Indiscernible ] Make sure he keeps working. [ Laughter ]

But it's unfortunate that I do take everything personally. I think it's been a terrific advantage to the company, but I wound up hurting myself and, um, if I -- if I can successfully moderate my, um, my application and my emotions, um, then we will be able to keep this going for a long time if Michel wants. But, the pressure that is involved in meeting the high expectations of the Board and the shareholders, I can't do that on an ongoing basis or a full time basis. So the issue is I have to lighten my load, and I think we have found a good way to do that where I'm thrilled with this evolution.

I think this management change is a fantastic demonstration of how succession can be managed and I'm very appreciative of the support I have had from the Board. All members of the Board, and um, especially the chair, laterally, and the support I've received from the customer base and the investor base, and for that I thank you, I am sorry I won't be speaking to you again unless Michel invites me to come into the conference calls in a support role. I look forward to my newer and smaller office, please, and I thank you all for your support. It's a sad day but it's a very happy day for this company.

Thank you. Thank you. Thank you. Thank you, all of you. Thank you.