Quad/Graphics Inc (QUAD) 2003 Q1 法說會逐字稿

Good afternoon ladies and gentlemen, welcome to Quebecor World First Quarter results conference call. I would like to turn the meeting over to Mr. Claude Helie Vice President and Executive Financial Officer. Please go ahead Mr. Helie.

Thank you. Good afternoon everyone and welcome to the Quebecor World conference call for the first quarter of 2003. Joining me today from our offices in Montreal, are Jean Neveu, Chief Executive of the company, and David Boles, Chief Operating Officer of Quebecor World North America, and also Jeremy Roberts Vice President of Investor Relations.

As most of you already know, Jean Neveu was appointed Chief Executive Officer of the company on March 18th, upon the departure of Michel Desbiens for personal reasons. David Boles was appointed to the position of COO North America on March 24th. The conference call will last approximately one hour and will follow the usual structure. Jean will provide introductory remarks, I will follow with a review of our financial results in international operations, David will review North American markets, and I will conclude with a brief comment on the substantial [fisher bid] share repurchase program that was announced earlier today. We will then open the call up for questions. I would like to remind everyone that this call is being webcast, and that any forward looking comments are subject to the Safe Harbor provision of applicable laws. At this point I will ask Jean to provide introductory remarks. Jean?

Thank you Claude. Good afternoon ladies and gentlemen. This is my first quarterly conference call as CEO of Quebecor World in a number of years. But as most of you know, I have a long and continuous relationship with this company. I have served of the Board of Directors since 1989, and I was Chairman and CEO of Quebecor Christine during most of the '90s when we experienced much of our growth.

So it is fair to say that I have seen my share of good times and some tough times too. I had no illusions about the job I was getting into, because I was fully aware that this would be a challenging year for our company, and for our industry. Our first quarter results are a demonstration of that fact. For the quarter, revenue increased by $72m to a $1.5b, compared to the first quarter last year. One of our objectives this year is to aggressively protect our top line, and so far we have been successful. We continue to have a stronger customer base in the industry, producing for the top publishers and retailers North America, Europe, and Latin America.

For the quarter, our earnings per share was .12 cents, compared to .28 cents in the third quarter last year. These results are in line with the first quarter of '02, we provided in mid-March. As we said at that time, the first quarter is traditionally our seasonal low point. In addition, certain non-recurring costs such as higher spot energy prices were a contributing factor. Negative contributing factor. We do not believe this quarter's negative preferment to last year will be reflected in subsequent quarters. We are advancing cost reduction programs across our platforms. We expect to realize the benefits in the subsequent quarters, that will result in improved operating margins. Now we provide you with specific numbers in a few minutes.

We also cannot ignore the fact that we are facing challenging markets in all of our geographies. The global economic slow down and the a drop in consumer spending have definitely impacted our business. In North America magazines and [inaudible] are up slightly over last year, but this is already reflected in our results. And that David Boles will expand upon later. We command an excess capacity are continuing to have negative impact on prices. While our overall results are lower compared to the first quarter of 2002, this is still a very healthy company in a strong industry. We have strong management, we are making money, we have a solid balance sheet, and will continue to generate significant free cash flow.

As a signal of our confidence in the company and the industry, Quebecor World today announced that we are initiating a substantial [inaudible]. We are proposing to re-purchase up to 10 million shares, which will represent approximately 10.6% of our current public float. In recent months our stock price has dropped approximately 30%. Why? We understand our lower first quarter outlook, and recent management changes, contributed to this drop. We really believe that the market has over-reacted. Our underlying fundamentals have not changed. This is why, with no significant debt repayment due until 2006, and an undervalued stock price, we really believe share buyback is an appropriate use of free cash flow that will enhance shareholder value. I would now like to turn the call over the Claude for a more detailed discussion of our first quarter results, and our substantial [inaudible] bid. Claude.

Thank you Jean. Revenues for the first quarter increased by $72m from $1.459b, to $1.531b, a 5% improvement over the same period last year. I should add that $24m of this increase relates to our 2002 acquisition of [Achete] the European printing operation. Also, we benefited from the strengthening of European and Canadian currencies, although this was offset somewhat by weaker currencies in Latin America, for a net impact of $41m. Adjusting for these factors, revenue on a consolidated basis increased by approximately $7m. EBIT was $78m, net income $24.5m and EPS was at .12 cents which is in line with our outlook that we provided on March 18th. We said at that time there were a number of specific factors that contributed to the decline in earnings compared to last year. Notably, close to $8m year-over-year increase in energy cost driven mostly by the Q1 spike in natural gas prices, higher employee benefits representing an increase of about $5m compared to last year, close to $5m profit erosion in Europe, a good part of which was attributable to France. And subsequent to our March 18th announcement, there was a minor but unexpected charge relating to our Mexico [DS] facility that had a negative impact on earnings per share of approximately .01 cent.

Finally, we experienced inefficiencies and less profitable product mix in our North American book group, which David will also discuss momentarily. Free cash flow of negative $250m represents a decline of $170m from the first quarter of last year. This decline reflects an investment in working capital of the $270m during the quarter, compared to investment of only $159m during the first quarter of 2002. This increase in working capital investment is due to several factors. First of all, the year-ended 2002 trade payables of $581m were down by $170m to a level of $411m, as we renewed our efforts to take advantage of supplier's discounts. Secondly, accrued liabilities were reduced by $50m to $435m, in part due to the release of $12.4m related to the 2002 restructuring costs that were accrued during the 4th quarter of last year. Our accounts receivable securitization program was reduced by a total of $67m since year-end 2002, from $650m down to $583m. This reflects the normal seasonal pattern of our accounts receivable.

The decline in free cash flow also reflects higher capital expenditures, which increased by $28m from $47m last year to $74m this year. Most of this increase in capital expenditure is related to the refinancing of equipment in our [inaudible] UK facility, that was previously under operating lease. Other capital initiatives affecting the first quarter included a [inaudible] to install in Augusta, Georgia and [Franklin], Tennessee, the continued expansion of our new retail offset facility in Riverside, CA, and the addition of the 48 page short cut-off web offset press in our Chicago, IL [Madcap] facility.

Earnings to long-term debt increased relative to year-end 2002 by $267m, pushing our debt to capitalization ratio up from 40% to 43%. This increase is a reflection of the working capital investment I mentioned previously, but I would like to note however, that the long-term debt has in fact decreased by $122m from March 31st of last year, despite the working capital investment. The current debt to capitalization ratio of 43% compares favorably with the 47% level of one year ago. Financial expenses remain unchanged with last year at $45m in spite of the reduction in total indebtedness and stable interest rates, mainly due to the net impact of currency mix in our debt portfolio. The effect of tax rate was down slightly from 24% last year to 23% this year.

Now if we turn to our segmented results of operation: In North America, revenue increased by $27m, or 2% to $1.228b. This increase was primarily due to the favorable movement in the Canadian dollar combined with higher paper sales. Including these two factors, revenue in North America was essentially flat, but the company offset lower prices in virtually all market segments by aggressively securing volume with leading customers. Operating income in North America was $83m, down from $108m in the prior year, resulting in an operating margin of 6.8% compared to 9% last year.

In a moment Dave will discuss the detailed operating performance in North America. For Latin America, first quarter revenues declined slightly from $47m last year to $45m this year. Currency depreciation in all of our operating territories had a significant negative impact, most notably in Argentina, Brazil and Mexico. Revenues would have increased in Latin America had this not been the case. Economic conditions in Latin America continue to be weak, having a corresponding impact on volumes demanded by some of our larger customers. However, we counter the negative economic impact on our large customer volumes by extending our customers reach, aggressively selling to second and third tier markets, as well as increasing our export sales efforts into the United States. These sales initiatives actually put volume throughput up during the quarter in most of our facilities with the exception of [Recife]Brazil. Operating income in Latin America declined by $4.2m during the first quarter. The region suffered from many of the same issues that are affecting North America and Europe, namely general economic softness leading to reduced advertising expenditure and fierce price competition.

Also changes in product mix, particularly in books, which as you know is one of our core product franchises in this market. In addition, we experienced challenges that are local in nature. An example: in [Recife] Brazil, we received lower than expected orders for telephone directories. In Mexico [DF] we experienced excessive downtime on the newly installed 4-colour directory press, thereby shifting the product mix to lower margin 2-colour work.

And as I mentioned a moment ago, we incurred a minor charge later in the quarter relating to our Mexico [DF] operation. While the amount was minor in the context of the company's consolidated results, we are still quite small in Latin America so that the impact was disproportionately large on a segmented basis. Now, if we turn over to Europe, revenues increased by $46m to $258m representing a 22% increase. However, if we exclude the impact of the stronger European currency, the [Achete] transaction, then paper sales revenue were in fact, down by $11m or 5%.

Operating income in Europe declined from $5m last year to slightly negative in 2003. Our European operations, excluding France, experienced price pressures resulting in lower margins. Notably, in our Scandinavian operations, and in our book sector in Spain. On this basis, operating income declined by $3.2m from $9.3m to $6.1m. The company's French operation continued to struggle due to declining markets, operating inefficiencies and the high cost structure.

France contributed negative $2.3m to the $5m European shortfall. Finally, the restructuring initiatives announced last year are now underway. The financial impact of this initiative should become apparent in the third and fourth quarter of this year. And now I'll turn it over to Dave who will provide you with a review of our North American operations. David?

Thank you, Claude. And good afternoon everyone. What I'd like to do here this afternoon is first start out with a brief review of our strategy for managing our business during these challenging market conditions which we continue to face. Next, I'll discuss our first quarter performance in several of our major market sectors, and then finally I'll provide some specific examples as to how our strategy for enhanced profitable growth is indeed yielding positive results. As I said three weeks ago at our annual meeting, our top-line revenue continues to experience deflationary pressures of a soft economy, industry-wide print production over-capacity, and extreme pricing pressure. At the same time we also face significant inflationary pressures with respect to rising operational costs for energy, employee benefits and environmental compliance.

However, as I stated earlier this month, we remain confident that our strategy for managing our business remains correct and on course. And that is we continue to establish long-term relationships with successful blue chip market leaders. We further penetrate major targeted accounts by utilizing the diversity of our entire platform to sell multiple types of products to key clients. We use our scale to manage supply chain efficiencies and drive cost out of our business. And finally, we focus on continuous improvement by incorporating best-practices across our platform.

Given today's market conditions we fully recognize that incremental revenue is likely to be won only at margins that are reduced from historical levels. However, since ours remains a scale business in which there are typically intrinsic benefits associated with higher volume, we fully understand the need to more aggressively manage the cost side of our operations than ever before. From support and management functional infrastructures operating on a regional basis rather than locally, the process optimization initiatives and smart procurement efforts are underway to maximize our ability to both sell and save our way to enhanced profitability.

This approach makes good business sense. It represents a path we started nearly three years ago. And it continues to help us to both minimize the impact of the series of ongoing negative market dynamics and to be well positioned for when an economic recovery and a balance between printing supply capacity and printing demand capacity occurs. Now, turning to the first quarter activity, it appears that overall value of shipments for the total commercial print industry remains relatively flat, while industry production and capacity utilization is increased. This combination gives an indication that printers are producing more product volume to generate the same previous level of sales. Our own experience at QW validates this trend as we continue to see significant negative pricing pressure in many of our market segments for both offset and [inaudible] printing. With impressions on the retail and Sunday magazine side, with impressions approximating last year's levels, revenue increased 7.5%, retail and Sunday magazines. This revenue increase is driven primarily by increased paper sales and additional capacity, and incremental revenue in our offset network. However, EBIT was negatively impacted by the severe price pressure in this market.

Additionally, unfavorable utility costs also contributed significantly to the pressure on EBIT. Ongoing manufacturing cost controls helped offset some of the combined impact of reduced prices and these increased utility expenses. Over to magazine and catalogues-results showed a reduction in sales of 1.5%. While market printing prices continue to fall over half the sales reduction was actually due to reduced paper pricing. Improvements in manufacturing performance and reductions on SG&A helped to mitigate a portion of the downward pressure on EBIT.

Over to the book marketplace-the total number of units sold has eroded by 1-2% in the first quarter. Consumer trade, reference, business to business catalogues are all showing signs of significant weakness. [Addled] hard cover, paperback and mass market books are down double digits. Additionally, not only our overall unit volume is down in most segments of the book market, but there is the added erosion of high value added products as publishers continue to cut back on the number and types of high-end reference books, elaborate Bibles and coffee table books. Our own first quarter experience has been fairly consistent with the market as we experienced a downturn in consumer books, reference books, B-to-B catalogues.

Our position, however, in college textbooks has benefited from market growth, but at measurably lower prices. At the same time we've seen a significant reduction of up to 30% in overall order quantities, combined with a tremendous change in customer mix from high page count, longer run volume, to lower page count, shorter run volume. Additionally, the start up a both new and transferred equipment into our Kingsford and [Versills] Kentucky facilities, presented challenges in 2002 that continue to be problematic in 2003. Several new members of our management team are working diligently implementing corrective measures to get these situations under control.

Over to commercial direct, this group represents that segment of our business that is most susceptible to incremental changes in the economy and advertising climate of the country. Since most of this work is highly transactional in nature, it operates primarily on a discretionary non-contract basis. First, the anticipation, and then the actuality of the war in Iraq, contributed to a wait-and-see attitude amongst many print buyers in this segment. Concerns that consumers would be focused in front of their television sets watching the news, led some advertisers to hold back their print campaigns. This segment exhibited a first quarter reduction of 1.3% in sales, the combination of depressed prices and volumes were only partially offset by platform efficiency gains and reductions in SG&A. Expectations that this business will quickly begin to demonstrate signs of a recovery once the economy and general mood of the country begin to do so.

The latest industry projections for a modest 1% increase in directory advertising expenditures for 2003. Back in Q1 our directory revenues are up approximately 1% and EBIT is under less pressure than it's been in some of our other business sectors. In Canada, we've elected to restructure the organization to capitalize on the shared benefits of a regional business. Plants in close geographic proximity to each other are utilizing common internal and external resources to manage and streamline their operations. Progress continues to be made in minimizing redundancies throughout these regions. I'm sure this major segment review conveyed the message that for the most part we're certainly feeling the impact of universally reduced printing prices, relatively flat print volumes and significantly rising energy costs.

But, that, fortunately, is only half the story. Our operational strategy is enabling us to make the most of these challenging times. As we continue to aggressively counter adverse market conditions though enhanced focus on securing long-term contracts with segment leaders, more cross selling of multiple products to core customers, leveraging our scale for stringent cost containment, and incorporating best practices for process optimization initiatives.

With respect to contractual stability of our business, it's important to note most of our core businesses have a significant amount of volume under contract for at least the next three years. Especially among their largest customers. In fact, retail catalogues, magazines, books, all add between 45 and 85% of their top twenty largest customers currently under multi-year contracts. The first quarter of '03 was a period of enhanced new business acquisition, and contract renewals in several key areas, including the retail insert group with clients such as Staples, Best Buy, Right Aid, the Sears Canadian flyer program, Good Guys, Famous Footwear and Party City, all extending their contracts. In catalogue group, all major work that was scheduled to expire in 2003, was successfully renewed including Avon, Viking Office Depot and United Stationers. For magazines, the contract renewal at shed media resulted in several hundred million dollars of business being secured with a six-year term of this extension of this 30+ year client. We also renewed, secured new title, or extended contracts with Bauer, [Primedia], [Condynass, [Advro], Radar Media and Hearst. And we recently printed, and now have under contract, Hearst's new lifetime magazine and [Condynass] Teen Vogue. And in our book group, a major multi-year contract was entered into with McGraw-Hill during the first quarter. The volume stability that results from having significant amounts of contract business brings great predictability and allows us to effectively manage the flexibility, capabilities and capital requirements of our manufacturing platform. While there is no question that these long-term contracts are struck at prices lower than what would have been the case in prior years, this has always been the case in printing. Commercial printers have generally been absorbing price concessions each and every year for as long as I can remember. But, as the largest player in the industry, with the leverage of scale, this is often worked in Quebecor World's favor, as we have continuously found new ways to improve productivity, making ourselves more competitive and profitable, even at lower prices.

This will continue to be our focus as we move forward, finding better ways to meet our customers demands on cost and service, while delivering bottom line performance for the benefit of our shareholders. We also said that a critical component of our strategy is focused on selling multiple products to core customers. And I'm pleased to be able to report significant progress along those lines as well. As we look at our activity in our top 10 accounts across our US platform, which in the aggregate total over $1b in annual sales, and represents over 25% of the total US sales volume, the cross selling results are quite impressive. Nine out of our top 10 accounts buy products from three or more of our product group. Eight out of ten accounts buy products from four or more of our product groups, and six of our top 10 accounts buy products from five or more of our product groups. Within these top accounts are companies like Sears, who buy from six groups, AOL Time-Warner from eight groups, Advance Publications from six groups, and the list goes on. This approach of providing enhanced one-stop shopping is particularly effective in these challenging economic times, as more companies are looking to consolidate their buying power, streamline their procurement processes, and leverage their volume with fewer suppliers for longer time periods across their own platforms.

Turning from the revenue side to the cost side of our operation leads us to our own activities in the area of supply chain efficiencies and implementation of best practices throughout our entire operation. Like many of our customers, we too are consolidating the number of vendors that we do business with. In some areas, we've gone from using hundreds of sources to dozens. In other categories we've gone from a few dozen down to two. IN Q1 2003, we've launched a major initiative involving universal spare parts inventories across the entire manufacturing platform. Our manufacturing optimization processes in both [inaudible] and offset continue to yield manufacturing cost savings which help mitigate a portion of the negative impact of items such as rising energy costs, and declining market printing prices. The involvement of our employees-all of our employees-from top management to shop floors is crucial in implementing these programs. From my own perspective, having been in the position of North American COO for just about a month now, I'm delighted with both the level of commitment to success and the level of involvement that I see from individuals across the entire organization. The opportunities that a singular management structure for the total North American platform [represent] are significant, as we begin to collectively identify additional areas for combined focus across all segments of our business. This is of particular importance, since as I stated earlier, most of our major customers are indeed already doing business with our organization across multiple business groups. We're looking for ways to even increase that trend and provide additional competitive benefits for our customers and ourselves. So, in summary, while our Q1 results reflect the magnitude of the challenges we continue to face across our platform, we remain convinced that this company is best positioned in today's marketplace to capitalize on new sales opportunities, continue to extract additional manufacturing process and procurement efficiencies, and respond favorably when market conditions improve. And I will pass it back to Claude.

Thank you David. Earlier today, we announced our intention to re-purchase approximately 10% or 10 million of our publicly traded subordinated voting shares. As you know our shares currently trade at 30-40% valuation to discount, a discount to its [inaudible]. And we feel that this offering is the best indication of management's view of the recent market decline in the Quebecor World share price, that the recent market decline is overdone. This use of funds represents the most compelling acquisition opportunity available to us in the market today. The public offering memorandum will be mailed to all shareholders on Monday, April 28th, and the final determination of the re-purchase price and the number of shares will be determined through a Dutch Auction process which will expire on June 2nd.

The bid price of $24-27 represents a 4-17% premium to yesterday's closing price of $23.06. The re-purchase will be financed initially through bank borrowings of up to approximately Can $270m, or $185m US. This transaction has been reviewed at length with our credit rating agencies, and we remain confident that our debt securities will remain investment grade. The additional borrowings will result in a slightly higher debt to capitalization ratio at the end of the quarter. But this will be short-term in nature, as positive free cash flow in the back half of the year will be directed to debt repayment.

We assume that if the maximum number of shares are tendered within the bid price range, the number of shares outstanding will be reduced from 141 million at the end of 2002, to 131 million shares on the proforma basis. Allowing for higher interest costs on the borrowed funds, the transaction will be accretive to EPS by approximately .10 cents on the 2002 proforma basis. This transaction reflects not only management's view that the company's shares are deeply undervalued, but also that this is a strong enterprise with a powerful asset base and a capable management team. On this note, I would now like to open the call to questions.

Thank you. We'll now take questions from the phone lines. If you have a question, please press one on your telephone keypad. If you are using a speakerphone, 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. There will be a brief pause while the participants register for questions. Thank you for your patience. And our first question is from Randal Rudniski of Credit Suisse First Boston. Please go ahead

Thank you. Two quick questions. First of all, Claude, can you provide us with an expectation for your free cash flow production this year?

We did $320m last year. We're not giving guidance on free cash flow for 2003, nor are we giving guidance on the earnings. I think the best guidance that we're giving to the market is the fact that we are re-purchasing 10 milliom shares. And as I said, this is our deep conviction that this company is pretty good. We've got a good asset base, and we've got pretty capable management. So, that's the guidance that we're giving to the investors for 2003.

Okay. I also wanted to touch on France. Can you provide us with a few more specifics in terms of the restructuring plan there? And is what you're engaging in there-is this all that will be necessary to effectively turn France around? Or is there still more restructuring that might be required?

At this time-I've been on board for two months, Jean has been on board for less than a month. What we've done is we've looked at the plan that we have for France, there's a number of areas that need to be corrected. We need to put more emphasis on sales. We have a lot of capacity in France-a lot of equipment. We need to put a hell of a lot more emphasis on costs, which we'll do not only in France, but throughout the organization. But I think we've started to do things, and I think the plan will move along. Will we do more on that side than we had mentioned to the market by the end of 2002? Time will tell. But, What I'm saying is that we'll take the measures to make sure that France is turned around within the next couple of quarters.

Okay. Thank you.

Thank you. The next question is from [Vince Valentini] from [TD Newcrest]. Please go ahead.

A couple of things. On the SG&A costs as a percentage of revenue-ticked down a little bit from I think 8.9% to 8.5%. I'm wondering if that is a result of some of the initial cost reduction programs your team has put in place, or whether we're still to see the benefits of that belt tightening in future quarters?

SG&A went down from 8.9 as you say to 8.5. And included in the 2003 numbers, you've got the effect of the currency, and also the [Achete] acquisition. So that the SG&A went down by a few-but put on a comparable basis, went down more than $5m or $6m compared to last year. This is the start. I think you'll see in the coming quarters, additional decreases.

Is it fair to say multiples of that $5-6m is what management will be targeting to save over the next-call it two years?

Well, I don't know what multiples you have in mind, Vince, but what we'll do is, we'll do our best to make sure that SG&A is in line with the rest of our costs, and also in line with sales. Because as we said before, we're aggressively pursuing sales. And if we have to give pricing concessions then our costs have to come down so that we maintain margin. SG&A is one part of the areas we'll be concentrating upon.

Second question-I guess related to the guidance, I understand you don't want to provide any at this time-but is this a timing issue? Where maybe as we get half-way through the year you will be more comfortable with some visibility to provide guidance? Or is this-shall we take this as a sign that we will never see guidance again from this company?

Well, at this time, from this management, you're not going to see any guidance.

Okay, and lastly, the CEO decision. Jean has obviously been characterized as interim. Is there any update on what the timing is for a permanent decision to be made by the Board?

No, there's no timing decided yet. I am going to remain as President for as long as it takes to find the right person to be CEO of this company. There is no time limit.

I should add that Jean did not renew his membership for golf this summer!

Okay, thanks!

Thank you. The next question is from Bill Gibson from Banc of America Securities. Please go ahead.

Previously on an operational basis, there was a move underway to combine the commercial direct operations with [Mad Caps] plants as well. Is that indeed in place? Or, what's going on there?

We have developed and identified great synergies between our catalogue group and our commercial direct group. And they are, in fact, being instituted. Obviously, of you look at commercial direct you should really consider that as two separate and distinct markets, with the direct marketing working very closely with catalogue. And then our commercial group is the greatest beneficiary of our cross selling activities. And so there's really two types of synergies there. And my group president, [George Zengal], he is heading up those operations under a single, vertical market organizational structure.

So, it's really working together, both on a marketing front and an operation-I mean on a plant front, as to which [inaudible]where the printing is sent?

Yes, I think it remains to be seen operationally, what we want to combine. Our plants are highly focused. I'm an advocate of plant focus, it makes us quite distinct from our competitors. So, our customers basically buy from us on a network basis. But what makes us distinct from our competitors is 70% of our plants-when you walk in the front door-within about 15 feet you know what business they're in. You can't say that about too many of our other competitors. And I'm never going to sacrifice operational focus at the risk of reduced performance.

Okay, now, that makes sense to me. So, from an operational point of view, we shouldn't see too many changes from what's going on now. It's mainly on the marketing point of view, is that correct?

Actually, I think you're gong to see really no change in the strategy. The strategy is driven at a vertical group market, group presidential basis, that remains in effect, has been in effect and will be in effect in the coming years.

Good, thank you.

Thank you. The next question is from Megan Anderson from RBC Capital Markets. Please go ahead.

Thanks, just a couple of questions, and I apologize, I had trouble getting on the call at the beginning, so if you've reviewed it, my apologies. But, I'm just wondering if you can tell us how energy costs are tracking for the balance of the year compared to last year? Secondly, John, if you can comment on anything you're seeing happening North American wide as far as any capacity reductions at all, on the part of the industry and competitors. And third, Claude, you mentioned what you thought the accretion value would be if all 10 million of the voting shares are bought. But I didn't hear what your assumptions were behind that-whether the assumption that the average price-if you can just clarify that please.

Okay. Energy-we said that the first quarter, we had an impact of about $8m, this is pre-tax, compared to last year. We had a spike in February of up to $10 per unit-millions of cubic feet-whatever it is. Gas, now is down to about $5.25-5.50, so it has come down substantially from that spike. What it will be for the balance of the year, I guess your numbers are as good as mine, in that regard. Now, when I talked about accretion, I said .10 cents a share if 10m shares were tendered, and this was based on the 2002 numbers on a proforma basis. Now for your third question, since John is not here, we'll let Dave answer the question.

Well, with respect to capacity in the market, as I speak we're starting our own wide web review press in [Franklin], Kentucky. And we started our Greenfield plant, Riverside County, 2-3 months ago, an exceptionally smooth start-up. Unbelievable--Greenfield. Other announcements in the market remain to be seen whether or not they are incremental capacity announcements or substitutive capacity changes in the market. People for the most part are sitting pretty tight, and that's probably bad news for printing press manufacturers.

Okay, so in other words, there's no clear sense of a reduction in capacity?

No, in our own experience, one of the things that we're doing to counter some of the negative impacts are, we're producing more impressions as we enhance our efficiencies. So, I'm not inclined to take capacity out at all.

Okay. And Claude, sorry, just back to your accretion comment. What price are you assuming that you pay for the shares that are tendered? Is it the mid-point?

It doesn't make that much of a difference.

Okay. Thank you.

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

Thank you very much. Claude, you and I talked, I guess, at the AGM, I asked you about Vincent Bastien whose absence I guess was noted at the AGM, and you kind of demurred to this conference. Maybe you could just address what's happening there vis-à-vis management, who in fact is running the show there. And I apologize, I missed, I guess part of the answer to Randal's question regarding the situation in France. On the Q4 call, I guess we were led to believe-or someone made a comment for management-that operations could head towards breakeven this year. I realize you're not talking of guidance, but do you hold to that statement? Or, that's off the table?

I'll answer your last question. What I said earlier, is that we will expect a turnaround in the coming quarter, the second-the third or fourth quarter, and I think we feel fairly comfortable with the breakeven or better in that area. Of course we're gong to push sales, we're going to reduce costs and we are going to make the operation more efficient.

Now, regarding Vincent Bastien, he's still there. He's running Europe. He's on board. We've got [John Dickens] as the COO of Europe. They're both still on board. We're working closely with them, and they know what the priorities are. So, we're working as a team, and there's no change at this particular time.

Okay. That's great, thank you Claude. Just one last question with regards to Capex-I guess there was a bit of a range, kind of suggestion, on the Q4 call previously, subject to how you would use certain leases. Can you give us a sense as to how Capex might be this year?

Well, last year we did 185m of Capex. I think that at the last conference call we said that we would have a number of leases that would come up, that are coming up, that we will be re-purchasing these leases-refinancing these leases, and I think a number of $60-80m was mentioned, which is in the ballpark.

Okay, and just [outside] just last thing maybe for David Boles. We saw some strength in the other component [pre-medium] logistics, is that primarily ongoing gains being achieved within the logistic distribution platform? Maybe you can just address that.

I think it's clearly a by product of our focus on strategic comparative number two, and that's our cross-selling activities. We work at a core printed impression as a stone that we want to gather moss. We want as much value-added associated with the printed impression as possible. Because, frankly, on the logistics side, we're the biggest and we're the best in the industry. And we can make money with it.

Great, much appreciated, thank you.

Thank you, the next question is from Michael Millman from Smith Barney. Please go ahead.

Thank you. Could you talk about what you're seeing currently in the marketplace, and where the decline in energy prices have-how much this suggests-at least improvement-when you put it on some sort of basis? Secondly, could you talk about, with the contracts you're making, what kind of long-term margin when things improve have you [baked] in. I think Charley used to talk about the double digits for the company, maybe even 12% or more. Is that something that's obtainable given the current pricing? Thirdly, I'm not sure what you meant by breakeven. To us it means zero earnings. And so, maybe you can tell us a little bit-what the comment was about the breakeven.

Let me answer your first and third question. When I said breakeven, I said breakeven or better. And I was talking about France.

Oh, that's France. Ok.

That's right. I was talking about France. I was answering a question on France to the effect of, were we going to be profitable this year-and I said we were confident with the team that we have on board, and the effort that we're going to put at all levels of the company, that we will be at a breakeven or better situation. But, given the fact that I am prudent, I'll leave it at that.

And you're saying that would be for the full year taking into account, I think, the $2.3m loss, or breakeven?

No, no, I said breakeven or better in the coming quarters. I didn't say for the full year, I said in the coming quarters.

Okay.

Okay? This is-this thing we're going to do one step at a time, but we're going to get there. On energy, as I said, $8m for the first quarter-energy has come down so the impact is going to be less in the coming quarter. At this particular time I could not, or I would not like to quantify that number. Regarding margins, and that sort of thing, I think it's difficult for us to be specific, but I'll let Dave talk about margins. Especially with the pricing environment that we know, but also with the effort that we're making on reducing our costs, and what the results will be.

The types of customers that we target, they're growing customers. They're customers we know that are going to be there tomorrow. Once we have that volume secured, we're in a position where we can drive cost out of the business. And I can tell you that we're a company that has come together in relative nanoseconds compared to our competitors, and there are ample opportunities for cost reduction in our business. I suppose when you take something on, with a reduced price, that's a negative step function and cost reduction tends to be a more gradual thing. So, sometimes there's a little bit of a lag. But, I'm very encouraged with the opportunity that we have in our business to drive cost out, in both the short, intermediate and long-term

Does that mean you think you'll be able to-when conditions are good-achieve the kind of margins that Charley used to talk about being obtainable in the business?

I would expect we're going to position this company for profitable growth in the future. Right now we're facing a tough economic environment, but I think we've effectively positioned this company as a growth earnings company, and I think you're going to see that again in the not too distant future.

And could you just talk a little bit about what you're seeing now through April, now that the war seems to be slowed down. And, does it look like there's some [inaudible].

They're still pausing. Our customers, what I find, is they are looking for ways to take cost out of their business, and in a normal economic environment, you get a mixture of good news and bad news for the most part. Right now, I'd say people are taking a pause. But we know in due course that that will reverse itself.

We shouldn't assume much-in the second quarter-much more than normal, seasonal increase in revenues.

Yes, we're pretty well loaded for the balance of the year. We have a few areas of concern, but we have our top line pretty much identified for the balance of the year, and we're seeing the normal seasonal spikes that we'll have toward the latter half of the year.

Thank you.

Thank you. And our next question is from Carl Bayard from Desjardins Securities. Please go ahead.

Good afternoon. I just noticed that DBRS placed you under review with negative implications. You mentioned earlier in the call that you had had discussions with the credit agencies. I was wondering-do you think there's any risk that the larger credit agencies will make some sort of similar move?

Well, our rating with DBRS is triple B plus. Our rating with Standard and Poors is triple B flat, with a negative outlook, and [Moodey's] is BAA2 - stable outlook. What I said is that we are-after talking to the rating agencies for confidence that we will remain strong investment grade, maintain a strong investment grade ranking. You said [Moodey's] and S&P are the rating agencies that will see what we need to expect. But in that regard I think we're in fairly good shape-or we should be in fairly good shape.

Okay. A couple of other questions if I may. I was wondering-how much do you have outstanding in credit facilities?

We have, outstanding-outright we have a billion dollar credit facility.

Okay, and how much of that is available?

Now, it's-you'd be talking-if you look at the number on the balance sheet, we've got about 700 or 800 available.

Okay, and what's the cost of that? Is that prime and 75 basis points, something like that?

It's [lyneborg] with less than 100 basis points.

.. [lyneborg] less than a hundred. Great, thank you very much.

Thank you. And the next question is from Doug Arthur from Morgan Stanley. Please go ahead.

Yes, I've been covering North American printers for, I don't know, well over a decade. And, I have never seen a major North American printing company consistently make money in either Latin America or Europe in a variety of economic and currency scenarios. Is there a point in time where you pull the ripcord and say-enough is enough, and focus the company in on the profitable North American market to maximize returns, or do you just stay the course?

Well, maybe we'll demonstrate to you that it will be the first time in your experience that we can make money in Latin America, or in Europe, in good times or in bad times. But, having said that, which is a bit of a flip answer, is we are-we've got new management. Nothing is taken for granted. We look at everything. We'll be assessing what our cost of capital-where we'll get the best return. And we'll act upon that. So at this time that's the [inaudible].

One thing perhaps can add to that, Claude, is that as each quarter passes, we increasingly are able to leverage our global-I think our unique global position-into stronger and enhanced relationships with people that buy from us on more than one continent. That's created opportunities for us here in North America, and it creates opportunities in the other regions in which we compete as well. So, this is a very dynamic strategy, and it's taking hold with greater strength as each passing quarter goes by. So, that certainly-although I may be responsible for North America, certainly that's something I [wouldn't want to see us abandon].

It is not the intention of this company to abandon Latin America. You can make money in Europe and we want to make money in Europe

Okay, thank you.

Thank you. Our next question is from Andrew Mitchell from Scotia Capital. Please go ahead.

Hi, good afternoon. I'm wondering if you can talk about two things. Firstly, are there any major structural changes in this downturn for your industry, versus the prior ones you've seen that would suggest to you you've got to make some different changes to your platform? Right now you're talking about aggressively chasing volume - is there a sense that you may have to develop scale in some areas you're not in-cut back on some of the scale in some of the areas you're inn-there seems to be a trend here to shorter runs in some areas. So, I just wanted to get your sense on that. And, secondly, can you talk about the long-term contract strategy in terms of looking after volume ahead of price right now. Looking out-you contract for generally 5 years in term. How does that pricing strategy play out in your contract looking over a broader term than just sort of the next year, so that you can try and recapture that as you move forward?

Well, dealing with your last question first. Certain contract extensions are three years, I have others that are ten. So, it's a combination of the two. And, yes, there's been pricing pressure, to varying degrees, depending on the situation. And, while it tends to be somewhat acute right now, my experience has been-this is in some ways kind of a normal course. Printing prices-the last twenty years-haven't been going up, they go down. And companies like ourselves find ways to get cost out of the business, arising from a variety of operational strategies, including scale. It's very much a scale business. Including focus, including technology, including sound operating practices, utilizing our scale in procurement and the list goes on and on. And again, I feel pretty confident that the opportunities for us, through again-with North America with 110 plants-there are other opportunities that we have yet to fully implement.

Can you talk to-that does deal with the cost side-what about the revenue side, your strategies as you enter into discussions-I would assume both parties recognize you're dealing with an acute experience right now in the industry. So as you look out on the longer term contract basis, I would assume that your strategy is to give more of a price break up front than longer term. Is that-I know that concessions have always been there, but the major part of the concession would be, I assume over the next eighteen months, as opposed to just driving that right into the contract [inaudible].

Well, actually, one of the problems that we have is the fact that these contracts are done on a fiscal year, calendar year basis, where it's literally a step function on January 1st. And the cost measures you take tend to be a more gradual thing where there's a lag. And you're chasing. One thing you have to keep in mind with the types of customers that we partner with, they are the consolidators of their businesses, and they grow. And as they grow, we grow. And when you match that with scale, we can find a way how to make a dollar doing that, at the same time giving them a lot of value.

Okay. Do you want me to repeat the other areas I was looking for your thoughts and views on?

The other question was the structural change?

Yes, the structural changes you see in the industry, are you feeling any need to adjust how you're positioning your business.

No, I would say our moves this year are going to be tactical in nature as opposed to-I would use the word tactics and re-org-as opposed to restructure.

Thank you - we have time for one more question.

Thank you, our last question will be from Andrea Horan from Westwind Partners. Please go ahead.

Oh, hi. Just got in under the wire, there. Two questions. One is, can you tell us how your receivables are tracking year-over-year and whether or not you expect to-you mentioned that there's a normal seasonal variation-you're down from $650m at year-end. Do you expect to end the year at around $650m? And I guess, the other question I had is, we've seen how you spent, or planned to spend some of your free cash flow this year. Do you have any plans at all to do small tuck under acquisitions?

Okay. To answer your first question, what our year-end receivables are going to be-I can't answer that.

How are you tracking versus last year at the exact same time? Did you go down by about the same amount last year?

Or is there a strategy to reduce your receivables or increase your receivables?

Well, on our balance sheet, if you look at our receivables, we have $507m of trade receivables on the balance sheet as compared to $509m on March 31st of last year. Which is basically the-and $466m as of December 31st, so from the year-end we're down $30-40m. As I mentioned, our securitization program is down, but I can't remember what [inaudible].

67.

That's right, 67.

Yes. So, the secure accounts receivable program is probably going to track to around the same number by year-end.

It should track, basically, to the same number.

Okay.

Regarding your-acquisition. This company was been through acquisition, we didn't change our minds, but, for the moment we're not talking about any major acquisitions possibilities. But, if something presents-and it's something that we like, then I'll have a look, take a good look and we may proceed. Andrea, you're referring to a niche acquisition?

Yes, just sort of not taking on a lot more debt obviously, but maybe as a way to deploy your free cash flow. Especially if other printers are-smaller printers must be suffering more than the large scale operations.

If it makes sense, if it's accretive, if it's good for the business, never say no.

Okay, thank you.

Thank you everyone for participating in this call, and we'll talk to you at the next quarter. Thank you.

Thank you.