Quad/Graphics Inc (QUAD) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, welcome to the Quebecor World second-quarter results conference call. I would now like to turn the meeting over to Mr. Claude Helie, Executive Vice-president and Chief Financial Officer. Please go ahead, Mr. Helie.

Thank you, good afternoon everyone and welcome to the Quebecor World conference call for the second quarter of 2003.

Joining me today from our offices in Montreal are Jean Neveu, Chief Executive Officer of the company, David Boles, Chief Operating Officer of our North American Operation and Jeremy Roberts, our Vice President of Investors Relations and Treasury. The conference will last approximately one hour and we'll follow the usual structure.

Jean Neveu will provide introductory remarks. I will follow with a review of our financial results and a detailed explanation of the new restructuring initiative announced earlier today. Dave will review North American markets. Jean will review our international markets, 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 Provisions and any applicable laws.

At this point, I will ask Jean to provide introductory remarks.

Thank you Claude.

Today Quebecor announced a new set of [INAUDIBLE] market conditions, which has been [INAUDIBLE] for the past two years. These are underway as we speak and should resolve in a savings of 36 million per year, or 20 cents per share, mostly from the elimination of employee's position. At our last annual general meeting in April the Chairman of Quebecor World, Brian Mulroney announced a strong new corporate governance policy. This was designed to ensure transparency and timely disclose sure of all relevant information and imposes rigorous demand upon management to identify resolve and be accountable for any significant issue or problem.

It is in this context that Quebecor World has announced in its release today. Reducing head count is never a pleasant task and we will do our best to ensure affected employees are treated fairly. However, the current economic climate make it essential that we be rigorous on costs and projectivity.

As said, impairment, restructuring and other charges of 82 million contribute to a loss of 51 cents per share for this second quarter. Excluding this charge, the loss per share was 7 cents. During the quarter the company has so recorded specific charges that reduce earnings per share by a further 27 cents. Claude will explain these in a moment in more detail.

Revenues in the second quarter were 1.5 billion. EBIT operating income was positive 43 million before the impairment restructuring and other charges. This includes, however, 49 million of other specific charge recorded during the quarter. External factors affecting the financial result this quarter, include issues that we have talked about before. Price erosion from overcapacity and weak demand for advertising and also we still are facing a rising employee benefit cost and other energy costs.

In summarizing, this continued to be a very difficult environment for printer and our results reflect this. We will continue being rigorous in covering our costs and protecting our . We have taken measure to deal with the current environment, which will make us more productive and profitable in the future. This is what our shareholders expect from us and what we expect to deliver.

Claude will now review the segment result operations and provide more detail on the new restoration incentive, Claude?

Thank you, Jean.

Until recently, the economic conditions affecting our financial results were somewhat continued to isolated geographies or product. This is no longer the case as we are experiencing pressures in almost all of our divisions.

During the second-quarter, consolidated revenues increased 2% or 31 million to 1.5 billion. Adjusting for currency impact of 65 million, revenues were down slightly. Operating income was 43 million before impairment, restructuring and other charges and to help our listeners, I will make my subsequent remarks on the same basis.

In North America, revenues were stable as we continued to win new business and renew long-term contracts. Operating income was 45.3 million compared to 124 million last year.

Our North American performance reflects the price concessions we have granted to our customers to build up volume and long-term relationships and this stems from overall reduced print advertising demand where the industry posted a 1% decline in ad pages during the second quarter. The month of June was particularly weak with ad pages down 3%. As Jean mentioned, we are feeling the impact of other cost increases, including energy and employee benefits.

Finally, in North America we've recorded $15 million of charges related to our logistics business and we increased our provision for that account by $11 million.

Now, turning to Europe, revenues increased 12% to $268 million U.S. but if we express it in euro, the sales were at $236 million compared to $261 million last year. Operating income was 3.4 million compared to 8.3 million dollars U.S. last year.

In Latin America, our revenues were stable at 44 million, while operating income was -- was negative 3.5 million for the quarter, reflecting a weak pricing environment as well as a specific charge of 4.4 million to increase our accounts receivable reserves, and other items.

I want now to provide additional details concerning the restructuring, impairment, and other charges of 82 million, as well as certain specific charges totaling 49 million. Let me start off with the restructuring charge. We have taken a very rigorous approach of identifying issues affecting our operations. As part of our review, it became clear that the restructuring measures identified last year did not go far enough. The company has introduced new cost reduction initiatives resulting in the elimination of some 1,000 additional positions.

More than half of the positions are in North America of which about 100 are in Canada, about one quarter of the Canadian positions being eliminated are in Quebec and I should mention that more than 750 positions have already been eliminated as we speak. The costs associated with these new reductions is expected to be approximately 26 million, of which approximately 23 million will be in cash. This will provide annual cost benefits of approximately 36 million, or 20 cents per share. We expect to realize approximately half of these savings in 2003.

I should add that the company also incurred additional charges of 8 million required to complete previous years' initiative of which $5 million is in cash. The $82 million of charge also includes 47 million of asset write-offs.

Over the past three years, the company undertook a significant movement of equipment to, first of all, to integrate world color and Quebecor operation and, also, to create larger more specialized facility. These initiatives resulted in the lower cost structure with fewer employees, but they also created a collection of idle, obsolete presses and other equipment throughout the network. It is in this context that we have identified these assets for disposal. In effect, we are putting our house in order.

The company also absorbed 49 million of specific charges during the quarter mostly related to increasing our reserves and also related to our logistics business. If I start with the logistic business, this group grew very rapidly over the past three years and is now the largest shipper into the U.S. Postal System. The volume of materials shipped tripled during this period. Unfortunately, this base of growth strained the divisions tracking systems capabilities and as a result, we took charges of approximately 15 million in the quarter to correct the matters, now, I should say that systems have been upgraded and the division is under new management.

Turning to provision for bad debts, we've increased our provision for doubtful accounts by $15 million during this second quarter. In the U.S., Chapter 7 filing increased by 5% in the first quarter and we'e up 10% compared to the same period last year. We believe that it is appropriate in this climate to take a more conservative stance.

I should add that this specific charge is included in SG&A expense for the quarter, adjusting for discharge and for currency differences, SG&A was in fact $5 million lower than last year. The balance of 19 million of specific charges relates to a number of smaller adjustments, mostly non-cash in nature, such as the write down in carrying value of certain assets like inventories and spare parts. In total, these specific charges had a $49 million impact on EBIT or a 27 cent impact on earnings per share.

Now turning to free cash flow. Our focus on generating free cash flow was not affected by these changes. Free cash flow of 72 million during the quarter represents a 32 million or 80% increase from the same period last year. This improvement in free cash flow reflects stabilization and the level of accounts payable compared to the first quarter combined with a large reduction in accounts receivable capital expenditure increased which includes a refinancing of equipment in our manufacturing network that was previously under operating lease.

So, we are quite pleased with our ability to produce positive cash flow in this environment, notwithstanding these lease refinancings.

Now, turning to a review of the balance sheet, our long-term debt increased by 164 million during the quarter, which is fully due to the 173 million spent last month to repurchase 10 million shares. The debt to capitalization ratio now stands at 47%, while financial expenses increased slightly to 45.8 million, from 42.2 million in the first quarter, and the increase is due partly to the share repurchase and partly to currency fluctuation.

Now, if I were to summarize, I should say that despite difficult market conditions, the company posted positive cash flow results for the quarter, excluding the charge of 82 million and other specific charges of 49 million, earnings per share amounted to 20 cents. And the forward-going savings associated with the new restructuring initiative will be approximately 36 million per year, or 20 cents per share, of which approximately half will be realized during the current year.

Now, I'll turn it over to Dave for a review of the North American operation. Dave?

Merci, Claude.

As Jean and Claude said, the soft global economy continues to present considerable challenges across many of our major market segments and geographies. North America is no exception. For the most part, prices are depressed, at the same time the volumes are being reduced.

I'll talk more about the price environment in a moment, but first I want to discuss how we are reducing costs to maintain our margins at these lower price levels. It is a multi-faceted battle plan. The restructuring initiatives quote as detailed is just one facet of that plan.

It goes without saying that we are reducing discretionary spending across the board. Like everyone else, we are using things like video conferencing, internet work groups and other tools to reduce travel while maintaining our close personal contact with all of our customers. Since I last talked to you, I have reorganized our management structure in North America to reduce overhead and improve efficiencies. This along with the rationalization of head office services between Montreal and Greenwich have produced significant savings.

On April 1st, I had 25 direct reports. Now I have 12. I had 11 group presidents reporting to me and today by combining related business units, I now have seven. Group presidents who previously had just sales responsibility now also have manufacturing reporting to them. Our book and directory operations each have a business leader reporting to a single group president.

Catalog and logistics are now run by a single group president, as are the commercial direct and premedia businesses and our Canadian operations have been restructured along regional lines. Facilities in close proximity to each other across the platform are taking out costs by sharing back-room accounting functions, purchasing, and human resource departments.

In procurement we continue to use our skill to reduce costs with select supply-chain partners and to reduce the number of suppliers overall. This effort goes well beyond our major consumables like ink, paper and press consumables to now include areas such as spare parts, material handling products, like shrink wrap and pallets.

In the area of packaging and pallets we have gone from more than 300 suppliers to fewer than 20. Rather than each plant specifying particular product characteristics, we now have regional purchasing of common products across multiple plants. This lowers our suppliers' costs and allows us to share in the savings.

Best practices is another element that reduces cost and enhances customer service. For example, our process optimization team for GPO is just one example. Staff arranges a supervisors and line operators from 13 different North American plants, their focus is on optimizing and standardizing materials and processes. They are finding savings in very specific segments of the operation, such as cylinder engraving, ink consumption, paper weights, press throughput, material handling and many other areas.

Finally, some of our cost savings are capital driven. Investing in new equipment and systems that will further reduce costs down the road. All of these efforts are reducing costs in the short-term, medium term, and long-term.

Now, before I get into an overview of my product groups, I want to say one more thing about pricing. I want to make it clear that we are competing in this environment aggressively and successfully but there is no free lunch. I will not take work at any price. If we can't make money at it and there's not a strategic reason for doing so, we will and have walked away.

Sure, we have signed long-term contracts at lower prices to maintain relationships and secure the business but only because we truly believe we can reduce our costs to deliver acceptable margins to our shareholders.

In magazines we are renewing business and gaining the lion's share of many new launches, most recently this includes titles from Hearst, Conde Nast, Bauer and Dennis Publishing and we are in discussions with several other major publishers regarding other potential new launches. We were just awarded an important piece of new business, Hemmings Motor News, which was printed by a competitor for the last 30 years. Our ability to produce their magazines and directory titles in a manner that reduces their cycle time combined with our ideas to help them attract new audiences and develop new revenue streams were key to our completing this cross selling sales.

In the catalog market I our leading market position is producing benefits, while some customers have canceled events, others are actually increasing their volume and these are our customers. This is why partnering with the biggest and the best is the right strategy.

The Book Group continues to be unable to offset the impact of pricing and volume reduction. Pricing, market pricing on incremental new work remains at very depressed levels. We have had some successes, though, in the quarter, most notably with Harry Potter and Hilary Clinton's living history and several other blockbuster titles, but it is a difficult market environment.

Last quarter I discussed our facilities in Brazil and Kingsport. We have made reductions in work force at both facilities Brazil's is coming around faster. Kingsport, though, is more complicated. The accounts were more than 80% of the total EBIT falloff in books in Q2 versus Q2 2002. Going forward, it needs to become a more specialized facility and this quarter I will be introducing a plan that will make this happen.

Directories continue to see publishers controlling inventories to reduce run lengths at the same time that advertisers are reducing ads. However, there was still some significant bright spots in Q2 for this business.

Two of note, we entered into a $70 million long term contract with Yellow Book and signed another long-term agreement with Verizon Canada. The commercial marketplace is beginning to gain momentum but pricing remains very depressed. Still, we are making money in all of our facilities except one and we have seen a volume rebound in orders for July and August.

In retail, we remain the vendor of choice. This is a very tough market with significant negative price pressure, quarter over-quarter and year-to-date sales are up, though, and we are reducing costs to improve margins, especially in our offset platform. We have a new offset facility in Riverside California that is having some start-up problems but once these are ironed out I think you will see improved results from this business segment.

The Canadian market has been affected by the deappreciation of the Canadian dollar, again here pricing is difficult but we have had some major contract renewals and new business wins that are worth noting, including agreements with Toys R Us, Home Depot Canada, Shoppers Drug Mart, Columbia House and Canada Wide Publishing, it is clearly tough out there but we are trying everything we can think of to make it work.

Our cross-selling initiatives are one more example. This is an area that I believe has been misunderstood. Many people think it is simply about selling more product to the same customer, like our recent win of 13 new book titles for the Weekly Reader, for whom we also print their magazines. That of course is an element but what cross-selling is really about is showing customers how they can utilize our technology to produce new revenues.

Products developed for direct mail like loyalty cards and scratch offs can be designed to help college textbook publishers sell more new books rather than used books to college students. Or how a magazine can use an E drive to promote increased traffic to an advertiser's website.

We also bring customers together, such as a children's magazine publisher with a children's retailer to create a special in store event promoted by the magazine. And there are customers finding new ways to work together, there will be now printing opportunities for Quebecor World to enjoy. That is what cross-selling is all about, creating true added value.

Now, finally, I'm pleased to announce that this morning our Board of Directors has approved a 12.8 million dollar investment that will significantly enhance our ability to compete in the educational book market. This investment is made possible in large part because of a long-term enabling contract with McGraw Hill, under which they will give Quebecor World one third of all new titles primarily in the educational market.

To accommodate this work, we will be relocating and upgrading an existing equipment adding new inclined binding sewing and casing lines to our Dubuque, Iowa facility. Dubuque, which now produces soft-covered books will become specialized in and have the largest capacity in the industry for 10 7/8 inch hard cover educational books. A facility dedicated to the printing and binding of educational textbooks is something that publishers in this sector demand, with this investment, Dubuque will fit the bill perfectly. This is a market we have been pursuing for some time because we believe the demographics, product dynamics will generate real growth over the next several years.

While costs containment is front and center these days, we are loose looking at new ways to grow our business. This may be in creative cross-selling initiatives, introducing customers to a new range of services or by targeted investments in specific sectors like the one in Dubuque.

The market is tough, there is no question but for companies of our size and scope, there is opportunity. I believe if we make the most of these opportunities, we will come out of the other side better positioned than ever before. And with that I'd like to pass it over to Jean.

I want to talk about Latin America first. As you all know, the Latin America economy continued to show weakness. While our revenue is stable there, we are experiencing significant price concessions in all of our facilities. More -- most importantly, in Argentina, Mexico and Columbia.

We're offsetting the price erosion by increasing volume everywhere except which are being hit very hard by changes in the market. The publisher, they print less copies than they used to print before.

Overall, volume are up in Latin America, which reflect an impressive sales effort. Part of the sales effort is concentrated on building our export market into Mexico and the U.S., while exports shipments were up 20% over last year.

In Europe, print markets are suffering from weak volumes and weak pricing overall. The poor German economy and the overcapacity of the German printing industry is one of the major roadblocks to a return to stable pricing.

Volume in our platform are somewhat better than the offset platform, but not enough to make us happy at this time. In the specialty printing market in Europe, customers are increasingly shifting to lower value added products. Within our facilities in Belgium and the UK are the best performers and we expect the relatively strong performance to continue throughout the year.

The area where we are facing more challenges now are Sweden, Finland and Spain, where overcapacity is the highest. To counter this effect we are generating volume increases, from our global customer like IKA and McGraw Hill, we are now producing books in Spain.

Another development we like is that we are seeing more of our largest urban customer express interest in signing long-term agreement with us. As you know, our print customers have relied more on the spot market than the counterpart in North America. I believe that the weak condition of many of the European printers is motivating publisher to find other sources of long-term print capacity, which is turning their attention to Quebecor World.

Overall, the European market is very difficult. However, we do believe that where one of the low-cost producers that we have the most diverse product offering in the market.

Our operation in France generated a loss of 1.9 million this quarter. This is an improvement for the first quarter, where we post a loss of 6.3 million but prices are down, especially in offset. They are improving somewhat in, [INAUDIBLE] wherein we have the best network in the country.

We felt some additional pressure from the nation-wide labor strike which effectively shut down business for several days. Nevertheless there has been a reduction in that head count and our intention is to continue this effort. Benefit from help our performance and loading for the third and fourth quarter, they look stronger than they were at this time last year.

I am so pleased that Evan was appointed as director in June. I have known Evan since nearly 10 years and I have confidence -- great confidence that he will continue to improve result in France.

In closing, I would like to restate that management is to continue reducing costs and efficiencies in all our business group and in all our geographic. The measure we have announced today will result in improved margin and operating income regardless of when the overall economic climate improves and it will some day.

We will ensure that financial rigor discipline and accountability are observed at every level of our organization. This is what our shareholders demand. They are certainly challenges and they are not limited to any one business group or any one country. However, I believe this should have the -- knowledge and determination to overcome them and deliver superior returns to our shareholder.

So, now we're going to open the line to questions from our participants.

Thank you. Ladies and gentlemen, we will now take questions from the telephone lines. If you have a question, please press star 1 on your telephone keypad. If you're using a speaker phone, please lift the handset and then press star 1. If at any time you wish to cancel your question, please press the pound sign. Please press star 1at this time if you have a question.

Our first question comes from Vince Valentini of TD Newcrest, please go ahead.

Claude, a couple questions for you and then maybe one for David.

On the cost side, first of all you mentioned 5 million reduction in SG&A costs versus last year if you isolate FX and the other item, the bad-debt item. Is that sufficient for you, or do you envision the year-over-year savings getting better each quarter with some of the belt tightening you're doing. That's one question.

Related to that, the 36 million in savings from the thousand head count reduction, is it safe to assume that's all operational and has nothing to do with the SG&A belt tightening you're doing or is some of that a bit of overlap?

And then related to that partially as well, if I look at your numbers, you say air going to get 10 cents of improvement from these savings you've just put in place, this 36 million, you'll see 10 cents improvement in the second half of this year. When you did the share buyback you said there would be 10 cents accretion in the second half of the year from that. I also assume we're going to see some savings in France from the fourth-quarter charge you took last year which hasn't fully shown up yet.

If I put all those pieces into the mix, do you think it's possible that even though pricing is extremely tough and volumes haven't really picked up yet in your markets, is it possible to see earnings in Q2 and Q4 this year being flat with last year?

Well, that's -- Vince, that's quite a question. Let me start with the SG&A. SG&A's just a cost element. There are other cost element, that is a work in progress. We have reduced our S G & A this quarter as compared to last year we mentioned by $5 million. There's still work to be done in that regard, and we will continue to do so.

Now, your second question related to the $36 million of cost savings that we will be realizing. We said that half of it will occur this year. So that that is going to be working to our result as we -- in the second quarter, the cost reduction, thousand people, as I mentioned, 750 has already been done, the balance is going to be done in the coming weeks. So, this is things that are happening, as we speak, or have been done. So that will be reflected in the result of the second quarter and also in the results of last year.

Now, the -- the other point, when we bought our shares, we said that it would increase our benefits, I think it was on an analyzed basis, I think you're right, about 10 cents a share. The numbers we had, that will work out because we had 141 million shares outstanding. We are down to 131 now, as we speak, because we did the buy back early June. So that's going to work ourselves into the number.

And finally, regarding your last question, will the second quarter be as good as the second half be as good as it was last year? Given all these things, we think that we are putting in place a lot of measures that are reducing costs, but we're -- at this time, we'd rather not give guidance as to our second-half result so that time will tell.

Can I clarify, Claude, the 5 million SG &A savings, if those are annualized that would be 20 million. Is it fair to say those are fully in addition to the 36 million savings from the thousand head-count reduction?

Well, no. Part of that is -- is in the thousand. Because the thousand is throughout the organization and at various levels. Okay. And the one thing, just for David.

On the pricing, can you explain to us a bit on how the contract renegotiation cycle is going? It seems like we've been repricing at lower levels for the better part of two years now, would you say the vast majority of contracts are now repriced and we should start to see stabilization as well as market conditions don't get even worse, or are there still a lot of contracts that have to still be repriced at lower levels?

Well, January 1st, '03 I suppose was a bit of a watershed time. If you look at various printers, they have -- their work, for whatever reasons, come up at different times. I would say that for us, more expired or we chose to pre-empt, renewals as of that date.

So I would say that, yeah, it's definitely on the high side in terms of the number of renewals. There are other renewals, which are coming up, but not to the same magnitude.

And finally, I suppose with respect to pricing, you know, the question gets asked, you know, have we hit the trough. And, you know, there is spot-market pricing out there and there are sectors of our business which are more transactional than others that aren't all tied in with long-term contracts and they come up, they continue to get influenced by the spot-market pricing.

So I would say that the worst of it is behind us, but it was a big thing to swallow, simply because what was brought to us in January 1st was more of a step function and you can see cost reduction tends to be more of a gradual thing, so there's a lag that we're dealing with right now. But I would definitely classify the shift from '02 into '03 as a bit of a watershed for us and probably more so than most other printers out there.

Okay. Thank you.

Thank you, Mr. Valentini Our next question is from Megan Anderson of RBC Capital Markets. Please go ahead.

Thanks and good afternoon. I'm wondering if you can give us what organic revenue growth was excluding the impact of paper. You mentioned 4 X but if you could just add in the paper?

Secondly, in terms of geographic weakness outside of North America, and you did mention this is some -- I guess not so much new as it being more of an emphasis in this quarter. What have you historically seen in terms of either lag effects when markets outside of North America start to go down? Does it typically recover in sync with North America or is there a much longer lag there?

And, finally, in terms of the job losses, if you can just give us a sense of the kinds of jobs being lost. You mentioned it geographically but if you could just from a functional standpoint that would be helpful?

Okay. To answer your first question, Megan, excluding paper, sales are slightly down.

Okay. But excluding currency effects, I think it was down 2% organically?

2%, excluding paper we're down slightly, about the same area.

Okay. About 2% down?

That's right.

Okay.

On the -- your third question on jobs. As I said, it's across the system. It has been non-unionized job, it's been in various plants, so it is throughout the organization. There's no specific department that has been targeted, it's where we felt that we could do more with less and that's how we've eliminated the job. Now, regarding the lag effect, I will let my colleague Dave answer that question.

In terms of pricing, or in terms of --?

Well, the question, I think, Megan, was that if we were talking about the North American market, how would the other markets react, do they lag the North American markets?

Correct.

I think that depends on local market conditions. I mean, what the Germans do in Europe has little to do with what happens to us here in North America?

I think it's irrelevant because each market has its own different problems. A different problem for example, to the North American problem or Latin America is quite different and countries, from one country to the other country is quite different, too.

Okay. So you could see recovery in North America eventually but still a drag elsewhere?

Well, what my colleagues are saying, it depends on the region for each economy.

Just one final one if I may. Do you guys have in mind a certain GDP gauche threshold, do you think the industry would need to see in North America in order to get pricing power renewed?

I think that has all to do with supply and demand on capacity. As well as there's excess capacity, there's going to be pricing pressure. Where that might be tempered is, you know, there are some fundamental shifts in the print market, for example, quarter lengths or order runs for dramatically decreasing. Rendering, certain bits of gear obsolete.

And, frankly, that's part of our charge. I mean, it wasn't just moving around equipment and having redundant equipment in locations, we've seen in some segments of our business order quantities drop in half in less than three years and so what equipment may have been viewed to have been somewhat productive even two years ago, no longer is applicable.

So, you know, as long as there's excess equipment out there and equipment doesn't become a boat anchor somewhere, there is going to be price pressure and the best thing to be and our approach to doing this is we want to be number one in every segment that we compete in.

And if we're number one and we have -- we will attract the best customers in that segment and when the winners in each segment are increasing their volume at the expense of lesser competitors, they're going to turn to us. So what might be opportunities. well, I expect it to present to us opportunities that wouldn't be presented to other printers.

Okay. Thanks.

Thank you, Miss Anderson. Our next question is from Adam Shine of National Bank Financial, please go ahead.

Thanks a lot. Just following up with the earlier questions on pricing. David, can you maybe characterize or maybe even quantify the sort of year-over-year price declines that are being inflicted on the industry? And also just in regards to you looking out to Q3, if not, you know, generally the second half, are there any signs of demand improving across any of the segments, you know, that you can talk to? Thanks.

Well, I think in terms of demand -- I mean, we expect to be more or less sold out in the fourth quarter this year. I think in units we've held pretty well. What -- in quantifying that pricing, that's a very difficult thing to do.

I think in certain instances, uh, there's totally irrational behavior out there. I mean, you have, you know, you might find yourself in a competitive situation where somebody is choosing to take something just to keep the presses going and they appear to have little regard for contribution towards fixed costs.

In other cases, you know, it's much less pressure. You really can't categorize it along any, you know, any segment of the print business and you really can't categorize it, whether it's a spot-market situation or a longer term situation.

I will say this, though: That many customers look beyond what they see as a rational behavior where they can clearly see prices that are not in the best-term interests of their supplier. And say no to it simply because they are wise enough to understand that anyone putting such pricing forward may not be around to deliver these services in the years ahead.

Thanks David. And just, you know, in terms of building on Megan's questions and your comments, you know, we've seen restructuring charges that you guys have done going back to Q4, I guess, '01 and, you know, at that time there was a 1% capacity in reduction, these restructuring efforts produced no real capacity reduction.

There seems to be, you know, a reluctance on the part of you, Donnelly and the others to really take capacity out to maybe mitigate part of this problem. Can you just talk to that situation?

Well, you know, maybe it's not the top two or three printers that are creating the problem. Maybe it's the --

Sure.

Second tier that frankly, some of the most irrational behavior is coming from what I would call the number five or number six players and I mean very simple example of what happens is, you know, I'll have, say, 10 printable customers in a market sector and three or four of them may be going through a hard time but the top two or three or four or five are winning at the expense of the other ones and, you know, you got the good news offsetting the bad news to a greater extent than if I was the number five printer in that segment, I would probably just be feeling the brunt of servicing let's say not the market leaders because the consolidators in our target markets are looking to the consolidators within their print-supply chain to service their needs and increasingly that's going to be us.

So I would say that some of the most acute irrational pricing behavior is not coming from the top tier.

Okay. Great. Thanks a lot.

Thank you, Mr. Shine. Our next question comes from Randall Rudniski of Credit Swiss First Boston please go ahead.

Thanks a couple questions on the charges. First of all, can you tell us what proportion of the breakdowns pertain to the Gruvere plan as opposed to the offset plan?

Uh, Randall, I haven't got that information readily available. I'll have to look into it and I'll have to get back to you.

Okay. Fine. And how much of the restructuring of the total specific charges and restructuring in rate downs pertain to Europe as opposed to Latin America and North America?

Well, I think in the numbers that we gave you a good part of it relates to North America, I'm sure that's where we have 80% of our business, so that's where we mention, that's where we have naturally more equipment, so that's the good majority of the write down, it related to our North American operation.

We have mentioned in Latin America we took 4.4 million mostly related to bad debt. That's included in the 49 million dollars of specific and there's some numbers of millions of dollars related to Europe, to answer your question, it's mostly North America.

Okay. And then maybe just finally. In terms of guidance, there's I guess a continued reluctance to provide any, but can you give us any sense as to, you know, what might be your budget in terms of, you know, to help us out with our models in terms of how, you know, how you see the revenue line in your budget as, you know, and if that would speak to how you're trying to manage the business?

Well, listen. Dave talked about, you know, about the revenue side, about the market, the economics of the business. What we're doing, you know, as he said, it's tough out there. We do our best to win the business at the best price that we can. So we are working on that aspect. We're also working on the cost side of the business. Because if prices -- that have come down.

As we said earlier, in order to maintain our margins we have to make sure that our efficiencies go up and that our costs come down. So this is what we have been doing in -- concentrating upon them the last number of months and, I guess, you'll have to judge it by the results in the coming six months to a year.

Terrific. Thank you.

Thank you, Mr. Rudniski. Our next question is from Andrew Mitchell of Scotia Capital. Please go ahead.

Good afternoon. I was wondering -- I had three questions.

First, I just want to deal with the restructuring program where you are. Can you just give us a sense -- looking at the current conditions, if you feel you've taken out enough capacity to right side the business and whether sort of in the back-half of the plant closures or whether you think we're still in the opening half of this? And also on that, what kind of run rate, ramp up in your run rate or capacity utilization level change might you need to get back into the 9% to 10% EBIT margin range in your models.

That's number one, and, number two, which is partially linked to that, can you just talk us through the new troubled zones in Europe a little bit and give us a bit of a sense for the structural risks on restructuring in those areas, if you need to do it. Do you see a risk, will we get another lingering type of situation in one of those other geographies?

Okay. To answer your first question, we've, you know, as we said in our opening remarks, we've done a -- I think a fairly pretty good review of our operation the last couple of months and we've decided to take some of the charges that we announced, some of the cost reduction, also impairment of assets that were obsolete or under utilized and this is what we have done. And from what I know, I think we've been pretty thorough in that regard.

We do not anticipate at this time on -- we do not know at this time of any other large restructuring write-offs that would be coming in the next few quarters. Your second question was that -- what -- what -- how much of the capacity should go up to bring our EBIT up to 9% to 10%.

Yep.

I think that's going to depend on what--

Right.

What -- what -- well, a bunch of factors. I mean, number one, unit volume at least from a North American perspective during peak periods is not the problem this year. I think it's a question of can your break-even points drop sufficiently where you can make more money at the same level of value-added.

Secondly, we've noticed in many sectors more acute seasonality. So let's put it this way: It's not that difficult to be sold out in the fourth quarter, it becomes a little more tricky to enhance your capacity utilization in the other quarters and I think it, you know, finally it comes down to margins as dictated by pricing. So, you know, to the extent the capacity utilization is is in the industry at large it proves the point to reduce and mitigate some of this irrational pricing behavior, that'll certainly have an impact.

So I think it's a combination of a lot of different things and it would be very difficult to give you a proportionate relationship between capacity utilization and an EBIT margin -- or an operating margin.

I'll put it -- the third part of the question, countries, Europe, where we are facing some challenges now or problem, that Sweden, Finland and a part of Spain, that the size of the operation in those three countries are nothing to do with the size we have in France. So we won't be hurt in France in the past. I don't know if that answers the question.

It's not -- I recognize that. I'm really wondering more in terms of what kind of flexibility you have to deal with labor in those countries so that is it a problem that if you feel have you to do some plan restructuring there you can get behind you relatively quickly, or is it a problem that's going to take time and longer negotiations and all the rest of that stuff?

I know we did in Spain and Finland for example, I don't see any problem there if we have to remove people. It's not the case in Spain. For example, a part of Spain is doing pretty well, the second part is a volume problem which is temporary. I don't see it in the midterm.

In Sweden, we bought this plant three, four, five years ago and we did make a lot of money and now we're facing a market problem and we're going to get through. It's not the same contact than France.

Just maybe one last point, Andrew. When you're talking about EBIT margin, if you look at North America and you add back the specific charges that we've talked about, we're at an EBIT margin of about 7% as compared to 9.7 last year. The 7% to get back to 9.7, you're talking 20 some odd million dollars of EBIT in the quarter. So the situation, when you exclude the noise, is not that dramatic.

Fair enough, thank you.

Thank you, Mr. Mitchell. Our next question comes from Carl Choy of Merrill Lynch. Please go ahead.

Hi, good afternoon. A couple questions.

One, I wonder if you could give a little more color on the charge that you took related to the logistics business, it sounds like it had something to do with improper tracking or transactions, or is this just a catch up in the past few years or it was really just this year and, second, if you could give us an update on CEO search? Thanks?

Okay. On the first question, logistics, it's basically -- as I mentioned,the business grew very rapidly, so it was just a question of catching up. And it is not related only to this quarter, but it is related to the last couple of years and by putting in the new system, we've updated. We now have a pretty good handle on the matter. So to answer your question, it is not specific to this quarter, but to a number of past quarters, regarding the second question I'll let Jean answer that one.

The CEO for this question should be addressed to the chairman, Mr. Brian Mulroney. In the meantime doing the job I was appointed for, CEO in the interim with no time frame, so I'll be here as long as I need to be here.

We'll take one last question.

Thank you. Our final question will come from Andrea Horan of Westwind Partners. Please go ahead.

Thanks. Just to go into the operating leases, are those all done now? You had spoken about planning to do that, are you done, or is there more still in the back half?

No, we have still a number of operating leases that go out for the next number of years.

That you're planning on repurchasing, or are you done?

We, well some of them we will be repurchasing. Most of them I think we'll be repurchasing because some of these operating leases are for equipment that are in our printing plants.

Okay. And when you look at the specific charges, is there any element that carry forward, whether it's further doubtful accounts or anything in there that would also impact future quarters, or is it really just a one-time item?

As far as we're concerned, it is a one-time item and we do not foresee anything of that nature in the -- of that magnitude, I should say, in the coming quarters.

Okay. Thanks very much.

Thank you everyone for participating and we'll talk to you at the next quarter with, I hope better results.