Quad/Graphics Inc (QUAD) 2003 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the Quebecor World 2003 Fourth Quarter Results Conference Call.

I would now like to turn the meeting over to Mr. Claude Helie, Executive Vice-President and Chief Financial Officer of Quebecor World. You may now proceed, Mr. Helie.

Thank you. Good afternoon everyone and welcome to our conference call for the fourth quarter and the full-year 2003.

Joining me today from our offices in Montreal are as usual Jean Neveu, our Chief Executive Officer, Dave Boles, Chief operating Officer of our North American Operation, and Jeremy Roberts, our Vice President of Investor's Relations and Treasure.

Conference all will follow the usual structure. Jean will provide introductory remarks and an overview of our international operation. I will follow with a brief review of our consolidated and segment and financial results, including an overview of our restructuring and specific charges. Dave will discuss our North American operation. Jean will then conclude and open up the call for questions.

I would like to remind everyone that this call is being Web cast 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 the introductory remarks. Jean?

Good afternoon everyone. As our results show this is still a very tough market, and quite frankly, we're not seeing many signs of a quick upturn. Some people are crediting an increase in ad spending this year. I hope they're right. But so far we are not seeing much evidence of it.

So, we're dealing with the current reality, which is that in the fourth quarter U.S. consumer magazine ads pages was down 2% compared to the same period in 2002, and for the full year, they were down 1%.

Also in the U.S., industry-wide cap ex stabilization remain well below the historic average. They are not too sell many presses (inaudible) not enough work.

Despite (inaudible) to put pressure on price resulting in lower margin. This is despite our success in increasing volume in some of our business.

To improve our financial performance and combat negative impact of our lower prices, we're considering with our program of self-containment and cash reduction that we began in the second quarter of this year.

In 2003 this involved 98 million for restructuring and impairment, 79 million of fixed rate charges as well as other relating to financing and tax. (inaudible) will go through the detail in a minute, but I would first like to highlight some of our cash reduction and efforts in improvement in (inaudible).

In the fourth quarter, our reduction in force program, involved 878 employees position. In total our 2003 restructuring and incentives will result in addition of close to 2,300 employees or approximately 6% of the global workforce of this company.

Proper (ph) services are being consolidated to reduce costs. Earlier this year we close our Paris office and in the fourth quarter we took steps to close our (inaudible) office. Certain covered services are being transferred to our Montreal Ad office while others are locating to our (inaudible) north Connecticut or our New York State office. The British office will close after (ph) the first this year. As well we are moving certain sales office and other corporate service into existing customer base where it makes sense to do so.

While these (inaudible) resolved we still have work to do. We are considering to look for cash reduction emergencies (ph) in all our region. One area is procurement where we have reviewed a number of vendors and we have appointed a Vice President of Global Procurement to (inaudible).

For 2004, we have instituted broad based (inaudible) applicable to 2000 non-union employees. Last week we announced that we are suspending the company 2004 contribution to our U.S. employees 401C plans. To improve productivity, we have (inaudible) and other (inaudible) performing asset across our global platform.

Our interest expense was too high given the current cost of debt, so we have taken steps to reduce financial expenses. In the fourth quarter we took advantage of the lower interest rate to refinance a portion of our long-term debt that will result in reduce interest expenses going forward.

These action and other have veiled lower cost, but they have also create an intangible benefit, but you cannot assign a number to something that's important to our long-term success. In fact, we have already established or at the very least, (inaudible) the common (inaudible) future, which is that make sure that every corporate dollar is well spent and is a benefit to our customer and our shareholder.

Another strength of our company is the ability to continue to generate free cash flow, despite this difficult year, we accomplished that again this year, generating 183 million of free cash flow. We have also always systematically invest in our manufacturing platform. We did that again this year and will continue to do so in 2004, through the administration (ph) use of cap ex.

As a demonstration of confidence in our business and (inaudible) we are taking to improved the company profitability, the Board of Director has maintained a quality (inaudible) at 30 cents a share.

This has been a painful year in many ways. People now know that what is this company is all about, look at and top quality service.

Dave Boles will give you a more complete market review of our operation (ph) business, but first I would like to make a few comments on our international operation in Europe and Latin America.

In Europe, the (inaudible) market is suffering from over capacity and weak pricing, which is being aggravated by other single companies (inaudible) East Block countries, such as Hungary and Poland. Most of our (inaudible) are reporting stronger volumes, but a weaker prices. We're in long-term (inaudible) summer and will see new magazine work in the UK from global publisher like the (inaudible).

A (inaudible) in the UK, Australia and Belgium continue to perform very well, and they are pretty much throughout the year. In Belgium this is part due to our governance in (inaudible), while in the UK, the (inaudible) supplies balances is still relatively good.

The book business in Spain has experienced increased volume and the export business has been affected by the increase in the value of the euro.

In Finland and Sweden, there is a severed price pressure, because of (inaudible) as a result of significant drop in magazine situation. There is also increased competition from German, Dutch and Polish printers in the domestic market. Throughout Europe, we are accompanying with cost saving and incentive toward (inaudible) reduction in supply from consolidation.

In France, the result of cost cutting and improved efficiency and a more aggressive approach sale are very not (inaudible) in our transfer operation. We have (inaudible) that new (inaudible) arrangement with our sales force, which has more performance based than before, and as you know, we closed a number of unlucrative office and we (inaudible), which has also had our performance over there.

The result is that we made money in France in the last quarter compared to our reported loss last year.

(inaudible), if it's too early to say France at six, but we are now, we certainly have been in the right direction (inaudible).

(inaudible) thing and (inaudible) factor in this (inaudible), and they are throughout most of the platform. Our volume for the quarter improves over last year, but this was negative by lower prices. (inaudible) pressure in certain countries and currency devaluation have all a negative impact on prices.

We are cutting, we are still cutting costs to improve productivity and reduce our costs.

Thank you Jean. As Jean mentioned, our 2003 results are greatly affected by weak, markets and conditions that persisted to the fourth quarter. During our third quarter conference call, I mentioned that we expected an improving trend and operating margin, which did not happen in the fourth quarter.

Most, if not all, of the broad industry performance measures, showed continued weaknesses throughout the quarter, including capacity utilization, pricing, print shipment. You name it.

A couple of days ago, the U.S. Federal Reserve Board released a December data for commercial print shipment, which were still down 2.2% from last year. The biggest impact on our results has been flat once again in terms of lower prices, which we have been fighting hard to offset through cost reduction.

During the fourth quarter, consolidated revenues increased by 2% or 40 million to 1.7 billion. Adjusting for currency impact, revenues were down approximately 3%. On a full-year basis, revenues decreased by 3% if we remove the effect of currency from that position. This is despite volume of increases in most of our businesses.

Operating income, as reported was 68.6 million for the quarter and 232 million for the year. Included in the fourth quarter number is 22.7 million of specific charges, and 21.5 million of new restructuring initiatives. Excluding these items, and adjusting for currency, operating income for the quarter was 110 million or 6.7% of sales. The comparable for the year is 444 million or 6.6%. I will refer to the operating income calculated on this basis as adjusted operating income.

Of the 22.7 million in specific charges, 13.9 million was related to North America, 3.4 million to Europe and the balance for Latin America and other provisions.

Most of the charge, 18.2 million specifically, was including in selling, general and administrative expenses.

Of the 13.9 million related to North America, there is 6.3 million for lease provisions and an additional 5 million provision for dental (ph) accounts.

Now turning to our segmented results. In North America fourth quarter revenues were down 1% at 1.355, 1.355 billion and the adjusted operating margin was 6.4%. For the year, revenues were down one-half of 1% of 5.1 million and the adjusted operating margin was 7.3%.

In Europe revenues increased by 18% during the quarter and 15% for the year, due mostly to currency appreciation.

Excluding the impact of currency and acquisition, revenues were flat for the quarter and down 5% to 953 million for the year. Fourth quarter adjusted operating income in Europe was 20.3 million, reducing a margin of 7%, slightly higher than that of North America.

As Jean mentioned, France was profitable in the fourth quarter. Operating income in France was 6.8 compared to a reported loss of 1.5 million in the fourth quarter of last year. They're pleased to see the first results of our efforts in France and we are sure that we will continue with the same trend.

Now in Latin America, revenues were stable in the fourth quarter at 48 million, an adjusted operating income of one million. Excluding currency revenues, for the full year increased by 4% reflecting in part the contracts announced earlier in the year with important customers such as Avon, Reader's Digest and (inaudible).

We'll now take a few minutes to review the status of our restructuring initiative.

During the third quarter conference call, one of the questions was whether any significant restructuring charges should be expected for the remainder of the year.

No major restructuring related to plant consolidations were anticipated at that time. However, later, in the fourth quarter, as part of our annual planning cycle, and given the prolonged weaknesses in our markets, we realized that more cost reductions were needed across the board in all regions.

As Jean mentioned, this management team is very committed to reducing its cost structure. The second quarter restructuring initiatives went partway to achieve this objective, and we identified a further 22 million of opportunity in the fourth quarter.

Combined with earlier initiatives, some 1,800 positions were removed in 2003, and another 500 were able to be removed from 2004. As of today, less than 50 of these 200 - positions are remaining.

The fourth quarter initiatives represent a total of 878 positions to be eliminated, providing annual savings of 47 million. When combined with our updated analysis of the second quarter restructuring, we estimate that the 2003 initiatives will provide in total more than 90 million of annual cost savings.

These cost reductions are not apparent in our results, because they are outweighted by the drop in prices over the past few years. While we are cutting where we can, we are also facing increases in other areas, such as utilities, pension and medical. As you will see in our MD&A figure three - that was just posted on our site - we identify that these three costs alone increased by close to 35 million in 2003.

But to illustrate that we are in fact making headway, I should tell you that our 2003 SG&A expense was down 33 million, or 6% from last year, once we removed the impact of currency valuation and specific charges. These measures are difficult, no question, but necessary, and will work to everyone's advantage in the long run.

I should also point out that there is a $2 million impact on expensing stock option compensation, which we adopt this year.

Now, turning to non-operating charges. And the fourth quarter included non-operating charges relating to financial expenses and tax. Financial - our interest expenditure in the first quarter was 84 million versus last year's level of 43 million. This increase was largely explained in our October 29th press release.

Essentially, during the quarter, the company refinanced some 600 million in long-term debt. The account (ph) increase requires that we incur a charge of 30 million, reflecting the difference between the current value of the bond and the repurchase price. However, from an economic standpoint, our annual interest expense will be $12.5 million lower, going forward.

And in 2003, we reported income tax expense of 39 million, which incorporates the combined impacts of two specific tax charges, representing 46 million during the fourth quarter and 53 million for the year. These are discussed in note five for the financial statements, as well as the MD&A.

First, the company reduced the carrying value of it's taxed assets, essentially reflecting the lower expected value of future tax loss carry-forwards, and this was a direct result of the lower profitability in 2003.

And second, the company adjusted the average tax rate applicable to the deferred tax balance within different States in the U.S. The need for this change followed a routine (ph) review of the taxable income for each legal entity in the U.S. on a State-by-State basis. As a consequence, future tax liability related to deferred taxes need to be adjusted by some 4%.

The combined impact of the charges taken during the fourth quarter served to reduce earnings per share by 75 cents. This includes 12 cents related to restructuring and other charges, 10 cents related to the specific charges discussed, 18 cents related to financial expense and refinancing activities, and finally, 35 cents related to one-time tax effects.

Excluding the charges, earnings per share should have been - would have been 27 cents for the quarter, and for the full year, $1.01. Before turning the call over to Dave, I would like to conclude with a summary of our cash flow performance.

As Jean mentioned, the company generated free cash flow of 183 million for the year, consistent with our earlier expectations. While our earnings were lower, a number of charges were non-cash in nature. Operating cash flow was 461 million, and we generated an additional 170 million from our technicalization programs.

This allowed us to reduce our accrued payable by a similar amount during the year so we could take advantage of all supplier discounts being offered.

Our capital expenditures were 243 million, approximately 60 million higher than last year, due in part to the purchase of 71 million of existing equipment that was under operating expenditures. I should note that this also reflects pension fund contributions of 68 million, some 40 million above the proscribed minimum amount and some 28 million above last year's level.

I will now turn it over to Dave.

Merci, Claude, and good afternoon, everyone. I'd like to begin by giving you a brief overview of the markets in our major North American business group, and then I will take some time to discuss our ongoing efforts to improve profitability by reducing costs, improving operational efficiency and increasing sales.

First of all, as all of you are aware, price pressures are still a major factor in almost all of our segments. As Jean pointed out, consumer ads - magazine ad spending was down for the quarter, fourth quarter '03, and in 2003 year over year comparisons. And while there have been predictions of growth rates ranging anywhere from 5% to 7% in magazine ad spending for the year 2004, pages at best will be flat. Growth would be great, but that is not what we are basing our business plan on. We're taking action based on a much more conservative estimate of the market.

Now, reviewing segment by segment, I'll start out with our Magazine/Catalog group. For the year, our volume was down slightly in our magazine business as publishers reduced page counts and circulation. There are some bright spots, however, in certain sectors such as teen magazines and celebrity gossip and men's magazines. We are getting our fair share of the new titles.

Recent contract renewals include Business News Publishing, Forbes Global and titles for Nickelodeon. Our catalog business did register year over year volume increases, but the revenue was down due to lower prices. Much of the increase comes from additional volume from growing, successful customers who have long been with us.

Almost all of our core customers are signed to long-term contracts. Recent renewals in the catalog group include Crate & Barrel and Learning Tree International, which we incidentally produce in Europe.

Over to our Retail sector. For the quarter, volume is up but revenues were down due to price erosion, again. The same is true for the full year. In Q4, we had some significant customer wins and renewals including Best Buy, Home Depot and Famous Footwear, Walgreen's and Circuit City.

Retailers continue to see the value in our coast-to-coast platform, and we've also noticed a trend that retailers are turning more to retail inserts to reach their customers, but are sending far more targeted messages. This plays directly into our strength of being able to deliver a process-neutral, long-run and multi-versioning platform.

Over to our Commercial Direct sector. We are seeing some improvement in this business, especially in the direct-mail segment. Price decline, though, is still a major factor, but direct-mailers seem to be rebounding from the post 9/11 Anthrax issues. Facilities that specialize in personalized mail products showed some of the largest increases. It is hoped that the recent Do Not Call legislation will lead to increased use of the printed media for telemarketers.

Volume increases were due to newly signed and renewed agreements with customers such as Fleet Credit Card Services, AT&T Wireless, Capital One Financial, NewsCorp and Publisher's Clearinghouse.

Over to our Book and Directory sector - both of these business, and I guess this is getting redundant, are fighting price declines. We have had some success in our directory business, particularly with independent directory publishers, because we are able to provide a cost-effective multi-plan platform that suits their needs.

In 2003, we gained approximately 30 new customers in this area, including Alltel, Frontier and Metro Directories. We've also recently renewed our business with Hilton for their hotel directory.

Overall, the book industry's unit sales declined slightly as publisher inventory reduction impacted print orders. This obviously affected pricing, but we have made some targeted investments in this business that are good examples of our strategy of inward development by improving our existing assets with targeted investments by listening to our customers and the marketplace.

Over to our Canadian operations. As in the U.S., the Canadian market is very price sensitive on both the renewal of long-term contracts and on the spot market. Although the recent increases in the Canadian dollar - also, the recent increase in the Canadian dollar has impacted our Canadian facilities' margin on their U.S.-based business. However, major contract renewals in the quarter include Regal Greetings, Tribute Publishing, Wal-Mart and the Jean Coutu drugstore chain.

Now, let's switch over here to operations with what I call focus on operations. As you can see, the situation is pretty much the same across our business group. This tough economy is keeping peoples' hands in their pockets, creating overcapacity, thereby reducing the price on the work that is available in the market.

Our strategy is, of course, to reduce costs, and we are doing that. Claude has eloquently given you a rundown of those efforts. But we are also sharpening our focus on the operational side of our business by looking at how we can better manage our existing assets, improve scheduling, reducing waits, improving throughput and efficiency and make strategic investments in technology to improve performance and provide additional service.

As always, we are focused on growth. However, on a go-forward basis, it will be driven by a more organic means. At the same time, we are more aggressively selling, and by that, I mean we are incenting our salespeople in the field by restructuring some of our compensation plans to reward additional sales.

Let me give you a couple of examples. At the moment, we are looking at our magazine offset network to see how it could be retooled and run more efficiently with targeted investments. Phase one of this initiative has been approved by our board, and we are investing in new (ph) wide-web 48-page web offset press for this part of the market, and 13 closed-loop register systems. Formal announcements of this and other developments are forthcoming.

The systems constantly monitor color quality, helping us reduce rates and delivering a consistent top-quality product. By optimizing our platform, we provide better service, reduce paper weights, make ready times and improve press and bindery throughput and compress cycle times.

Another example, in our Book and Directory platform, last quarter I talked about our Dubuque, Iowa facility and our investment in NK (ph) case bindings - in line case bindings for the educational market. This is an additional investment to further enhance our capability in a core strategic market. The strategy is very simple. Identify customer needs, listen to their requirements, and address them with leading-edge technology and facilities that are strategically located and investment friendly.

We are doing something similar with our digital printing platform in our book network. We are upgrading the system to increase capacity and production flexibility, while reducing cost. This added digital capacity enhances our existing offset network, providing publishers with long-run, short-run versioning and personalization options using the same supplier and the same facility.

Our success with independent directory publishers is in large part due to our ability to convince them that we can produce their directory on a multi-plan (ph) platform with one point of contact. This allows us to print their product closer to the end user. The customer deals with just one facility and we route the files to the appropriate plant.

These are just a few examples. I hope we move ahead and I will be able to share many more with you. But I also want to stress that this focus on operations is being done in partnership with our customers. We are actively listening to what they want and what they need, because we know that doing what's right for our customers is ultimately what's right for our shareholders as well.

And with that, I am going to pass it back to Jean to make some closing remarks.

Thank you.

Jean Neveu; Thank you, Dave. In closing, I would like to say that as evidence we are taking a conservative stands while (inaudible) significant market improvement, we are seeing a few positive signs.

We are not building our business then on them, but (inaudible) around areas such as Barracks Linens (ph) of commercial segments are showing some strength and this does give us some encouragement. We are making progress on our cost-cutting efforts. We are not finished. It is an ongoing process, but we have already lowered this company out-space (ph).

This, combined with the negotiative (ph) selling of our global whole (ph) service platform is the best way to deal with the current situation and prepare for the future. Part of that future will be future acquisitions. At this point, we cannot discuss timing, but opportunities will be considered as they develop.

In the meantime, as we have said many times, our focus is on strengthening the balance sheet and improving margin of this company. We have said we would fix France, and although we are not quite ready to declare victory, we do believe we have turned a corner. Costs are more in line and our sales force has been repurposed.

One of the people who has been very important in this turnaround has been Pierre Karl Peladeau. As you know, he used to run our OPM operation in the '90s. We have been pleased to benefit from Pierre Karl's knowledge and experience during the last few months. Finally, this business is about our customers, and as Dave just finished saying, we listen to them every day.

As we move forward in 2004, we will be keeping listening and we can show our efforts are in tune with our links (ph).

I would like now to open the line to questions from the participants.

Thank you. [Operating Instructions].

Please go ahead if you have any questions.

Thank you. Your first question comes from Jeffrey Fan.

Please go ahead.

Hi, good afternoon. A couple of questions to start, on the cost side. You mentioned procurement and also eliminating the retirement contribution. How much are these going to save - how much is that going to generate in terms of savings in 2004, and is that - is any of that factored in to 90 million annualized savings.

Let me answer first. I am told that there is a slight noise on the line. It's probably due to the fact that we have a snow storm here in Montreal as we speak, so we'll try to speak a little louder and more distinctly.

The - when we talked about the $90 million cost savings, it's mostly related to the 2,200 people that we ended up taking out of the system. The - when we talked about the four (ph), the - we saw contribution for the 401K in the States. We're talking of a cost reduction that has impacted us for this year of $9 million. This is the contribution for 2004. And we'll decide at the end of the year what we do, depending on the situation at the company.

But the $9 million is not included in the $90 million in cost savings that we alluded to.

And on the procurement side?

On the procurement side, there's a number of savings that are already factored into our 2003 results. Additional savings will be factored into our 2004 results, but as I said, the 90 million is mostly related to people.

OK, and how much do you expect medical and pension cost to increase in '04?

Medical and pension, it will be a double-digit number. We went from 10% to 15%. We are looking at all the avenues that we can to see if we can reduce our cost in that regard.

OK, and just one last question, regarding your free cash flow. If we look at your free cash flow generation in 2003, you can probably attribute a lot of that to the increase in the securitization program that you had. Looking forward, what do you think is the normalized free cash flow generation capabilities of Quebecor World?

Thanks.

We did 183 this year. Last year, we did 300. As the normalized, it would be probably somewhere between these two numbers. We realize that our free cash flow this year with reduced payables as compared to last year by about $100 million. So we did not accumulate payables at the end of the year to generate - to show a higher free cash flow number. And that has also enabled us to take advantage of cash discounts, which did flow through within our numbers.

OK, thanks a lot.

Thank you. The next question comes from Douglas Arthur (ph). Please go ahead.

Hey, good afternoon, it's actually Craig Hubert (ph). A few questions - one, on cap ex, if I recall correctly, one or two conference calls you talked about a $250 million number for 2004, given that the environment obviously has gotten worse here in recent months, or at least hasn't stabilized. Can you update us on that number please?

And then also, a question directly for Dave Boles. Can you let us know, is any executives that report directly to you in recent months, have they left the company that - I'd like you to clarify that please, thanks.

To answer the first part of the question, we did $240 million of cap ex in 2003. I don't recall saying specifically that we would do 250 and 204. We might have given a range, but I think the 240, 250 is the number that holds ground at this particular time for 2004.

Thanks. And as a follow up to that, your main competitor, RR Donnelley - if with the new management coming in, in the next month or so, if they end up really substantially reducing their cap ex spending in 2004, will you feel that you can do likewise and not lose any traction there?

We try to run our business as we think we should run it and not do it according to what the other guy's doing. If we feel that we need to do additional investments to improve our network, we will do so, as long as we maintain our balance sheet, but we will not increase or decrease our cap ex because the other guy's doing it.

I will echo that. We will do what's right for our company. With respect to our - yes, a couple of direct reports elected to leave the company in the last couple of weeks. They were valued employees - in one case, a long-termer, and we wish them very well.

Can you just tell us what areas they were in charge of, if you would?

It was our Magazine and Catalog group.

The heads of each of those two?

Yes, and I am not prepared to make any announcements organizationally, but I can tell you that we have the situation well under hand, despite the outstanding contributions these two individuals made over the years. And we will be addressing the issue internally with our bench (ph) strength.

And I might add that these types of organizational changes are not strange in our own business. I think if you look at some of our direct competitors, you can see a multitude of changes at the senior-most levels. But the important thing is, the people that are driving the strategy and the people that are touching our customer's products, they're here. And will be here.

And then lastly, if I could, do you think these cost savings you've talked about for 2004, given the price erosion out there in the marketplace, that you'd be able hold more - that the offset - you'd be able to hold margins flat in 2004 in the U.S. in particular?

Our goals are to grow our margins.

That's right. And that's why we've been reducing our costs, and into - I mean, the work is not finished. In 2004, we will continue to reduce our costs where we can in order to bring back our margins where they were a couple of years ago.

OK, thank you.

Thank you. Your next question comes from Megan Anderson. Please go ahead.

Hi, good afternoon. First question, can you tell us if there is any impact on your revenues from paper?

On revenue from paper - I am not sure I understand your question, Megan.

Was their an impact on paper prices or perhaps supply, you supplying more for your customers at this point?

Well, you know - may I answer this? It depends on the market sectors. Certain sectors throughout (inaudible), if you look at company to company comparisons, sometimes it's an apples and oranges type of thing. For example, where we have a significant position here in Canada, by and large we supply paper for our customers up here, and then in certain sectors of the United States, we exclusively supply paper, and then there's others where it's kind of rare.

There has been a focus, though, of our companies to supply more paper for a multitude of very good reasons. Number one, our size and the fact that we're global on both sides of the Atlantic and our company understands and can take advantage of value chain opportunities that the market demands these days.

Right. And I guess, on that vein, and you've talked about it in the past - it's just if you were supplying more paper, then it being a past element (ph), it actually might make your margins look lower than they really are. So I was just trying to adjust for that.

The major customers supply their paper.

OK. So, in other words, you don't think there's any paper effect this quarter.

It's not a big factor.

OK.

No, it wouldn't be a big factor in that regard.

OK. OK. Great. Second question. In terms of all the cutting you've done the labor side, would you be able to quantify any impact on your productive capacity as a result?

Our productive capacity grows each year and will continue to grow. Impressions are going to increase this year. And I might add that volume and impressions have never really been an issue for us. Our impressions year over year went up in every sector, with the exception of one, which was flat. And I might add, that was done with shorter runway. And we've done that with fewer and fewer employees each year and we're going to keep doing that because organic operational improvement on existing assets is just as important as investment in new assets.

OK. And final question. Claude, I'm sorry that you were cutting in and out, but when someone asked about the medical and pension expense increase, I think what I heard was the percentage amount. Could you give us an absolut dollar amount for that increase in '04?

Oh, I said it would be between 10 or - 10-15%. I added that we were looking at (ph), as far as ways to try to hold those increases, I did not give a specific dollar amount and I'm not in a position - I haven't got that specific dollar amount at this particular time. I'd have to get back to you offline.

OK. Thank you.

Thank you. The next question comes in from Adam Shine. Please go ahead.

Thanks a lot. I'd like to just go back to one of the previous questions before Megan regarding, you know, holding onto some of the savings. It's been two years now where we've seen a number of cost-saving initiatives pursued and they appear to be largely washed away by the price erosion. At this point, given the experience over the past years, is there - is there some way to arguably quantify the sort of net impact? You know, 90 million of savings netted out against the price erosion. There seems to be a degree of visibility in terms of where the price the price erosion has come from and, you know, I don't think there's an expectation that's - erode further per se. I might be wrong. Maybe you can just comment on that.

And then, similarily ...

... your last comment, so I hope you're right. That there will be no further erosion ...

Well, I mean, the erosion continues. It's a function of the industry. I'm just talking about more, you know, further declines or more acute erosion than what we've just seen over the past year.

I - let me take a stab at that. A year ago, even though there may have been some other people involved, our expectations were last year, because '03, as we've discussed many times in previous conference calls, that was somewhat of a watershed year in terms of renewals. And it was our expectation last year that it was going to be a big challenge for us to offset price erosion with cost. Our expectations for this year are very much in the corner that with, with what we have identified. And we have identified that that majority of the price erosion, that will impact us in '04. We feel confident that we're going to be able to turn the tide and start going in a positive direction again. That feeling did not exist a year ago.

OK. Fair enough. In terms of, I guess, some of the previous printers that have reported - I guess, you know, Donnelley comes to mind, certainly, yesterday. Are you seeing any change in the dynamic that has - you know, currently, Donnelley seems to have gained some significant momentum and the results certainly speak for themselves in terms of not being quite as weak as what materialized today with you guys. Can you just talk about - a little bit about the competitive landscape or specific individuals or companies, Donnelley, in particular?

I think it remains status quo. It's all a question of timing. The timing of their renewals and other competitors, our own, vary company by company. As I said, I don't see anything that suggest, you know, so much growth in printed products that is going to deal with the supply and demand issue. Now, I might add, though, that there were a number of plant closures that were identified with our competitors, some of which are not public, in the latter half of last year. And that just might translate into somewhat of a correction. But it's too early to tell.

And just, you know, you mentioned the few contract wins. We don't hear about the losses. You know, has there been any degree of losses during the second half?

Well, I think we would consider a loss would be when we don't win a new title launch, for example. Our expectations are we want to have a secure and credible enough position with our existing customers to take advantage of organic growth. And, you know, my expectations tend to be somewhat higher than they might be somewhere else, so I treat lost opportunity as a loss, but no, I, you know, there were a couple of incidents with losses in the last year, but I think they are far and away, you know, overshadowed by the wins that we've had.

As I've said, I don't think too many people in our business can talk about real unit growth as we did. That was not the issue for us. Last year - and I don't expect it to be a big issue again this year. Now, there are certain sectors, of course, that are very soft, but that's just an overall market trend.

OK. Great. Thank you.

Thank you. Your next question comes in from Vince Valentini. Please go ahead.

Thank you. I want to keep pushing on the contract renewal issue. Can you tell us (inaudible), what percentage of your business is coming up for contract renewal in '04? And if you can't give us a number, can you related it, maybe, to the '03 number? Like say, it's 20% less or something of that magnitude?

It's a lot less. More than 20% less.

And the pricing on those new contracts. Given that you, at this point, still don't see any material improvement in the markets, would it be your expectation that you'd have to take price concessions on those contracts, similar to what you took last year?

It's all factored into our '04 thinking. And my comment on where I thought we were going to go in '04 has taken all that into consideration.

So you would be expecting similar price concessions there? Is that right?

It's going to have some price concessions, but I comment on what I think we can do with our overall margins. I have factored in with a very realistic assessment of what I think those renewals will take place at.

OK. Let me try something else. Interest expenses, maybe more for Claude. If we take the Q4 number, obviously adjusted for the 30 million charge, and multiply that by four and then take off the 12 million of savings, is there anything to suggest that that shouldn't be sort of the run rate of where interest should be in 2004?

It should be a, you know, a fair approximation. Then there's always the foreign exchange fluctuation, which is a bit of wild card. But I think that would be fairly close.

OK. Good. And on the share buyback issue. Can you tell us, I mean, if you're continuing to generate free cash flow, would it be your expectation to have another share buyback program this year? Can you give us any of your thoughts there?

Well, we said that we would be using free cash flow to reduce leverage to cap ex, but we did an essential share buyback in 2003 and it's not our intention to do an additional one in 2004.

OK. Thank you. And last one, the CEO situation. Maybe this is more for the board, but we don't get to talk them on the conference call, so I'll ask you guys - is the interim CEO position something that should be changed to permanent over the next few months?

(inaudible) going to be nominated and (inaudible) the board is working on that. That's (inaudible). That is the situation now.

So you can't give us any update on the timing and - from your perspective?

No, no.

Thank you. Your next question comes in from Andrew Mitchell. Please go ahead.

Hi. Good afternoon. I just wanted to touch on just the overall strategy. Since you guys have taken over, you've spoken a number of times about restructuring the manufacturing platform - maximizing, excuse me ...

Could you speak louder, please?

Sorry, we're losing you, Andrew.

OK. Sorry. Can you hear me, now.

Oh, yes. Much better.

Can you just talk about your overall strategy? I think you've really emphasized three points - restructuring manufacturing platform, maximizing economies of scale and leveraging your purchasing power, since you guys took over. And I'm just wondering if you can give us a sense of how far you are through those efforts as you look out over the next 18 months and how much more upside do you think there may be to the annualized 90 million of restructuring savings that you talked about today?

I'll take a stab at it. I think, Andrew, certain sectors are, you know, are much more, I guess further along in terms of their strategic development than others. You know, some of our sectors are very well positioned in the market to take advantage of opportunities in a very competitively unique manner. I think other sectors that may be somewhat more behind, to me, as I've said on previous calls, the glass is half full. Because inherent with these opportunities are opportunities for us to improve efficiency in throughput, more so than perhaps other companies.

So I see those as opportunities for us to deliver above average return on investments. So I'm, even where I see we may lag behind in a couple of areas, I see these as wonderful opportunities for us and our customers.

OK. Just one quick follow-up and then a last question. So, the quick follow-up would be can you take a stab, then, at how far we are through seeing the savings. I mean, is there another potential 50% upside, say, over the next 12 months, as you guys continue to restructure to your 90 million number you've announced today? Or is it - are we slimming down here and the cupboards are getting more bare. I mean, you're saying you've got a lot you think you still can do. I'm just wondering how material that may be.

And then, the final question would just be, back to the bench strength, there are some questions on the CEO, talking about some recent losses as well. Just wondering whether you can talk about the opportunity as you look towards the Donnolley Moore Wallace (ph) transaction and the fact that body (ph) is just going to shake out there. Whether you guys can rebuild your bench strength on the back of that.

OK. Let me answer the first question. You're talking $90 million. That's a substantial number. We said before we will continue to work at - our reducing our costs. At this particular time, we're not in a position to give any numbers. Essentially, will not be to the same extent because we did a big - we did a big - we had a big effort, a big result this year. We will continue to work at it. But at this particular time, we can't give you anymore specific numbers than that.

Regarding the ...

It's that ongoing process.

That's right. Never ending task.

Well, let me address the bench strength question. But just one little comment I will make and that is the cupboard is not bare. And I'll leave it at that. But over on the organizational side, you know, I think, you know, some of the things that those that have departed that did a nice job with us building a lot of depth. There's been strength underneath that.

And if anything, they made it easier for the company to deal with their departures and that was through their own efforts. And I feel very, very confident that we have the talent that is going to keep our evolving strategies going in a more progressive manner than ever possible. We have good people and lots of them.

Thanks.

Thank you. Your last question comes in from Randal Rudniski. Please go ahead.

Well, thank you. I think, a couple questions. You've probably seen the January numbers so far and it sounds like the - we haven't seen much of an improvement in the overall environment. But with the cost cutting that you've implemented so far, have you started to see an improvement in operating margins in January?

You're looking for guidance and now, Randal, we'll be announcing our first quarter results in early May. And we'll comment at that time.

(inaudible) first.

OK. The - you also referred to, I think, Dave, to the planning assumptions for 2004. Can you touch on what you're planning for the revenues. I realize this isn't guidance, but just how you're managing the business towards. . .

As I said, I think, in terms of, you know, we're not looking at a market-led recovery. We are very satisfied that our platform is loaded in the way that we would like it loaded. And inherent with that, our real tangible productivity improvements, which we have sold into in the back half of the year. So, again, units - again, there are certain parts of the business that I wish were a little more robust, like the educational book market or the sheet-fed commercial market. Yes, they continue to be soft and weak, but, you know, and I have certain customers that I wish, you know, for whatever reasons, you know, ad pages may be a little bit down. But there's nothing tangible that would lead me to think that we were off base with our functions, going into '04.

OK. Thank you. And just lastly, Claude, can you tell us what you would expect the tax rate to be for 2004?

The take rate will be, I think, the general ballpark - 25% would be a rate that would make sense, given plus or minus a couple percent one way or the other.

Terrific. Thank you very much.

Thank you very much.

Thank you, everyone, for participating in our conference call and we'll talk to you in the next one in early May. Thank you.

Thank you very much. This concludes today's conference call. Please disconnect your lines and have a wonderful day.