Quad/Graphics Inc (QUAD) 2004 Q1 法說會逐字稿

Please be advised that this conference call is being recorded. Good afternoon, ladies and gentlemen. Welcome to the Quebecor World 2004 first quarter results conference call. I would like now to turn the meeting over to Claude Helie, Executive Vice President and Chief Financial Officer of Quebecor World Inc. You may now proceed, Mr. Helie.

Thank you. Good afternoon, everyone, and welcome to the Quebecor World conference call for the first quarter of 2004. This call is being webcast and forward-looking statements are subject to Safe Harbor provisions. Joining me today from our offices in Montreal are Pierre Karl Peladeau, Chief Executive Officer; Dave Boles, Chief Operating Officer North America; Jeremy Roberts and Philip Gautier (ph) who will be working with Jeremy in investors relations.

As most of you are aware, Quebecor World held its annual general meeting of shareholders today. I would like to thank those of you who attended and look forward to seeing the rest of you in person later this year.

Our financial results for the first quarter were also released this morning and the reaction has been positive. Our shares were up more than 10 percent at the close a few minutes ago, and our bonds are also trading tighter throughout the day.

I would like now to let Pierre Karl provide some introductory remarks.

Thank you, Claude, and good afternoon, everyone. I am pleased to welcome you to my first conference call as President and Chief Executive Officer of Quebecor World. Also, welcome to those of you who may have attended our annual meeting earlier today. For those of you who didn't, the speech and the presentations are available on our Website.

As you can see from our result, the cost cutting measures that we began last year are adding a positive effect on our overall results. Even though revenues were essentially flat at 1.55 billion, operating income increased to 94 million from 74 million in the first quarter of 2003. Earnings per share increased to 20 cents per share compared to 12 cents during the same period last year. This has been accomplished despite continuing negative price pressure and a challenging economic environment.

But it's clearly an improvement over last year. We are on the right track, even if we're not satisfied. We can and we will do better for all our shareholders. Claude will give you a more -- sorry -- complete breakdown of the results in a few moments.

First, I would like to highlight what I see as some of our recent accomplishments and discuss where I see us going from here. While I only assumed the position of CEO in March, as most of you know I have been fairly active during the past year in helping Quebecor World get its cost structure back in line and re-establishing a culture of cost control that had unfortunately been allowed to slide during the last few years. At the same time, we were aggressively renewing existing customers and securing new volume.

We have made progress on the cost side, as you can see in our first quarter numbers. The cultural shift is taking hold. There will always be more work to do and we can never afford to take our eyes off the ball again. I can assure you that we won't as long as I am here.

During the last year we have also taken a hard look at our global platform and our asset base. Claude, Dave, myself and others in our management team have spent many hours during our (indiscernible) asking questions and comparing performance between North America, Europe and Latin America. We have decommissioned idle and obsolete equipment, lowered certain costs and improved efficiencies. But cost reduction is only the first step and can only take us for so far. Now we have to go to the next level.

It is time we stopped resting on our laurels and addressed the future needs of our business and our customers. As I said earlier today at the annual meeting, some of our platforms such as retail are top-notch. We have invested in this platform during the last several years, and that is a major reason why it was able to post respectable numbers during the last year or so, when prices were being slashed across the board. Unfortunately, we can't say the same thing about our offset for magazine and catalog platform.

We are able to provide top-quality and good service to our customers, but because we hadn't invested it as we should have it is not as efficient as it could be. This is why we recently presented a three-year strategic plan to our Board of Directors. The strategy was put together during the last several months and included the input and active participation of all our business groups.

It includes a global investment strategy and a discussion of the possible consolidation of certain facilities and businesses. The business model is similar to the one we have employed in the past; that is, concentrate on our core business, keep costs low, invest in new technology to further improve productivity, and to attract and secure customers. Finally, continue to look for growth through acquisition by further consolidating a fragmented industry.

Internally, the discussions are well underway, and as we make decisions and implement different elements of the plan going forward we will keep you and our customers in the marketplace advised. Although we see a few hopeful signs this is a still challenging market. However, our old management team is prepared to meet the challenge. As I said earlier, our cost cutting and cost containment efforts have put us on the right track. Now with a clearer plan taking shape, we are better prepared and more focused to improve our performance.

Claude will now review our financial results.

Our first quarter results show that we are benefiting from the cost reduction efforts we began in the second quarter of last year. This is despite continuing weakness in print markets. The most recent industry performance measures for the first quarter are still negative. U.S. consumer magazine advertising pages were down 2.3 percent compared to the same period last year. U.S. commercial print shipments were down 2.9 percent and capacity utilization is still well below the historical average.

During the first quarter, consolidated revenues increased 13 million to 1.55 billion. Adjusting for currency, revenues decreased by 4 percent and organic growth was approximately 2 percent negative. The largest impact on our results remain lower prices, which are partially offset by increased volume in certain sectors.

In our magazine platform, revenues were down 6 percent despite higher volume. Book and directory revenues were down 9 percent and the commercial direct business group was down 13 percent, mostly explained by the commercial segment's difficult pricing environment. The first quarter results include a net restructuring charge of 4.3 million, or three cents a share. This includes the elimination of an additional (technical difficulty). We expect these initiatives to provide $20 million of annualized cost saving, of which approximately 75 percent should be realized this year.

Consolidated operating income before restructuring was 98 million for the quarter compared to 74 million last year, a 32 percent improvement. The operating margin was at 6.3 percent compared to 4.8 in the first quarter of 2003. Net income increased to 36 million, while earnings per share were 20 cents per share compared to 12 cents per share last year. Excluding restructuring, earnings per share were 23 cents. SG&A expenses was 119 million compared to 136 million last year. In fact, SG&A decreased by 23 million, or 17 percent, compared to the same quarter last year if we exclude the impact of currency.

Financial expenses were reduced by 4 million compared to last year, reflecting the 600 million refinancing that we did in December of 2003. There were also a 2 million charge related to the redemption of our 7.75 percent senior notes. Excluding the latter, financial expenses would have been down 6 million.

Now, if we look at our segmented results -- in North America, first quarter revenues were down 38 million, or 3 percent, to 1.19 billion. Excluding the effect of currency revenues -- sorry; excluding the effect of currency, revenues decreased by 5 percent. Operating income before restructuring was 87 million compared to 81 million, and the operating margin was 7.3 percent compared to 6.6 last year.

In Europe, revenues amounted to 315 million for the quarter, which represents a 3 percent increase excluding currency impact. Before restructuring, operating income in Europe was 11.9 million compared to a loss of $2 million last year. The improvement came from France and from the rest of our European operations, where the focus on productivity improvement, cost containment and revitalized sales incentives delivered positive results.

In Latin America, revenues were up 2 million to (technical difficulty) million. Operating income was basically breakeven for the quarter, compared to a loss of 1.9 million in the first quarter of 2003. The general economic environment in Latin America is improving compared to last year. We also saw improvements in Chile and Argentina, while continued low volumes in Brazil put negative pressure on margin.

Turning to cash flow, it improved by 160 million compared to last year, due in part to better management of working capital. A lower CapEx spending rate year-to-date versus last year also contributes to explaining the improved free cash flow, as the Company wanted to complete its strategic review exercise before committing to new major capital investments. Moreover, there was a material lease buyback in the first quarter of 2003 which did not reoccur in this quarter this year.

The debt to capitalization ratio increased slightly to 46/54 at the end of the quarter, reflecting mostly the share repurchase that was undertaken last year. However, year-over-year our debt net of cash is essentially flat. A dividend of 13 cents per share was declared and (technical difficulty) previous quarters.

Now I will turn it over to David, who will review our North American operations.

(indiscernible) Claude. Good afternoon, everyone. I will give you a rundown of the markets in our major North American business groups, then briefly discuss some of our strategies going forward.

As has already been mentioned, price pressures are a major factor across almost all of our business groups. We have been able to offset this somewhat with increased volume to new and existing customers. We're also offsetting the price reductions by cutting costs and improving efficiencies. I'll have more to say about that in a few moments.

I'll start with the magazine group. Even though publishers continue to launch new magazines at a reasonably steady rate, fewer ad pages, distribution issues and low single copy sales are proving a challenge in this market. Consumer ad pages were down for the 10th consecutive month in March, and as Claude mentioned, 2.3 percent for the quarter.

We are seeing some positive trends, especially in the two largest categories -- two of the larger categories, both automotive and personal health, which remain strong. Two other publication categories that have lagged in recent months showed some improvement this quarter -- both the financial and hotel travel resort sectors.

I'm very pleased to announce that Chuck Miotke has assumed the role of President of our magazine group. Chuck has more than 25 years of experience in the printing industry and has experience in sales and operations with magazines, catalogs and our book groups. And he has some superb and excellent ideas on how we can grow this business, and is already providing excellent leadership.

Turning over to the catalog sector. Our market share remains strong and we had some significant wins or renewals in the quarter, including Pottery Barn Teen, United Stationers and JCPenney catalog. Prices in the quarter were relatively stable in this segment, although we suffered a 2 percent drop in volume compared to last year. Going forward, the challenge in our catalog platform is to improve efficiencies. We still have some isolated performance issues with certain facilities, but they are being rigorously addressed as I speak.

Over to the retail side. Revenues in the retail group were up due to a 7 percent increase in volume. Our combined national (technical difficulty) and offset strategy is paying dividends. Certain customers who traditionally printed on offset are now utilizing both platforms. Customer renewals in this quarter include Walgreen's, Good Guys, and Office Depot. Despite price pressures, cost control, improved press efficiency, and higher volume have produced strong results. Large increases at both CVS and the Jean Coutu pharmacy chains are also being reported.

Turning over to book and directory. The book business continues to battle lower prices and overcapacity. There were a couple of -- there was a couple of strong segments in both adult trade and religious trade, but the education market is still soft. We made an important investment decision in this quarter with our digital book platform, and we are consolidating our digital book business into two facilities. These enhancements give us the flexibility to run any size and product life so that publishers can increase sales without increasing inventories. Our directory business is also faced with lower prices, but our success in attracting independent directory publishers replaced volume from a major contract that ended last year.

Our commercial direct group. This group saw a 13 percent drop in revenue in the first quarter. This was due to lower pricing and reduced volume. Two large customers in this group significantly scaled back their volume compared to the same period last year. However, the emphasis to develop new business with financial institutions is starting to pay off, with the placement of orders from Banc One for direct-mail components within the last two weeks and commitments from at least two other leading banks.

Turning to our Canadian operations. The major issue facing our Canadian operations in the first quarter was a 12 percent increase in the strength of the Canadian dollar compared to the same period last year. As is the case in the United States, competition is fierce due to continued overcapacity. We have also experienced reduced page counts from some of our major retail customers as they lower their own cost by cutting back on advertising. However, I am pleased to report significant contract wins and renewals with customers including American Express, Future Shop, RadioShack, Loblaws (ph), Provigo (ph) and Toyota Lexus.

Moving out of our -- out of operations, I will make a few comments about our strategic plan that Pierre Karl discussed earlier. We put a lot of work into this in the last few months, and as I've said on previous conference calls, our focus right now has been on operations and looking for ways to reduce costs, but also how to provide better service to the customers and anticipating their needs, whether that is developing new products or investing in new equipment.

We have looked at the market and our core businesses, assessed our strengths and weaknesses, and determined where we can make the most prudent strategic investments. We have merged management of some groups together because it is more efficient and makes sense from an operational point of view; catalog and retail, book and directory are two such examples.

Operationally, we are becoming more and more specialized and market focused, because it is simply a more efficient way to do business. When you go into one of our plants, you know immediately what business they're in and what they are producing. And we segment this, whether it be long or short-run retail inserts, monthly or weekly magazines, consumer or industrial catalogs; the more specialized we become the more we can save by reducing wasted inventory and optimizing assets.

The changes we are making now and we plan to make will take time. There is never a simple solution or a silver bullet in this business, but I'm very encouraged by our management team and the discussions we have had to date, because I think we have the focus and we are developing a clear vision that will hold us in good stead for several years to come.

With that, I will turn it back over to Pierre Karl.

Thank you very much, Dave. Before we open the line for questions, I would like to make a few comments about our international operations, in Europe in particular. As you know, we have been involved in ongoing restructuring in Europe for the last several quarters in an effort to improve our performance.

In Europe our operating income was positive for 12 million in the quarter, compared to a loss of approximately 2 million a year ago. This is partially due to the improvement of our French operation, where we have reduced our workforce, introduced new, more efficient technologies, including more automating (indiscernible) lines and installed an additional (indiscernible) press.

One of our competitive advantages in France is our network of (indiscernible) facilities. We are now operating these facilities as an integrated platform, entering that work as move around to maximize loads. The strategy, combined with a more highly motivated sales force, is producing stronger results. This is similar to the strategy that Dave is employing in his North American platform. In our other European operations, almost all our facilities with the exception of Austria showed improvement this quarter compared to last year.

So to sum up, we have made significant strides in reducing our cost base and re-establishing the Quebecor culture across our global platform. We are continuing with this effort but also taking a much more focused and long-range approach by developing a comprehensive strategic plan. This plan as a rollout will bring new efficiencies, improved performance and enhanced quality that will benefit our customers, employees and shareholders.

Before turning to questions, for the journalists on the call, I want to clear up what might have been a bit of a confusing answer to a question at a news conference after our annual meeting. In answering a question as to how long I would be CEO of Quebecor World, I said I was acting CEO and it would be up to the Board how long it will remain in the job. I mean to say acting as CEO; I didn't mean to give the impression this was in any way a temporary position.

So we can move on to the question period.

(OPERATOR INSTRUCTIONS). Megan Anderson, RBC Capital Markets.

First question, just on the CapEx plans, and you mentioned presenting a strategic plan. Can you give us a bit more flavor there in terms of what you expect spending-wise in '04 '05, and what you hope to achieve with any increases? Second -- if you can give us some information about the trends in your pension expense for the quarter and for the year? Finally, I noticed that it looks like you had about an 8 million benefit, in cost savings anyway, from higher paper prices that you sold your (indiscernible) at. And I'm just wondering, is that a normal type of number, or can you give us any idea what we should forecast for the year?

Dave and I will answer the first part of the question, and maybe Claude (indiscernible). Our CapEx runs this way. We need to introduce, as I mentioned to you earlier, our catalog and magazine platform on the offset side. A larger machine, 48 page and 64 pages, that will have also a faster speed. So we're on track to replace, I would say if we were to use a rule of thumb, 3 for 1. I mean, decommissioning three machines and will be replaced by one. Or you know, even a ratio that could be even more positive.

So what does that mean? I would say that we're talking about between 8 and 12 machines throughout the U.S., so probably between 200 and 300 million. Obviously, that's not going to take place in one quarter; we're working on it. Dave was mentioning that -- we went to our strategic meeting. We had a good idea of where we want to invest, where we need to invest, and we'll look over to do the appropriate announcement in due time.

In the meantime also, I think that we need to focus on something else which is very important going forward. You know, it's the transition -- when you're talking about catalog and magazine, obviously, you're talking about having two sets of large operations in the facility; the press room, obviously, but also the bindery. What we would like to focus on in the very near future is to try to be more efficient on the way that we are transferring signatures out of the press room to the bindery; try to automate as much as possible to reduce the labor component, which is required at this stage to go from one part of the facility to the other. So we look forward also to look at this in much detail, try to automate log factors, log feeders, and every element that will provide us with a lower labor component in our different plants.

I us might want to add the timing of this, I think, is appropriate. We have been spending an awful lot of time, all of our senior management, on our operating facilities. And one of the things that we have attempted to, and still is a much greater focus on operations and improving efficiencies with assets that we already have. And we feel that we are getting to the point where I suppose it's another way of saying putting your house in order. We wanted to ensure that before we start committing -- making major financial commitments to more capital that we are running what we already own with the necessary discipline.

So you think you've finished that process and now you're ready to go forward with that spend, or you're still working through that?

I think that we're quite far in the process, and you know, we should look at an announcement in the near future. Maybe or maybe not; we'll see if we consider it being necessary or not. But something which is -- there is no compromise on is our necessity to go forward with this investment plan. (indiscernible).

You had a question on pension, which pension costs are trending up, and we would expect that cost this year would probably be anywhere from 5 to 10 percent higher than in 2003, all things being equal.

Did you make an additional payment or something this quarter?

No. We usually make payment in the third and fourth quarter. As you know, we have made $78 million contribution to our pension fund in 2003. Now, regarding your second question where we had $8 million in cost saving? As it says in our MD&A, this is mostly related to a gain on sale of waste and also a gain on procurement of paper, ink and other material. If this -- going forward, will that be maintained? We will see how that goes, but we are making every effort to try to maximize our procurement and increase our savings in that regard.

So was it more toward the procurement or more toward the savings on waste?

It is a combination.

What was the -- you answered also the third part of the question (multiple speakers). Just maybe before going on the next question I would like to just add an additional point, is that pension -- and all I would say health and benefits cost-related expenses are also under deep review. And we look forward not just to be carried by the wave, but to be proactive and find out what we can do to reduce this component, which as you know had been a significant issue in North America, more specifically in the U.S. So we have a team that works on this on a very serious basis that will provide the appropriate recommendation to go forward and see our expenses down in the near future.

Adam Shine, National Bank Financial.

A question I guess for David Boles. Just in regards to how the early Q2 trend is going. Can you just add some color in terms of comparing and contrasting it to the early Q1 results? And also, I guess acknowledging that the savings are finally bearing fruit and actually driving earnings; Claude, you being there just over a year; I acknowledge Pierre Karl that you have just been there I guess a few weeks. But is the business improving to the point that you might get comfortable finally giving guidance? Or more specifically, you know, do you have a better handle as to the sort of outlook and prospects for this year? Thanks.

Adam, you know what? Before you've been talking about guidance and asking Dave to give you sort of a flavor about the early part of Q2, (indiscernible) you know, I'll join the club very quickly. Because obviously we do not intend to give any guidances. As you know, we have been abandoning this at Quebecor many -- about now, probably two years ago. And we intend to do the same at Quebecor World from now on. So you have our quality results, you know that we have been working very hard and it shows in the numbers. So you will be obliged to work with the data that we're providing, but not any guidance of any nature. Sorry about this.

So even David Boles can't give any additional color like you said in the past, regarding just maybe how the trend has continued post Q1?

I think it's the usual seasonality trends; as the year progresses, one gets increasingly busier; and I see that continuing. And I think the important story thus far this year is the fact that we have been talking for quite some time about cost reduction, but I think we've made some significant strides and we have finally broken through. And I have every reason to believe that these efforts will continue to bear fruit for us.

And we're seeing the results in the first quarter, because if you remember, we started our cost reduction program early in the second quarter of last year. And as we mentioned, we took out 2200 people last year for an annual savings -- annualized of $90 million. So we are starting to see the results in the first quarter of this year. And as we continue to reduce our costs we will see further results in that regard. Been working on cost reduction, efficiency and productivity, and its bearing fruit.

And maybe just one last question for you, Claude. Just in regards to that 5.1 million legal claim settlement; can you just clarify what the sort of tax implication, if any, there was there, and in which markets that would have occurred? Thanks.

This is $5 million claim is a favorable settlement with a U.S. supplier which we settled in the first quarter, had been going on for a number of years. And the tax element is about 40 percent of that.

Jeff Fan, UBS.

I wanted to ask a question about the CapEx, just a follow-up to the previous question. The 200 to 300 million plan that you have; is that in addition to sort of maintenance CapEx that you normally keep -- spend every year?

Yes? It's in addition.

And the 200 to 300 million -- can you be a little bit more specific about the timing? I know it's now been one quarter, but is that all in 2004?

In 2004 we had -- there's a number of 250 that was mentioned; I don't know if we call it guidance. I think that that 250 still holds, because as we do capital program it's going to take a little while to kick in and to be dispersed. So that 250 number is still a good number.

So the 250 is kind of an all-in CapEx number for 2004?

That's right.

Quickly, the tax rate that we should be using for the rest of the year?

The tax rate was high in the first quarter of this year. Let me explain why. First of all we had higher profits in the U.S., where the tax rate is higher, is a little over 40 percent. And also, at the end of last year when we did our refinancing we also had to rearrange some financial instruments that were not as tax effective as they used to be. So that going forward, I think that the tax rate that would make sense would be anywhere in the high, in the mid to high 20s.

Tim Casey, BMO Nesbitt Burns.

Thanks. I just wanted to come back to the strategic plan and the machines you're going to put in place. You said the 2 to 300 million is incremental, but we should assume the 250 still holds for '04. So that suggests you're not going to initiate this plan until '05, I guess. I wanted to sort of -- so should we assume that the number for '05 then is going to be north of 400 million? And the second part of that question -- can you give us some color or guidance with respect to what kind of payback you think you can make on that type of investment, given that it's fairly significant relative to your run rate? Thanks.

Maybe before going in more accounting or financial details, I will tell you that if we were to order machines right now, offset machines, they are not going to be delivered before 12 to 14 months. Then in Germany, by early January -- and some of the large manufacturers are pretty busy right now, and same thing if we were to have any (indiscernible) capacity. So it's not going to take place in 2004, and it's going to take place in 2005 and 2006. But you know, we already have some projects which are on the table, or not at the same magnitude, this is for sure. But to answer more specifically in terms of timeframe, '05 and '06 would be the major period. Anything else (indiscernible) on the 250?

Just to remind you that last year we had lease buyback of about $80 million which was included in our CapEx number of 240, 242 if I remember. So that the 250 that we were talking about leaves you a lot of room for expansion capital.

Okay. On your investment on the rate of return, obviously this is something that we calculate internally. But let me give you a little bit of a flavor or a detail about what I thought earlier regarding being the rule of thumb 3 for 1. If you were to change -- to replace 3 1000, what we call 1000, which are 32 page machine (indiscernible) running at 1000 feet a minute. By 48 page, that runs, you know, 3000 feet-a-minute, or is rated at 3000 feet-a-minute. Then you're going to be able to have the same output out of those 3 machines that you have with the 48. And technology and equipment is even going further than 48. We're now talking about 64 pages. So where you used to have labor for three machines you now have labor for one. And on top of that, you have some of our -- those operations are automated, either at the real stand (ph) and/or at the deliveries, that also reduce the amount of people which is required to run the machine. So there's probably, you know, a rate of return on this. But I was looking to tell you how this is effective in terms of introducing new equipment in large facilities.

Is there a way you looked at it, Pierre Karl, that if you're paying 25 or $30 million for a machine, that you feel you can earn that back in terms of months? Can you express it that way?

Not in terms of months. Obviously you're going to have a significant amount of investments, but your EBITDA on that will also going to be important. And you know, you calculate the amortization and you get your EBIT. But we all know that we live in a capital intensive business. This business lives and dies through investment; in the meantime you need to make sure that you do the proper investment, and you're not going to spend two times what is required. So we look forward to being very detailed, very concerned, very deep in details where we're talking about major capital expenditures. So look forward to continue (indiscernible). I'm sure that some of you have been watching what we have been doing in other capital intensive business, and we have been showing in the recent years that we know how to deal with those issues, but obviously, not impairing of any nature of our business. In fact, we're doing that for the purpose of making it more stronger, servicing our customers more effectively, and with a better return for our shareholders. Claude, anything?

Yes. I should add that for all expansion projects, naturally we calculate rate of return using the standard method of discounted cash flow so on and so forth. We compare that to our cost of capital and make sure that we get an incremental return. Naturally if we do a large capital investment such as a new press, the payback is not in months unfortunately, it does not work that way. It takes a lot more than that.

But we're still -- we find the returns to be acceptably higher than our -- the internal hurdle rate that we use to evaluate these projects. And I might add that in keeping with what we have been saying for quite some time now, our focus is on cost. They are capable returns which are cost driven. And should the market reward us in some ways with further expansion, we would see the returns even being more favorable.

I had a chance a little bit earlier at the annual meeting to reemphasize a previous example where we've been doing very well. Dave talked about; this is in our retail platform. (indiscernible) basically did significant investment in retooling what we call our reviewer retail platform. And we did there well, and we look forward to do the same in the mag and cat offset platform.

I think philosophically where we're going is we're re-engineering our platform, and I would say that probably the watchword for us is one of integration. And we don't look at our manufacturing assets as in a singular sense. We look at an entire -- we don't look at a press, we look at how a press (technical difficulty) look at how a pressroom integrates with binding, we look at (technical difficulty) plant integrate with one another (technical difficulty). And there's some very exciting possibilities available for us.

Vince Valentini, TD Newcrest.

Thanks very much. Sticking with the same topic in a different angle. Would it be your expectation that you would take these three old presses out of commission as fast as you put in the new ones? So you would be basically capacity neutral as you did this transformation?

I was introducing this as an example. In certain facilities that could be effectively the case. I mean, I'm talking about the rule of thumb. But that's not always fit this model, but this is what we're looking for.

Are there other players in your competitors right now who already have the 48 page and even the 64 page machines installed?

48 page is obviously something of we already have many, so we look forward to implement others, and to complement, in fact, those 48 pages that we have in -- let's say in Clarksville (ph), we have (technical difficulty) and other of our mag and cat platform. Obviously our competitors have those equipment; there's nothing exclusive here. And you know, that is the trend of the industry.

Would it be possible or is it under consideration to have a buy versus build type of strategy? Or is there anybody you could acquire to gain these capabilities that you need rather than having to buy new presses?

Yes, but there's not so many other guys in town to be bought. We are dealing with in certain segments, the mag and cat. We were basically three large guys and other people that I would not say are marginal, but are not going to be considered as being appropriately equipped to service a large national catalog or a publisher. That means that there is some, but there's not hundreds of them. But despite saying this, I think it is important for us that we need to do this. And probably you are right to say, Vince, that if we were to decommission the same amount of output that we'll create through investment, we will be better served (indiscernible). With the cost of all the benefits which is now taking place in the U.S., I think that we have great incentives to look forward to decommission the lowest productive machine. But in the meantime also, we probably have the capacity to move it elsewhere in the network, probably easier in Latin America. But there's other opportunities in the future. We can think also of moving a slower machine which had been providing good service 10 or 15 years ago in the magazine and catalog business to an in-line marketing -- direct marketing presses, like the facility that we have in Effingham, Petty (ph), which is not requiring that amount of speed, because you're going to in-line finish a different product that you're servicing for your customer. So there is sort of a second life or that kind of machines, which is also possible in our network. Maybe, Dave, you have (indiscernible) --

There are opportunities for re-purposing on both a geographic basis and an end-market basis. When the speed (indiscernible) in line becomes a rotary cutter for example, there's no sense putting in a 200-foot-a-minute press on a 1200-foot-a-minute rotary cutter. So there are opportunities available for that, but we are -- as I say, if we have market-driven opportunities to add volume, we will take advantage of those. But we're not betting the house on that happening. I think we're taking a very cautious approach to what the market is going to bear for us and our investment decisions.

Last from me while you have the mic there David. The impact from the Olympics, to the extent there would be a boost in certain related publications or advertising, when would you actually see that and start printing? Would you be doing that like now, or is that still to come?

I think we would start seeing that mid second quarter, towards the end of the second quarter.

Just also quickly, maybe another thing that we are actually looking at -- and Dave and I with our colleagues are working on this -- as you know the retail business has been shown in our -- the way that our quarterly results are. So retail is very strong by the year end and slower at the beginning of the year. So maybe what we're considering also is decommission the lowest -- the slowest machines, but use them to provide some additional capacity in peaks. And peaks are taking place at the last part of the year, so then therefore, we can probably bring additional customers from the first piece of the year or for the first part, and try to optimize our large (indiscernible) viewer and offset retail platform. So these are things also that we are considering, sort of assets that (indiscernible) is not going to be (indiscernible) not going to be accrued on a yearly basis, but only use dealing with peaks to be able to fill the first part of the year better. So these are ideas and issues that we're dealing with that once again will provide possible optimization of our assets.

The name of the game is to keep your most productive assets which are capital-intensive full, on a 24/7, 12-month-a-year basis. And that is one tact that we're looking to utilize.

Fortunately as you know, the U.S. is more flexible in terms of dealing with labor, which is compared to Europe. So we have this possibility there and we will try to piggyback on it as efficiently as possible. Next question.

Philip Olson (ph) UBS.

Just a couple of questions in terms of financial flexibility. Could you give us an update on where bank debt was at the end of the quarter? And in terms of the two financial covenants in both your credit facility and your accounts receivable securitization programs, I don't think you've publicly disclosed those previously, but can you maybe give an idea if you're not willing to disclose the covenants of how much flexibility you have in order to remain within those covenants? And then finally, towards the end of last year you had indicated that your free cash flow expectation for 2004 would be to see an improvement versus the 2003 level. Just wondering if -- one, if that is still the case, and two, what the priorities are for the free cash flow?

Your first question on --

You're going to keep Claude very busy (indiscernible)

You first question on the debt, it appears on our balance sheet. Our long-term debt at the end of March is 1.874 billion, with a current portion of 23; I'm not sure if that was your question.

Specifically looking for how much was outstanding under your three revolving or bank facility.

Our billion facility outstanding would be about $400 million included in the number that you have there. So there's 600 that is not utilized.

But now, is it my understanding that some of that you use as a backstop versus the drawings under your AR program?

We have a securitization program in place where the covenants are the same as the bank covenants, which we -- that's a modification that we made last fall. And our bank facility could be used as a backstop for our securitization program, but we don't foresee any problem with our securitization program. That should be ongoing. Now regarding the financial covenants, you're right, we have not made public what those covenants are. But what I can tell you is given the fact that our results have improved in this quarter as compared to the last quarter of -- the first quarter of last year, and these covenants are usually on the 12 month rolling average basis, I can say that the covenants are improving. And as we go forward, they should continue to improve. Your last question dealt with free cash flow. We published the numbers for the first quarter. We had an improvement of $160 million of free cash flow as compared to last year in the first quarter, so that we are still confident that all in all this year, we should do as well if not better than we did last year on a free cash flow basis.

And the priority for that free cash flow?

It's going to be -- we have talked about debt repayment is going to be our top priority this year, as it has been in the last year.

Karl Choi, Merrill Lynch.

A couple of questions. One, I just wonder if you have seen any disruptions from some of the union issues that you have encountered recently. How many plants are the unions sort of targeting in terms of union drive? And two, have you determined if -- any benefits you are going to get from the recent legislation by Congress in the U.S. in terms of subsidies for prescription drugs? Thanks.

First question, approximately 30 percent of our employees in the United States work in nice conditions. And no, we haven't had disruptions during the campaign underway. But at this stage there's nothing material to report from a disruption point of view. Over on the benefit side, --

You're talking about the (indiscernible) legislation that's kicking in in 2006, if I'm not mistaken, on the prescription drugs. As Pierre Karl said, we are looking at all of our benefit programs, health benefits, pension fund. We are taking into account the new legislation that will kick in, and we should benefit from that as other companies will.

Randal Rudniski, CSFB.

Just a follow-up on the global investment strategy. Pierre Karl, I just want to make sure I heard you correctly first of all. The 200 to 300 million of incremental investment; this is focused on -- is this focused on the magazine group specifically and entirely?

Not all, but mostly.

What proportion of the magazine capacity would this investment program effect?

We didn't make the calculation, the specific calculation. And it's not finished yet, so I think that for the next conference call we will have more details to provide.

And just maybe one follow-up on that question. The 200 to 300 million of CapEx for 8 to 12 presses works out to 25 million per press, which for an offset press sounds, frankly, a little bit high to me. But maybe I'm just not expecting -- maybe I just don't realize the cost of an offset press. Is that roughly what it's going to cost per press, or are there kind of implementation costs, etc. that are baked into that 200 to 300 million?

You're correct in your calculations, but there's more to becoming a low-cost producer than just buying a press. And as I mentioned, the factory needs to be integrated from front to back, and that includes a lot of things that we're going to be doing post-press, i.e. in the binder.

So there wouldn't be more CapEx involved in terms of making the plants more efficient?

We're looking at automation from front to back in our operating facilities.

Also, don't forget that when we talk about our strategic plan it's a strategic plan worldwide, not only the U.S. So there will be investment in other parts of the world, mostly in Europe. In the U.S. we'll be investing actually in magazines, catalog, also books, our other sector. So we will invest in the proper area to make sure that we get the proper returns and that we improve our business.

I have one other question, if I might. In the quarter it appeared that, particularly in North America, that volumes improved over the levels that you have seen for the last two or three quarters. The revenue line didn't look like it changed a whole bunch over the trend over the last few quarters. And so I guess what's missing from our equation is either paper sales or printing prices. And I was wondering if you could give us some kind of sense as to which of those two factors might have deteriorated a little bit, or explain kind of the flattish revenue profile relative to an improvement in volumes.

The volumes did increase in the first quarter as compared to last year; we mentioned that. I also mentioned that organic growth was negative two percent. So that if volumes do increase, that means that price has decreased as compared to the same quarter last year. You will remember that we did mention last year that we have renewed a fair amount -- a fair number of contracts in the first half of 2003. So that when we compare our first quarter of this year versus the first quarter of last year, you see some of these price decreases are starting to -- have kicked in.

Thank you. That concludes our question and answer session.

I would like to thank you all for attending this conference call and we look forward to be with you at the next quarter. Thank you very much.

This concludes today's conference call. Please disconnect your lines and thank you for your participation.