Quad/Graphics Inc (QUAD) 2004 Q2 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 second 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 second quarter of 2004. This call is being webcast and forward-looking statements are subject to the safe harbor provisions. Joining me today from our offices in Montreal are Pierre Karl Peladeau, President and CEO; Dave Boles, COO, North America. Also with us Jeremy Roberts, VP of corporate finance and treasurer; and Philip Gautier who is assuming greater responsibility for investor relations. I would like now to turn it to Pierre Karl to provide some introductory remarks.

Thank you, Claude. Good afternoon, everyone. Thank you for joining us. Our results this quarter further prove that our cost reductions and cost containment objectives were the right prescription for this company when we started them a year ago. The second quarter, while revenue was essentially flat, excluding [inaudible] change at $1.54b, operating income increased to $108m before restructuring.

On the same basis, operating margins increased to 7 percent compared to 2.6 percent a year ago. Still not good enough, but getting better. Net income for the quarter before restructuring was $50m or 31 cents a share, compared to a loss of $1m or 7 cents during the same period last year.

On the same basis, year to date net income was $89m or 54 cents per share, which compared to $22m or 4 cents per share last year. Claude will give you a more specific breakdown, but I think it is clear that we have made significant progress in improving our profitability by pursuing the right issues.

On the cost side, I believe our message of rigorous financial management is taking hold across the company. For example, SG&A on a comparable basis is down 40 percent compared to the second quarter last year. The decrease is due to workforce reductions and lower discretionary spending in areas such as D&E. We are finding ways to be more efficient, and we are ensuring that when we spend money there is a good reason for doing so.

As I have said before, this is a cultural change within the company. After the [inaudible] acquisition, we are now operating out of the same playbook. As part of our efforts to spread the message, in June we held a two-day series of meetings in Montreal with our North American sales force and general managers. The meetings involved presentations from senior management so everyone could see what the company as a whole is doing and where we are headed.

I was very pleasantly surprised by the tone and level of participation during the meeting, and by the feedback I received afterwards. I think after this meeting with our senior management group we have a better understanding of where we have been, where we are going and what is expected.

As you can imagine, one of the big points of interest at the meeting was our manufacturing platform and our capital investment plan. As I said last quarter, we are taking a detailed look at our global platform and our active base, asking questions, touring plants, effecting the market and talking to our customers about their current and future needs.

As a result, we recently announced the closing of one of our U.S. magazine facilities and the downsizing of one of our U.S. book facilities. This plan involved decommissioning equipment, moving certain equipment to other facilities where it can be more efficiently deployed, and investing in new equipment as well.

I said when I took the job we need to have the best operating platform and the highest utilization rate as possible to be successful in this industry. There is no other [recipe] that we therefore require a flexible and compatible platform to succeed in one of the most competitive industrial market in the world.

This is what the magazine and book announcements were about. All of these actions are about reducing costs and also creating a more efficient and responsive manufacturing platform. Cost reduction is part of the equation, but we are combining that with a major three-year strategic investment plan.

This plan, which is long overdue, is taking us to the next level. It has targeted our U.S. platform at our magazine, catalog, retail and book groups. We will be purchasing 22 new [inaudible] offset presses, one of which will be commissioned in 2005 and the balance in 2006 and 2007. The new offset 48 and 64 page presses are for our magazine catalog platform, and the 96 and 128 pages presses are for our book platform. They will improve service to our customers and allow us to be more competitive in the current environment.

We will benefit from faster make-readies, greater through put because of the wider rest, lower waits, more automation and less maintenance downtime.

The new wide-web offset equipment is being integrated into our platform so that we can further expand our specialized network of plants. What I mean by this, is we are grouping assets together so we can offer our customers instead of one 48-page or one 64-page press, we can present a network of two, three or four or more in multiple locations. This allows the company and the customer to explore new and more flexible solutions to our printing requirements.

The plant will be capacity neutral and that includes the dismantling of some presses and the idling of others. We are also adding automated systems, [inaudible] systems to increase performance and to deliver a top-quality product. The investment is in the range of $300m and will take place over three years with about one-third of the equipment coming in line in 2005. This investment is taking us to the next level and will firmly establish us as the technological leader in the industry.

With that said, we will continue to look for ways to contain and reduce costs, further improve productivity and provide better service. We have seen some positive signs in the marketplace recently, including the rise in the U.S. magazine ad pages, but this is still a challenging market being driven by price.

I think our focus on cost, coupled with our new investment, is clearly building a platform that will produce better results for our shareholders. Thank you.

Merci, Pierre Karl. As Pierre Karl pointed out, our second quarter results demonstrate the value of the cost reduction efforts that we began last year. During the second quarter, consolidated revenues increased $28m to $1.54b, and year to date revenues increased to $3.1b. Adjusting for currencies, revenues were flat for the quarter and down 2 percent year to date.

The revenue decrease is due to price pressures that have been offset by increased volume in certain sectors. One of the major groups showing year-over-year volume increases in the second quarter, we can highlight U.S. Magazine, which is up 4 percent; U.S. Retail up 3 percent; U.S. Directory, up 13 percent; Canada, which is up 3 percent; Europe, 6 percent; and Latin America up 4 percent.

The second quarter results include restructuring charges of $52m or 26 cents per share, which mainly reflects the closing and downsizing of two U.S. facilities. The cash component of the Q2 charge is $11m.

An additional $7m pre-tax related to these initiatives is expected to be recorded in subsequent quarters. The completion of the second quarter initiatives will affect 1,363 employees in total. However, we expect to create 457 new jobs in other facilities for a net reduction of 900 employee positions.

We expect these initiatives to provide $27m of additional EBITDA, of which approximately $9m should be realized this year. In addition, the company has entered into negotiations regarding the future of its facility in Stockholm, Sweden. There is a distinct possibility these negotiations could lead to the closing of the plant, which would involve a net reduction of 150 employee positions, and estimated incremental restructuring costs of $12m to $13m.

The second quarter results also include specific charges of $7m, or 3 cents per share for various items including waste provision and the writedown of other assets mainly in North America. This contrasts with specific charges of $49m, or 24 cents per share incurred in the second quarter of last year.

Consolidated operating income before restructuring was $108m for the quarter compared to $39m last year. Although as I mentioned, we recorded $49m of specific charges in the second quarter of ’03.

For the first six months of this year, operating income on the same basis was $206m compared to $113m last year. The operating margin before restructuring for the quarter was 7 percent compared to 2.6 percent in the second quarter of ’03, and the year to date comparisons are 6.7 percent in ’04 and 3.7 percent last year.

On the same basis, net income for the quarter increased to $50m, while earnings per share was 31 cents, compared to a loss of $1m or 7 cents per share in the same period of last year. For the first six months of this year, net income was $89m, or 54 cents per share, compared to $23m or 4 cents for the first two quarters of ’03.

SG&A expense for the quarter was down $28m to $113m. Excluding a specific charge of $3m this year and $16m in ’03 and currency translation of $2m, SG&A expenses in the quarter were reduced by $18m or 14 percent. As Pierre Karl mentioned, this is primarily due to workforce reduction and lower discretionary spending.

In our view, these numbers represent a new reality in this company and are a testament to our rigorous and ongoing cost reduction program. Year to date SG&A expense is down $45m to $232m, and down $39m excluding specific charges and the impact of currency translation.

Our management expenses for the second quarter were reduced by $10m compared to last year, reflecting the $600m refinancing in December ’03, lower interest rate and favorable movement in foreign exchange.

Now moving to the segment results, in North America second quarter revenues were down $7m or 1 percent to $1.19b. Year to date, revenues are down 2 percent. Operating income before restructuring for the second quarter was $96m, compared to $43m last year. We recorded $39m of specific charges related to North America in the second quarter of ’03. Year to date, operating income before restructuring was $183m, compared to $125m a year ago.

The operating margin for the quarter was 8 percent, compared to 3.6 percent last year. Year to date the margin has improved to 7.7 percent from 5.1 percent before restructuring. In Europe, revenues amounted to $310m for the quarter, which represented a 6 percent increase excluding currency impacts. Before restructuring, operating income in Europe was $12.4m compared to $1.9m last year. The improvement came once again from both [France] and the rest of our European operations. Year to date, operating income before restructuring is now up to $24.3m from the breakeven a year ago.

In Latin America, revenues were flat at $44m. Year to date revenues are up 3 percent. Operating income in Latin America before restructuring was $1.8m compared to a loss of $3.5m in the second quarter of 2003. Year to date, it is up by $7.4m compared to the same period last year.

With regard to free cash flow, second quarter results are once again demonstrating our ability to generate solid, continuous inflows despite challenging market conditions. Free cash flow from operations for the quarter were $71m, which is on par with Q2 of last year, but year to date our free cash flow from operations has shown an improvement of $160m.

Now, turning to capital expenditure, I would like to give you an indication as to how these strategic investment plans will affect capex spending going forward. While we are not going back to giving guidance, I would like you to understand the range that we are looking at this year and for the year 2005, 2006 and 2007. Including a portion of the money from the new presses that we’ve just talked about, our capex in 2004 should be approximately $200m. For 2005, 2006 and 2007, we expect that capex will remain in the range of $250-$350m at the top end.

Anticipating your questions, I want to make a brief comment on the ROI of these purchases. I won’t get into specifics, but I will say that the return is sufficiently more than our cost of capital to provide an adequate return for our shareholders.

Finally, the board of directors declared a dividend of 13 cents per share, stable with the previous quarter.

Now David will review our operations and markets in North America.

Merci, Claude, and good afternoon, everyone. I will give you an overview of the markets in our major North American business groups and provide additional comment on our equipment investment and our ongoing cost containment and continuous improvement strategies.

Print markets have experienced some improvement in certain sectors, but pricing continues to be very competitive. Some of the most recent industry performance measures took a positive bounce in the quarter. For example, U.S. consumer magazine advertising pages showed a year-over-year increase of approximately 4 percent in the second quarter.

Capacity utilization seems to be experiencing some kind of rebound as it finally shows a decent year-over-year improvement, but it is still below historical averages. Although we are seeing some positive signs in some areas, price pressures are still a major factor, pretty well across the board. The severity of those vary from group to group, but any sort of study or sustained improvement in pricing is going to have to be demand driven. We are only seeing that now in fits and starts.

As Claude and Pierre Karl have said, our year-over-year improvement to date has been largely cost driven. While we’ve made substantial progress, we realize this is only one factor in improving our performance. We believe there is a lot more we can do in this area, but I will talk a little more about that in a minute.

First, a quick rundown of our major North American business groups. First of all, magazines. It has been mentioned that consumer ad pages in the U.S. grew in the second quarter compared to last year, and are up only slightly, less than 1 percent on a year to date basis. There were about 400 new launches in this sector in the first two quarters, which is about on par with last year.

Business to business magazines are also showing some improvement with ad pages up in May compared to last year. This is the first increase in this sector since December of 2003.

In general, analysts and others who study the industry are looking for growth in the second half of the year, so that is good news. One of the new publications we will be printing is the new Donald Trump magazine, Trump World. It is being launched in a few weeks, another example of a successful business man who is developing his brand through the use of print.

Moving over to the catalog sector. Prices in the quarter and year to date remain relatively stable in the second. Volume was flat for the quarter. Significant contract renewals or extensions in the quarter include Thomson, Venus Swimwear, Learning Tree, and Chelsey & Scott, to name a few. We have made significant improvements in rectifying some of the isolated performance issues in selected facilities. The investment in new presses in this sector will enhance performance and customer service.

Over to retail. Revenues in the retail group were up 3 percent in the quarter, driven by an increase in volume. Prices have begun to stabilize somewhat in this sector. Customer renewals and wins in the quarter include Big 5, Sprouts and A&P Company. Stringent cost control and cost reductions have helped mitigate price erosions and several capital projects that will soon be online will further improve throughput and quality.

Moving over to books and directories. Lower prices and an unfavorable product mix were the main reasons why we saw a drop in book revenue this quarter. We have made some important restructuring and investment decisions in this platform, which I will get to a bit later, but this remains a solid business. In May, Quebecor World printed close to half of the top 150 best selling books in America as reported by U.S.A. Today. We have produced many strong titles including Bob Woodward’s Plan of Attack, the South Beach Diet, its associated cookbook, Warren Legacy and many others. We’ve recently received large orders for new books by Dr. Phil, Tom Wilks, Stephen King, just to name a few.

To maximize our platform and our assets we are trying to more fully integrate our book and directory facilities together. We have just recently secured a directory contract where we will print the directory in one of our book plants and have it bound and shipped from a nearby directory facility. This allows us to make more efficient use of our assets by filling up unused capacity, regardless of the plant’s principal focus.

In our directory business, we are making more inroads with regional publishers. This quarter we also received the [inaudible]. Three of our directory facilities received SBC Communications Gold Award for supplier quality, and our digital book platform was given Microsoft’s Impact Award For Excellence.

Our directory business is also faced with lower prices, but our success in attracting independent directory publishers replaced from a major contract that ended last year.

Over to our commercial direct groups in the United States. This business continues to struggle with lower pricing and reduced volume. This is particularly the case in the commercial segment. The direct portion of the business performed somewhat better, however. The efforts to develop new business with financial institutions is starting to pay off with the placement of orders from several large banks in the United States, and our card and insert business for magazine customers showed some strength in this quarter.

To our Canadian operations. In Canada, volume was up but revenue was down for the quarter, reflecting the negative price environment. The volume increase is attributable to retail and directory customers. Contract extensions and wins include Jean Gautier, Air Canada Vacations, Canada Post and Venture Publishing. Cost control and production efficiencies continue to have a positive impact on results.

As I said before in the last year we have made significant headway in reducing SG&A and other discretionary spending, but there is a lot more we can do. Towards that end, we have continuous improvement projects in all of our business groups. We have embarked on what we call a scorecard project. With this we are able to measure key performance indicators on similar equipment and jobs across the entire platform. We are moving up the profit and loss statement and our cost-cutting efforts, and we are now looking at overhead at the plant level, which is part of the analysis that went into the magazine and book announcements that we made this past quarter.

We are systematically working through the issues at our problem facilities and developing solutions that will improve overall performance.

Finally, we are excited and encouraged by the new equipment that we will be purchasing. This is a clear signal to our customers that we are committed to employing the latest technology to help make better use of print to build their businesses. I want to stress to you, and this is the same message we deliver to all our facilities. New equipment is great, but it is equally or more important to make sure we find creative ways to improve the efficiency of our existing assets. Like Pierre Karl, I was also encouraged by our recent meetings in June. I think bringing together 350 people from across the company to explain and share our goals and objectives was extremely positive. Events like that, combined with the operational moves we are making, will help us grow our business and deliver improved results as we go forward. With that, I will pass it back to Pierre Karl for some closing remarks.

Thank you, Dave. So before we open the lines for questions I would like to make a few comments about our operations in Europe and Latin America. Claude has already given you the numbers, so I will confine my comments to general comments about the state of our business in those regions and recent developments.

In Europe as in North America pricing continue to be very competitive. Volume increased 6 percent led by the retail and our catalog markets. The improvement on our European results is largely due to the improvement of our financial platform.

While we can make money [inaudible] of the border, we are very close to breakeven. The restructuring and cost reduction initiative are having a positive impact, and a more highly motivated sales force is generating increased sales.

In Sweden, we announced in the quarter that we are installing a 48-page web offset press in our small plant facility in Sweden. This will be the first press of its kind in Sweden, and give Swedish publishers a home grown solution for their printing needs.

Also in Sweden, we enter into talks about the future of our [inaudible] facility in Stockholm. As Claude had mentioned, there is a possibility these talks will lead to the plant closure and a redistribution of its assets to other locations. We should have a better indication of the results of those discussions in a couple of months.

In the U.K., as many of you know, one of our largest customers publish weekend Sunday supplements. They announced they were not renewing the contract with our factory next year. The reason is quite simple. They were asking us to build a Greenfield facility in the U.K. and we declined because we determined it would be detrimental to our profitability going forward. The contract is scheduled to end in May of next year. We are currently putting together a sales strategy to replace this volume in our [Acorbi] facility.

In Latin America we are also seeing the benefit of our cost-cutting initiatives and a stronger focus on our operation. In the quarter, operating income was positive, compared to a loss in the same quarter last year. Price pressures are a reality here as well, but we have seen volume increase 4 percent for the quarter. Argentina boasts strong results largely due to new orders for educational textbooks from the Ministry of Education.

Also in the quarter our Columbian facility made a successful foray in [inaudible] market. So to sum up, we have reduced our cost base in all our regions. We are taking steps to reorganize certain business groups to be more efficient and to improve customer service. This is an ongoing process that involves the input of everyone at all levels of the company. Coupled with this, we are making a significant investment in our manufacturing platform that will further improve productivity and service without increasing capacity.

Taken together, these measures and others yet to be realized will be deliver better service to our customers and better returns to our shareholders. I would like now to open the line to questions from participants.

Thank you. (Operator instructions) Your first question comes from Megan Anderson - RBC Capital Markets.

Hi, good afternoon. I’ve got three questions. First, was there any impact on revenues in the quarter as a result of paper, either in terms of paper pricing or changes in the amount you supply versus the amount your customers supply? That’s the first question.

Second, in terms of your capex program and bringing in 22 new presses, you’ve identified that there is no net change in capacity. I am just wondering what happens to the displaced presses? Will any of those be resold, or are they simply decommissioned, and if so, any estimates on impairment charges?

Third question, can you tell us what proportion of your revenues under contract come up for renewal in 2005?

Okay, I will ask Claude to answer the first question, and then I’ll come back with the second regarding the usage of our assets. Maybe, Claude, you can talk about if there is any impairment value there and I will come back with you.

I think if you take the last quarter-- you started with a three or four part question. Your first question, you wanted to know what the impact on revenue of paper price is? And scrap revenue, was that your second question?

No, you’ve identified the scrap benefit. What I was just wondering I know the paper goes through revenue line. If you strip out the currency effect for us and acquisitions, I am just wondering if there is any positive or negative effect from paper pricing in your revenue line?

Basically if I look at paper sales this quarter versus last year, excluding currency, it is basically flat.

Okay.

On the asset, the asset so then we are looking to decommission would in the main part being decommissioned and idle, there is no usage at this stage. We are not going to sell them, but we will review the possibility of moving some of them in Central or Latin America, but no where else.

Is there any impairment charge related to those decommissioning assets, Claude?

No. There won’t be any impairment charges related to the new investment.

But we need to understand that those assets are mainly what we call 32 pages, that runs between 1,000 and 1,200 feet which basically are 15 or 20 years old type of offset equipment. There is nothing significant in terms of renewal for 2005 with our contracts.

Okay, thank you.

Next question, please.

Thank you. Your next question comes from Karl Choi of Merrill Lynch. Please go ahead.

Hi, good afternoon. I wonder if you can drill down a little bit deeper into your contract loss in the U.K. Do you expect at this point that you can completely replace the volume, and or if you need to [inaudible] for more people and will take a charge?

Second is, are you seeing any changes in competitive pricing behavior from your competitors, especially since the major one has to [inaudible] on a major management change there? Thanks.

The first question is related to the U.K. and the second to the U.S.?

Yes, in the U.S. Correct.

So in more details then, as I mentioned earlier a customer was requiring a green field solution and we have in our [Corbi] facility a complete [inaudible] solution. I think that we have been performing very well for the customer since we took over [Corbi] which was in 1994 or early 1995. At that time we took over a brand new facility that was in fact built by Associate Newspaper but they exercised their put and we started running it.

At the beginning it was a little bit, as any start up, a little bit tough because these were large 96 offset machines coupled with fair rags pitching technology. I know that well because I spent my summer in [Corbi] at that time. So it was not an easy start up, but through the years we have been able to do a fantastic job for them.

We didn’t really understand what they were really looking for in terms of a [inaudible] solution because we were doing a great job, but at the end of the day obviously the decision is made. So we thought that if we were to build a review facility, and as you know we have many in continental Europe it would not be in the best interest of the corporation to do so and we remain with the problem of how our offset capacity that was there will stay idle.

So we have a little less than a year from now to have a replacement solution. As you can probably imagine, we are already working on it. We identify many customers and we are looking to make any offers, so we will continue to identify them. In fact, we are going to have another meeting on this issue by the week of August 23rd where we will spend the week in Europe, so we look forward to have the appropriate replacement.

At this time, it is too early to say anything regarding the use of the equipment. This equipment is in good shape for our technology, which was basically dedicated to that customer. It is also useable for other customers, as you probably know. The newspaper supplement market in the U.K. is huge, and this has been tremendously favorable to what we call the Fleet Street market in the U.K.

So we look forward to put this equipment to service other Fleet Street publishers. Regarding prices, maybe –

With respect to the U.S., you know competitive behavior and pricing is not really a question of management philosophy, these things tend to be determined more by the market. So the competitor in question has been aggressive in the past and we expect they will bring a price to the market in the future, and that’s it.

And I think, you know, we need to be realistic. I have been spending probably more than 15 years in printing and I never saw prices going up. I think that with the technology that we have been able to implement throughout all of those years, larger machines, larger offset factor – this basically provides us the capacity to keep going with price erosion. That is what this business is all about, and that’s why we need to always be on the leading edge of technology.

We’ve been in this business for so many years that we know the names of the game and the rules. We always took our responsibility in investing when the time was appropriate. I mean by that we are not over-investing. I mean that we’ve been always somewhere prudent in the meantime, making sure that we are at the appropriate level of technology.

Your next question comes from Vince Valentini - TD Newcrest.

Thanks, a couple questions on the capex. Claude, the $250m to $350m range for 2005, would that include the $60m of leases that come due, which you seemed to indicate you were likely to buy out?

I think we talked about leases that come due in 2005. In 2005 we basically have no leases that come due. What we’ve indicated is that we said at our last conference call is that last year in 2003 we bought out leases for approximately $80m which was included in our capex of $240m. So that if we exclude that, our capex last year was $160m. This year we said that it is going to be around $200, so with comparable numbers, and what I said is that for 2005, 2006 and 2007 including the new programs to purchase presses that our capex is going to be from $250m with $350m at the upper levels, and that is our best estimate at this time including everything that we know.

And maybe more for Pierre Karl. Has there been any further consideration to buying some other companies that may have some of these assets rather than buying all of these presses new?

This I think is not a question of buying a company, it is a question of being more efficient in the facilities that we have. I think that we clearly in the past used a balance between acquisitions and investments. It is not because you are going to buy a company that you would not need to invest, because once again the investment is to be able to make sure you will be able to face how competitive the market is. We work for our customers, obviously for our shareholders also, but there are not going to be any shareholders if there were not to be customers.

Customers are requiring and asking for better service, faster speed, quicker deliveries, more flexible imagination, all sorts of things that are required to be in this business. So I think it is realistic to combine customers expectations and profitability for our shareholders. We’ve been through that in most of our years, we’ve been successful and there is no reason why we should change our strategy there.

I think while our acquisitions might be part of the equation at some point in the future, we prefer to use our people and our platform to provide the types of solutions that our customers are looking for.

Thanks. One last question for you, David, is that everybody is sort of gearing up for 2005, a pretty big state adoption year for books in the U.S. Is that sort of stuff where you could start to see print volumes in the fourth quarter of this year as people prepare for it, or is it all in 2005?

I think it is pretty much ’05, but we could see some, whether the election being November 2, I think it is going to take a little bit of time before things settle in in that regard, but we are expecting a robust ’05 in the education market, particularly in the [inaudible] market.

Let me just correct something I mentioned. When I said that we have no material leases I was talking about this year. I think you were asking for ’05?

That is right.

We have mentioned $60m and that number is included in the $250m to $350m range.

Okay, that is great. Thanks.

Thank you. The next question comes from Jeff Fan - UBS Warburg.

All right. Thank you very much and good afternoon. The first question is regarding your SG&A costs. So far this year I guess you saved in the neighborhood of $39m to date on SG&A, I think $18m is the current quarter. So how should we look at this as we go through the second half of this year and go through 2005? Do you think they will have room to further reduce the SG&A base going forward?

No, maybe what we can say here is that this is something that will take place every quarter. It will certainly, in fact this is the truth that we will have leases that will not be renewed. There will probably be some locations that are leased on a mid to long term basis that we will be able to sub lease. I don’t know if it will be third or fourth quarter that it is actually on the marketplace, but these are all actions that will have been taken for 12-18 months. I’ve been kicking in on a quarterly basis and it should improve quarter after quarter. Obviously somewhere we will reach the ceiling of that. I think that we are not so far away from it, but there are certain other things that we can do and we will kick in on our numbers in the coming quarters.

Okay. And regarding the investment that you are talking about, what makes you feel that it is the appropriate time right now to start to invest again? I mean, is this something that is more internally driven or is it something you are seeing externally that gives you the comfort that the return on the investment here will be sufficient?

Well, maybe what I should say here is, and I said it earlier, I think we did a fantastic job on the [inaudible] side a few years ago. Dave was running our retail platform and I think that today once again there is no one in the marketplace can challenge our leadership in this business. We put forth all major retailers in North America. We are doing a fantastic job with that, and this is a very growing market for us in the U.S.

So I think that what we are saying here is we are basically replicating our success formula that took place on the [inaudible ] side. Obviously we didn’t do enough in the past year to offset that, so therefore it is not that we are catching up, but somewhere a little bit we are catching up with the appropriate technology.

I think that, you know, somewhere we are a little bit lucky in this process because we are introducing something which is not really a new technology, but this is something that is not actually widespread through the North American market, which are the 64 page offset machine. We have been seeing a lot of 48’s, obviously we have a few of them, but 64, we would have one of the biggest order from manufacturers in Germany and in France, providing that kind of platform in the U.S.

So that’s why we are saying that we will clearly be at the technology [inaudible] introducing a wide platform of 64 pages in our magazine and catalog facilities. So this will bring significant savings because, you know, what you have today which is as I told you, a 1,000 or 1,000 B running 32 pages at 1,200 feet a minute will be replaced by a machine that is producing two times as many pages in one resolution, at 2.5X faster speed.

So it will probably be less people because you are going to have automation at the [inaudible] and at the delivery. So this is a cost-driven initiative. Instead of paying labor or operating expenses you will have amortization expenses. But one to the other, this is for sure that the amortization is much more favorable and you are building up this company, or exceeding the expectations of our customers.

Okay, and just one last quick one. What is the annual revenue that you are currently generating from the U.K. from the customer that is not renewing the contract this year?

I don’t have the number by heart, I will need to double check this. We will have to get back to you on that one, Jeff.

Okay, thanks.

Thank you. Your next question comes from Tim Casey of BMO Nesbitt Burns. Please go ahead.

Thank you. A couple things. One, can you confirm that the interest expense line in the quarter is clean, that there are no non-recurring items in there? And is that a sustainable run rate going forward?

A second question relates to the scrap sales, you got another benefit in the quarter. Can you sort of provide some color on what has happened in that market that you have been able to generate $26m year to date and perhaps comment on what the outlook is going forward? How sustainable are those gains or conversely, could they go the other way? Would there be any negative surprises down the road on that? Thanks.

Thank you, Tim, for your questions. In the last year, year-and-a-half we’ve been trying our utmost to come out with clean numbers, transparent numbers and what we have in our interest expense, which is $10m less than it was last quarter, as we’ve explained there are three things in there. The fact that we refinance $600m when we did the refinancing we announced that the annual savings would be approximately $12m so that is part of it.

The second part is that we have a lower interest rate on certain of our borrowing, and the third part which is hard to see if it is going to be sustainable is exchange rate between Canadian dollars, U.S. dollars and Euro. But these numbers are as clean as we can have them. If there are [inaudible] included in there.

Your second question relates to cost of sales where we say we had a reduction of $18m and the number was $8m in the first quarter and this basically relates to the paper gains. We are more efficient, scrap revenue where prices are higher, we also have gains in other supplies through procurement. It has increased fairly substantially from Q1 to Q2. Now is that sustainable? I think the gains that are related to efficiency I think we can sustain, probably improve the gains that are related to market. It will depend on what the markets will do.

The gains related on our procurement I think what we have in the bank should be the same going forward.

Okay.

The next question comes from Bob Beck of CIBC. Please go ahead.

Hello, this is Amy Gording for Bob Beck and our questions have been answered. Thanks.

Thank you. Your next question comes from Megan Anderson of RBC.

Hi. Just a couple of quick ones. In terms of the new process, you said one-third in ’05 and the balance over ’06. ’07 will that be weighted more towards the back end of ’05 when the equipment actually arrives, or can you give us a sense of timing across the year?

Second question, can you give us some guidance on the tax rate for 2005 please?

Megan, you are back. Welcome. Welcome back, Megan. It’s an interesting company. Your first question was related to the timing of the investment in 2005. It will be, given the fact that the time it takes to manufacture the commission in the back half of 2005. The disbursement, which is probably what you are trying to allude to will be throughout production, upon delivery and then with the balance upon performance of certain guarantee performance if you wish.

The second question?

Tax rate for 2005, any guidance?

No, I just think it is too early to give you guidance on that.

The only thing I will say with that investment is that the investment will touch all of our core markets as identified in 2005.

okay, thank you.

Your next question comes from Adam Steelman. Please go ahead.

Thanks for taking the question. In terms of the credit rating, you’ve got a low triple B rating. You’ve said in the past that it is important for you to maintain the investment grade rating and you’ve obviously been taking some very effective cost cutting steps and generating some free cash.

Is there any update in terms of your position on the balance sheet and any update you can provide in discussions with the rating agencies?

Well we have regular discussions with the rating agencies, as a matter of fact some of our colleagues are meeting them in the next coming days, given the fact that we are generating I would say strong results this year as compared to last year. Our free cash flow is improving, I would think, and our balance sheet is in pretty good shape. I would think that would be a positive for the rating agencies, so that we try to have, as I said, constant discussions with them, keep them abreast of what we do, and at the end of the day I would think it should be positive. The final answer will come from the rating agencies.

The final answers belong to the [inaudible]

Just a follow on. I understand you are not giving guidance and there are a lot of moving pieces with the working capital both seasonally and also your AR facility. Do you have any internal directional goals or incentives in terms of generating free cash flow?

If we have goals or incentives?

Yes, if you can provide your free cash flow guidance that would be great, but what I am asking is just directionally, is there anything you can say about the actual, aside from GAAP earnings, anything you can say about your goals?

Our goal is always to improve, be it cash flow, operations, EBITDA. EBIT, that sort of thing. So that’s our goal, but I can’t tell you more specifically on that because we are not giving guidance either on earnings or free cash flow.

Thank you.

Okay, well we would like to thank you all for joining us this afternoon and for some of you I think we will talk more at Quebec World conference call. Thank you very much and good afternoon.

This concludes today’s conference call. Please disconnect your lines.