Quad/Graphics Inc (QUAD) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Quebecor World 2004 Third Quarter Results Conference Call. I would like to now turn the meeting over to Mr. Claude Helie, Executive Vice President and Chief Financial Officer of Quebecor World, Inc. You may now proceed, Mr. Helie.

Thank you. Good afternoon and welcome everyone to the Quebecor World Conference Call for the third quarter of 2004. This call is being webcast and forward-looking statements are subject to the safe harbor provisions. Joining me today in our offices in Montreal are Pierre Karl Peladeau, President and Chief Executive Officer, Dave Boles, Chief Operating Officer, North America. Also with us is Jeremy Roberts, Vice President, Corporate Finance and Treasurer, and [indiscernible], our Director of Investor Relations. I would like now to let Pierre Karl provide some introductory remarks. Pierre Karl?

Merci, Claude. Good afternoon everyone. Thank you for joining us. Before I discuss our third quarter results, I would like to make a comment on a related matter. Today Quebecor World has filed suit in the Circuit Court of Cook County, Illinois against R.R. Donnelley & Sons Company and three former Quebecor World employees seeking an injunction prohibiting Donnelley and the former Quebecor employees from using or disclosing Quebecor World trade secrets and other relief. Quebecor World intends to prosecute the action aggressively. Quebecor World Senior Management will not make any further comments on the lawsuit that is now a matter before the court. The detail of our position is asserted in our claim filed in the Circuit Court of Cook County, Illinois, nearby Chicago.

Now for the third quarter results [themselves]. My overall comment is that while these numbers don't show the same level of improvement we have seen in the previous two quarters, we are making the appropriate moves to head the Company in the right direction by making the tough decisions that are necessary to strengthen our business. I think it is important to view these results in the context of our overall strategy, that is to improve the performance of our platform by concentrating on our investment in pure and most cost effect--cost effective facilities.

In the third quarter revenue--I'm sorry. In the third quarter, revenues were $1.6 billion, which when you exclude the effect of currency, is essentially flat compared to the third quarter last year. Operating income before restructuring stood at $150 million compared to $117 million, and margin was 7.3 percent in the third quarter last year compared to 7 percent this year. On a year-to-date basis, our operating margin has improved to 6.8 percent compared to 4.9 for the first three quarters of 2003.

Net income for the third quarter before restructuring was $59 million or 37 cents per share compared to $55 million or 34 cents per share in the third quarter of last year. I will leave a more detailed breakdown of the numbers to Claude. We have shown improvement in some areas, but perhaps not as much as we expected. Maybe we should be more patient and do not expect too much too soon, but that's not the way we operate. We said when we start on the task of earning this Company around, there was going to be a lot of work ahead. It was not going to happen overnight. I think if you look at our year-to-date number, you'll see we have made significant progress. In fact, we are pleasantly surprised that we got as much as done quickly as we did and we began reaping some of the benefit as early as we did.

While revenues year-to-date are essentially flat at $4.7 billion, operating income has increased almost $100 million to $250--$252 million. Net income has increased to $99 million compared to $22 million in the same time last year. Our reported EPS from 55 percent which is a loss of 3 cents at this time last year and before restructuring, EPS of 91 cents compared to 37 cents last year.

This has been accomplished by reducing cost and improving efficiency across the platform. As an example, our SG&A costs for the first three quarters are $45 million below what they were during the same period of last year. This has come through work force reductions, the centralization of corporate functions and support services, better supplier agreements, and by being more prudent with every dollar we spend.

We are also finding ways to further improve efficiency by reducing waste, increasing our speed, and improving make-ready time.

Our recently announced three-year strategic investment plan will provide additional help by replacing older presses with wider and faster one. This will be coupled with state of the art robotics that will result in more automation, further improving efficiency. The first wave of this equipment will be coming online in 2005 with the remainder being commissioned in 2006 and 2006. All this to say that we are definitely heading in the right direction. However, it will be [indiscernible] be a few bumps along the way. In the first two quarters of this year, most of our improvements were larger the result of cost containment and workforce reduction. In the third quarter, we began some more time-consuming structural changes. We closed our Effingham magazine facility and downsized our book facility in Kingsport. Both these actions were requiring the moving of work and equipment. Much of this equipment was reinstalled on time, but as you can imagine, there is a normal learning curve to achieve maximize efficiency. At the same time, the experience of spike in magazine ad pages and an improvement in demand in--is certain sector of the book market.

As an example, one of our customers published Vogue. The edition we printed in the third quarter was the largest Vogue had every put out. It's as big as a dictionary. While an increase in ad pages isn't new, especially with the environment that we have been living throughout recently, it came at a difficult time because we were redeploying and reinstalling equipment. Handling some of this added volume while we were restructuring resulted in the same and certain inefficiencies. We incurred additional costs, including extra overtime, more make-ready, trucking and airfreight cost to ensure deliveries, and so on. The result was that a couple of our large U.S. facilities did not perform as expected and it hurt our overall performance. That's the bad news. The good news is this was a temporary bump in the road and--that is already being fixed and we are now better positioned for the future.

The plan remains the same, which is to create the best operating platform with the highest utilization rate possible and, of course, operating the best service to our customers.

As I mentioned, we have seen positive signs in the marketplace recently with the rise of U.S. magazine ad pages, but it is still a challenging market being driven by prices in almost all sectors. We are continuing to see price reduction in most sectors and in most countries, although there is some flattening out of the year-over-year declines. We are taking the appropriate steps to deal with the current and future challenges that face our business, which I believe will lead to improved results for our shareholders.

I will more to have a little later with respect to our international operation, but next, Claude will take us through a detailed look at our third quarter and year-to-date numbers. Claude?

Merci. Thank you, Pierre Karl. In the third quarter, consolidated revenues increased $36 million to $1.63 billion, and year-to-date revenues increased $77 million to $4.73 billion. Adjusting for currency, revenues were flat for the quarter and down 1 percent year-to-date. The revenue decrease is due to continuing price pressures and has been offset somewhat by increased volume in certain sectors. Among the major groups showing year-over-year volume increases in the third quarter we can highlight, U.S. retail is up 4 percent, U.S. book is up 3 percent, Canada is up 7 percent, Europe, 2 percent, and Latin America, 25 percent.

The third quarter results include restructuring charges of $12.9 million or 8 cents per share, which reflect the closing of our Stockholm facility and the closing and downsizing of our Effingham and Kingsport facilities in the U.S. The cost component of the Q3 charge is $9.4 million.

An additional $10 million related to the Stockholm closure will be accounted for in the fourth quarter and in 2005. The third quarter initiatives effected 282 employees in total. However, we expect to create 29 new jobs in other facilities for a net reduction of 253 employee positions by December 31. These certain initiatives announced for the first nine months of 2004 will result in the net reduction of 1,482 employee positions by the end of the year.

The third quarter results also include specific charges of $6 million or 3 cents per share for various items including lease provisions and increased workers' compensation claims related to the downsizing and closures--and closure of facilities in the U.S. This compares to specific charges in the third quarter of last year of $2 million.

Consolidated operating income before restructuring was $115 million for the quarter compared to $117 million last year. For the first nine months of this year, operating income on the same basis was $321 million compared to $230 million last year. This includes $10 million of specific charges during the first--nine months of $204 million compared to $56 million during the same period of last year.

The operating margin before restructuring for the quarter was 7 percent compared to 7.3 in the third quarter of '03 and the year-to-date comparison of 6.8 percent in '04 compared to 4.9 percent last year.

On the same basis, net income for the quarter increased to $59 million, while earnings per share were 37 cents per share compared to $55 million or 34 cents per share in the same period last year. For the first nine months of this year, net income was $148 million or 91 cents per share compared to $78 million or 37 cents per share for the first three quarters of last year.

SG&A expense in the quarter was down to $118 million and excluding the impact of foreign currency--foreign exchange, was down $3 million end of quarter compared to last year. This number includes costs related to stock options that we began expensing in 2004. The results are provisions for performance incentives. We did not pay incentives last year and are taking the provision now because of our improving results. At the same time, we are maintaining a conservative and prudent approach to doubtful accounts. All of these factors help offset the favorable impact of work force reduction. For the first nine months of the year, SG&A expenses were lower by $45 million compared to the same period in 2003.

Financial expenses for the third quarter were reduced by $10 million compared to last year, and on a year-to-date basis, financial expense decreased by $26 million, excluding a $2 million charge on the extinguishment of long-term debt in the first quarter.

If we look at the segmented results, in North America, third quarter revenue increased by $9 million to $1.29 billion. Year-to-date revenues are down 1 percent. Operating income before restructuring for the third quarter was $113 million compared to $109 million last year. Year-to-date operating income before restructuring was $295 million compared to $233 million a year ago. The operating margin for the--margin for the quarter was 8.7 percent compared to 8.5 last year. Year-to-date the margin has improved to 8 percent from 6.3 percent before restructuring. In Europe, revenues were $296 million for the quarter, up 8 percent including the favorable impact of currency. Before restructuring, operating income in Europe was $9.3 million compared to $6.2 million last year. Year-to-date operating income before restructuring was $34 million compared to $6 million the previous year.

In Latin America, revenues increased 11 percent to $45 million. Year-to-date revenues are up 5 percent to $136 million. Operating income before restructuring was $1.1 million. Year-to-date it is $3.1 billion compared to a loss last year.

Now turning to free cash flow. Our free cash flow from operations from the quarter was almost neutral, and year-to-date was $145 million ahead of last year. During the quarter, our accounts receivable securitization program decreased by $69 million as compared to the previous quarter. This is a seasonal fluctuation. In addition, we made investments in inventories as we prepare for our busiest time of the year.

As for CapEx, we are still below last year as we did not have any significant lease buyback during the quarter. Our CapEx [indiscernible] for this year will be approximately $150 million. Some investments we had envisioned earlier aren't likely to occur until 2005. We maintain, as we indicated last quarter, that our CapEx for the next three years will be in the range of $250 million to $350 million per year as a result of our strategic capital investment plans as we announced last quarter.

With regard to pension, after nine months this year we have contributed $69 million. This compares to a contribution of $68 million we made last year. Of that amount, $47 million was made in the fourth quarter of '03. Since our last actuarial evaluation on September 30, 2003, we have contributed $116 million. We do not expect to make any material contribution in Q4 of this year.

From the financing perspective, I would like to mention that in the third quarter we have renewed and extended our securitization program in the U.S. for another year and added an automatic 12-month renewal option. We are also renewing and extending our $1 billion bank facility. We have approval from the banks and the signing is expected to take place next week. We will now be looking at a maturity of November 2007.

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

Now, David will review operations and markets in North America. Dave?

Merci. Thank you, Claude. Good afternoon, everyone. As usual, I'll give you an overview of our--of the markets in our major North American business groups and provide additional comments on some of the restructuring initiatives and operational improvements and challenges. As we have said for several quarters now, price continues to be a major issue. It varies from group to group, but any improvement in pricing is and will be demand driven. As Pierre Karl has mentioned, most of the improvement we have made to date has been largely cost driven. We have recently taken the right steps to make some structural changes to our platform that caused some problems in this quarter, but we will see the benefits going forward.

Let me give you a brief run down of our major North American business groups. First of all, the magazines. As has been mentioned, the closing of our Effingham facility and the moving of work and equipment did not allow us to take as much benefit from the increase of ad pages as we would have liked. Pierre Karl used the example of Vogue, but several of our other publication customers saw ad pages increase anywhere between 20 to 30 percent. Our platform is better positioned, but the extra costs related to producing some of this work with recently installed equipment reduced our margins in the quarter. This was particularly true in the first half of the quarter. We did begin to see some improvement in the latter half of the quarter, which I believe bodes very well for us in the future.

Moving on to catalogs. We had some wins in this sector in the third quarter, including renewals with Enthusiast Ink, Bloomingdale's, Macy's, and Central Purchasing. We have a couple of production issues with two specific plants in this platform, but again, we've seen improving conversion rates by the end of the quarter, a different story in September than what we saw in July.

There are some encouraging forecasts in this market. The Direct Marketing Association projects that sales from catalog--that catalog sales will increase 6.8 percent in 2004, even though sales and advertising spending is on the rise, catalogers find themselves under significant pressure from fierce competition, a wavering U.S. economy, and increasing privacy regulation and material costs. We understand these pressures and listen to our customers' concerns for schedule compression, distribution and savings, and the assurance that Quebecor World will be able to accommodate their growth.

Our new equipment will help in that regard with the substantial investment in 64-page press technology. The first 64-page press supporting catalogs will be operational in 2005.

Moving to our retail sector. Significant retail customer wins for the third quarter include long-term contract renewals with Best Buy and Kohl's, two market leaders. Our market position in both retail and Sunday magazine markets remain strong. This business is fighting price pressures, but is holding up well by operating more efficiently. For example, our West Coast facility in Riverside, California that has experienced some growing pains to date, has turned in its strongest quarter yet. It's all the way in the black. We continue to work with customers as they become increasingly interested in changing their advertising programs to combat the pressures of a challenging retail market. This involves changes in product size, page count, and paper substrate types. In addition, we have seen an increase in versioning across many market segments as retailers look for a more targeted marketing program.

Over to our book and director group, overall volume in the book business was up 3 percent, but revenue was flat. We have seen an improvement in the adult trade sector, but more of the work was concentrated in one and two-color markets and not as much in the higher priced hardcover markets. There was a bit of an up tick in the educational sector, largely in college, although not as strong as we would have liked. We see a bright future there, particularly toward the end of 2005.

Our decision to reorganizing--to reorganize our book platform and downside our Kingsport operation was the right one and our results in Kingsport proved that. We are now making money there. Again, something that improved during the course of the quarter.

In directories, we experienced volume increases of 18 percent, but at lower prices. Much of this work is from independent directory publishers, replacing a major contract that ended last year.

Over to our commercial direct groups. One of the bright spots this quarter was our direct marketing business where volume was up significantly, because we have made some major inroads with financial institutions and our games business also did quite well this quarter. The commercial business, on the other hand, continues to be fiercely competitive. This is really a plant-to-plant type of analysis with some plants doing better than--better than others, largely because this is a locally driven market.

Our Canadian operations. In Canada, volume was up 7 percent, due primarily to gains in the retail segment, but revenue in U.S. dollars was basically flat. Our business in Quebec is doing well, but there, as in other parts of Canada, the rising Canadian dollar is squeezing margins on their U.S. work. We have made progress in improving our Canadian operations, including a new labor agreement at our [Islington Gravier] facility, which will reduce certain manning levels and make the facility more competitive.

So to sum up, obviously, there still is more we need to do and more we can do in terms of structural changes to improve efficiencies. We don't expect the market to become any less competitive. The new equipment that will be coming online beginning next year will help significantly, but it is only one part of our plan to improve productivity and better serve our customers. As usual, our Management is focused on these goals and is equally committed to achieving them to deliver improved results.

And with that, I'd like to pass it back to Pierre Karl for some closing remarks.

Thank you very much, Dave. Before we take questions, I would like to make a few comments about our operations in Europe and in Latin America.

In Europe, as in North America, pricing continues to be very competitive. Our volume increased 2 percent with strong performance in the retail and magazine segments. Year-to-date volume is up 5 percent in Europe. In France, operating income and margins were still negative for the quarter and year-to-date, but an improvement over last year, which demonstrates the positive impact from restructuring initiatives we began to implement in 2003.

There is still more action we can take to improve our results, especially in the offset market, and we'll be doing much more in France.

In Europe, the Brazil market remains the most stable while the off--the web offset market continues to suffer from broad overcapacity and price pressure, driven in part by a newly installed [i-pagination press] in several--in several countries. We are also seeing increased low cost competition coming from the EU countries, namely Poland, Hungary, and Czech Republic.

In Sweden, we announced in the quarter that we are closing our plant in Stockholm and relocating the presses to our facilities in Finland and Belgium. This news has been reasonably well received by our customers, some of which are moving their production to our Swedish offset facility or to one of our other Gravure facilities.

In Latin America, the revenue and volume were up over the third quarter last year. The volume increase was generated by the magazine, catalog, directory, and retail sectors, which helped offset a drop in our book business in San Paulo and in Mogoda and Columbia. The volume increases also helped offset the continuing difficult pricing environment. We are continuing to gear up out Latin America export business for the U.S. and for the European market, especially in the book sector.

The increase in the magazine, catalog, and retail sector are indicators of improving economic conditions in the region and currencies have remained stable in most countries.

To conclude, we are taking the appropriate measure to reorganize certain business groups to be more efficient and to improve customer service. This quarter, some of those measures resulted in temporary inefficiencies in a few of our large facilities in the U.S., which affected our results. However, these moves better position us to produce improved results going forward. We have a plan and we are making it happen. This, coupled with our ongoing cost containment efforts, operational efficiency programs, and previously announced strategic investment, will improve productivity and service without increasing capacity. The changes are real, they are sustainable, and they are producing results for customers, employees, and shareholders.

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

We will now begin the question and answer session. (Caller Instructions.) Your first question comes from Andrew Mitchell. Please go ahead.

Thanks and good evening. I have four questions. Maybe I'll just give them to you two at a time. Getting back to the magazine disruptions you were talking about in the network related to the Effingham closure. Can you talk about the drag on an EBITDA standpoint that maybe occurred there? And secondly, can you talk about the election. We're hearing on the magazine front that it's not being affected at this point by the uncertainty developing in the U.S. advertising market around the election, and I just wanted to hear if that's meshing with what you're seeing as well.

Andrew, as you know, we--whenever we have inefficiencies in the--in our operation, we don't give specific--you remember last year that we had some problems with some of our--some of our operations, which we fixed along the way. We had some problems in the third quarter of this year. So we cannot be specific, but I would say it probably accounts for the part of the differential between what we reported, 37 cents, and what the street was expecting.

With respect to advertising and the impact of the election on advertising, we've seen up ticks in markets that aren't directly impacted by current events or news. We've seen it in a number of special interest titles as well. So, you know, our hope is that, you know, we'll see a--somewhat of a more robust magazine market in 2005. Certainly, what we saw and are seeing throughout this quarter, has taken quite a number of us by surprise.

[Indiscernible] surprise.

Yeah, and there's some pretty major titles out there whose ad pages are up 20 to 30 percent versus last year, as I said. So, you know, this is a leading--has been used as a pretty significant leading indicator for the print market at large. So--.

Great. Okay. And the last two questions, just on the Corby facility in the U.K. Can you talk about whether you are any closer to replacing the lost contract volume there? And then, finally, on the financing cost side, if the U.S. dollar continues to slide, Claude, I was just wondering if you can give me any sense at to whether we'll see any further sequential benefits on the financing line?

  Okay, Andrew. I'll answer the first part and Claude will do the second. On Corby, we are, you know-- we identified many possibilities, many customers, either domestic in the UK or elsewhere in Europe. We have the capacity, because those machines are of interest. You know there are four round (ph) presses, 16 units with gravure folders. They have quite a high amount of flexibility. So today we’re printing Sunday Magazine on it, but it’s not impossible to consider that we can reconfigure the nature of those machines to print the directories, which we do also in some of our European operations in Spain. There’s an interesting market there, so we’re considering many alternatives at this stage, but nothing yet to announce.

Okay, on the slide of the US dollar, one of the impacts that we have, naturally, is that sales, especially in Eastern Canada – a proportion of our sales is made into the US market, so that has had an impact on our results. But I would say that we had, in the last couple of years, covered a good portion of our sales for this year and next year by forward contracts, so that the impact this year and next year going forward should not be material on the overall scheme of things.

I thank you for that. I think what I was meaning more was just on the financing lines, I think you’ve got some derivative related to your foreign exchange exposures and matching up your balance sheet liabilities. And I think that’s been having some implications for your financing line. I was just wondering, considering the volatility we’re seeing right now, can you just give us some guidance on sequentially, whether that’s an impact we should be taking into consideration?

No, what we have is, if you look at the notes, we have forward contracts to cover sales and then we have cross-currency swaps to cover our investment in foreign countries. But that has no impact on the P&L. It's just pretty well a balance sheet item.

So you would suggest – I suppose you wouldn’t, because you don’t give guidance, but this kind of level you’ll be maintaining on the financing expense side?

Basically, yes.

Jeffrey Fan, UBS.

A couple of questions regarding your cash flow. One, I think, Claude, you mentioned that you made some investment in inventory this quarter, which impacted your cash flow. I guess you’re implying that that’s going to reverse in Q4? I just want to check that. And whether you have any working capital projections for year-end as well?

Okay, the answer to the second question is no, we don’t give out projections for the fourth quarter. But the inventory buildup that we have done in the third quarter is pretty well seasonal. If you go from one – if you look at the second to the third quarter in 2003, and the second to third quarter in 2004, you’ll see that there’s a buildup. And that comes down in the fourth quarter as we put the work through the network.

Just one quick one. In the last couple of quarters, I think you guys mentioned that you had some gains on waste or scraps. Can you talk about whether you had a similar gain this quarter?

In the third quarter we had gains that were close to what we had in the first two quarters of this year.

So the quarterly run rate is pretty similar?

I think it’s down slightly, but it’s fairly similar.

Phillip Olson (ph).

Just a couple of questions with respect to the balance sheet. I think Moody’s was out with a comment fairly recently, blithering (ph) the negative outlook, concerned about overall leverage. I guess my question is twofold. One, given the ongoing business risks that you guys are facing, would you look at any action potentially designed to strengthen the balance sheet? I think your current credit profile is probably inconsistent with your investment grade rating. I’m just wondering if there’s some steps you could take there to strengthen it, as the industry conditions remain somewhat challenging?

And the second question, specifically on free cash flow, I think the rating agencies are looking for a minimum of 150 million per year going forward. I just wanted to make sure that those are estimates that you feel comfortable with?

Okay, on the first part of your question, one of the, as you say, one of the issues that was raised by one of the rating agencies in particular was liquidity. What we have done, and as I mentioned earlier in my presentation, is that on our synchronization program we have extended it by one year and we have added a one-year term note, so at least to give us more flexibility in that regard. And also, we are extending our billion-dollar facility until 2007, so that should take care of immediate liquidity problems that did not exist, but that could be perceived by certain parties.

The other part about free cash flow, agencies have talked about $150 million going forward. In the last 12-months we had free cash flow – the last 12-months ending September 30th, we had free cash flow of $300 million. We are entering our period where we generate our biggest free cash flow, so we’re not ill at ease at all with the number that’s being mentioned.

And just if I could circle back to the first question, it was really less to do with liquidity and more to do with the overall leverage levels. I think if you look at your balance sheet ratios relative to EBITDA or to free cash flow, it remains very high for a low investment grade rating. And I was wondering if there would be any step that you’d be prepared to take to help accelerate the de-leveraging of the balance sheet?

Well one of the steps that we’re taking now is improving our results, generating more free cash flow and bringing down the leverage.

Megan Anderson.

Hi, good afternoon. Just on the issue of the – I’ll call it the cost setback, with regard to the Effingham plant, are you confident or comfortable saying that that is really confined to a one-quarter event? And on that same vein of thought, is it possible we could see a similar type of event happening with the Stockholm plant?

Oh, I think it’s a month by month thing. We’re going to be working through it very rapidly and it will have some lingering impact in the first part of Q4, but it’s rapidly improving. It's very temporary. This is basically moving machinery around and going through the usual shakedown, inherent with starting machinery up, and it just happened to coincide with a very robust bump in demand that – we knew there was going to be growth, but unforeseen in its robustness. So, this is very much a temporary thing and the initiative is totally the right thing to do.

I think you know us well enough by now to know that when we have opportunities and issues and problems, our predisposition is to deal with them immediately and not wait. So this was the right move and will bear fruit very very rapidly.

So you think this is a unique situation and unlikely to be replayed out in any other plant you’re sort of doing the same thing with?

Yes.

Okay. I’ve just got two more questions. Just on--.

Megan? Do you want just the second part of your question being Stockholm.

Sure.

The operations there, obviously you have quite a different size at Effingham. You had nine offset presses in Effingham, where you only have two gravure (ph) presses in Stockholm and two stitchers and one perfect binder. Binding was pretty big also in Effingham. So, we don’t see any problems taking place. In fact, we are ready to move the different machines. You need to know that these two machines there fit the same size of the machines we have in St. Helene (ph) and in Belgium.

So in these two facilities we have three 2-meter 45s, so we’ll have one. So each facility will not have four 2-meter 45s. That will be – it’s probably the best configuration that you can have. So we look forward to having significant improvement in the near future. Where our Stockholm facility, as you probably know, was losing money for now several years.

Okay. And then just two more questions. One on pricing. Looking to your MD&A, I appreciate you giving us all the detail about pricing by unit. I’m wondering if you can comment on whether you see this, at this point, being more an issue of you wearing off old contracts that had much greater discounts, or is this both a contract and a spot issue right now?

It's a combination of both, although we haven’t had any – I can think of one contract that kicked in this past quarter. But basically it’s influenced more on a spot basis, I suppose, or the combination of a lot of medium and small size transactions.

Okay. And then the final question is for Pierre Karl. I’m sorry, when you were speaking at the beginning of this conference call, I couldn’t write as fast as you speak. But just about the lawsuit that you filed in Cook County. Can you just repeat that? I think what I heard is that you filed a suit against Donnelley and three – I think it’s three former IQW employees. I couldn’t figure out whether you’re seeking damages or whether you want a cease and desist in terms of using trade secrets. Can you just clarify what you said?

It's an injunction prohibiting Donnelley and the former Quebecor employees from using or disclosing Quebecor World’s trade secrets and other relief. So it’s an injunction that we’re asking.

Okay. Now I realize that you didn’t want to comment about it, but can you reflect perhaps on any other similar situations where you’ve had to take such action and what the outcome might have been?

No. It's the first time that we’ve been seeing that situation.

David McFaggin (ph).

Yes, two questions. You usually assess the pension every year, September 30th, I was wondering have you done that yet for 2004, and can you tell us the pension deficit?

We’re going to be doing our actual evaluation as of September 30th. We haven’t got the results at this particular time. So I really can’t answer that question, I’m sorry.

Okay. The other question relates to the news with Donnelley today. Were you the printer for WWE, the contract that they announced?

Which contract did they announce?

They just announced a multi-million dollar – oh sorry, I’m looking at the wrong release. Okay, just ignore that. Okay thanks, bye.

Vince Valenti (ph).

Thank you. I have one question on cost and one on revenues. First on cost, your SG&A line, the trend really changed this quarter. If I just go back in the first quarter you saw improvement from 136 million to 119. In the second quarter it went from 141 last year down to 113 this year, so great improvement. And this year it’s almost flat, 119 last year only went to 118. So I wonder if you can comment on why we’ve seen such a change in the trend? Is some of this Effingham cost you’re talking about, did that flow through SG&A? It would seem to me that those are more cost of sale type items, but maybe I’m wrong there.

And the second part of that is, going forward, maybe more for Claude, should be expect more just flat year over year SG&A from this point forward and you’ve sucked out all you can or is this just a temporary slowdown?

The Effingham with the (indiscernible) cost of sales wasn’t going to SG&A. As I explained in my presentation, we had the first six-months, a fairly rapid reduction from the previous year, fairly flat in the third quarter as compared to last year if we exclude the foreign exchange. But as I said, we are expensing now stock options, which we did not do in 2003. We’re also taking provision for performance incentives, which we did not pay out in 2003. We’re also, as I said, maintaining conservative and prudent approach to doubtful accounts. So all of these offset the decrease that we had known in the previous quarter.

Going forward, as you know, as we make reductions and we move on from one quarter to the next, you have the law of diminishing returns.

And we also, from an operational perspective, at the beginning of the third quarter we had operating issues in a couple of our catalogue facilities and we wanted to be ready to service our customers during the peak time, which starts in the latter half of the third quarter. And our key operating indices indicate that those moves are very prudent, because toward the end of the third quarter these catalogue facilities were converting in a much more efficient manner. And it was due to some of the provisions and cost that we took in the beginning of the quarter.

Okay, that’s helpful. And my revenue question is related to the inventory you talked to before, in the MD&A though, you mentioned specifically that an increasing inventory, mostly explained by higher levels of work in process caused by timing differences in delivery. That caught my attention. I’m just curious, has there been a timing shift in some delivereies of some orders from Q4 to Q3? Oh I guess sort of the opposite, from Q3 to Q4 this year?

I’m not sure I understand. Could you repeat the first part of your question?

Yes, the inventory buildup that you talked to, in the MD&A is mentions timing differences in delivery. So I’m just curious if there has been an unusual shift in deliveries of some of your product that would have been delivered in Q3 last year, but maybe slipped by a week and are delivered in Q4 this year? So the slight weakness in Q3 revenue could be offset by a bit of a bulge in Q4? I’m just trying to get if there’s any--?

No. What we’re alluding there is that we might have ordered earlier some products such as paper, because of the price increases, also because it’s a tight market. So that’s all we’re referring to in the MD&A.

Okay. And then one last thing. You talk about natural gas hedges now. Can you talk about – there’s been a pretty big jump in natural gas prices in Q4 so far. Can you talk about how much of your natural gas cost is hedged for Q4 and maybe into ’05 as well?

Good question. We know – we’re very well aware that natural gas has spiked up substantially. We had taken some hedges earlier this year, so we’ve got, I would say about one-third of our – the demand until the end of this year that is hedged at pretty favorable prices compared to current prices. Going into next year, unfortunately our hedging position in lower than that for the full year, given the fact that we were looking to take position at more reasonable prices, but prices have spiked up so rapidly so that we did not have a chance to improve our position in that regard.

We will now take two final questions. Bob Choi (ph).

Hi, this is Bob Choi, from Merrill Lynch. A couple of questions. One, I noticed that in the MD&A you mentioned that magazine volume was flat in the quarter and I just wonder if you could reconcile with your commentary about advertising page recovery during the quarter, if that has something to do with the restructuring inefficiency?

And two, the corporate and other expense line spikes up to $8 million in the quarter, from a couple of million dollars in the first half, could you talk a little bit about what exactly happened there? Thanks.

I think with magazine revenues, as we mentioned, decommissioned equipment during the quarter, in which there was increased demand with core customers. And then on top of which we lived with the startup and learning curve with several pieces of equipment. So, that’s where the pinch was.

The second part--.

We couldn’t understand the second part of your question. The line was bad.

It would be segment breakdown, geographic breakdown in the corporate and other line, operating income was a negative $8.7 million. And year to date it was 11 point something. So I just wanted to find out what was behind the increase in the third quarter?

What we have in there is some of the charges that are not allocated specifically to the division, some of the specific charges, also accrual for management incentives, stock options, some of the things I talked about earlier.

Tim Casey.

Well, almost. Can we go back to the corporate line, following on Carl’s question. I guess is that a run rate we should think about, assuming that there is now going to be options in management and performance incentives on an ongoing basis?

And can you give us a little direction on your exposure to rising energy prices? I recall, I think it was the first part of 2003, there was a nasty spike on the cost side in – I recall the number was somewhere around $15 million. I may be off there. Is there any color or direction you can give us on the magnitude of any potential increases due to the energy environment? Thanks.

Well energy I’ll answer with the second part of your question. Energy prices, natural gas now is about $8.40 or $8.30. It has gone up from $6 it was about two or three months ago. Last year in February, it spiked to $12, which had a fairly substantial impact in our Q1 results of 2003, because the price had gone up rapidly.

I should say for this year, part of the increase is already built in our results, because prices have been high throughout the year. As I mentioned earlier, we have part of our needs that are covered, hedged for next year, but that’s minimal as compared to what we could have done if we had known where prices were going. So that’s my answer. I hope it’s sufficient.

And your first part of the question was that in the unallocated, if going forward that was to be expected. Well, as I said, we’re extending the expensing stock options as we go forward we will have those expenses, specific charges. We hope that we’re done with specific charges, but it’s hard to say from quarter to quarter.

We have done last year a fair amount of cleaning our house, but we’re always running into, along the way, little bumps on the road (technical difficulty last minute of event).