Quad/Graphics Inc (QUAD) 2005 Q1 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to the Quebecor World 2005 first quarter results conference call. I would now like to turn the meeting over to Mr. Claude Helie, Executive Vice President and Chief Financial Officer of Quebecor World, Inc. You may now proceed, Mr. Helie.

Thank you, Operator. Good afternoon, and welcome to our conference call for the first quarter of 2005. As the operator has said, my name is Claude Helie. I'm the Vice President and CFO of the Company. This call is being webcast and forward-looking statements are subject to Safe Harbor provisions.

Last quarter, we had -- we held a combined Quebecor World and Quebecor, Inc. conference call so you could receive the full picture of all our operations at the same time. It was not possible to do a joint call this quarter, because we could not schedule both board meetings and annual meetings on the same day. We will return to that format in the second quarter.

Joining me today from our offices in Montreal, are Pierre Karl Peladeau, the President and CEO of the Company, also with us is Jeremy Roberts, Vice President, Corporate Finance and Treasurer and Philippe Cloutier, our Director of Investors Relations.

Pierre Karl will now provide some introductory remarks and give us an overview of our market segments. Pierre Karl?

Thank you, Claude. Merci. Good afternoon everyone and thank you for joining us.

In the first quarter, Quebecor World earned $0.28 per share before restructuring, compared to $0.23 per share in the first quarter of last year. Revenue in the quarter was 1.6 billion, compared to 1.5 billion last year. Operating income before restructuring was 89 million compared to 97 the first quarter of 2004. We continued to reduce costs and improve efficiencies.

Again, this quarter we saw reduction of selling, general and admin of 5 million compared to the same period last year. The cost reduction had not have – has a strong impact on operating income as we would have liked due to the ongoing weak price environment and lower volumes.

In the quarter, we sold our Torcy facility in France, which will have a positive impact on future results. We are also in the process of putting together a comprehensive investment program that will provide this platform with the right mix of technology to perform in this market. We also -- let's remind that our North American commercial platform is non-core. As a result, we recently entered into an exclusive negotiation to sell these assets.

This includes assets in the U.S., and similar facilities in Canada. Operating income in the quarter was also impacted by lower volume in our U.S. magazine business, the loss of a customer at our Corby, UK facility, and our French result and our U.S. commercial group that I already mentioned.

In our magazine sector in the U.S., the drop in volume is related to several factors. Even though overall magazine ad pages as measures by the Publishers Information Bureau increased in the quarter, ad pages for weekly magazines were off more than 1%. Weekly magazine account for a significant share of our volume.

We didn't renew two important customers -- Harris Publication and Conde Nast which has reduced our volume. The Harris work left at the end of 2004 as did some of the Conde titles. The rest of the Conde work that was under long-term contract will leave for a portion at the end of 2005 and 2006 for the other portion.

We are working to secure new volume as well as renewing our long-term customers. We are reading (ph) our shares of new titles and having success in the short-run magazine business. A large part of our capital investment plan is target at our U.S. magazine platform. Some of this new technology will start to operate in the fourth quarter of this year, and it will improve the efficiency of our offset platform.

In Europe, our operation in Finland, Sweden, Belgium and Spain showed year-over-year improvement. However, in France, restrictive labor condition and the lack of investment in our offset platform over the years is affecting our results. We've been trying to introduce more efficient labor practices, which has resulted in several unannounced work stoppages.

We are disappointed by these reaction, because they are not creating an effective environment to move forward with the appropriate investment that is required to maintain our industry leadership. We are also in the process of putting together a comprehensive investment program that will provide this platform with the right mix of technology to perform in this market.

I will now cover the review of North American operations. As I said earlier, our U.S. magazine group experienced a decrease in volume. Ad pages, as reported by the Publishers Information Bureau, were essentially flat for the quarter, but slightly lower from weekly magazine which is a large part of our business. In the quarter, we produced new titles from A Chef (ph), TV Guide, and Ers (ph). Recently, we reach an agreement to print the UK -- I'm sorry, the U.S. version of a Okay (ph Weekly, a UK publication.

Our targeted publication group won new work from Hemmings Motor News, Giant magazine, and Time Out Chicago. The U.S. catalog and retail market is undergoing significant consolidation as witnessed by the Sears-Kmart merger, the May Department Stores acquired by Federated, Cornerstone Brands acquired by IAC Interactive Corporation, to name just a few. The result is that the sector will continue to see very competitive pricing.

In the quarter, we had several renewals in our retail business with CompUSA, Walgreen's, Bed, Bath and Beyond, and new wins with Dillards, Rhodes, and Belk Stores. In catalog renewals include Paragon, Avon, Carol Lott (ph) Casual Male and Universal Screen Arts.

On the retail side, we purchased a facility in Pittsburgh, California, that will booster our west coast retail platform. The facility is located near San Francisco, and was previously operated by American Color Graphics. As you know, California is the sixth largest economy in the world. We are the only printer that can offer a complete gravure offset solution in the retail insert, the catalog, and the magazine business in this area.

In the book and directory, the business was essentially flat compared to last year, with our book volume being lower and our directory volume up but at lower prices. Price competition is strong in the book and directory markets. We had a strong quarter in the adult trade and mass market paperback markets and are making inroads in the educational sector out of our Dubuque facility.

In our directory business, we scored an important win this quarter with Dex Media. We will be progressively increasing our volume with them over the next several years until we become their sole directory printer in 2012. Over the term of the agreement, our volume with them will quadruple. We currently print 200 directories for them.

In Canada, our results were ahead of last year. Revenue and volumes were better than the same period last year, mainly due to growth in the directory, and retail sectors. Pricing continued to be very competitive, but this has been offset by the higher volume and cost containment efforts.

In Europe, I have already mentioned our principal European issues with our underperforming French platform and the loss of volume in our facility in the UK. Overall volume in Europe increased, especially in the French magazine but it was offset by continued price erosion. Our operation in Latin America improved on all fronts compared to the same period last year. We are having success with plan of positioning this platform as a low-cost alternative to publishers and retailers who are currently outsourcing to China.

We recently held a book fair in New York City with most of the major publishers, and brought them together with representatives from our Latin American facilities. The event was very well received. Some publishers have already toured our facilities in Latin America and others are scheduled to.

I will be back with some closing remarks, but first, Claude will now review our financial results.

Thank you, Pierre Karl.

In the first quarter, revenues were 1.6 billion, compared to 1.5 billion in the first quarter of last year. Operating income before restructuring was 89 million, compared to 98 million in the first quarter of 2004. Consolidated revenues increased 4% compared to last year. Excluding the increase in paper sales and favorable currency impact, revenues were essentially flat.

The volume of increase reported by retail, Canada, France and Latin America was offset by difficult market conditions, including lower pricing. The benefits of restructuring initiatives and improvements of several business groups were offset by some of the operational problems Pierre Karl alluded to. The operating margin before restructuring for the quarter was 5.5% compared to 6.3% in 2004.

The first quarter results include impairment of assets and restructuring charges of 33 million, or $0.23 per share, compared to 4 million, or $0.03 per share in the first quarter of 2004. The noncash component of 25 million is related to the impairment of assets in the UK, Europe, and North America. The cash items amounted to 8 million, of which half is related to new work force reduction initiatives, mainly in the UK and the other half relates to the continuation of prior years' incentives -- initiatives, sorry.

The first quarter results include specific charges of $3 million or $0.01 per share, mainly for lease provisions. In 2004, due to the favorable legal claim settlements, specific items resulted in the 2 million gained, or $0.01 per share. Year-over-year the differential is $0.02 per share.

SG&A expense in the quarter was down 5 million to 111 million. We continue to maintain this strict discipline over costs, the decrease is mostly due to cost containment, and work force reduction. SG&A as a percentage of sale, was 6.8% in the first quarter, compared to 7.5 in the same quarter last year.

Financial expenses for the quarter were 29 million, compared to 38 million last year mainly due to a lower volume of debt, a non-recurring loss on the extinguishment of long-term debt in 2004, and foreign exchange gains compared to losses in 2004.

The reported tax rate before restructuring was 22.9% compared to 33% in 2004. The decrease was mostly -- mainly due to lower profits before taxes in jurisdictions with higher tax rates. Net income before restructuring for the quarter increased to 47 million, while earnings per share were $0.28 per share -- were $0.28 compared to 39 million or $0.23 per share in the same period last year.

Now, looking at the segmented results in North America, revenues increased 40 million to 1.23 billion, but were down 1% excluding the increase in paper sales and favorable currency impact. Operating income before restructuring was 81 million compared to 87 million last year. The operating margin before restructuring was 6.6% compared to 7.3% for the previous year.

In Europe, revenues were 332 million for the quarter, up 5%, excluding foreign exchange and paper sales impact where revenues were essentially flat this quarter as compared to the previous year. Before restructuring, operating income in Europe was 6.3 million, compared to 11.9 million last year. In France, operating income was negative, and lower than 2004.

The loss of a major client in UK started to impact our operations outside of France, and the operating margin before restructuring was 1.9% compared to 3.8% last year.

In Latin America, revenues increased 21% to 57 million, and operating income and margins before restructuring increased to 3 million, and the -- and 5.3% respectfully.

Our free cash flow from operations for the quarter improved 10 million, resulting to an outflow of 80 million, compared to 90 million in 2004. Capital expenditures at 55 million were above last year, due to the implementation of our strategic capital investment plan, and total CapEx for 2005 should be approximately 300 million.

We were able to maintain our debt to capitalization ratio to the December 31, 2004 level of 43-57 as opposed to Q1 last year where it stood at 46% debt and 54% capitalization. The board of director declared a dividend of $0.14 per share, the same as last quarter, and an increase of $0.01 as compared to the $0.13 that we paid last year. Also today, the Company announced a normal course issuer bid for a maximum of 7.3 million shares, or 10% of the number of outstanding subordinated voting shares. The NCIB will be accretive and will further enhance shareholder value.

Finally, as we have noted in our press release, and in our comments earlier today at our annual meeting, while we are taking steps to address some of the challenges we are facing, we do not believe that these measures will be in place in time to have a significant impact on our second quarter results. We anticipate our results in the second quarter will be lower than our results in the first quarter of this year on account of a forecast drop in volume of our U.S. magazine business. We also expect our U.S. commercial group will continue to underperform until we finalize our divestiture plans. And the situation in Corby will be aggravated through the end of this month, when the remaining volume from a large customer leaves the facility.

I'd be happy to answer your questions in a few moments, but first, I will turn the call back over to Pierre Karl for his closing comments.

So, as we outlined, we face certain challenges, and I assure you, we have already begun developing plans to meet those challenges. I would also like to point out that we have faced difficult markets and difficult decisions before. We are not afraid to make the decisions required, and we have successfully navigated through stormy seas in the past, our 2004 results are an example of that.

Finally, I would like to briefly make note of an agreement we recently reached with representatives of the union in the U.S that represents approximately one-third of our U.S. workers. This agreement governs rule regarding union organizing at our U.S. facilities. It is only -- only in accord with Quebecor World-stated policies and uphold our workers right to a secret ballot election to decide on union representation. This agreement puts an end to what was an unproductive campaign for both parties and will allow us to work towards our common goals which is building a stronger company for all our stakeholders.

We will now take your questions.

Thank you. [OPERATOR INSTRUCTIONS]

Thank you. Our first question comes in from Megan Anderson. Please go ahead.

Hi. Good afternoon.

First question, your comment about expectations for U.S. magazine volumes to drop next quarter. Is that an extension of what you saw with the weekly magazines in this quarter or is that a customer dropping off? That's the first question.

Second question, was there any benefit at the EBITDA line this quarter from selling scrap paper at higher prices versus last year? And third question, on the potential sale of your commercial operations, could you give us any kind of idea what you expect proceeds may be?

Okay. -- Claude will answer the second question. I think that you would probably be forced to repeat the third one, and I'll answer the first one.

On the magazine side, there is two type of businesses. What we call the consumer magazine which are mainly the monthly long-run magazine as I mentioned to you earlier that had been affected by the loss of certain titles from Conde Nast. On the TP side, which is the short and trade publication, this is a quite large segment of the business, obviously, the brands are not as known as a consumer magazine that everybody knows which are mainly under contract on a long-term basis.

So we're -- we are more aggressive on this side of the business to be able to fill the availability and the capacity that had been available to our consumer magazine. In certain ways also, we are reconfigurating the way that we've been working previously. All those plants or facilities that were dedicated in the consumer magazine will now move forward and be more flexible and using also this platform to print those trade and small run magazines.

Claude, on the paper side?

Yes. I believe your question was related to scrap revenue?

Yes.

It's basically flat this quarter as compared to last year. And your third -- the third segment of your question, sorry we missed, could you repeat it?

Sure. It related to the potential sale of your commercial operations, if you could give us any financial metrics around that, perhaps in terms of expected proceeds.

The -- We are talking about a dozen plants with sale of approximately $250 million that we had in 2004. It's too early to give other specific at this time. Once we have concluded a deal, if we conclude a deal, which we hope to do by -- before the end of the second quarter, we will give you the full particulars.

Did we say that we inherit this segment mainly from the World Color acquisitions? Previously, Quebecor printing thought that this is not the type of business that we would like to be in. There was only one facility that we have been operating in Canada on the Toronto area, and it was also dedicated to the financial printing where we were using the sheet-fed activities that we got there to service the financial market in Toronto.

The other facilities that are mainly located in the U.S. were more driven to service advertising agencies or the annual report market, which is I would say probably highly relationship-driven. And what we are strong on and that's how we are building our business on is our capacity to service customers on a nationwide basis, and this is the gravure and our offset platform.

Okay. Thank you.

Next question, please?

Thank you. Our next question comes in from Andrew Mitchell.

I have a couple of questions as well, so I'll give them to you up front, and then I'm happy to repeat them, if you need.

First, just on the share buyback. In April, it appears that Moody's reaffirmed your credit rating but they did also reinforce negative outlook, and cited your free cash flow to debt ratio as a concern for them.

So I'm wondering, from the standpoint of the share buyback, it stands to reason that that would tend to aggravate that measure they're focused on, and as a result I'm wondering are you -- I'm just wondering what your full rationale is for launching a buyback at this point. Are you not concerned about your debt ratings, or you think Moody's is heavily underestimating your free cash generation? I know you've refinanced a lot of your long-term obligations, so you're probably not concerned about that part of that balance sheet in the short term, here. But, it seems unusual to push ahead in light of a potential downgrade.

Secondly, just on the commercial facilities. Claude, I know you said that you can't provide us with a lot of color right now. I just wondered, can you take us through whether you think you are going to have to put any cash restructuring charges in place related to work force reductions in order to secure a sale? And secondly, Pierre Karl, I'm just interested -- commercial's been very weak for some time, as you pointed out. And in your decision to exit at this time, are you seeing impacts from the intensifying competition from the R. R. Donnelly merger with Moore?

That's it.

Okay.

Your first question relates to our normal course issuer bid, and the comments that were put out by Moody's in April. You have to remember that we -- well, we're doing this because we think it's accretive and it will create value. We have been generating fairly strong free cash flow, notwithstanding the capital, -- the CapEx project that we have. We have also the sale of our commercial business, which will generate free cash flow so that -- and also on NCIBs you buy shares as you go along over the year. So that we feel that all in all, that is something that is -- that is feasible without putting too much stress on the balance sheet of the Company.

Moody's is aware of what we are doing. If you look at their wording carefully, they say that they will judge by our results, the free cash flow that we will generate until the end of this year, and then they'll see how they will react to that. So it will be up to us to -- to come up with the good numbers in the second half of the year. And the -- and also, we've been able to reduce our debt in the last couple of years from free cash flow and from operation.

Your second question was regarding commercial, if we were to -- if we would take any restructuring charges related to the sale of the commercial group. The answer is that there would be no -- the way the deal is structured now is that there would be no restructuring or no special charges related to that transaction.

And I'm sorry, Andrew, you would need to repeat your question, because --

No problem. No problem. I'm happy to do that.

Just on the decision to exit commercial, it's been weak for sometime, and I'm just interested as to what triggered your decision at this point in time. Are there impacts you are seeing in the marketplace from the R. R. Donnelly, Moore Wallace merger, where there's more business being consolidated under their umbrella? What in particular has led you to decide that it's not just going to get any better for you guys competitively?

Okay.

This is why I was not sure that I understood well because I don't see a sizable relationship between Donnelly and the commercial group. I don't think that Donnelly has significant operation in this business. Those companies or those businesses that are more involved in the commercial side is San Veo (ph) or Consolidated Graphics, and it's highly diversified throughout the U.S. -- Sandy Alexander, and you got also large amounts of local sheet-fed printers that spread out in the U.S. So, when did we take the decision to divest? Once again, as I mentioned to you, I think this was never really a core business to Quebecor World. That had been based on trying to establish a network and this is also the reason why we bought our, this Pittsburgh, California facilities to be able to service even more better.

Our retailers -- our national retailers from Kohl’s, Circuit City, Staples, that are our major customers in this business. So that will reinforce our presence there. So, we're building this Company on that business model, and certainly, this commercial group is not core to that and is not even close to that kind of business model.

Should we look at the balance of your businesses as core -- that you've done a full review and you are comfortable with the rest of your exposures?

Yes.

Our catalog and our retail, our book, our directory segments are core because they are based on quite sizable large customers and also some that are global. Maybe there would be few facilities here and there that would not going to be significant that maybe we can reorganize in the future, but this would not be material.

Thank you very much.

Next question, please?

Thank you. Our next question comes in from Jeffrey Fan. Please go ahead.

Thank you. Few questions.

First, on the head count reduction, can you just review for us, Claude, what number of employee reductions that have not come off yet on initiatives that you've started in the quarter or previously?

Let me -- Have you got a second part to your question?

Yes.

I'll come back to the first part, because I haven't got that.

Second part is regarding France, the divestitures there.

When did those come off in the quarter, and what sort of losses were those generating prior to the divestiture? I’m just trying to get a sense of the positive impact going forward. And then on the U.S. volume on the magazine side, the lost customer there, can you just review for us the size of that contract and when that comes off?

Okay. I'll talk about France quickly.

During the quarter, we were trying to introduce what we consider the appropriate shift crew or crew shift in our Corbeil, which is a facility we bought from Hachette about two years ago. We would like to work like every other facility that we have in France, and in fact, in Europe.

These are five crews, but there before that, they use to have the weekend crew and the week crew. So when we introduced that, we had an agreement with the national union, but unfortunately, when we introduced it at the local level, people went on strike for about three weeks during the weekend. So we had problems, we were forced to move work from one plant to the other, outsource that at a cost.

Same thing took place also at our Lille northern France facility where we introduce the ribbon control devices that was providing the capacity of the Company of reducing one individual per machine per crew. And unfortunately, when we introduced that, once again, we had work stoppage, and therefore some consequences of removing the work, outsourcing, and incurring costs.

Finally, with one of facility in the Paris area when we're looking to shut down certain of unefficient machines, we've been also unfortunately meeting some strong resistance from the union. And we are now looking forward to solve those problems in the next quarter. And then as I mentioned to you, we would like to see this environment more friendly to get the appropriate equipment that will be able to, once again, keep our leadership on the commercial side there.

Maybe Claude, now, you can give information on the --

The number of employees, what we have that will be coming through the balance of the year is a little in excess of 400 employees. The majority of that is related to the plant closure that we have announced in Canada, and last month, where 220 or 230 employees will be coming off.

Now, we have said in our annual meeting that in the UK, we will be doing some restructuring, so there will be some additional numbers coming from the UK which will be recorded and the costs will be recorded in the coming quarters.

Okay. So the UK numbers are not in the 400. What about the France numbers? Are those in the 400? The French divestitures?

No, no, no. No. These are head counts, reduction, the Torcy -- you're referring to the Torcy, so that's been excluded. It's not considered as a head count reduction.

Okay.

And what about the additional 30 million restructuring charges for the rest of the year? Will that be accompanied by further head count reduction?

Well the -- what we referred to in our -- the 30 million that we referred to the MD&A is basically the 400 plus the UK that I mentioned earlier. So a continuation of some of the initiatives that we did in the previous quarter that go on for a period of time before they are completed.

Okay. And the U.S. contract? On the magazine side, size there?

Your question was the size, the dollar value of the contract that we lost?

Yes.

We believe it's not appropriate to give that information at this time because we're talking about information that's --

Just the timing on that?

-- competitive. Sorry, competitive information. So it's --

Can you talk about the timing then? When that's going to come off?

About half of it will be off by the end of this year, and about half of it in 2006.

Okay.

Roughly.

Okay.

And lastly, what's the tax rate that we should be modeling in?

It should be in the -- between in the high 20's for the balance of the year.

Okay. Thank you very much.

Next question, please.

Thank you. Our next question comes in from Tim Casey. Please go ahead.

Thanks.

Couple of questions, one on the announcement of the commercial -- intended commercial divestiture. Can you give us an indication of what the margin is on that 250? I guess, is it dramatically lower than the consolidated business, or is it a positive margin business? And I guess Pierre Karl, for you, what are we to take away from this if you as one of the bigger commercial printers, can't make a go of it? I guess what I'm saying how -- this must be a challenging sale if you can't make a go of it to find other buyers.

I'm interested in your comments on that, and also on your, I guess your patience with France. This obviously isn't the first time some disruptions in France have impacted the quarterly results, and I'm just wondering if you are at about the end of your level of tolerance for that.

Thanks.

Okay. Well, on the first and second questions that are related to commercial, I don't think it will be appropriate for us at this stage to talk about what we consider being confidential information, especially we're in the middle of negotiations and this process of divestiture. If someone is able to succeed, well, it's -- I don't know. This is something that once again, we are considering non-core.

I don't think it will be appropriate for me to repeat what I said earlier regarding what we believe being our strength, so then therefore there are certainly other businesses and maybe those businesses, given that they are highly relationship-driven would be better managed by individuals or specifically, local ownership that would be closer to the required relationship that is needed in that type of business. So, it seems that, throughout the marketplace, the business model trying to re-group certain local sheet-fed operators together, either in North America or in Europe have not been highly successful.

So is it because we are average or to the other people in the industry, or basically because of the nature of the business that requires specific attention to their customer, I guess? The answer is the latest, because we've been seeing for the last 10 years a lot of companies been trying to do this and fail.

On, in France, I think it's important here to say and to highlight once again that we have a significant portion of the business. Certainly, we are pretty strong on the gravure side since we bought Hachette, we inherit the last major portion of gravure business in France. But in the meantime, we inherit a facility that was historically highly related with strong unions that call it that way, and we're entertaining discussions with them because we think that this market is good. But we need to make sure that we will be able to have the appropriate labor practices to get this profitable for all the people that are involved, not only in the Company, but then also the employees, it's pretty important that they understand all the issues.

Obviously, when you are raising this it's not a slam-dunk. This is how this business is built down there. Does it mean that it's impossible to manage? The answer is no. It's probably different than managing businesses elsewhere in North America. It takes more time, but at the end, we'll do it, and we consider it that our responsibility is to achieve this, and we look forward to keep those objectives on our radar screen and on our agenda.

Thanks.

Any comment on the margins of the commercial printing? Is it a positive margin business?

It will depend from one plant to the other, and it's also cyclical, because there's not such a thing like a long-term loading or scheduling. It's really, once again, as I mentioned to you, transactionally driven, so the loading would defer from one month to the other sometimes. So I don't think it's fair to give you an overall answer on this.

I understand.

Are you pursuing a sale of the whole unit or as individual plants on a one-off basis?

We've been receiving many interests, and some are for the whole, other are for parts. We would probably favor the smallest amount of transaction that will make this more easy to complete.

At this time, what we are looking at is to do one transaction for the dozen plants that we referred to.

Thank you.

We'll take the next question, please.

Thank you. Your next question comes in from Katharine Dalton. Please go ahead.

Okay. Thank you.

Just given the new presses that you have coming on line this year, I was wondering if you could give us an idea of what you are expecting for depreciation in '05? And just are you expecting any plant disruptions as you roll forward these installations or just a relatively smooth integration? And just on the current spot pricing market, I'm just wondering if you are seeing any relief at all as you renew your contracts and what your expectations are for pricing pressure for the rest of the year?

Pricing continues to be a significant issue that we're facing every day. If we want to get the volume, I mean there's other people on the street that are looking to have volumes so then therefore, we need to face the reality of pricing.

Something that I think we have and we will continue to highlight is our capacity to deliver products across the nation. And our entire platform provides the capacity to print in Tennessee, print in Chicago and print in California instead of printing in only one facility and distribute throughout the entire country. We've been introducing this platform in the catalog business and as of today, we are receiving some positive answer. As you know, we've been doing this mostly, and this is probably one of the examples that -- of how successful we were in the retail side where we have undisputed leadership position.

Our capacity to service the -- our customers on the entire national platform. We will continue also to push forward with value-added services, like co-mailing and our expertise on the logistic that also provide the capacity to our customers to get some savings. But certainly, pricing will remain there and we will continue I think, at least, from on the short to midterm basis to meet that kind of issues.

Any other questions?

Yes. Just on the depreciation for the year and the rollout of your new presses.

The new presses -- that will basically come on line in 2006.

That's right.

We will start running new equipment in our Dallas facility in Q4, and probably one also in our Jonesboro, Arkansas in Q4, but the bulk of it will be in 2006. They are actually being manufactured in Germany, and we look forward to receive them in the Q4 and Q1 mainly in '06.

That's right. And then we'll start depreciating those assets when they are operational. This year's depreciation should be no great change from last year which is 320 or $330 million.

Thank you.

We'll take the next question, please.

Thank you. Our next question comes in from Andrea Horan. Please go ahead.

Thanks.

I just wanted to dig in a little bit more on the -- the margins and the weakness in the margins which you attributed to pricing pressures. And I'm wondering if you can break down at all, the degree to which the pricing pressures are associated with long-term contracts, and the degree to which they are associated with the marginal spot work that you are getting just to fill up capacity?

Well, pricing is a combination of two things, it's a running when you are considering long-run publication, and make-readies when you are considering short or mid-term, mid-size publication.

So we've been seeing pressure and -- on the renewal side if you've been enjoying contractual work that was established three, four years ago, obviously when you are renewing it, you are seeing some significant decrease. What is it? Certainly, over 10 or 15%, it will depend where you were before, and how nice or fat was the pricing previously.

So it's not something that is the same across the board and on the make ready side, I guess that we can say that it can vary from one customer to the other regarding if you are in the consumer or on the small end and midsize type of business.

Thanks. And the other question I had related to books where some of the other peers have reported reasonably decent sales, especially in light of the stated auction cycle. You cited your exposure to the adult trade segment, which I know in terms of gross sales has been more flattish. But did you not get benefit from the educational sales?

Well, on the book side, what we've been doing for the last few months is try to really establish a global platform to our American publishers. As I mentioned to you earlier in my presentation, I talked about the book fair that we had in New York where most of the major New York-based publishers were there, and basically, the idea is the following. We got facilities in Mexico, Peru, and Colombia that are, for the further two days from the U.S. by boats or, about I'd say 24 hours by truck out of our Mexican facilities.

We have been introducing new equipment there, and what we are proposing here is a combination of our North American platform and also our Latin American platform to be able to compete against Chinese environment, and also unfortunately, putting pressure on the downside in terms of pricing. So most of the work, which are not time sensitive, and in certain ways educational books are there, then we are able to propose a Latin American platform, but educational is not the only market that we are trying to service.

In fact, we're doing quite well, and in terms of our investment plan that we are considering, part of it is also dedicated to educational work out of our Taunton, and as I mentioned to you earlier, Taunton, Massachusetts, and as I mentioned to you, in Dubuque Iowa, our facility we we're servicing a large customer like McGraw-Hill. So, we are seeing this business favorable, and by the second portion of the year, should be also favorable.

You expect a change in the back half of the year?

You know, our indication at this stage are favorable.

Okay. Thank you.

Thank you. We will now take one last question from Vince Valentini. Please go ahead.

Thanks very much. Trying to focus on some of the positives you've talked about. Can you tell us at all with this commercial deal that you've got, it sounds like, in principal, set up. Would that be accretive to your earnings per share once that deal is closed, Claude?

I would think that the -- it's going to be positive once we close the deal.

Can you give us any sense of magnitude? Is it a material positive item or just is it pretty small?

It's -- I'd rather not give an order of magnitude at this time.

Okay.

The second one is the shut-down of Torcy. Now that that's done, is that something that should have an accretive impact on your EPS in future quarters?

That's a disposal, Vince, we didn't shut it down. We disposed, so obviously, we didn't have to take significant severances or restructuring charges, so I think --

It will be positive going forward, because we were losing money at Torcy.

Is the -- the offset presses, as they come in, I know you said it's mostly 2006 versus this year, are those supposed to be accretive to earnings immediately or is there a bit of a ramp-up period for six to 12 months before you would see the efficiency benefits?

We negotiate some I think interesting and favorable provisions with our manufacturer. I mean they are forced to perform so we think that we will be able quickly to go there in terms of performance, if we are not there, then therefore, we will see the prices for the equipment being lowered.

So, we are not installing all those machines in Q4 because as you know, this is a busy period, and we just don't want to replicate the Lincoln situation that we've been facing last year when we shut down the Effingham facility during the summer, and relocated some of the equipment in Lincoln and elsewhere, that was unfortunately plagued with tough start-up because the equipment that we moved from Effingham was not in good shape. So we expect to implement and execute the implementation of mainly all the machines that we will have in 2006 by first quarter and second quarter, then we’re not going to disrupt the best period of the year.

So if they are still in the first and second, would you expect the earnings impact to be positive in Q3 and Q4 next year?

Since we are going to decommission equipment and we are going to be able to produce with much more efficient equipment, the same kind of volume at a lower cost, I guess that this is the definition of accretion.

Okay. Great.

And the last thing, Pierre Karl, in the years I've followed your company, I can't remember a quarter where there's been such a huge gap between your revenue performance and that of Donnelly. They reported 13% increase in revenues, and you said you're basically flat.

Is there any comment you can provide on what your perspective is on that huge gap, and what's going on?

Well, I don't think it will be appropriate for me to comment on Donnelly performance. And certainly, the -- this year is different than last year in terms of, you remember in Q1, they had the formal execution of the Moore Wallace deal. So probably not always easy to understand the way they report the numbers. So I don't think it will be appropriate for me to comment on Donnelly's performance.

Okay. Thanks.

Thank you, Vince.

Well, we would like to thank you all for joining us this afternoon. And we'll talk to each other at the second quarter results. Thank you very much and good evening.

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