Quad/Graphics Inc (QUAD) 2006 Q1 法說會逐字稿

Welcome to the Quebecor World conference call. I would like to introduce your chairperson, the Executive Vice President and CFO, Quebecor World, Inc., Mr. Jacques Mallette. Thank you. Go ahead, please.

Thank you. Good afternoon and welcome to the Quebecor World conference call for the first quarter 2006. My name is Jacques Mallette, and I am the Executive Vice President and CFO of Quebecor World. This call is being webcast, and forward-looking statements are subject to Safe Harbor provisions.

Joining me today from our offices in Montreal for today's call is Pierre Karl Peladeau, President and CEO of Quebecor World, and Roland Ribotti, Quebecor World's Director of Investor Relations. Pierre Karl will now provide some introductory remarks and give us an overview of our market segments.

Good afternoon, everyone. Thank you for joining us. As many of you know, this will be my last quarterly conference call as President and CEO of Quebecor World. Wes Lucas will be assuming that title beginning tomorrow morning. I would have preferred to step down with better numbers, but I believe what we have accomplished in the last two years will position the Company for stronger results going forward. We have [reinstilled] a more disciplined approach to cost containment and cost reduction across our platform. We have completed a comprehensive assessment of our manufacturing platform, which has allowed us to develop and put in place a detailed three-year strategic plan. The plan contains many elements, but the key component is our retooling initiative for our North American and European platforms. That plan is fully underway.

Today, we have installed six new wide-web presses, there are nine more to come in 2006 and another seven are scheduled for 2007. The principal focus of the investment is our magazine catalog and book platforms. In Europe, we are installing two gravure presses in our Belgium facility. Additional wide-web presses will also be installed in Austria and in Barcelona and in Madrid.

This investment is being coupled with restructuring efforts to ensure we are locating and staffing our asset base to deliver maximum value to our customers and shareholders. In the last five years, our employees base has gone from more than 40,000 to approximately 30,000 (indiscernible). At the same time, we have generally increased revenues and volume. This is the nature of our industry. We need to invest and find ways to print our customers' products more efficiently.

The recent announcement of the closing of our Kingsport facility is a prime example. While this facility has served publishers well over many years, it was no longer able to adequately compete in today's market. Competition from Asia is increasing at a steady pace. With the addition of new equipment elsewhere in the platform, we can produce the work more effectively at other facilities. We will also be able to utilize our Latin American book platform as a low-cost alternative for publishers who are looking to Asia.

Another important element in our review has been to focus on what we believe our core business going forward. This means not only areas where we have important relationships, but also areas in which we believe we will be able to leverage our competitive strength to generate added value. This is why we decided to sell our US and Canadian commercial plant last year and why we sold five non-core facilities in France. It is why we have invested in new bindery equipment and in co-mailing and other programs in our logistics business.

Obviously, as you can tell from our results, our transformation has not been without a few bumps in the road. We have lost some important long-term customers, largely because we were unable to match their specific needs with our investment program. For the most part, we have replaced this volume, but as you know, large-scale volume migrates over time, and much of the replacement volume will enter our platform later this year and in 2007. This, coupled with our retooling plan, is why we are saying that 2006 will be a transition year for our company.

Before I turn the call over to Jacques for a detailed discussion of our financial results, I will give you a brief rundown of our operation, beginning with North America. In the magazine and direct-mail segment, magazine volume decreased 4% in the quarter. Our magazine group was also impacted by a negative price and product mix in the quarter. During the first quarter, we had printed our first issue of ESPN the Magazine, and Rolling Stone on our new 96 presses in Stillwater, Oklahoma. In the first quarter, we also began installation of three new 64-page presses. We secured major customers to long-term renewals, including Forbes and American Lawyer.

During the first quarter, we announced the closure of our Brookfield, Wisconsin plant. We have already begun the transition of Brookfield customers to other locations, and are pleased that the majority of these customers will continue to print with Quebecor World.

In our direct business, volume decreased 6% in the quarter, essentially due to lower volume from one large quarter. New accounts include Universal, Imagine Group, Kimberly-Clark, Citigroup, Pier 1 Imports, Sam's Club, Bank of America and Sears Home Improvement.

In retail, volume was flat for the quarter. Renewal includes [Atron], Bell, [Bosco], [Harvard Keys] and Stein Mart.

In catalogs, volume increased 2% in the quarter. In market share, where pricing continued to be very competitive, our [solution] strategy is what will differentiate us in the marketplace. This is evidenced by the number of new customers joining our catalog team, combined with existing customers, and trusting us with their catalog program for the long term. Renewals for the first quarter include BlueSky Brands, Bradford Exchange and Venus Swimwear. We are proud to announce the long-term renewal of our partnership with Williams-Sonoma as their majority printer, including their premier catalog, Pottery Barn. We are also very proud to announce a renewed commitment from Redcats for the printing of their Lane Bryant and Jessica London catalogs.

In the book and directory, book and directory forward in achieving its three strategic objectives of fully integrating the US and Latin American book networks, of significantly growing its directory market share and of reducing its cost base. Reported group revenue were down 4% in the quarter, due to the discontinuance of a publication and due to the planned transfer of work for the Latin America and retail platforms. Profits were also affected by equipment startups.

Telephone directory volume was up 11% in the quarter. With recent long-term contract wins, the expansion of directory network to service, and incremental 150 billion pages, is in process. Our three-year equipment modernization plan has started, which will allow the Company to close inefficient facilities later this year. In the first quarter, multiyear contract success include Disney/Hyperion, Allied Electronics, Sunrise Publications and Gold Leaf Directories.

In Canada, revenues were down primarily due to lower volume. Volume decreased by approximately 2% in the quarter, due to the sale of one facility and the closure of two others compared with the same period last year. Lower volume in the magazine and catalog sectors was partially offset by an increase in retail and directory. New contracts signed in the first quarter include Staples Canada, Home Depot and Us Magazine. Renewed contracts for the quarter include Radio Shack Canada, The Brick, Toronto Star STARWEEK and Business in Vancouver.

In Europe, volume and revenues in the quarter were lower, due to the sales of several French facilities compared with the first quarter last year and due to lower volume in the UK. Operating margins and income were lower in Europe compared to last year and negative in France. Operating income and margins increased in Spain, Austria and Sweden compared to the first quarter of 2005. During the quarter, the Company informed its workforce in Strasbourg, France that it will be closing the facility. Negotiations with employees are continuing, and the facility is expected to close in the second quarter.

In Latin America, revenues were flat and volume was down because of uncertainty surrounding presidential elections in Peru, where we have one of our strongest-performing facilities. Our facility in Argentina delivered improved results, reflecting recovery in the local market. We continue to see positive results in our Latin American book platform, which registered 13% increase in volume.

I will be back with some closing remarks, but first, Jacques Mallette will give you a more detailed review of our financial results.

Thank you, Pierre Karl. I will now comment on our financial performance in the first quarter compared to last year. Comments focus only on continuing operations. Revenue in the quarter was 1.5 billion, down 5% from the first quarter of 2005. In North America, volume overall was essentially flat, but operating income and margins were negatively impacted by unfavorable price and mix in certain segments.

In Europe, volume was also down compared to the first quarter of 2005, due to the full impact of the loss of a customer in the UK and the sale of certain facilities in France. Price pressure continues in most segments, and we are now feeling the full impact of some previously announced contract losses in the first half of 2005.

For the first quarter of 2006, our EBITDA before restructuring and impairment charges was $128.5 million, compared to 174.7 million in 2005. Results were affected by certain expected startup-related operational inefficiencies related to the installation of our retooling programs. For example, we had to remove certain presses to enable new equipment to be installed. Our new presses that have been installed are now operating at or close to expected levels. The gross margin before restructuring and goodwill impairment for the quarter was 15.3% compared to 17.7% in the first quarter of last year.

The first-quarter results include impairment of assets and restructuring charges of $22 million or $0.13 per share, compared to $33 million or $0.22 per share in the first quarter of 2005. The non-cash component of 6.4 million is primarily related to the impairment of assets in North America. The cash items of 15.7 million involve workforce reductions, mainly in our Brookfield, Wisconsin facility. The recently announced restructuring initiatives will result in the reduction of 756 positions with 367 already completed.

SG&A expenses were lower by $6 million in the quarter to 95 million. SG&A as a percentage of sales was 6.5%. Income tax expense was actually a recovery of $6.2 million, primarily due to the distribution of taxable income amongst the various countries in which we operate.

In the first quarter, net income before restructuring and goodwill impairment was 23.2 million, compared to 46.1 million in the same quarter of last year. On the same basis, earnings per share was $0.09 compared to $0.27 in the first quarter last year. Free cash flow generation was positive, around $5 million in the quarter, compared to a negative 80 million in the first quarter of 2005. This was in part due to the proceeds from the sale of certain assets.

I will now cover segmented results. In North America, revenues in the first quarter were $1.1 billion and down (technical difficulty) to the first quarter of 2005. Operating income for the quarter before restructuring was 42.5 million, compared to 80.2 million in 2005. The operating margin in the first quarter before restructuring was 3.7% compared to 6.9% last year.

In Europe, revenues were 262 million for the quarter, compared to 332 million last year. Before restructuring and goodwill impairments, operating income in Europe was 3.7 million compared to 6.3 last year.

In Latin America, revenues in the first quarter were essentially flat at $57.5 million. Operating income before restructuring was 2.8 million, essentially flat from last year's 3 million.

Concerning our investing activities, in the quarter we have invested $49 million compared to 55 million in 2005, and this was mainly related to our retooling programs, both in North America and Europe. For the remainder of 2006, we now expect CapEx to be approximately 325 million, which would place us slightly below our previous guidance.

With regard to our financing activities and liquidity position, in December 2005, we had extended our $1 billion credit facility until January of 2009. At quarter end, we had over $950 million of available liquidity. We have completed, in March 2006, a $450 million issue of ten-year, 8.75% long-term notes, with strong participation in terms of number of investors and the order book. We also have drawn over $100 million against our equipment financing agreements that the closed in January, providing us with very attractive financing costs compared to other financial instruments available. With these funds, we have repaid all of our 2006 debt maturities. In March, we repaid $250 million of 7.2% senior notes. In April we redeemed the series four preferred shares, which will reduce our asset-backed financial expense and avoid excessive shareholder dilution. All these measures have enhanced our debt maturity profile to approximately six years, and spread it out more evenly over the next several years.

Today, the Board of Directors declared a dividend of $0.10 per share on multiple and subordinate voting shares, as well as our regular dividends on preferred shares.

We will 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.

As I said earlier, I would like to be handing off to Wes Lucas with better results, but I believe the plan is in place to get there. As you know, Wes is a former Chairman, President and CEO of Sun Chemical. They are one of our largest suppliers. As a result, Wes is already quite familiar with our industry. Since we announced his appointment approximately a month ago, Wes and I have traveled to several of our facilities in Canada, the United States and in Europe. We have met with almost all our senior management and many of their direct reports, so that tomorrow he can, as they say, hit the ground running.

Jacques and I will now take your questions.

(OPERATOR INSTRUCTIONS). Jeffrey Fan, UBS.

I have a question about your retooling program. In the quarter, it looks like you only spent about 19 million on both Europe and North America. Can you just provide us with some explanation as to why? That amount seems a little bit lower than -- given the size of the plan -- is it related to just timing of the delivery of the presses? Or is it due to some inefficiencies on the presses that you previously installed in previous quarters causing some delays? Can you just give us a little bit more color?

CapEx and the retooling program are basically -- most of them are disbursements on the equipment that has been installed or is being installed, and are dependent on the payment schedules that we have negotiated with the suppliers. Other than that, you will have what we call the [pit] costs, which are really the installation costs related to the presses. We have a few presses in installation, and most of the costs in the first quarter are related to installation.

Vince Valentini, TD Newcrest.

To follow up on that on the CapEx for a little bit, as you said, the full-year 2006 CapEx of about 375 million is below what you were targeting before. Would you call that a permanent reduction, or is this just timing issues with some of your spending slipping into 2007?

It's mostly related to timing. As you know, we announced 400. And right now, based on our forecasts of disbursements and when the equipment will be installed and when we will pay the suppliers, we're down to 375.

And to follow up, it says in the MD&A there was a 4 million sales tax settlement benefit. Can you just clarify where that is? Is that within the European division operating income, and therefore flowed right through to EPS for the quarter?

Yes. We had several what we call specific charge and income items during the quarter, one of which was a $6 million revenue which was related to value-added tax refund in Sweden. And that is obviously reflected in the results of Europe.

Sorry -- 6 million is just a revenue item? Did it have an impact on operating income and EPS?

Yes.

Can you quantify how much? Was it a full 6 million, or are there any costs associated with it?

If you're concentrating on what we call specific income or expense items in total, they are approximately $4 million. They include that $6 million income, but we had also some specific charges. So the total is $4 million.

And on an EPS, basis that would be about $0.03, by my math. Does that sound right?

Yes.

The last question is the energy costs. You mentioned there's still a negative impact in the quarter. Looking at natural gas prices this year Q1 versus last year Q1, they were basically flat. I know you had some hedges in place, but I'm wondering if you can talk about what was driving energy costs up. Is it more than just natural gas? Is it electricity and other items that were on the rise as well?

Well, you have, obviously, electricity -- that is a big component. Gas is a big component as well. And again, depending on the hedging contract that we had entering last year and those that we had entering this year, there is a variance which was, in total, fairly significant for us this quarter, on the magnitude of $10 million additional expense versus last year.

The 10 million -- is it possible to say if -- like is half of that natural gas and half of it electricity and other? Or can you not segment that way?

I don't have the exact breakdown with me.

Andrew Mitchell, Scotia Capital.

I have two questions; I think they are somewhat related. Pierre Karl, you ran through the contract renewals and wins. I'm just wondering, were there any material contract losses in Q1 that will affect future quarters that we should know about?

And then, secondly, I'm just wondering if you can boil down the contract wins and losses into layman's terms. When you add up the volume secured under contract wins you have identified, would you expect to be able to deliver higher or lower volume at the same time next year?

No, there is no significant contract that we have been losing. We are having conversation right now on certain of our customers in our Kingsport facility that will migrate in Latin America. We have been entertaining a manufacturing solution for them. As of today, we have been seeing some favorable response, so nothing special there. What we anticipate for 2007 -- on the directory side, there is some significant volume kicking in from the Yellow Book, and the same thing that is taking place also in the catalog, where we announced previous new customers that will kick in by the end of 2006 and the beginning of 2007.

How would the balance of the businesses look, just in terms of a plus/minus, simple layman's terms?

I don't have the precise number, but I would say that is probably a little bit more than what we were printing before.

Tim Casey, BMO Nesbitt Burns.

I wanted to come back to the retooling program. Pierre Karl, could you kind of walk us through -- there's about 16 presses left to come in. I would have thought you would have a lot more installation activity in the first half of the year compared to the back half of the year, based on the seasonality of the business. Is there a way you can, I guess on an order of magnitude basis, just sort of walk us through how many presses will be installed per quarter? Or are you not able to do that? I guess, do you have a concentrated team who has to move from one job to the other?

And Jacques, could you just clarify for us what the effective tax rate should be for the year?

Out of the 60 machines that you were referring to, some are actually under installation. For instance, we are now in the process of start shortly two 64 presses in our Clarksville facility, same thing in Dyersburg. Wes and I was in Belgium last week, in Europe, and we went to our Belgium facility. It's now under construction, and we're expecting our gravure machines to come in by late Q3 or the beginning of Q4 and operating by the beginning of 2007. We're looking to -- or there will be another machine in Austria and Barcelona and Madrid. We're in the final stages of negotiating appropriate conditions for implementing our equipment in Corby facility, and we're looking also to continue our investment in our book group. We are now underway, putting three machines in our Fairfield facility, and we have about two or three machines right now that have not a final location that will go through it when we will have this plan finished.

Should we assume about half of the 16 you mentioned will be installed by the end of this year?

Yes, roughly.

We really won't see the impact, the financial impact of these, anyway, until really until 2007?

Well, they are now under installation, as I mentioned to you, the Clarksville, the Dyersburg one. There will be another 64 in Jonesboro next year, in 2007. I forgot to mention also that we've got these two 64-pages being installed right now in Merced, to be able to take the volume of time that will kick in, in January 2007. It will up and start and running in September. So we will have time to make sure that they will run appropriately for January 2007, when volume is coming in.

On your second part of your question, related to the income tax rate, obviously, the first quarter of the year -- which is not a good quarter, usually, depending where the income is split amongst the countries -- you can end up with an income tax rate that is unusual, especially with lower profitability. What we can say is normally, on average, over a year we should be in the mid-20's.

Bob Bek, CIBC World Markets.

Just on the European decline in revenue, do you have an apples-to-apples sort of excluding the plants that you sold, and perhaps excluding the Corby contract, just to get a sense for the base business?

And secondly, I guess I will ask the generic question on pricing. I guess, Pierre Karl, you talked about some contracts, the not many up for renewal through 2006. But if you could talk a bit about pricing in relation to that, that would be helpful.

On the renewal, we have been not seeing any changes in the landscape. I mean by that that there is some pressure on pricing, and our renewal went through that environment. And at the end of the day, we are happy that we have been able to renew. This will run on machines that will be able to increase the contribution that we have been having. But obviously, as you can imagine, that comes at a cost of the investment. So don't see any significant changes taking place in the pricing environment.

From an European standpoint, Jacques, do you have (multiple speakers)?

No, no. On the first part of your question, we do not have a specific split that we can provide to you.

Again, I think we can say that our Spanish, Austrian and Swedish operation, we're doing well, and Belgium also was okay. The main issue was related to France. As you know, we announced the closure of two machines, our Corbeil facility. Unfortunately, we have been negotiating and fighting legally for making sure that we will be able to go through what we call there the social plan, plan social, and this had challenged many times by the union, and we finally, last week, won the last piece of procedure. And as of last week, we've been able to reduce our headcount by roughly 120 people at our Corbeil facility.

In the meantime, as I mentioned to you, we announced the closure of Strasbourg. There's roughly about 130 people, individuals there. We're now in the middle of negotiating a severance agreement with all our employees. And as of today, it's doing well, and we expect that we are not going to see the situation that took place in Corbeil again down there. And it well obviously accelerate our capacity to close and reduce the negative impact that we used to have on our EBITDA line from this facility.

All right. We will now take last question.

David McFadgen, Sprott Securities.

I take the UK EBIT was positive? Can you confirm that?

I'm sorry?

That the UK EBIT, earnings before interest and taxes, was positive? Can you confirm that it was positive in the quarter?

We don't disclose specifically UK.

Okay. It's just that you mentioned France, but nothing about the UK,

Yes.

My second question just relates to just a comment you made in your MD&A on page six right at the bottom. You talked about the fact that the market conditions were more difficult than you anticipated. Have you seen the market from the fourth quarter into the first quarter this year really change that much? Has the pricing become more difficult? And what's the outlook going forward?

As I mentioned to you, well, to the previous question, we're still seeing some significant pressure on pricing. And as of today, we are not seeing anything really different for the remaining quarters of the year.

But did that get worse relative to the fourth quarter of 2005?

No, it's between a window. It depends where you come from. If you have a contract that had been negotiated five years ago or six years ago, then the pressure is higher than if it was to be negotiated two years ago. There is no final number on it; it goes in a window from top to bottom.

Then I guess I'm trying to get at, and maybe I'll ask more directly, what caused the actual results to be different relative to your expectations with respect to the market?

Again, the market is difficult. And what did not help as well in the first quarter is the mix. Mix can vary from quarter to quarter, especially in the book business. And some of our products had less value added than usual. That might come back in the next quarters. Book business -- you don't have too much visibility, much more than three months ahead of time.

You have articulated your strategy very clearly, in terms of you're going to upgrade your plants with all the new presses, and that is going to improve your efficiency. What have you seen in terms of the competitive response? Are your competitors doing the same thing? Have you seen any response from them as a result of your strategy?

Well, it depends which competitors that we are addressing. I can't see that there is a uniform answer there. Some of our competitors had been investing steady, year after year, both in gravure and offset. Others have been seeing peaks -- others that do not have the financial possibility, because of the leverage they carry on their balance sheet. We have been seeing Bertelsmann recently much more aggressive on the printing side. As you probably heard, they are (technical difficulty) facility in Liverpool, a gravure facility in Liverpool, which -- that has been taking place for many years. So it's across the board. You have got different types of strategies, depending the company that you're talking about.

Our advantage is that we are basically investing in new technology, 64-page. We didn't invest too much in 48-page, so we are moving from 32-page technology to 64, which we feel is the right technology and it's a great advantage for us not to have spent too much money on 48 pages.

And almost -- in every facility that we are investing, we should say that we are pairing our equipment, so that you have got two 64's in Merced, two 64's in Jonesboro, two -- well, a 96-page in Stillwater, two in Clarksville, to in Dyersburg, two in [Charlowa], which, when you pair all those equipment together you have the capacity to have -- instead of adding a machine or a [crew per] machine, you have a little bit of what we can call an operational unit that work on both machines. So, at the end of today, you have per crew machine, lower individuals on top of which we've been automating a significant amount of our process from the make-readies to the delivery devices or peripherals that we are running.

We thank you all, and at our next conference call, Wes Lucas will be with you to answer your questions. Thank you very much.

Thank you. This now concludes the Quebecor World conference call.