Quad/Graphics Inc (QUAD) 2006 Q2 法說會逐字稿

Welcome to the Quebecor Inc. conference call. I would like to introduce your Chairperson, the Director of Communications of Quebecor World, Mr. Tony Ross. Please go ahead.

Thank you. Good afternoon and welcome to the Quebecor World conference call for the second quarter 2006. My name is Tony Ross and I'm the Director of Corporate Communications for Quebecor World. This call is being webcast and forward-looking statements are subject to Safe Harbor provisions. In terms of logistics, we'll begin with the presentations of the results of Quebecor World, followed by a question and answer session with analysts. This should last approximately 45 to 50 minutes.

For the convenience of those that also follow Quebecor Media and Quebecor, Inc., you can just remain with the same conference call line. Immediately following Quebecor World's conference call is a separate conference call for Quebecor Media and Quebecor, Inc. using the same line. We apologize if we started a bit late, but we've done that because there seems to be a lot of interest in this call this afternoon and some people are still in the queue waiting to get on the line and will be joining us in progress.

Joining us from our office in Montreal today is Wes Lucas, our new President and Chief Executive Officer, joining us for his first conference call as our new President. In addition, we have Jacques Mallette, Executive Vice President and Chief Financial Officer, Jeremy Roberts, Senior Vice President and Treasurer, and Roland Ribotti, Senior Director of Investor Relations. Wes Lucas will now provide us with his views of Quebecor World's business and his plans for the future of our company. Wes?

Thank you, Tony. Good afternoon, everyone, and thank you for joining us for my first quarterly call as the new CEO of Quebecor World. First I would like to start by especially thanking all our customers for your business, your trust in us, and for being our partner. I'd like to acknowledge our shareholders, who share our commitment and belief in our company, and the equity research analysts who constantly challenge us to improve our financial communications.

On a personal level, I would like to thank our employees for their warm welcome. I greatly value your input, your commitment and dedication to our company's success.

Finally, I want to recognize Pierre Karl Peladeau's support in handing over the reins. I've known him for a long time and greatly valued his partnership and experience during this period, as I take over the leadership of Quebecor World. I look forward to his continued support and help in the future as we work together on the Board of Directors.

In this call, we'll review Quebecor World's transformation plans and our second quarter and year-to-date results.

I am disappointed by our results. Disappointed. They're not up to my level of expectations, nor those of our shareholders. To meet our shareholders' expectations and mine, we must drive the fundamentals. And these fundamentals are strong earnings growth, continuous improvement in productivity, cash flow generation through disciplined management and prudent decisions on capital expenditures, and a healthy balance sheet, which is a source of strength for our company. Simple. Basic. But compelling when executed well.

So how will we make this happen for Quebecor World? Today I've outlined a plan based on five action areas to transform Quebecor World. First is customer value. Second is developing and retaining the best people. Third is building great execution capabilities. Fourth is our retooling initiative, which is the foundation for our value propositions. And fifth is building a strong balance sheet. We will describe these five action areas in much more detail with you in quarterly conference calls in the future, analyst conferences, and our upcoming investor days. We intend to communicate with you extensively to keep the market aware of our progress of this transformation.

In this spirit, I will share with you now just a quick summary. First, as always, starting with customer value. We will build the capability to create the highest value for Quebecor World's customers by providing differentiated superior value products and services to be our customers' complete print solution partner. Simply put, for providing a high-value integrated solution and not just delivering to our customers a print product. This is a transformation from just a printer to our customers' print-solution partner. Do not misunderstand. Quebecor World is already a leader in the industry today in providing solutions. For example, we were the first in the industry to provide an integrated and seamless [statistics] solution based on end-to-end information tracking and data management.

For example, our customers can know when their catalog will reach the end-user so they can send them an advanced email alert or a voicemail to reinforce their print marketing campaign. The opportunity here is that we will deliver more of these high value-added services more frequently to more customers and using a consistent and disciplined approach. The opportunity is to expand these pockets of excellence into a true competitive advantage.

Specifically, this is the integration that makes complete solutions with such customer needs, both before the printing process and after the printing process, of areas such as content management, data sourcing, services to streamline our customers' business prophecies, print marketing and advertising optimization, and a comprehensive and innovative logistics services to reduce the overall costs [AUDIO SKIPS] And of course, a high-quality printed product delivered on time and at the highest value to our customers every time. Every time.

We can help our customers and our shareholders by a focus on selling value and not just print. We need to change from selling too much based on price to selling more based on the value of our products and services. Because I believe in the importance of this key initiative of customer value so much, I will take the lead in kicking off this initiative. I've already met with many of our top customers, talking and sharing our ideas in how we can be the most valuable business partner to them.

The second area is developing the best people. Truly great companies are based not on the equipment they deploy or on their products, but on the people and teams that are dedicated each and every day to creating value for their customers and creating cash flow for their shareholders. People make it happen each and every day. We will develop our people to be the best that they can be through a comprehensive People Development Program consisting of training, new processes and tools, to build high performance teams. Our goal is an organization made up of high performance teams working in a safe and respectful environment, where we all can achieve our own personal goals in a company we're all truly proud of. Personally, I am proud to be joining this fine team at Quebecor World.

As part of this People initiative, we will be driving a comprehensive safety improvement program to ensure that everyone is able to go home safely to their families after a hard day's work. One good example is our facility in Leominster, Massachusetts, near Boston, which has been free of lost-time accidents for a full eight years. Great job. You are an example to all of us on how it is our own personal responsibility to keep ourselves and our plant safe.

Another component of this initiative is focusing on high performance teams and implementing people development programs to ensure we are the employer of choice, attracting and retaining the best people. We will implement a comprehensive People Development program comprised of significant training and skill building in these key areas that matter the most to deliver value to our customers and driving earnings growth for our shareholders.

Julie Trenblay, Quebecor World's Head of Leadership and People Development, is leading this important effort for us.

Our third key area of action is focused on great execution. Once we have completed the significant retooling investment, we will move from improvements based on capital to earnings growth driven by continuous improvement. This should result in low capital and high-return projects, marking an end of the current high cycle of high capital spending to a new cycle of high cash-flow generation. For my own personal experiences in leading continuous improvement programs at other companies -- programs such as Six Sigma, Lean Manufacturing and Five S -- the results are truly remarkable. The opportunities for program improvements, productivity improvements from tools such as Six Sigma and Lean, include such high-yield projects as paper waste reduction, supply chain optimization, cycle time reduction, total cost-to-print reduction, and other projects to reduce costs, eliminate waste, and drive time.

The goal is delivering superior execution and speed, producing efficient, dependable, and high quality results.

David Blair, our Senior Vice President for Manufacturing Technology, will lead this important event for the Company.

The fourth action area is our retooling plan. We will complete the Company's retooling program, which involves deploying state-of-the-art technology in fewer but larger facilities by running faster, more efficient next-generation technology with a focus on maximizing the return on capital. This three-year deployment of state-of-the-art press and bindery technology is a key component of our strategy and I intend to ensure it is a success. By investing in the next-generation technology presses, Quebecor World is essentially leapfrogging over one generation of technology and for the most part, many of our competitors. These machines are built for speed, flexibility, and low-cost. The program is capacity-neutral, with one new press replacing two or three old ones, allowing us to produce the same value much more efficiently. The new presses have better print performance, run faster, use less energy, reduce waste, and can be staffed and maintained more efficiently, giving our customers a higher quality product and our shareholders increased returns.

We believe this new equipment will result in a true advantage for Quebecor World. This new press deployment is naturally creating temporary inefficiencies and disruptions in our platform as we decommission presses to make way for new ones and shift volume to different facilities, because for the most part, these new presses are being installed on existing floor space. This reduces volume and increases costs, resulting in lower earnings. However, as an offset, this reduces the need for investment in costly bricks and mortar.

A key point is that we are progressing well in our retooling program, that our new presses are running as planned and we are seeing the planned cost reductions from new investment. As a milestone, this quarter we passed the halfway point in terms of equipment deployment. It is noteworthy that each new press is being installed better and faster than the previous press and we're climbing the learning curve. For example as last month, a new press at Clarksville is starting up 30 to 35% faster than the previous start-up at Jonesboro. This is the result of some terrific work by our Plant Manager at Clarksville, Greg Bumb, and a great help in transferring these lessons learned from the success at Jonesboro by Mike DeHart and James Jackson. This is a good example of what I mean by great execution.

The fifth action area of the transformation plan is our balance sheet. We will take the appropriate financing actions to improve our flexibility and reducing our interest costs by strengthening our balance sheet. A strong balance sheet is a key priority for me and I am committed to improving it to a position of strength for Quebecor World. We've already taken actions in this respect in the first and second quarters and Jacques will speak to those in regards to the detail of them in a minute.

This plan that I just described is designed and built upon our strengths and has already begun. As we move forward, I will update you on our progress and on the concrete actions that we're taking to drive greater shareholder value through this transformation.

Now I will provide an overview of our businesses in the second quarter and then hand this over to Jacques for a review of our financial results. First I will go through the U.S. and Canadian businesses, and then Europe and Latin America.

In our retail business, sales and volumes increased 1% in the second quarter compared to last year. Wins and renewals included several top retailers such as J.C. Penney and Party City. In our catalog business, sales increased 10% and volumes were 7% up in the quarter. Contract wins included Cabela's, Brookstone, and Bass Pro. We continue to expand our full service offering to retailers and catalogers as highlighted by our relationship with Bass Pro. One of the premier outdoor retailers and catalogers in the U.S., Bass Pro utilizes a complete solution with a full range of services from Quebecor World. As our customers continue to centralize their purchasing initiatives, our ability to provide a single source for comprehensive marketing and advertising solutions is a true competitive advantage.

In magazine, sales and volume decreased in the quarter due to the loss of volume from a large customer, lower page counts from publishers, and by the fact that several presses were idle to make way for the installation of new equipment. In the second quarter, we also announced the closure and consolidation of two magazine facilities in Red Bank, Ohio and Brookfield, Wisconsin to reduce costs and improve operating efficiency. One closure is complete and the other one will be completed in the fourth quarter.

To date, we have started five new presses in the magazine platform. Two more will start up by the end of the third quarter. We're also having success with complete solutions to magazine customers such as PRIMEDIA, one of the leading target media companies in the United States. PRIMEDIA has over 100 brands that connect buyers and sellers through print publications, Internet events, and merchandise and video programs. Their titles include "Motor Trend," "New Home Guide," "Surfing," and "Sail." We provide them with an on-site business outsourcing and workflow management service, including image management, workflow automation and file delivery. Our ability to offer CoMail services for titles with both large and small subscriber counts and deliver a consolidated print and logistics package has enabled PRIMEDIA to improve their efficiencies by reducing costs and cycle times.

In our direct business, sales have increased 4% in the quarter. New sales include such marquee brands as CitiGroup, CapOne, and American Express. We believe that we're the leader in this attractive market and believe that this business has excellent growth potential, as more customers view direct marketing as one of the most effective vehicles for one-to-one marketing and target marketing.

In Directory, our volume increased in the quarter, but sales were lower due to reduced pricing. Despite the added competition from the Internet, the Directory market remained strong as Directories continued to provide excellent category-based search for local markets. Our volumes will increase substantially next year as we gain additional volume from our previously announced Yellow Book contract.

In our book business, sales and volumes were lower due to weak market conditions and inefficiencies related to restructuring of this business. We're in the process of closing our Kingsport facility and distributing the work across our U.S. and Latin America platforms. New and renewed customers in the quarter include Microsoft Press, Rand McNally, and Harcourt.

In Canada, sales were lower, excluding the positive impact of foreign exchange, the higher Canadian dollar had a negative impact on our U.S. related business.

I would like to spend a minute giving you a flavor of our logistics business, which is an industry leader and one of our significant value-added solutions for our customers. Our logistics business has the competitive advantage in being one -- the only ones to offer simultaneous dynamic multi-origin CoMailing and nationwide distribution, specifically for the shorter-run publishing market. We also are one of the only companies with a full in-house mail list technology system, which provides shortest time in the industry needed to presort address files. We also offer every-step-of-the-way tracking for our customers, which we believe is one of the most accurate tracking in the industry, where our services allow a customer to have the visibility in their marketing programs through the Postal Service into the final customer's hand. Our logistics business delivered significant increased sales and volumes in 2006 and we have very high aspirations for the future for our logistics business

In Europe, sales and volumes were lower in the quarter due to the sale of several French facilities compared to the second quarter last year and also due to lower volume in the U.K. In the second quarter, we continued with our restructuring that includes the closing of our facility in Strasbourg, France. Our investment and consolidation of the combined French and Belgian Gavere operations is progressing on schedule. European print marketing continues to suffer from low prices as a result of overcapacity. In the quarter, we received new magazine work at the U.K. facility and additional renewals from Bauer and Hachette in France.

In Latin America, sales and volumes were lower in the quarter because of multiple runoff elections in Peru, which temporarily disrupted the economy. We continue to see positive long-term results in our Latin American business and see this as a high-growth area based on strong economic regional growth, and it's a low-cost alternative to China. For example, as the North American book market faces increasing pressure from low-cost producers in China, our strategy to provide a low-cost solution in Latin America for time-insensitive books is right on plan. New customers include Thomas Nelson, Book of Hope, Scholastic, Rand McNally, and Harcourt.

I will be back with some closing comments and remarks right after Jacques will review our detailed financial results. Jacques?

Thank you, Wes. I will now comment on our financial performance in the second quarter compared to last year. As per the previous quarters, comments focus only on continuing operations. Revenue in the quarter was $1.45 billion, down 2.6% from the second quarter of 2005. The reduction comes from price decreases across the platform, except in Latin America, as well as volume decreases in both Europe and Latin America. For the second quarter of '06, our EBITDA before restructuring and impairment charges was $130.6 million compared to 167.4 in 2005. The gross margin before restructuring and Goodwill Impairment for the quarter was 16% compared to 17.7% in the second quarter of last year.

The second quarter results include Impairment of Assets and restructuring charges of $31.4 million, or $0.21 per share, compared to $31.8 million, or $0.23 per share in the second quarter of 2005. The charges mainly relate to closing of our facilities in Kingsport, Tennessee, Red Bank, Ohio, and Strasbourg, France. The non-cash component was $3.4 million.

The 2006 announced Restructuring Initiatives will result in the reduction of 1,700 positions, of which 661 are already completed. The remaining 1,000-plus sessions will be eliminated by year-end and fully benefit our results in 2007.

Results were also affected by certain expected start-up related operational inefficiencies due to our retooling programs. For example, we had to remove certain presses to enable new equipment to be installed. Some volumes were transferred as we proceed with the [closer] of several facilities. Our new presses that have been installed are now operating at or close to expected levels.

As for SG&A expenses, they were at $99.7 million, a 1.7% increase, compared with the second quarter of '05. Excluding a non-unfavorable impact of currency translation of $2.7 million, SG&A would have been lower by 1% compared to 2005. Income tax expense was actually a recovery of $8.5 million, mainly due to losses incurred in jurisdictions with higher tax rates and in which profits are generated in 2005.

In the second quarter, net income before Restructuring and Goodwill Impairment was $20.5, million compared to $38.3 million in the same quarter of last year. On the same basis, earnings per share was $0.10 compared to $0.22 in the second quarter of last year.

Free cash flow generation was $26.6 million in the quarter, compared to 117.8 in Q2 2005. Year-to-date results are comparable at $31.3 million in 2006 versus 37.9 in '05. This lower result on a year-to-date basis is mainly attributable to lower cash flows provided by operating activities.

We'll now cover segmented results. In North America, revenues in the second quarter were $1.1 billion, up 0.6% compared to the second quarter in 2005. Operating income for the quarter before restructuring was $59.6 million, compared to $84.1 million in 2005. The operating margin in the second quarter before restructuring was 4.1% compared to 6.6% last year. Overall volume was more or less flat across the various groups. Pricing pressures and non-favorable price mix in certain segments negatively impacted operating income and margins. Operating income was also impacted by higher energy costs, as well as temporary inefficiencies related to the start up and installation of new presses.

In Europe, revenues were $251.9 million for the quarter, compared to $283.9 million last year. Before Restructuring and Goodwill Impairment, operating loss in Europe was $6.3 million compared to $2.3 million last year. In Europe, volume was down compared to the second quarter of 2005 due to the full impact of the loss of a customer in the U.K. 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 that wound up in the first half of 2005.

In Latin America, revenues in the second quarter were $51.8 million compared to $66.2 million in '05. Excluding the impact of foreign currency and paper sales, revenues for the second quarter of 2006 were down 9.2% compared to last year. Prices in the second quarter increased compared to 2005 as a result of a favorable impact on export sales, but volume was down significantly, mainly in Mexico and Peru. The Peruvian elections affected local sales and print volume in the country, while Mexico directory volume was reduced. Operating income before restructuring was therefore $0.6 million lower from last year's $3.5 million.

Concerning our investing activities, in the quarter, we've invested $87.2 million compared to $73.7 million in '05, mainly as part of our retooling programs, both in North America and Europe. For the full year, we still expect CapEx to be approximately $375 million.

With regard to our financing activities and liquidity position, on our $1 billion credit facility, maturing in January of 2009, at quarter-end we had over $750 million of liquidity. As previously announced in the quarter, we will redeem the Series 4 Preferred Shares, which will reduce our after-tax financial expense and avoid excessive shareholder dilution. I'm pleased to report that we have also expanded our Euro 153 million securitization program for Europe for a three-year period through May 29th, 2009.

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

Thank you, Jacques. Finally, I'd like to tell you why I came to Quebecor World and what my expectations are. The short answer is because I believe this company represents a tremendous opportunity for value creation.

I would like to review the key messages we wanted to share with you today. We've announced a five-point transformation plan that is based on the following areas. First, creating the highest value for our customers. Two, developing our people. Three, building great execution capabilities. Four, successfully completing our retooling plan. And five, improving our balance sheet to a position of strength.

This plan will transform Quebecor World into a provider of high-value complete print solutions that will enable increased margins, a better mix with more high-value services, and the focus on selling value instead of price. This plan is to turn this improved performance capability into consistent earnings-per-share growth, strong earnings improvement, high cash flow, and significant debt reduction.

That's the transformation plan.

For those of you familiar with my previous experiences and track record at Allied Signal, Nova and Sun Chemical, you will know that creating value and driving high performance is what I do. Driving performance by focusing on the business fundamentals -- the fundamentals of cash flow, earnings growth, financial discipline, is a formula that works. I am confident that this formula will be successful here at Quebecor World.

Thank you for the time today and for your support of Quebecor World. We'll now open up the call for your questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question is from UBS Securities. Eric Mencke, please go ahead with your question.

Thanks very much, guys. Just two quick questions. First, on the EBITDA erosion in North America; can we get some sort of a break-down on what relates to volume and price, what relates to retooling efficiencies, and what relates to the increased energy prices?

And then my second question is if you can give us a little more color on what your plans are for France or Europe? As I know, you guys have an additional 150 million of CapEx budget to spend there, but it still looks like you haven't made any more commitments on presses.

Thank you, Eric. Let me take up Europe and then I'll pass it over for the EBITDA breakdown with Jacques. In terms of Europe, we are applying this transformational plan to Europe to understand what are the key areas for improvement within Europe. And as you know, Europe isn't just one overall market, but there's distinct individual markets in each of the areas. And we're evaluating a strategy for each one of those for performance improvement. And so therefore, as we develop this plan in each area, we'll be able to come back to you with an understanding about how to create the most shareholder value and serve our customers the very best in each one of the markets.

And so that will be something we'll come back and report on. Jacques, for the EBITDA breakdown?

All right, if you can look at North America, again, we're right in the middle of our very heavy season, in terms of retooling and restructuring, so you need to understand that this is temporarily affecting the results. In terms of volumes, you know, there was some impact from a mix of products in the certain business segments, and as well, some negative impact from pricing. So those are the main components. We also had a slight increase in utilities versus last year.

Next question, please?

Thank you. Our next question comes from TD Newcrest. Vince Valentini, please go ahead.

Yes, thanks very much. First of all, Wes, if you're going to improve your disclosure, can you confirm that you'll start to provide annual earnings guidance, like Donnelly and your other competitors do?

Second question is on your transformation plan, on the five points, one thing I didn't see there is anything to do with return of cash to shareholders, whether it be dividends or share buybacks. And in fact, your fifth point on balance sheet strengthening may imply that the dividend could be cut in order to improve your balance sheet ratios. I wonder if you can comment on how you view the dividend.

And lastly, on Goodwill, are you guys forced to review the value of your Goodwill midyear or does that evaluation only occur at year-end? Thanks

Thank you, Vince. In regards to guidance, we prefer to be able to deliver on our performance and then be able to see that. We're being very transparent in terms of our overall performance and trying to share with our strategies for the future, specifically about our five key action areas. And we'll be able to update you, both in terms of these calls, but also in terms of our investor base, but we'd rather not go out and give guidance specifically, but we'd rather deliver it.

Around the dividend and the balance sheet, please do not misunderstand. The actions that we're taking around the balance sheet are going to be driving cash flow improvement, both through the performance of our business, also understanding how to have the highest capital return projects in terms of capital expenditures, and being able to drive our performance across the business. We're also looking at opportunities in each one of our businesses to generate additional cash flow through working capital, but we're not looking at reducing dividends or being able to have share buybacks in that regard. But the balance sheet will be a key priority.

Also, we're looking at every one of our businesses to ensure that they have a return on capital employed and also the value, in terms of net present value, for our shareholders to be part of the Quebecor World family.

Goodwill?

Yes, the last question was on Goodwill, so we just complete our annual Impairment test that we have to do annually and that is typically done as of April 30th, so it's been completed in the second quarter.

Okay, thanks.

Thank you. Our next question is from Genuity Capital Markets. Andrea Horan, please go ahead.

Thank you. I was wondering if you could quantify a couple of things, I guess, to the best that you can. I didn't see in the description of the 2006 restructuring how much you might be able to secure in savings, not just from the headcount reduction, but presumably from consolidating facilities.

And then the other question is more with regards to targets, and I'm wondering if in your longer-term strategic plan, and have target EBITDA margins or anything along those lines that you can share with us?

In terms of restructuring and the impact, you know, we do not provide specific guidance on how much it will yield in terms of returns. Of course, as you can see, we are proceeding with a major retooling. We are installing our new equipment in strategic locations and as a result, we're shutting down some facilities. So there is an overall return on these actions, but you know we don't provide any specific guidance on exactly how much it's going to generate in terms of return.

Thank you. Our next question is from BMO. Tim Casey, please go ahead.

Thanks. Mr. Lucas, you've outlined your plan. I'm wondering if you can quantify what you mean by improvements. You mentioned that you're disappointed, you're not satisfied with the current operating results. At what level of margin -- or what level of growth would you be satisfied? What kind of numbers do you think the asset base you've come to is capable of?

And secondly, in response to an earlier question, you mentioned that you want to review all the businesses you're in and make sure they're the right fit. And that seems ironic because hasn't there been a company wide review to-date to decide on the technology and the retooling plan? Like hasn't that process already been completed and you've decided to stick with the current businesses you're in? Thanks.

Thank you, Tim. In regard to the disappointment in our performance, we as the leader in the industry and the size and scope and capabilities of Quebecor World, naturally I'm disappointed with these results. And the reason for the five key action areas is to be able to drive performance so that we, as a company, can be able to focus on creating the most value for our customers and our shareholders. And the opportunity we have in this leadership position is to create much more value, both before the press and after the press, by creating a complete integrative solution so that we're not selling based on essentially a printed product, but more of a complete solution with much higher value-added margins. And that adds to it, in terms of services, much less capital-intensive and higher margins than the products. Therefore, providing moving from a product to an integrative solution provides a significant opportunity for us to improve our performance.

Also, when you look at just our overall earnings levels today, our target should be very high in terms of delivering double digits, in terms of increasing our margins significantly, and turning around the overall performance of the Company. We have not developed those targets as of yet. I have asked the businesses to come back with key strategic plans to say exactly what is their full potential and what is the plan that they have, the disciplined integrative plan to take them from where they are to where they need to be and to provide the highest return on capital and the highest returns for our shareholders.

Tim, your second question regarding fit, just to be clear, our retooling program is right on track. It's in the areas and we're very pleased with it in terms of building a platform for a competitive advantage in the future. And also this platform, I'm very pleased, it will provide the operating capability for us to execute on the five action areas so that we'll be able to provide to our customers a higher value-added, based on a platform that we can trust that is highly efficient, with a low-cost capability and also with the ability to provide quality in delivering on time.

But it's not -- that wasn't the challenge. The challenge is to make sure that every one of our businesses provides the highest return possible to our shareholders and to our customers.

Hope that answers the question, Tim.

So there's nothing that you -- no business lines you're currently in, or no geographies you're currently in, that you're reviewing, whether they're going to be potential divestiture candidates?

Well, I think for us to be good stewards for our shareholders and to drive the highest shareholder value, every business has to stand on its own to provide the highest return on capital and to earn the right to be able to be part of the Quebecor World family. And if it doesn't meet those hurdles and that very high level of expectation, then we should look at. But as of right now, we're not going through that review. On the other hand, we always review annually and at every one of our meetings still to ensure that each business is performing at that level.

Thank you.

Thank you. And our next question is from Scotia Capital. Andrew Mitchell, please go ahead.

Thanks, good afternoon. I think I just wanted to get a big picture discussion just on the capacity-neutral strategy you've got. The MD&A acknowledges the industry conditions we're seeing; the overcapacity, the price deflation, intensifying competition from Asia. And you seem to acknowledge those are unrelenting challenges for the industry as you move forward, and then at the same time, you know, you've noted you've got a capacity-neutral retooling program under way. So I wondered if you can talk about whether it makes sense to have a capacity-neutral program, in light of your outlook for the industry and what your intentions are on that front.

Thank you, Andrew. In terms of the overall drivers in this industry and in our markets, you're absolutely right, that we do have many areas that are challenged, especially when you talked about with book with China. However, there are other areas where we're investing that are very attractive and that have good growth prospects, such as when I spoke about solutions for marketing and advertising campaigns. Where we have good growth around -- fundamental growth around direct marketing, retail and catalogs and such, that drive and help the retailers and catalogers, help the branded goods companies target specific markets and drive growth for both store traffic and for their branded goods. That's a healthy growing market.

So therefore, we're looking to invest in those, but we're also looking to be able to retool our overall network. So that is why we're approaching this in an overall capacity-neutral manner. We have also long-term contracts in the book and the directory business, with our magazine. Magazine has about half of our contracts long-term booked up. So we are retooling so that we can serve those long-term contracts -- in a capacity-neutral manner serve those long-term contracts with higher quality, more efficient operations, and at a lower cost so that our shareholders benefit.

Always that we're looking to ensure that we're successful in managing, in a responsible manner, our overall capacity utilization.

Can I just quickly follow up? The areas you identified of growth -- where you're seeing growth -- tend to be short-run and I think are fairly separate in terms of the retooling plan that's been put into place to date. The other areas where we're seeing more of the pressures would tend to be where we're seeing this capacity-neutral retooling program. So is there some need to rebalance how you look at capacity-neutral across the business, where you're actually increasing capacity in the short-run areas and looking to pull out some capacity in the long-run areas?

The one benefit that we have is that for areas such as directory, book, and magazine, and other areas, that we have these long-term contracts that were essentially -- have already filled up, or have already called for this capacity. So we have the contracts with our customers and we're filling those new presses with that work. Such as in Merced, we have long-term contracts that essentially obligate us to build those plants and retool in that environment, and so therefore, we're matching our customer contracts with our retooling efforts to make sure that we deliver those contracts at the highest return and the highest quality to our customers.

So there's a nice fit there. And when I was talking about the growth areas or other areas in terms of retail, which we have put money into, and the marketing areas to build on that.

Thank you.

Thank you. And our last question comes from Merrill Lynch. Glen Campbell, please go ahead with your question.

I'm sorry. I was in queue for the next part.

Okay, thank you.

Thank you very much. We appreciate your support and we look forward to our next call.

Ladies and gentlemen, we will now be moving on to the second part of this conference call. My name is Luc Lavoie, Executive Vice President, Corporate Affairs. And for those of you who've just joined us in progress, I would like to welcome you to the Quebecor conference call for the second quarter of 2006.

Joining me are Pierre Karl Peladeau, President and Chief Executive Officer of Quebecor; Jacques Mallette, Executive Vice President and Chief Financial Officer; Pierre Francoeur, President and COO of Quebecor Media and President [microphone inaccessible] of Sun Media Corporation; Robert Depatie, President and CEO of Videotron; and Mark D'Souza, Vice President and Treasurer of Quebecor Inc. and Vice President of Finance, Quebecor Media.

I now turn the floor over to Pierre Karl.

Thank you, Luc. Is there any information that we need to release concerning this conference call?

I went over it at the beginning.

Okay. Well, I'm sorry.

Okay, so thank you, Luc. Quebecor reported mixed results for the quarter. Quebecor Media performed well, while Quebecor World continued to be negatively impacted by the implementation of its strategic plan, as well as the unfavorable competitive environment.

Having commented on Quebecor World earlier during the call, we will focus on Quebecor Media. Again, in the second quarter of 2006, Quebecor Media's growth was primarily generated by its telecom unit. They have drawn tremendous success with its residential telephony roll-out, and lift impact on other products demonstrate the soundness of our launch strategy.

For instance, for the first time in the last ten years, Videotron recorded growth of its basic cable subscriber base in the second quarter, a quarter typically characterized by negative seasonal pattern, resulting from leases expiring on June 30th. In a few minutes, Robert will share with you additional details on one of the best performances in the industry. With the launch of our MVNO wireless product later this week, we are more than convinced that bundling various products is key for telecommunication companies.

Another major project of Quebecor Media is the installation of new printing presses in Toronto and Montreal. Our project in Mirabel, Quebec, is well underway and one printing press should be operational in September, whereas the two other presses will be operational in the last quarter of this year. This project should generate significant savings in the near future.

In Islington, Ontario, our project is on schedule and the presses should be operational in the first half of 2007.

Some of you may have heard about our labor conflict with the pressroom employees at "Le Journal de Montreal." [INAUDIBLE] production disruption caused by employee vandalism required us to print the newspaper in other facility for a couple of days. The employees responsible for the vandalism were terminated for cause and we took appropriate measures to quickly resume production with management in our Montreal facility. The dispute is now under arbitration, as contractually provided by the labor agreement.

I will now ask Jacques to review our financial performance. Jacques?

Thank you, Pierre Karl. I will start by reviewing Quebecor Media's results for the second quarter of 2006. Excluding the impact of unusual items, notably an $8 million restructuring charge at our newspaper operations, Quebecor Media reported a net income of $64 million for the second quarter of 2006, compared to a net income of $36 million in 2005.

Quebecor Media's revenues grew 10.7% from $671 million to $743 million. Our cable operations exhibited an impressive 20.8% jump in revenues. Revenue growth of 28.2% from our [internal] portal segment should also be highlighted.

Quebecor Media's EBITDA increased to $208 million in the second quarter of 2006 from $194 million in 2005, underpinned by our cable operations, which recorded 19.9% growth. Our Internet portals also performed very well, with EBITDA growth of 50%. However, this growth was partially offset by softness in our broadcasting and newspaper operations, where challenging advertising markets and the launch of new products dampened performance.

As for Quebecor Inc., we are reporting net income from continuing operations, and excluding unusual items, of $30 million for the quarter, [loud microphone noise] per basic share against $27 million, or $0.42 per basic share for the same period last year.

Lower operating income at Quebecor World was more than offset by lower financial expenses, resulting primarily from the refinancing at Quebecor Media that occurred in the first quarter of this year, higher operating income at Quebecor, and higher operating income at Quebecor Media. Our net income also includes the favorable impact, estimated at $9 million net of interest, of the tax rate reduction introduced by the Canadian federal government, and the elimination of the large corporation tax.

Revenues were down 6.2% in the quarter, to $2.3 billion, primarily as a result of the unfavorable impact of currency translation [loud microphone noise] and to a lesser extent, the impact of continuing pricing and volume pressures [loud microphone noise]. Our media operation had revenue growth of [loud microphone noise].

Consolidated EBITDA was down 12%, to 300 [loud microphone noise]. As for the results for the six months ended June 30th, 2006, Quebecor Inc. reported net income from continuing operations, excluding unusual items, of $48 million, or $0.75 per share, from a net income of $43 million or $0.67 per share in 2005. Revenues were down 5.7% to $4.7 billion, primarily reflecting the appreciation of the Canadian dollar, and EBITDA stood at 651 million.

On the other hand, Quebecor Media exhibited revenue growth of 11.3%, to $1.4 billion for the first half of 2006. And its EBITDA grew from $345 million to $367 million, primarily as a result of the 19.4% growth of Videotron's EBITDA. On July 15th, 2006, Quebecor Media repurchased the balance of the outstanding high-yielding notes for a cost of 39 million [loud microphone noise]. As a result, the Company will record an after-tax loss on refinancing of $6.7 million in the third quarter of 2006, but we'll now enjoy the full benefit of the refinancing completed earlier this year.

I thank you for your attention and I will now let Robert review Videotron's operations.

Thank you, Jacques, and good afternoon, everyone. I will first start by saying that this quarter demonstrated the formidable impact of the addition of residential telephony to our bundling offers. Although some skepticism remains regarding our pricing strategy, we believe that quarter after quarter, our subscriber metrics and financial results confirm that our focus on customer service, bundling offers, and providing the best technology to our customers is sound.

For the first time in the last ten years, which is as far as anyone could recall, we recorded net gains in our basic cable customer base in the second quarter. As you know, Quebecor typically witnesses massive moves in the second quarter as most leases expire on June 30th, usually resulting in net customer losses. For instance, in Q2 2004 and Q2 2005, we lost respectively 8,600 and 11,800 basic cable customers, whereas in the second quarter of 2006, we gained 1,000 basic cable customers.

Furthermore, it is important to note that the growth in this quarter is not the result of fewer disconnects, but is rather the result of higher addiction -- additions. [LAUGHING] It might be an addiction to cable. On a last-12-month basis, we gained 78,100 basic cable customers, an impressive increase of 5.4%. During this quarter we also added 33,000 digital TV customers, compared to 25,800 in 2005, 28,800 cable modem Internet customers, compared to 18,000 in 2005, and 56,200 telephony customers, compared to 26,900 in 2005.

For the six months ended June 30th, 2006, we posted growth of 15,100 basic cable, 70,800 digital TV, 72,600 cable modem Internet, and 120,200 telephony customers. This compares to a net loss of 9,600 basic cable customers and a net addition of 44,300 digital TV, 45,400 cable modem Internet, and 39,700 telephony customers recorded in the same period last year.

Once more we maintained the highest percentage growth in a last-12-month basis in basic cable, digital TV, and cable modem Internet amongst the large cable companies in Canada.

Our residential telephony service continues to get tremendous market acceptance. At the end of the second quarter, a total of 283,200 customers were subscribing to our telephony service, which was then available to 69% of our home path. Another example of the lift effect resulting from our bundled marketing strategy is that 55% of our customers who subscribed to our telephony service during the quarter also subscribed to least one other service at the same time. Moreover, 34% of our telephony additions were with customers with whom we had no prior relationship. And of those, 68% subscribed to all of our three products. Today, approximately [15%] of our customers subscribe to all three products and another 30% subscribe to the two products.

Last week we extended the rollout of our telephony service to 93,000 potential customers located in 24 municipalities, including Saguenay and its surroundings, increasing our service coverage to 74% of our home path. We're currently slightly behind schedule in our rollout plan as a result of delays in obtaining all required permits to provide power backup to the network. Since we don't want to deploy the service before having first secure backup power, we're now expecting to have completed full deployment in the first half of 2007.

Operating revenues amounted to $314 million in Q2, 2006, an increase of $54 million or 20.8% over 2005. The increase came primarily from the growth of our customer base and various price increases for all of our products. Contrary to rumors in the marketplace, we have not reduced our Internet prices to offset our fall telephony price increase. In March, we rather increased our monthly prices by a dollar for both [light] and high-speed Internet service.

We believe that our customer consider more than just the price when it comes to trying to subscribe to our Internet service, and that the quality and reliability of our product is differentiating us from competition. For instance, we recently announced a speed increase of our Extreme Plus Service to 20 megabits per second, making Videotron the first major telecom provider in Canada to offer such a fast service throughout its service area.

Churn rates continued to improve over the quarter, as our cable churn rate fell 0.5% to 12.4% on a last-12-month basis, compared to the second quarter of 2005. As for cable modem Internet, our churn rate fell 1% to 14.3, again compared to the same quarter last year. Our total cable ARPU [INDISCERNIBLE] jumped 18.3% from $50.86 in Q2 2005 to $60.17 in Q2 2006. This improvement reflects the impact of price increases, growth of bundled products, and the gradual migration of analog TV customers to digital TV.

We recorded EBITD of $122 million during Q2 compared to $102 million during the same quarter of 2005, representing an impressive growth of 19.9%. This improvement resulted from increasing revenue-generating units, as well as price increases.

For the six-month period ended June 30th, 2006, operating revenues amounted to $616 million compared to $512 million in the same period of 2005, an increase of 20.4%. We recorded EBITDA of $240 million, an increase of $39 million, or 19.4% compared to the first half of 2005.

Finally, before I turn the floor over to Pierre, I'd like to provide a quick update on the imminent launch of our wireless service, which will complete our bundle offers with a fourth product. As you know, this service will be available to our customers on an MVNO basis using Rogers' wireless network, and we will retain customer acquisition and maintenance and billing. We intend to gradually launch the product starting in Quebec City. Depending upon customer acceptance, we'll expand the service to other areas, in accordance with our ability to maintain the level of service our customers deserve.

I thank you for your attention and I'll turn the floor over to Pierre for the review of the newspaper operation.

Thank you, Robert. Let's now review the financial performance of our newspaper segment. Revenues increased 0.6% [INAUDIBLE] of 2006 to $241 million from $240 million last year, mainly due to growth in advertising revenues. Advertising revenues increased 1.3% in the quarter. A 74.7% of advertising revenue growth in our free dailies, coupled with growth of 8% in our urban dailies and a steady growth of 2.8% in our community operations contributed to this increase. Advertising lineage for our paid urban publications decreased in the second quarter. Despite this overall decline in lineage, we continued to increase market share in our urban daily newspaper markets for both [INDISCERNIBLE] advertising and classified advertising.

Circulation revenues declined 3.9% in the quarter, mainly due to our aggressive circulation strategies at the "Toronto Sun" to maintain circulation levels and market share, including cover price reductions and promotional home delivery pricing. Confirmed by [INAUDIBLE] financial results released last week, the GTA market remains very competitive.

At this stage, I would like to highlight some success in the latest circulation report released by the ABC for the six months ended March 31st, 2006.

Paid weekday circulation increased 2% a "Le Journal de Quebec," and 1.1% at the "Ottawa Sun." During the same period, paid weekday circulation declined for our competitors in these two markets. Our EBITDA declined slightly in the second quarter, from 62 million last year to 60 million this year. Higher newsprint and other operating expenses more than offset the increased revenues. Newsprint prices rose approximately 3.5% in the second quarter of 2006. Our investments in circulation in Montreal and Toronto further contributed to the increased operating expenditures. Finally, we incurred incremental costs relating to a strike a "Le Journal de Montreal" which began in June.

In the quarter, we announced a 6 to 7 million capital investment to reposition ourselves from a chain of daily and community newspapers into a multi-platform content provider. This project, called ISO, which stands for Interactivity Syndications and Optimization, confirms our willingness to challenge the way we operate in this role of multiple media platforms by being more creative, flexible and technology-oriented. As part of this implementation, we're investing in a new Content Management System that will allow our papers to share stories, pictures, pages, schedules, graphics and other elements. This will make news production more efficient and will improve the exchange of ideas and communication, in general. Efficiencies generated by the new technologies will allow the elimination of 120 positions and result in estimated net annual savings of approximately $4.6 million.

Some of the savings will be used to improve content by investing in a stronger research [delivery] services, additional news bureaus in North America, and announcing online capabilities to enter breaking news.

We're also working on other initiatives that will allow us to provide the best offers to our customers and readers and to reduce costs, which will also benefit our shareholders.

Our large investment in printing technologies also demonstrates our commitment to efficiency and quality, lower headcount, full [INAUDIBLE], highly automated equipment. and launches of new products are good examples of our plan to improve our performance in this changing competitive landscape.

As a result of this restructuring of news production and processes, a charge of 2.2 million was accrued in the quarter relating to the initial reduction of approximately 80 positions. In addition, we recorded termination benefits of 5.6 million, related to the two new printing facilities in Toronto and Montreal. Further restructuring charges related to the editorial projects are expected by the end of 2006 or early 2007.

The investment in our free dailies under the 24 hours banner continues to generate revenue growth. For the quarter, advertising revenues for the free dailies have increased 74.7% over last year, with particularly strong gains in national and retail. We expect this growth to continue.

Furthermore, our redesigned web sites continue to exhibit robust growth, contributing to the increased online revenues of 45% in the quarter in our urban newspapers. Talking about our online performance, I think it is important to highlight our ongoing efforts to better capitalize on the strengths of Quebecor Media's online properties by deploying a more integrated strategy with Canoe. As you know, Canoe exhibits one of the biggest [INAUDIBLE] in Canada through its various websites and we believe we both can benefit from an integrated strategy.

For the last few months, we implemented new initiatives with Canoe in order to remain one of the leaders in the Canadian marketplace. Another good example of our success is that Canoe, despite headcount increases throughout the quarter, managed to increase its EBITDA by 50% to 3.3 million.

As you can see, we're committed to challenge the way we produce our newspapers. We must realize that our national chain of tabloids is a great asset and that we haven't completely capitalized on its potential. We believe there are no other ways to operate in this new world of media where incumbent players are facing challenges to maintain their leading position.

I thank you for your attention and will now let Pierre Karl conclude our presentation.

Thank you very much, Pierre, and congratulations, Robert, again. I will conclude by saying that I'm pleased with the operating performance of Quebecor Media. Videotron continued to exhibit significant growth with upside potential and has now completed the rollout of the telephony service and penetration of digital TV and internet services still lags one of its peers. However, we are conscious about the challenges that other areas of our media operation face. Conventional TV broadcasters and newspapers must adopt their strategies to reflect the increasing adoption of Internet and other media platforms. Quebecor Media is clearly pursuing the shift to the digital world by answering that Canadian local content will be available on these new platforms.

Furthermore, we must make sure that our Internet properties will benefit from this surge in online activities by maximizing the integration of content of all of our properties.

As for Quebecor World, the retooling plans in North America and Europe are well underway and despite a few issues, we consider that the implementation is going relatively well. Improving our financial results remain the ultimate objective, but we must keep in mind that the benefit of this global retooling plan, being one of the largest ever realized in the industry, won't materialize over time. Our plan is to position the Company as one of the most productive and efficient in the industry and it takes some time to achieve that kind of goal.

Restructuring efforts continue at Quebecor World and on June 28th, we announced the closure of one plant in our U.S. magazine platform. Also noteworthy was our ability to close our facility in Strasbourg, France, without disruption as we had expressed elsewhere in France previously.

Early in 2007, we expect Quebecor World to start reaping the benefits on its various efforts as it completes its investment plan and starts to benefit from the large contract previously awarded.

I thank you for your attention and we're now ready to answer your questions.

[CALL INSTRUCTIONS]

Now I will turn it over to questions.

Thank you. [OPERATOR INSTRUCTIONS] And our first question comes from Merrill Lynch. Glen Campbell, please go ahead.

Yes, thanks very much. I'm wondering on the wireless MVNO arrangement with Rogers, if you could give us any sort of parameters on what the service will look like. Will it be prepaid only? Postpaid? What pricing strategy will you be adopting and so on?

Well, as you know, we'll make the announcement this week. We have a major press conference but of course it's an MVNO as you know. It will be totally transparent. For the customer we will handle customer service, technical service, sales, marketing and everything. One only thing I can tell you is going to be focusing on what we've been very successful at is bundling. So our key strategy will be again around bundling and that's probably the only thing I can tell you, but stay in touch. This Thursday you'll have all the information, including our packages. Stay tuned, as we say.

Okay, thanks. My follow-up is on business telephony. Could you talk a little bit please about what proportion of the small-business market you think you can address with your plan today and with plant extensions over time, how big a portion of the market will become addressable with time? Thanks.

Well, currently we have, based on our ex-VTL network, approximately 100,000 small and medium enterprises. So that's basically the market we're going after before we invest any major CapEx. We have a lot of opportunity on the network, so we feel that there is a chance for growth there, too.

And do you have a sense of how many lines are represented by those enterprises and how many of them you have today?

It's very small for us today. We do not provide these numbers, but as far as we're concerned, the volume is very minimal. We just launched it on a small level couple of months ago, so we're in the neighborhood of under 10,000. So that's the current market, but we're going to go more aggressive in the future.

Okay, thanks very much.

Thank you. The next question comes from UBS. Jeff Fan, please go ahead.

Thanks very much. Good afternoon. Robert, can you just repeat some of those statistics that you gave out on, I guess, the subscriber lift that you were seeing in the quarter?

On the subscriber lift that we've seen in the quarter? Do you mean the lift impact?

Yes.

Yes, first of all, we have 15% of our base customer -- that's on a cumulative basis -- who carry three and more products. So approximately 220,000 customers. We have approximately 30% of our base business that carries two products, which is around 420,000 approximately. Of the total telephony, 55% of our subscribers on the quarter took the telephony and one product extra, which is around 34,000. At least. 34% of our telephony customers were new customers to us and of that 34, which is 68% or 14,000 approximately, took three products. So 14,000 brand new customers to us took three products in the quarter.

Okay, that's great. Wondering if we can talk a little bit about the CapEx for this year. I think you've given us a guidance of around 275 to 300 for the year, wondering if that's still consistent. And on the wireless front, were there any costs incurred year-to-date to get the MVNO ready, both on the cost and the CapEx side? And also, whether the spending for the second half -- I know you've talked about it, wondering if you can just give us an update. Thanks.

Well, as far as CapEx is concerned, total overall, we mentioned on the last conference call it will be between 300 and $325 million, the only reason being that our growth is way more than we expected. So it'll be a success driven CapEx -- the difference. All the rest remains the same. As for the CapEx involved in the MVNO we're talking about around approximately $10 million, which is basically IT systems. That's about it. And as far as forecast, as you well know, Jeff, we don't provide any forecasts for the future business, so the only thing I can tell you, we'll stick to our plan.

And of that 10 million, how much has been spent already?

Approximately $10 million already been spent in order to put -- because as you know, we're going to be totally transparent. We're going to have one call center, so everything has been done as we speak now. People will see all services from one invoice. They'll call our call center, we'll activate automatically from our end the phones, so it's all automated. We didn't have to spend any more money, as you know, because the network is the network of Rogers.

Okay, thanks very much.

Thanks.

Thank you. Ladies and gentlemen, our last question comes from TD Newcrest. Vince Valentini, please go ahead.

Thanks very much. One operational question for Robert and one big-picture question for Pierre Karl. On the operational side, Bell has been ramping up their DSL promotions in somewhat of a retaliation against you guys. It certainly didn't hurt you in Q2, you put up great numbers, but I'm wondering if you can characterize over the course of the quarter, as the promotion continued to accelerate, if you saw any increase in your churn on the high speed internet front, including heading into Q3 and the month of July. Have you started to see any impact from Bell yet?

And for Pierre Karl, on the big-picture front, obviously we saw this chum deal happen recently and you guys didn't seem to get a call or be involved to be able to bid for it. I'm sure those assets would be attractive to you. I'm wondering if that's for you thinking at all about IPOing the Quebecor Media business so you can have a more visible currency and maybe be in the game for the M&A activity that may ensue out of that deal? Thanks.

Vince, as you know -- it's Robert -- as you know, this promotion, this aggressive pricing strategy from Bell has been in the market for the last two month. If the promotion would have been successful, this would have had a big impact. As you know, May, June and July are very big months for moving, so our churn has dropped in the last quarter, as you know. Dropped by one point in Internet. We have also a drop, if you look at today's new promotion plan, our discount, we have no more discount on Internet and we haven't seen, as of today, any increase in churn and as far as the future events, you know very well we don't provide any forecast or prediction but we feel very confident.

Thanks

Hi, Vince. On your question, I think obviously that's large transaction. It was announced surprisingly. I think it's pretty early to comment on this. There will be some steps that this transaction will need to go through. We think we can easily think about competition and the CRTC. From there, we're probably going to have a better idea about what's going to happen.

In the meantime, I don't think that we should consider an IPO driven by this acquisition. I think that we're at the stage right now that nothing's really changed about the nature of our company, from a shareholder standpoint, either Quebecor or our partner doesn't consider at this time it's inappropriate to entertain an IPO process. And if something was to change, obviously we'll address the issue when it comes.

Okay, thank you very much.

Thank you very much, all, and we wish you a good end of the summer and we'll talk to you at the next quarterly meeting. Thanks again. Bye now.

Thank you, ladies and gentleman. This concludes the Quebecor Inc. conference call.