Quad/Graphics Inc (QUAD) 2006 Q4 法說會逐字稿

Welcome to the Quebecor World, Inc., conference call. I would like to introduce Tony Ross, Vice President, Corporate Communications. Please go ahead.

Thank you. Good afternoon and welcome to the Quebecor World conference call for the fourth quarter and full year 2006. My name's Tony Ross, and I'm the Vice President of Corporate Communications for Quebecor World. This call is being Webcast, and forward-looking statements are subject to Safe Harbor provisions. We will begin with a presentation of the results of Quebecor World, followed by a question-and-answer session with analysts. This call should last approximately one hour.

Today we are starting a new format for our quarterly conference call. We will be including a slide presentation. The presentation can be accessed through our Website at quebecorworldinc.com. Click on the Webcast link in the Investors section and follow the instructions to register. This presentation will be archived in the Investors section of our Website after this call.

Joining me today from our offices in Montreal for Quebecor World are Wes Lucas, our President and Chief Executive Officer, Jacques Mallette, our Executive Vice President and Chief Financial Officer, and Roland Ribotti, our Vice President of Investor Relations.

I will now turn the call over to Wes Lucas to begin the presentation.

Thank you, Tony. Good afternoon and thank you for your interest in Quebecor World. We greatly value your support. We hope that you will find our new format an improvement, as we are driving continuous improvement in all our activities. We hope to improve also our investor communications as well, providing more clarity, details, more disclosures, more transparency. We look forward to your feedback on this new format.

Now to review the fourth quarter in 2006. In the fourth quarter, adjusted earnings per share increased to $0.28 versus $0.21 last year. Adjusted EBITDA of $170 million, versus $168 million last year, essentially stabilizing EBITDA margins at 10.5% versus 10.1% last year.

We've progressed well in all five points of the transformation plan, and we'll review this in detail. Also, we concluded key financing, which Jacques will review in detail. We are well positioned for continued success and progress in 2007.

In 2006 we developed and began implementing a new five-point transformation plan. We've renewed and expanded key agreements with major customers--for instance, Raycap, Bass Pro Shop, Sales Agents Group. We executed restructuring in North America and Europe, with nine new presses in North America and seven plant closures or exits, such as Kingsport, Brookfield, Red Bank, Strasburg, and three exits in France. We maintained our financial flexibility despite these heavy retooling activities. Then Jacques will cover our liquidity capability. We've only pulled $100 million off of our $1 billion credit facility. In 2006 we had new plans and significant progress.

Now I'd like to discuss the five-point transformation plan and then the businesses. As always, we start with the customer. We'll be going counterclockwise on this page, starting with the objective to build the capability to create the highest value for our Quebecor World customers by providing differentiated, superior-value products and services. The deliverables from customer value is the target of $300 million in higher margin sales. We're pleased with our progress recently by developing multi-channel marketing solutions for retailers and branded goods customers. These have been well received, enables us to sell more on value versus selling on price. We're also developing high-value print solutions for our publishers, which enables faster, better, and more efficient printing for magazine and book companies.

We're doing more--more complete solutions that combine full services before the printing process and also more services after the printing process. Examples of this is our renewed YPG agreement, which includes both premedia and logistics services. In premedia, it's items such as AdMagic with folks who do advertising, and logistics services, it's a logistics-integrating process that provides YPG with higher [value] in terms of efficiency and also lower costs for YPG.

Another example is a renewed contract with Williams-Sonoma, which includes significant logistics services. These in turn are mail list sorting, distribution that's deeper, getting closer to the UPS/PS, and also helping Williams-Sonoma reduce their costs and shorten their cycle times.

Also for customer value, we have co-mail expansion in terms of doubling our capacity in the fourth quarter, and we'll talk about also further expansion in the second quarter. We're transitioning to sell more on value and less on price.

Our second initiative of the five-point plan is around people. Our objective is to develop our people to be the very best that they can be in creating a high-performance organization. The deliverables are new people programs that are fully deployed, and in 2007 creating significant organizational capabilities around some key areas. The recent progress is that we've implemented world-class tools, training and development programs. We believe that we have the best people initiative today, but you can always improve and reinforce these teams.

And in that area, we've made several key appointments, such as Doron Grossman, who became our President for U.S. Magazine. He's a world-class leader, coming from General Electric and American Standards, has already made some significant impact. Chuck Miotke, he's one of the best print manufacturing leaders in the industry, and he's taking over our global manufacturing area. Steve Miller is leading our continuous improvement program, focusing on six sigma in manufacturing for lean manufacturing. And Greg and Amin both took over roles in terms of increasing our sales and marketing capabilities in premedia and Canada, respectively. We are building a stronger team. We are building a stronger organization.

Our third key point is around great execution. Our objective is to implement a continuous improvement program to build superior execution capabilities, producing more efficient, more dependable, and higher quality results. The deliverable? It's a $100 million annualized improvement, both in terms of increase in productivity and lower costs.

Our recent progress is that we kicked off more than 40 projects in the first wave of what we call "The Class of 2007." And we're kicking off the second wave of these projects in building that capability in April.

Some examples of our progress are around an annual expected run rate of savings in trends of Stillwater, where we're having better make-ready and run waste projects. These are three projects that total $1.2 million. One project's around faster make-ready time. Another project is to reduce our run waste on free presses, and a third project is around increasing our finishing speed. We've already reached a run rate of 1.2 million--100,000 a month.

Another good example is our St. Cloud Bindery project, which will have a total of 1.8 million in the run rate, which we believe will be hitting in the third quarter. This is focused on our binder speed, and this is making good progress, also.

And Atglen's paper and speed projects are around over-consumption of paper and reducing paper breaks and increasing the speed of the press. This will be a $1.1 million improvement, and we're anticipating that third quarter run rate also. We're pleased with these projects, and we're well on our way to that $100 million. We are driving execution excellence, and we're driving productivity improvements from this key point in this key initiative.

Turning now to retooling. Our objective is to build a leverage and complete the significant three-year program of retooling, which is deploying state-of-the-art technology in fewer but larger facilities. The deliverable is to accelerate the retooling program this year so that we're completed before the busy season in the third quarter 2007. Therefore, we're accelerating our program, and we're concentrating it in the first and second quarters. Recent progress is that we had our first press, one press installation was completed in the fourth quarter--that's Merced. And that was completed on time. We're pleased with it. Our four press installations were completed in January and February 2007. These included a wide web in St. Cloud and two large gravure presses, the 4.3-meter presses that we talked about in Charleroi. And also we added one wide web in Barcelona. These new presses are performing according to plan.

For objectives for 2007, we're accelerating the retooling and restructuring in the first half of 2007. These are 20 new or relocated presses to be installed in the first half. Yes, that's not a tightrope. It's 20 new installations. That's twice as many as the first half of 2006, when we had 11. This is a significant increase. And in addition, we'll have five closures or exits that we have recently announced. One is in Lincoln, the other in Elk Grove, Illinois, Phoenix, l'Eclaireur, and Lille.

Therefore, we're getting the retooling completed, and we're getting it behind us. The reason for this is a strategic decision to minimize the risk of disruptions and inefficiencies during the busy fall season of this year. They're also strategic decisions that we want to move everything up, to concentrate it in the first or second quarter, and to accelerate this retooling so as it's not as we planned before for 2007 and 2008, but we'll get it done in the first and second quarter of this year. We've made much progress in the last three years, and now we need one last big push in the first half of 2007 to complete it.

Those are the first four key points of the transformation plan, and Jacques will review the fifth point, the balance sheet, in just a minute. For the meantime, I'd like to turn to the businesses and review the businesses for a couple of minutes.

Turning to our business segment review. Retail, we've maintained our market leadership position with customer wins. It's reported at 4.5% growth in the fourth quarter, driven by much success around customers such as [inaudible]. We've increased our high-value package solutions, where we're really gearing and focusing towards multi-channel marketers. This is combining our strength and knowledge and of retail, plus services before press such as premedia, and services after press in terms of logistics. And our focus on the multi-channel players and marketers enables us to combine our products around retail, direct marketing, Catalog, and Internet to be able to provide a multi-channel capability for our customers. This provides a higher return per ad dollar. It also enables us to increase our relationships and closeness with these key multi-channel marketers.

In addition to Retail, we continue to increase our productivity through the execution initiative, and in Phoenix we consolidated these volumes to Riverside and Pittsburg, both in California, all ahead of schedule.

Turning to Catalogs, we increased our high-value package solutions, also geared to multi-channel marketers, and this from the same Bay Area retailers that focused on the cataloguers, helping them to be able to have higher impact Catalogs, and doing this in a multi-channel environment.

We're also improving our customer service model with the cataloguers, and we're implementing a new network. Since specifically implementing the Corinth transformation, which will become a state-of-the-art, multi-purpose plant. This is a significant undertaking. To provide some color here, this includes 15 capital projects that are currently being deployed. Also, we'll have four press start-ups and also a new super stitcher. This will create a leading plant that will provide increased value for our customers and also value for our shareholders. And this time we're retooling the structure in the overall network in this first half before the busy season.

Turning to Direct, the significant success of 8.9% growth in the fourth quarter and about 4.8% for the full year. This is driven by continued strong volume from our financial sector customers, with increased volumes in both the inline and personalized direct mail. Customers such as Capital One, JP Morgan Chase, American Express, and other prized customers. In addition, we've had new sales through partnering with ad agencies such as Media Horizons, Oreck, and our workings with Terminex and FSWD Hawkeye [inaudible].

In addition, other sales growth has been combining our capabilities in other areas, such as retail, with our position, leading position in direct mail. This enables us to provide a complete, integrated solution. Pier One has leveraged this with an entire direct mail program that they're rolling out across their capabilities.

Just as a note, too, we're continuing to expand and grow in direct as four of our new installations are in this area to help fuel and solidify our growth in direct.

Turning to Magazines, we're building high value-added solutions for publishers based on a new network. This will enable us to get a return on the significant investment that we've been making over the last couple of years. We have continued our cost reductions, and also we've accelerated them in many areas. And the Lincoln closure announced in January is proceeding on schedule.

We've reached a milestone here in Magazines, as the last press of Magazines retooling program was installed in January with St. Cloud. We're optimistic about our magazine business, and with the new leadership team run by Doron, we're looking forward to a good turnaround here.

Turning to Canada, foreign exchange has negatively impacted the margins. Foreign exchange has decreased our U.S.A. sales out of Canada, and also impacted the Canadian market and made it more weak. As a result, we've closed our l'Eclaireur facility, and we're also taking action to reduce costs, improve productivity and profitability. In terms of premedia, we're developing new value-added solutions, and we're integrating these services with our print product for a complete solution overall.

Books, our cost reductions continue to drive a productivity increase, mainly driven off of our retooled network, as we've spoken about in the last conference call. Based on this network, we're now focusing our sales force to maximize our capabilities to drive more sales through these improved retooled plants, and as one last step, we have two new Timson presses, which are the industry's first, which are 7.5 premium-sized mass market paperback book presses. This will increase quality, speed, and efficiency.

We also signed an exclusive multiyear contract with Harlequin, which we're very pleased with continuing that partnership. It's quite expansive, 145 million books, which total 44 billion pages.

In Directory, we're beginning production of the new Yellow Book contract, a $900 million contract, printing of 1 trillion pages, so it's a significant contract, and we're pleased to integrate this and leverage our new manufacturing strategy to maximize efficiencies. This is where we print directories during the day, and we print newspaper at night, which has a significant, increased our efficiency and capabilities. In addition, we're driving productivity improvements across the platform and are pleased with our new Hazelton press. This is a new KZA press that's up and running faster than planned. This is a significant achievement, because it's the biggest directory press in the world.

In terms of logistics, we've improved our EBITDA on a favorable product mix, and we're developing a strategy to increase our sales of high value-added logistics services and also third-party sales to expand and grow in this area. We're focused on our value-added services and integrated offerings and continue to be rewarded with new customers and high growth. This has enabled us to have a co-mail expansion as we talked about, which has doubled our capacity. And to continue to stay in line with our customers' increased needs, we're adding additional co-mail capacity in the second quarter. We're helping our customers, so, also to minimize their pending postage rate increase. This is driving our growth. We will bring these new services and options, not only with co-mail, but also with data management, belly banding, press pools, data and presearch options that are unique to the market in our effort to truly differentiate ourselves from the competition.

And turning to outside North America, our Latin America business continues to provide strong results. The regional growth outlook is good, and we continue to see fundamental improvements in terms of their growth, so we're pleased with our Latin America business. In addition to that, we've improved our product mix during this last quarter, and which should help the earnings, and we're providing alternatives to Asia sourcing. As we spoke in the past, we continue to be rewarded with new customer sales as our offering in Latin America is faster than Asia and also lower cost versus the U.S.A., which is a nice niche and a nice competitive advantage for us based on our extensive network in Latin America.

Our book module that we talked about in the past from Colombia is performing well, and we continue to receive new contracts, such as Hola Magazine, which is a multi-year large contract in Telemex.

Europe, on the other hand, continues to face challenges, and we have market conditions that are quite poor in France and the U.K. For France, this has been exacerbated by new tax on magazine distribution, which has reduced volumes, and the U.K., it's going to be continued hurt by overcapacity in the U.K. market, probably continues to see maybe some light as we see consolidation in the U.K.

Charleroi installations have gone on schedule and on budget, and we're pleased with the two new big gravure presses. We've also continued to consolidate and restructure. We're selling our Lille plant to a management group, and in terms of our cost reductions, they continue to progress.

I'd like now to pass to Jacques.

Thank you, Wes. The fifth point of our transformation plan deals with balance sheet. The objective is to take the appropriate financing actions to improve Quebecor World's financial flexibility by strengthening the balance sheet. Our goal is to maintain and gradually improve our credit ratings.

Here's our recent progress. We suspended the common dividend with a saving of over $50 million on an annualized basis. We issued $400 million of 9.75% senior notes due in 2015, and redeemed $54.5 million in senior notes with maturities ranging from 2008 to 2020. We early discharged $150 million of 7.25% senior debentures in December '06 that were maturing in January of '07. We entered into an $86 million sale leaseback agreement before the end of the year. All these actions have improved liquidity with only $24 million drawn on our $1 billion credit facility that is committed until January 2009. Strategic and tactical options are being considered, and we will continuously evaluate various alternatives to improve our financial flexibility and shareholder value.

In terms of ratios, we ended up the year with debt to EBITDA at 3.7 times and debt to cap at 51 to 49, in line with the third quarter ratios.

Regarding the fourth quarter '06 results overall on a consolidated basis, revenues decreased modestly by 2.6%, or 4.4% excluding ForEx impacts. That's due to temporary restructuring, dislocations, plant closures, and a challenging environment. Despite lower revenues, adjusted EBITDA gains up 1% reflects the benefits of improvement in operations, restructuring benefits, and cost reductions. Excluding foreign exchange impacts, SG&A expense decreased 4.4% despite increased costs from consulting fees for compliance procedures related to SOX. Reduction was mainly due to the Company's restructuring activities.

The 17.4% improvement in adjusted net income from printing and operations reflects the trend in adjusted EBITDA as well as an income tax recovery of $23 million in the quarter. CapEx were lower this quarter compared to last year, as we expect CapEx in 2007 to be lower than the 2006 levels in the $250 million to $275 million range before planned leaseback of approximately $75 million, which should be compensated by sale effects. With regard to sale leasebacks, we expect to close the sale of two of our buildings before the end of March for proceeds of approximately $34 million. For 2008, we expect CapEx to be toward our long-term average of $250 million to $275 million. This should benefit the free cash flow generation.

Now a quick word on our SOX 404 certification. Under SOX 404 rule, we completed for the first time a comprehensive review of all reporting control systems. We had to cover 19 systems, 45 processes of corporate. We tested in excess of 2,000 key controls and approximately 1,000 spreadsheets. Our only one material weakness was at enterprise. It was limited to the detection and reporting of impairments on long-lived assets. Only immaterial non-cash adjustments were required for the financial statements, and no restatements resulted from that weakness. We are obviously making the required changes to ensure this deficiency is resolved in 2007.

Moving to the results by in our geographical groups in the fourth quarter of '06, North America revenues were down 2.3% excluding ForEx impacts and paper sales due to plant closures, restructuring activities, and a difficult pricing environment in some business segments. Year over year, the North American workforce was reduced by nearly 1,700 employees, or 6.9%, helping increase our EBITDA. Increased EBITDA margin of 0.6 points resulted from initial benefits of retooling and restructuring and fewer start-up inefficiencies. We had lower CapEx of $39 million compared to last year due to the decision to time installations for off-peak quarters.

In Europe, our challenges continue to stem from France and the U.K. due to pricing pressure and lower volume. Revenues were down 3.4% in Q4 '06 compared to last year. However, when excluding ForEx impact and paper sales, revenues were down by 9.6%. Part of the revenue shortfall is due to plant closures and press shutdowns. In March 2007, we announced the sale of our Lille, France, facility, which will be downsized to two presses instead of four original. Efforts continue to further drive sales and reduce costs. Year over year, the European workforce was reduced by more than 800 employees, or 17%.

With regard to Latin America, revenues were up 6.5% year over year, excluding the ForEx impact and paper sales. They were up by 2.4%. Price increased in the fourth quarter due to product mix change, but were partially offset by some volume decrease. There are significant regional growth opportunities, and we see a positive demand outlook based on strong growth fundamentals. Currently we need additional storage and printing capacities to meet demands from our [inaudible] Argentina business.

I will now pass again to Wes, who will give an overview of the 2007 outlook.

Thank you, Jacques. Now to provide clarity and direction on 2007 and 2008. We'll start with 2007, both our plan and objectives going forward. Our plan is to have significant progress in our five-point transformation plan, focusing on improving the fundamentals of our business, driving up margins and driving down costs, with the objective of the yield of this, increasing our stock price. We're positioned for long-term earnings growth for the future. In 2007, our plan is to demonstrate progress under both the customer value initiative to $300 million and execution initiative to $100 million, to make concrete, deliverable progress and communicate that with our shareholders. Also generate continuing growth in selected areas, key areas which provide good margins and good growth opportunities, as we've talked about in the past, such as retail, direct mail, direct reach to media and logistics. In addition, to accelerate the completion of the retooling in order to be finalized before the busy season. It's to accelerate and concentrate the retooling that would have been done in 2007 and 2008 as planned, but the focus is on the first and second quarter. So this pain, now, in the first and second quarter, will provide the benefits in the third and fourth quarter of 2007 and then 2008 and in the future.

In addition, we continue to drive our costs in our magazine, catalog, and book businesses, and overall to improve our balance sheet, as Jacques discussed. In addition, as we heard from many of you during these calls, in 2007 we will address the European performance issues, and we will communicate a solution that maximizes shareholder value. In addition, we'll continue to improve the external communications with our shareholders. We'll be presenting at the BofA Equity Conference on March 29, and also we'll have an Investor Day in September, and we hope that many of you can join us.

In terms of 2008, the plan and objectives going forward is that we anticipate a successful turnaround and achieve the benefits received from the five-point transformation plan. This has continued to improve our business fundamentals, with $300 million in higher value-added sales from customer value initiatives, and $100 million in lower costs from the execution initiative. Also, our CapEx will return to long-term levels of about $250 million for 2008. This will enable us to have a higher cash flow overall, credible top line, bottom line. And, as a result, continue to improve our debt ratios.

That's the key message. We are on track. We're on track to create value for our shareholders, our customers, and our people, and we have a solid plan for success. This is built on a solid, sound strategy, providing robust and detailed execution plans and a dedicated and committed team. And we are showing benefits and getting results, expect results in the fourth quarter from this five-point transformation plan. This provides confidence that we're doing the right things and we're driving the right areas.

Now in 2007, we'll make even more progress, more progress on this five-point transformation plan. Also, to help you with your outlook for 2007, this will be impacted by the accelerated completion of the retooling ahead of the busy season, with results of increased inefficiencies in the first half of 2007 and benefits in the second half of 2007 and beyond. We are driving the fundamentals, and we have concrete evidence of our progress with both our customers and our operations. I'd like to thank you again for your time and support, and now we'd like to open it up for questions.

Thank you. [Operator Instructions.] Our first question is Tim Casey with BMO. Please proceed.

Thanks. A couple things. Just can you talk a little bit about the nature of contract renewals now, particularly with respect to price? What sort of pressure are you seeing on prices when you renew with your major customers?

And then a couple for Jacques, if I could. Jacques, I'm trying to reconcile your adjusted earnings numbers, and it appears that your, the implication is that there's a tax recovery even if we back out the restructuring and impairment charges. And I'm just wondering, are you suggesting that you did not incur any normalized taxes in the fourth quarter? I'm just wondering how we should reconcile that and perhaps an outlook going forward. And finally, Jacques, on depreciation with CapEx staying with leasebacks over $300 million, is the full year number kind of a run rate we should use going forward? Thanks.

Thank you, Tim. In terms of renewal of the contracts, we're seeing mixed results, and many of our markets where we're doing well, we're seeing very little price degradation and, in some cases, we've even seen some price increases. In other markets, we're continuing to see some declines in the renewals, especially the longer-term contracts that are maybe a five-year horizon, because rebooking that new contract is comparing to a five-year-old price. And due to declines in the market in the last couple of years, that would hit us now.

But the good news is that many of these contracts we've already renewed during the last year, and so we're, we're pleased with some of the new contracts that are coming up that we're really focusing on value, and that's the essence of our customer value initiative, is to have the discussions based on value. How to create more value for our customers, how to create opportunities to increase their margins and offer a chance for them to reduce their costs so that we can sell based on value instead of price. And that's the key focus that we have, and therefore we're, the essence of the customer value initiative. And so looking at new contracts, we're working hard to have them be flat or, in some cases, I said, even price increases. But it's been mixed according to different markets. To Jacques in trends of adjusted earnings.

All right. Regarding the income taxes, as you know, we operate in several jurisdictions with several different tax rates. And what we've seen in the fourth quarter and particularly for the year is we've had basically profits registered in some countries where we have lower tax rates, and then we had losses in countries where we have higher tax rates and where we can register income tax recovery. So you really have to get into the detail of the composition of the profits to come up with the right number. I understand it's not an easy task for any analyst to try to figure out what's going to be exactly the right number, so our job is to increase our profits so as profits increase, it's going to be easier to come up with the right percentage. With their lower profitability, you can have bigger swings.

In terms of the CapEx, what we're planning is that by 2008, we should revert back to what we call normal CapEx, which is based on historical data, should be in the 270, maybe up to 275 range, so we feel comfortable we can bring it down to that level. And we're going to be pretty well there this year if you exclude the sale-leaseback transactions or the leases that we will be buying back at the end of the year. But given the fact that we plan on doing some additional sale-leasebacks to compensate, if you were to net everything, we should be at that level, around 250 to 275.

The depreciation run rate, as you've seen, depreciation, of course, has been going up. There is, there's a few impacts, but we had some accelerated depreciation on some assets. So that we should get over it quickly. So over time, the run rate should be coming down.

Next question, please?

Thank you. The next question is Chris Li with Merrill Lynch. Please go ahead.

Hi. Thanks for taking my call. I just have a couple of questions. First, with respect to headcount reduction, can you remind us what was your net headcount reduction in 2006? And what do you expect that number to be in 2007?

The headcount reduction was--we don't provide any forecast on 2007, but the actual number from '05 to '06 is about 1,400 persons in terms of reduction or headcount, from roughly 31,100 to 28,700.

Okay. And if I look at just on the plant closures that have been announced so far, there's been, I think, five or six that are said to complete in the first half of '07. And you always add about a headcount reduction that's targeted, and that's, you're, I think already about 1,300. Can we expect more in, sort of, to come in '07? Or is that sort of the level that you're--?

Oh, again, as you're probably familiar with our policies, we don't provide guidance, so what we can tell you is what we have announced. And so we don't make any declaration on any potential additional plant closures.

Okay. Thanks, and just one question for Jacques. Would you consider acquiring any facilities in Europe if the economics are right, in order to give you more scale in countries where you have a relatively small presence? I'm thinking outside of the U.K. and France.

Well, right now in Europe, you're, we're focusing on improving our situation. It's a tough situation in Europe, and it would need to be a very compelling transaction for us to contemplate it. And as we've said before, and our focus is not on acquisitions at this point in time. And our focus is on improving the balance sheet.

Thank you. Next question, please.

Thank you. The next question is Eric Mencke with UBS Securities. Please go ahead.

Thanks very much. A couple quick questions. First, on this, the SOX compliance, the adverse opinion. Just, does that have any implications on your credit agreement or anything to do with the fines at the exchange? And this, another question. On the pension, notice that the funding deficit has come down. What kind of one-time or quarterly contributions are you going to have to make for '07 versus '06? And finally, on strategic alternatives to improve the balance sheet, can you just revisit that and kind of give us an idea on what we should be looking at?

Okay, first question regarding SOX. No, there's no negative implication regarding SOX, and maybe just to clear this one, I might repeat my step. I just want to mention again that there was no material adjustments as a result of this weakness, and our financials, was no restatement of previous years as a result of that weakness. We were in a position to conclude that our financials for this year and the previous years present fairly the financial statement, the financial situation. And if there were any adjustments regarding that weakness, it would be a non-cash impact. So again, we have a great remediation action plan in place, and we don't see any impact on any of our agreements.

In terms of the pension, yes, the deficit that has come down significantly this year. If you read our financial statements, you can see that our, the employer's contribution had gone up this year versus 2005, and our contributions are expected to come down in 2007 versus 2006.

And in terms of the balance sheet strategic initiatives, as we've said before, we are looking at all the different options to be able to improve our balance sheet, and we've also stated that each one of our businesses needs to stand on its own in terms of return on capital employed. We, as an exercise in going through our strategic plans and understand what is the correct and the way to maximize our overall position for our shareholders and strengthen the overall balance sheet, and we'll update you as we make decisions.

Next question, please?

The next question is Randal Rudniski with Credit Suisse. Please go ahead.

Thank you. Two questions, I think. First of all, in the--you referred to the co-mail expansion and doubling the capacity in Q4, and there's going to be a further expansion in Q2 of '07. Does this expansion refer to--the 2007 expansion, is that also related to the facility outside of Chicago, and will you be broadening the circulation to longer run titles, or will it stay more oriented towards short and medium runs?

Thank you, Randal. In terms of our co-mail expansion, yes, this is in Chicago in our Bolingbrook facility, and it provides our capability both on different types of capabilities for co-mail, which will enable us to be able to reduce the costs for our short run customers, to be able to maximize their efficiencies with the postal costs and to be able to piggyback on our collating and combining the multiple titles and multiple customers. And this capability, we believe, is [inaudible] a competitive advantage, enable us to work with titles that are shorter run and helping our customers be able to leverage that capability. Especially being more important with the postage increases coming through.

Sure. And the second question is, now that you can sort of see the light at the end of the tunnel in terms of the retooling plan, and we're starting to look forward a little bit longer, providing some comments on '08, even, I want to ask you, where do you see, on a sustainable basis, kind of the EBITDA margin for the business getting to over time? What do you think the sustainable level is?

This is Jacques. Again, as you're familiar, we've been asked this question numerous times, and our policy is not to provide guidance. Obviously, our goal is to achieve an improvement in these margins over time, but we can't state the level we're targeting.

Okay. Thank you.

Next question, please?

Yes, the last question. It comes from Adam Shine, National Bank Financial. Please go ahead.

Yes, thanks a lot. In terms of the postal increases, can you talk a little bit about at least what the trends are through Q1 heading into the postal increase? I know, Jacques, there's an issue here with your guidance, but maybe you can talk around that and just comment a little bit about some of the changes in behavior of any from clients heading into the increase, particularly as it relates to the catalog business, where I think today there was no particular change by the potential to review that proposed increase. And also, just circling around to the fact that there is going to be this weakness in the first half, are there any particular requirements for you to get perhaps some relief in regards to covenants heading into Q3? I know on the interest coverage, I think--actually, no, on the leverage, I think your covenant, there is a covenant change in Q3 '07. Any issues that you might foresee there, Jacques? Thanks.

Thank you, Adam. I'll take the first one, and Jacques can pick up the second. In terms of the postal increase, we're not seeing in the impact with our customer base, especially with catalogs, the small and short-run catalogs, yet. We are pleased with the announcement that they are going to take a re-look at that and not get hit by the increase as much, and we're pleased with the response of our customers. But that will be coming in the middle of May, and we have not seen an impact yet, but we anticipate that we might see something coming in as an acceleration before that, but we haven't seen it. But we'll keep you posted. But we are providing our customers with the flexibility to be able to maximize their advertising spend based on this hit in May.

Right. Okay, great.

But, with regard to covenants, again, we're in compliance with all of our covenants as of the end of the year, and again, we will not--sorry--comment on hypothetical questions. Whether there could be anything happening to the ratios, all I can say is if, for any reason, we needed to modify the ratio with a [inaudible] point in time, we have a very strong relationship with our lending group, so we don't see any issue.

Obviously, just a concern and maybe we'll look backwards instead of forwards. There was some relief achieved, seems to be the covenants, last year. Correct?

Yes, absolutely. We asked for a relief on one particular covenant to make sure that we had sufficient room to carry on with our business, that we were going through the heaviest season of retooling and capital expenditure. So it was very easy to obtain, but today we do not need that waiver based on our ratio. But we're always cautious, and we always work to maintain sufficient room on our covenants.

Thanks, Jacques. And just to go back to what Tim's, I think, first or second question regarding the tax break. I think previous guidance through the year has been for us to kind of look somewhere around the 25% or so, mid-20 sort of rate. Is that a reasonable level to look forward to into '07? I know most of this you're in sort of tax recovery, but in '07, is mid-25, mid-20s, a reasonable level?

Again, our profitability, again. If you go back in 2004, for instance, where this might have been more appropriate, the percentage was around that number, and if we move similar to reaching that level of profitability, we could move back with the profitability we had in 2006. Definitely, the percentage is lower.

Okay, we'll leave it at that. Thank you very much.

Very good. Thank you for your time today. We appreciate your support, and we're going to get back to work, and we'll talk to you on our next conference call and also potentially at the Investors' Conference that we have in September, and the BofA meeting that we'll have in the middle of March. All of that, thank you.

Thank you. This concludes the Quebecor World, Inc., conference call. Thank you from Videotron.