Quad/Graphics Inc (QUAD) 2007 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Quebecor World Inc. conference call. I would like to introduce Tony [Roth], Communications for Quebecor World Inc. Please go ahead.

Thank you. Good afternoon and welcome to the Quebecor World conference call for the first quarter 2007. This call is being webcast and forward-looking statements are subject to Safe Harbor provisions. We will begin with the presentation of the results of Quebecor World followed by a question-and-answer session with analysts. This call should last approximately one hour.

Today's call includes a slide presentation. The presentation can be accessed through our website at quebecorworldinc.com. Click on the webcast link in the Investor section and follow the instructions to register.

Joining me today from our offices in Montreal for Quebecor World are Wes Lucas, our President (technical difficulties), Jacques Mallette, 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.

As today we had our annual meeting for 2006, much of this information we have already shared with you and we like to thank the much strong support many of you that attended either in person or through an electronic medium. Therefore, we will be going to the information quickly since much of the presentation that has already been on the web site you've already seen or has already been communicated in the annual meeting.

This will allow us to have more time for our Q&A which we think will be highly appreciated by the analysts on the phone.

We would like to talk through the first quarter on page 2. We signed and renewed several key agreements and major customers, such as Hachette and also Primedia. We will talk about those in the customer guidance section. We have also as a summary accelerated our retooling efforts, completing retooling for the magazines platform in the first quarter and are on track for a third quarter completion for the overall retooling effort that is sooner than planned.

We closed or relocated six facilities. We have installed and relocated eight presses.

Overall, the execution initiative is gaining momentum. We will review that both for Wave I and Wave Ii. We will continue our progress in terms of the five point transformation plan and we have improved EBITDA in seven businesses, which reinforces our commitment; and our resolve turns those improving our businesses where we've done retooling and in attractive areas. However we have had three that are declining which we will talk about that which are mainly due to the retooling restructuring initiative.

Turning to page 3. This provides an outlook in terms of how these benefits will be coming in over a timeline. Retooling is a foundation that we've kicked off before. Our execution initiative is come in line with, we are making good progress in customer values, and people. The focus here is accumulating benefits to provide a plan that gives us improved earnings quarter-over-quarter, improve cash flow quarter-over-quarter and that is the plan overall for the five point transformation.

Turning to the customer value initiative to deliverable is the $300 million annualized benefit. We are seeing good progress here in terms of new products and services such as expanding with Sears in terms of new high value-added solutions. Continue to run that well. There's a multichannel solution with Williams Sonoma continuing to expand our value added with Williams Sonoma.

And with Hachette we have been able to sign a -- essentially -- a 100% magazines printing and distribution agreement with Hachette. We are very pleased with that and this is a proud relationship that we have had for many years with Elle, Road and Track, Car and Driver and other great programs such as Women's Day.

We have also expanded our focus on customer value through areas that are full-service before and after printed products. This is an area such as Primedia, with new Primedia services that is for 100% of the enthusiast magazine division that covers Motor Trend, Snowboarder and Hotrod. We've also expanded our [co-mail] application.

For instance our co-mail line will be coming in, up and running in two weeks and this is on track to be well utilized by our customers that have been demanding these services. We have also expanded on logistics.

Overall, we have been able to improve our customer mix. This is growing with specific areas that are attracted to us in terms of books with Thomas Nelson, continue to expand there. Magazines such as Highlights, we continue expand our attractiveness with Highlights as a very valued customer. And indirect marketing successes in B of A, Citi, Cap One.

We have also improved our mix by exiting unattractive areas such as we exited a -- places that have high peak concentration because we are sold out in the peak which is in the busy season in the third and fourth quarter going into the holidays. So we have tried to reduce our customers that have very peak or lumpy loads that are in the areas that were sold out, where we are actually going to our competitors and buying volumes there to be able to serve customers, and even them out throughout the overall year.

One large customer, as an example, a catalog customer where we exited this and now we are in the process of replacing those with what we call better spread or customers with more evenly spread volumes throughout the year. This will help our overall utilization and overall margins.

Turning to page 5, a good example is Home Depot. Peg Hunter has a wonderful quote here that we have become their national extension of their marketing department, collaborating on the strategies from very beginning to the end. We talked about this at our annual meeting. We thank Home Depot for this partnership here in Canada and it's a wonderful example of where we collaborate together on strategy, design, co-manage the process. We even build sets together. We shoot the photography with our own photography studios in-house and make our own designs sets and page layout, all the way through printing and integrating multichannels through our new run relationship. It's a good example of higher value-added complete solutions.

Turning to the second key initiative, that is people. Made good progress this quarter. Kevin Akeroyd was announced essentially this week as our president for targeting direct marketing. Kevin comes with extensive experience in both targeted marketing, ad agency, Internet and other direct marketing capabilities and world-class companies.

We are very pleased with Kevin's appointment and look forward to continue our focus and growth in this key area for us.

We are also pleased with our progress in terms of safety. We have 18% less lost-time accidents and 23% loss accidents overall. We are a safer place to work, a better place to work. We are pleased with that. We've [received] improved morale and also trading more high-performance teams who are pleased with our progress and the people development. People initiative.

In terms of execution, continue to see progress here. Our deliverable is $100 million improvement. Good progress here. Wave 1, 41 projects totaling $10 million of improvement in terms of productivity. This has been a significant success and we are pleased with that. We have kicked off Wave Ii which has trainings in May and 46 projects will be kicked off in May and June of this year.

Some examples of these projects are, in Dubuque, we have had a significant improvement here by reducing our mechanical downtime. St. Cloud, we have a focus on our bindery to improve our run speeds and optimizing the overall process with five (inaudible), a $1.2 million improvement. Jonesboro, improving our speeds of the presses $0.5 million. All of these total up to a significant improvement to only $10 million in Wave I and we believe that now we are on track for that $100 million for 2008.

We are confident of achieving that, based on this progress, and now we can look at rolling out Wave IiI for the third quarter for new success in that area.

As one example on page 8 is our Stillwater, Oklahoma 74,000 press. This is one of our first initial projects and as you can see we have already had significant improvements. Paperweight improved by 28%, lower cost in paper by 28%. Our make ready cost reduced by 36% and our press fees improved by 18%.

Here's a good example of the progress that we are making in our execution initiatives; and here is one of the early projects. This is about six to nine months old; and these are the speeds, the improvement's lower cost that we have already achieved in this project. This is just one of these 41 projects that are delivering real benefits, concrete benefits. And as we see these come online we (inaudible) to see more and more in terms of progress to the $100 million.

Our fourth initiative is retooling, page 9. The deliverable has finalized their tooling program before the busy season this year. In the first quarter we have eight startups to presses. This is compared to only two in the first quarter of the last year. These presses are performing according to plan. We are pleased with both the productivity and the cost reductions and the increases of quality.

We have closed or sold six facilities. Five in North America in Lincoln, Phoenix, Washington, D.C., L'Eclaireur, and Elk Grove and one in Europe which is in Lille, France. These overall had significant disruptions and inefficiencies. On the other hand this will have significant benefits in the latter half of 2007 and next year in 2008.

We have accelerated this retooling overall. In the first half 20 new or relocated presses will be coming online and this is twice as many as the first half of 2006. So the acceleration is about -- a double is what we did last year.

This does create some inefficiencies that you have seen in our numbers that Jacques will review. But it's one big last push in the first half of '07 to get the retooling behind us so that now we have this new platform to be driving improvement for the back -- back into 2008.

Our balance sheet initiatives No. 5, is to maintain and gradually improve our overall credit ratings. Jacques will review this but essentially we have seen increased free cash flow of $21 million despite higher CapEx of 28. We have also had some sale leasebacks and we have focused on continuing to improve our liquidity; and as you know we have $900 million still undrawn on our $1 billion credit facility.

Turn to Page 11, our businesses that are improving because of the actions that we have been taking give us confidence in the turnaround and transformation of our Company. Overall for instance businesses such as Targeted Direct Marketing, we have seen improvement because of good sales growth and expanded margins with customers such as B of A, Citi and Cap One.

In Retail we continue to expand margins by driving our efficiency and improvement. Magazines, we are seeing the benefits of the 2006 retooling. Significant improvement in our Magazine financial results. This is mainly leveraging the new assets and the retooling that we have in Stillwater, (inaudible) Clarksville, (inaudible) and Dallas and also plant closures such as Brooksville in the Cincinnati area consolidation.

The same results are in Book. Significant improvement in our results in Book because of the retooling in 2006. This is because of the new plant assets and new presses in [Taunton], Forsyth, Fairfield -- all running well -- and the Kingsport closure reducing our costs.

In Directory, we are seeing good strong volumes because we are enjoying good growth because of market growth and the good dynamics and an advantaged position. We are in an advantaged position because we're focusing on the attractive segment that is growing in directories that are regionals and focused on high value-added services, Targeted printing and also inserts.

This is a very attractive market for us and we continue to see good margins. And because they are retooling the Hazelton press we are seeing growth in this business area.

In Services we continue to focus our higher value-added service and see good growth there. In Latin America we are expanding with good economics and our leading position in these developing countries in Latin America.

Turning to Page 12, however, we do have three businesses that had reductions. Europe has split out in their financials. You have seen the numbers there. Jacques will review that but overall the decline is because of retooling and restructuring. We had significant retooling with several locations. Our (inaudible) press with Barcelona press, also significant new retooling and new presses and (inaudible) going in in Belgium.

This has caused restructuring and retooling inefficiencies. We also had a onetime charge for Lille, France and we've had, as everyone knows, challenging market conditions in Europe and as we see Europe in terms of the dynamics there, looking to hopefully improve dynamics in the future through consolidation of the European market dynamics there.

In terms of Canada, we see foreign exchange reducing our volumes to the U.S., and we have seen foreign exchange putting pressure on prices here in Canada. As this has impacted our financials overall. We have seen plant closure costs also hitting because of L'Eclaireur and recently we've announced our Vancouver plant shutdown as planned in the last business where we have lower results catalog.

Significant restructuring, retooling in our catalog plans has reduced our numbers here. Corinth, we've had four press startups. Corinth will become a model plant, a world-class plant with new technology at the front end and also new technology at the back end. And these new presses that are going in we look forward, of course, being a world-class facility of high-quality quick turnaround time. However, right now, this is creating significant inefficiencies.

In addition, Jonesboro has retooling both impact in volume and cost and because of the Elk Grove closure, which was announced for the first quarter, that's significantly impacted our financial results.

I would like to turn it to Jacques for a summary of the financials and I will return for a summary and then Q&A.

Thank you, Wes. I will begin with an overview of our operating results. Consolidated revenue in the quarter declined 5% year over year to $1.39 billion due mainly to inefficiencies from our returning restructuring efforts and to lower paper sales that more than offset my favorable currency effect.

On an adjusted EBITDA basis, first quarter results were 28% lower than last year's, largely as a result of inefficiencies from the accelerated retooling from an -- from an $11 million non-recurring loss on the sale of our Lille facility. Whereas last year's results included a $6.3 million non-recurring gain from the value-added tax refund. Excluding all non-recurring specific charges on a consolidated basis, adjusted EBITDA would have declined by $12 million.

As Wes mentioned, we are seeing the benefits of our retooling initiatives in the segments where it is essentially completed. CapEx increased in the quarter reflecting a higher number of press installations and the fact that our major retooling program should soon come to an end.

In North America, revenues were down 2.4% when adjusting for four [XM] packs and paper sales. That's due to plant closures and retooling activities.

Operating results were up notably in the Book and Magazine groups, (inaudible) benefits of prior retooling efforts. Adjusted EBITDA excluding non-recurring specific charges was essentially flat, despite our increased retooling and restructuring efforts. Year-over-year, the North American workforce was reduced by more than 2000 positions or 9%, helping increase our EBITDA. Nearly half of these reductions came in the current quarter through the closure of five facilities -- Elk Grove, Phoenix, Lincoln, L'Eclaireur and Washington.

CapEx rose as a result of a much higher bulk of retooling and relocation activity in the quarter.

In Europe, revenues were down 3% in the first quarter. European revenue and adjusted EBITDA were impacted by a major retooling and restructuring in Europe. The sale of the Lille plant, again, a loss of $11 million and difficult market conditions.

Excluding the specific charges adjusted EBITDA declined 6 -- almost 70% but was slightly positive. We suffered from significant labor disruptions during the negotiations to sell the Lille facility. But this is behind us and we now have a favorable environment, allowing us to focus on the day-to-day operations. We also had heavy retooling activity in the first quarter with a startup of our two wide Web gravure presses in Belgium.

Challenges continue to stem from France and the UK, due to difficult market conditions. But we see a better performance in other European countries, especially Austria and Spain. Year-over-year the European workforce was reduced by more than 500 employees, or 12%.

In the first quarter we estimated 195 positions and we eliminated 195 positions and sold our facility in Lille.

CapEx rose significantly reflecting a higher number of press installations. We are pleased to report that all of our new presses in Europe are now up and running in accordance to their ramp up curves or better.

Turning to Latin America, revenues rose 11% year-over-year. The increase was driven by both improved product mix and higher volumes. The country needs to feel there are significant growth opportunities in this region and anticipate continued demand growth driven by solid underlying fundamentals. To highlight a typical example, we need a traditional storage and print capacity to make demands that our Quebecor World Pilar plant in Argentina.

When adjusting for non-recurring specific charges, adjusted EBITDA for Latin America was up 6%.

I'll now pass to Wes Lucas who will give us an overview of our outlook for the rest of 2007 and 2008.

Thank you, Jacques.

On page 18, we are making significant progress in the Five Point plan. It gives us confidence when we look at the businesses that are improving year-over-year, and it gives us confidence that where we are doing the retooling such as Book and Magazine, we have seen the benefits and we have increased performance.

Other markets that are attractive and have good dynamics continue to see good performance. However, the ones that have declined we are working on those. We have programs on those. We have plans that are in place that will give us the improvements in the future. So we have been able to focus our energies on Europe, Canada and catalog to build to turn those around.

Also we've generated continued improvements in key markets. We have a vision and strategy for driving Marketing and Advertising solutions as one key market and the other key market, Printing and Publishing solutions at our value-added customer- (inaudible) initiatives are getting traction there.

There' accelerated completion of the retooling to highlight this earlier and faster, and as you have seen in our numbers there's a lot of pain associated with this acceleration. A lot of pain. However we believe that the gain will come about in 2008 by enabling us to get the retooling behind us and we are confident that we are on the right track here.

We've continued to drive out cost due to our execution program. We continue to improve our balance sheet and yes, as we've said in the last conference call we will address the European performance issue before year end and we will get back results and we will continue to improve our external communications with our shareholders. And we hope you appreciate the more transparency and we look forward to getting your feedback as we move forward.

Turn to 19. Our 2008 plan, we anticipate a successful turnaround in 2008 as we continue to work hard this year in preparation for that. We achieved our benefit from our Five Point Transformation Plan which is $300 million higher value added sales. Run rate for 2008, and $100 million of lower-cost from this execution initiative run rate 2008.

We continue to improve our business fundamentals and this, as our plan is, is to improve our EBITDA when we combine that with the CapEx back to historical numbers of 250 to 275 in 2008. That would generate improved tax flow which will enable us to grow our business or to improve our debt position whichever will create more shareholder value.

Therefore, overall, we believe, we are confident that we are positioned for long-term earnings growth.

Back to page 20. Key messages. We are on the right track. We are confident we are on the right track to increase over shareholder value. We are showing benefits and achieving expected results from the Five Point Transformation Plan. We see good fundamental improvement and concrete evidence both from progress -- significant progress with customers and operations. And therefore we have the confidence that we have a solid plan for success and we anticipate a full turnaround in 2008.

Thank you very much for your attention. We appreciate your interest and time. And we would like now to pass it back for questions.

(OPERATOR INSTRUCTIONS)

Carl Bayard from Desjardins Securities.

Three questions. Just as a matter of clarification the improved business segments you list on page 11 and 12 of your presentation. That is on EBITDA, right? Those are the same segments you made reference to earlier?

Because all it says is improved results. I just want to make sure it's improved EBITDA.

We -- it's overall financial results that we are looking at.

Okay. So it's not EBITDA?

No.

No. 2.

Further down bottom-line.

Further down bottom-line, okay.

No. 2, regarding the Catalog situation. I remember reading somewhere that they were expecting some pretty significant rate hikes May 14th. They were calling for like 20% postal rate hikes. Do we have an update there and can you just provide us some color as to how you think that would impact your business?

Yes. When we look at the postage rate increases, that is a significant initiative by the whole industry to build to ensure that this is a market advertising solutions is a better program. And we are looking at not those increases that we saw posted initially, and I think that the industry has responded in a well-organized manner.

I think the result of this will be a much more rational increase that is sitting maybe in a much lower number either single or double-digits but in the much lower numbers. They are still coming back with the resolution on that but it has not come through. But it will not be those higher numbers that you stated which were such as 22% or other numbers such as that.

What we are responding with is both working together as an industry and, secondly, we are looking at our coal mill capabilities. Our co stitch, our mail list solutions, (inaudible) which will [avail] to offset a significant portion of the overall rate increase.

Because we are the leader we believe that we have the most attractive, the strongest logistic solution in the industry. We are still unclear of how this will impact us because on one side it will increase our advantages that we have and the value of providing to our customers by providing a much more attractive solution that is mitigating much of those costs. But that is still an unresolved outcome and we hope that the government authorities will come back to something that is going to be attractive for the advertising industry, so that people could market and advertise their products through direct mail and catalogs as well.

So we should see an announcement soon, I guess?

Well, we have had multiple announcements come out as they are progressing. We are cautiously optimistic.

My final question for Jacques and I will get back in the queue. Just regarding your bank covenants I know you are at 3.9 times net debt to EBITDA. I know your covenant's at 4.5 and it goes to 4 I think in late September. I was just wondering. Does that worry you?

We monitor our situation all the time so as I have discussed before we have an excellent relationship with all of our lenders. So this is not an issue for us.

[Eric Minke] from UBS Securities.

Just on Europe, I want to know if maybe you can give us a little bit more color? I mean if you look at the relative performance it went from let's say normal EBITDA in Q1 last year of $10 million down to 0. And can you quantify how much of that is the press is being installed? And how much would that be related to lower volumes, lower pricing?

If you look at Europe, as we mentioned before, we've had a very heavy retooling and restructuring quarter in Europe, especially with the little negotiations that disrupted our operations. But if you look at -- if you take out all of the specific charges there's definitely some price impact in Europe; and some drop in volume that did impact our numbers so you are talking roughly $6 million, $7 million dropp resulting from price and volume in Europe overall.

The volume component is somewhat related to some of the disruptions we had in the first quarter.

Just to clarify, $6 million, $7 million. Is that the EBITDA line or the revenue line?

That would be at the EBITDA line.

Then I guess another question. You guys installed I believe it was eight presses in the first quarter? Installed or moved?

That's correct.

And you are going to another 12 in Q2 or into early Q3. Is there a difference -- and from what I understand you did five new presses in Q1. Is that correct?

Yes. There are new presses that we are installing but as we are shutting down some facilities, we are also transferring some existing presses to other facilities. So the total of 20 includes a combination of new presses; also presses that we are moving.

I guess my question was is there a difference in cost or in efficiencies between moving the press and installing a new press? So if we had five new presses in one move this quarter and we have one new press and 13 moves next quarter, is that -- is there going to be a significance that we should be factoring in here for the drop off we see?

So for example should we be timing this by let's say, another 25, 35% for the impact we saw this quarter from all these moves?

It's sounds like you should join our operating team as an engineer. Good question. We have evaluated that and at the end there is not a material difference, it is just the inefficiencies are coming from different sources. A new press's new technology is usually much more advanced and therefore we might have electronic synchronization issues and getting the right color when you put in a re-fabricated press. Because when we do relocate we upgrade everything from the gears to the electronics to other components and, therefore, that is getting things back in line and having old technology working with new technology. And these presses they're only a few years old but still is an integration challenge.

So it's -- there's not much material financial difference. It's more of where the problems exist. If that helps to answer that question.

But as you stated there are eight press startups in the first quarter. We are going to have 20 overall in the first half both new and relocated.

Chris Li from Merrill Lynch.

Thanks for taking my questions. First one is, Wes, can you explain the rationale for the new reporting format for the quarter? I noticed you no longer provide a breakout by Products segment within North America.

Well as we continue to improve our transparency, and to improve our reporting, we hope that the new format with the slides provides more information and then, with the segment information, we are trying to line ourselves with what others in the industry are doing. Jacques?

That's about it. We are just lining in with the rest of the industry.

Can you provide us with what the underlying revenue decline was for Canada and catalog the two businesses that were facing some challenges during the quarter?

We don't give out, we don't -- we never report Canada specifically and so we are trying to highlight that in terms of foreign exchange and pricing pressures, because of the foreign exchange in volumes.

Okay, because I was thinking last quarter for Canada when it was still broken out, I think the underlying revenue decline was 5.2% if you exclude foreign exchange and paper sales. Was that a similar rate in Q1 '07?

Yes. That's in the same area.

Okay, and in the Catalog business, I just want to confirm that the loss of L. L. Bean contract was not reflected in Q1?

No. It is not and when we use the word lost that was the contract I was talking about when we were waiting. They are a very highly weighted peak volume customer. When we are sold out and when we are sold out that the peak period which is good for us it's -- what's better is to have more evenly spread customers. And so we chose to redeploy our assets to maximize the utilization, maximize our profits. So it's -- I think that was a good part of our improvement in our customer mix. And we think the world of LL Bean but we think that does not fit our platform at this time to build and maximize our profits.

That would come in next year and we have a significant amount of time to improve our market and customer mix and we think this will expand our margins.

One final question if I may. On the SG&A, it's quite a big jump year-over-year about $18 million. I mean recognizing that may be there's a couple million of FX and maybe a few million of non-recurring items. I guess, can you provide us with what the true organic growth was in the SG&A? Because it's been sort of $95 million to $100 million per quarter for the longest time and all of a sudden it jumped up to $113 million.

Yes, again, we had several special items. We don't necessarily always report all of those specifically; but definitely a lot of them are for investments that we do in the future, especially for our Six Sigma program that we have in place. Some training goes in there. Some investments we are doing has gone through that line. Some strategic projects we are looking at.

There's also some timing of expenses that were booked at the end of the year last year, that we are now spreading quarter to quarter. There's also SOX which is a big one that did hit us in the first quarter.

So if you look at apples to apples, there is a very modest growth of the SG&A when you take out all of these special items.

And this you could also classify as a lot of the inefficiencies that go along with the retooling program will come in here as we have these specific projects focused on the retooling program to get it done in a concentrated matter.

It should not be of a concern though.

Andrew Mitchell. Scotia Capital.

Three questions. Just wondered if you could be a little more specific if possible on the $100 million in lower costs from the execution initiatives? You are talking about that as a run rate, annualized run rate by year-end 2008. I just wondered how much of that you will actually achieve in 2009 -- excuse me, in 2008 as opposed to going into 2009 to achieve $100 million?

That's really what you are meaning, right?

Yes. So, if in terms of the -- if the numbers are real numbers in productivity and cost and we have a good tracking system so these are not deferred costs or opportunities. These are real numbers. I call them what you can find in the parking lot. So if you can see the cost and put them out in the parking not which means equipment, waste, paper waste, energy, staffing. So if you can move it out in the parking lot then you can identify the productivity improvement.

So, therefore, I can't be what some people count as an opportunity cost. So that's not in the calculation.

Second, to help you understand, the $100 million is improvements that will be fully run out in the next year. And our objective is that each year to have $100 million of improvements. So, therefore, in 2009 you have the full $100 million in 2010. Another $100 million will accumulate each year.

The reason why we need to have this is because we are going to continue to find challenges with the market. With volumes, with prices, inflation, other things so we have to have an aggressive productivity improvement program in place.

So this is our initial target. It is $100 million. It is a run rate because we do have start-up curves; and that's why I showed the timing of benefits that are how they are tracking in. So this will be $100 million of run rate in 2008; and we are very confident of achieving that.

Therefore we will for sure have the $100 million in 2009; and while we enjoy the benefits of that $100 million 2009 full year then, we will be working on another $100 million.

Now we hope to build to achieve these benefits faster than planned, but we will share that with you as we go forward. We have $10 million from WAVE 1. We are working on our purchasing initiatives, headcount initiatives, productivity improvement in terms of our administrative functions in terms of IT. In terms of our purchasing a specific consumable, lots of different programs.

Does that help, Andrew?

Yes, that does. How do you think that will net out in terms of bottom-line impact? I'm sure that's your challenge on your end as well.

But just in terms of the give and take that is going on in industry right now with pricing pressure, etc.. So what do you think in terms of the $100 million, what are you really trying to overcome in terms of ongoing cost challenges that you need to compensate for? What's your sort of underlying target? Is there $50 million that you know you've got to make up for? So you are targeting $100 million so you can get some better flow through?

Good question. And that is the reason why we are driving these benefits because we need to build to overcome those challenges in the future. Now the good news is that we continue seeing improvement in North America. In the North American marketplace because of those (inaudible) and what we see in consolidation we are seeing an improvement in the North America overall market dynamics.

And because of that, we are cautiously optimistic and we will see how that plays out. The other benefit we have is that our real focus is on creating value for our customers and if we can compete more and more on value, trading value for our customers and then sharing that value as opposed to trying just to sell on price, then we will be able to create more value. And, hopefully, then we will be able to have a much less of an issue in the future.

However, we will ensure that we are proactive and take control of our own destiny by being cautious about driving more improvements than necessary, so that we can have earnings improvement regardless of what happens in the marketplace. That's our job.

Then you have answered part of my next question which was really, can you talk about how much contracting new activity you are going to experience this year? And whether there has been an improvement in price deflation across the units and it sounds like there has been improvement in price deflation. Is that across the units or --?

It's variable throughout but in North America we've seen an improvement and it's a light-year in terms or it's not heavy in terms of renewals.

Finally, just on the CapEx run rate, how long do you think you can sustain a $274 million level as a percentage of sales, if we just think about that as a percentage of sales going forward? Is there in your sort of time horizon looking out the next three years another period where we are going to see another retooling? Or do you think it is much further out?

Our objective is that getting to $250 million, $275 million will be the level that we will have into the future. And the reason for our customer [value initiative] to focus on growth and lower capital-intensive areas. Our objective, the plan is to be able to have that as a sufficient level to ensure growth.

So that's why we keep talking about services and less capital-intensive growth areas so that we can grow without needing the capital. Therefore that will drive a better return on capital employed and better shareholder value and higher cash flow (inaudible).

That is our planned objective.

Vince Valentini from TD Newcrest.

Question regarding how the retooling is impacting you and what you expect going forward? I think your shareholders have been remarkably patient during the last few quarters with the margin decline and the earnings decline and everybody sort of overlooking the current results and looking forward to the time when you come out of this period of retooling.

That's where my question comes from.

In the third quarter when the retooling is done, can you give us some sort of commitment that you are expecting to see a material year-over-year improvement in margins and earnings in that quarter and then going forward, that will continue?

Again, you probably won't like my answer because we don't provide guidance. And we had a discussion at the Board and we continue not to provide guidance.

What we're telling you is that the vast majority of our retooling will be over by very early in Q3 so we will have very few disruptions, which are hurting us right now. We will also have the favorable impact of our Five Point Transformation Plan starting to kick, especially on continuous improvement initiative and customer value.

If you look into, when can we really see improvement I think that to have full benefits of the retooling and also significant benefits from all of the new programs that we've put in place, 2008 is really the year you should look at.

(inaudible) for now. A follow-up question and somewhat related is you scared me a little bit on this call with your comments that you are already seeing good improvements in the areas that have already completed the retooling process. So does that mean the margins we see here and the earnings we see here already reflect some material benefits from the retooling? Can you give us any sense of what percentage of the assets you consider to be finished now versus not? Like are we just talking 5% so it's not material enough to impact you overall?

The first element is those businesses where we have completed the retooling have at least started by not being in the mode of moving everything around. So at least, we got rid of these inefficiencies. Unfortunately we have them in other groups right now.

But these groups where we are almost done or done with the retooling, this is gone. That is an improvement and as we continue to improve our performance with the new equipment, we get those benefits to kick in.

And just to be clear, when we look at this it's the understanding what is the onetimers especially look at North America. It was a slight decline year-over-year but that we can look at some of the businesses that when you strip out the inefficiencies because there were significant inefficiencies -- and that is why we highlighted. We have twice as many new presses coming in. We located presses coming in in the first half compared this year versus last year. And we have five plant closures, for instance, that we talked about in North America.

So given these enormous inefficiencies when we strip away those and look at the businesses, the good news is that those businesses when you strip away all that, they are performing improvements year-over-year. Now that means that as Jacques just stated that 2008, we are confident of the turnaround.

Bob Bek with CIBC.

You've already done a fair bit on the value pricing and strategy in North America. Could you talk a bit about whether that potentially exists in Europe? If there is some structural issues there that if the market has the potential, too, you have the potential to push to the value-added type strategy there or whether it's a different type of market as far as the full product line goes?

No, there's significant opportunities in Europe for a value sale and when you look at the submarkets because the language is because marketing strategies that are very locally based, there's an opportunity to be able to partner with your customers, have very targeted marketing programs, and provide a fully integrated solution. We have very well-developed service offerings at the front end and -- in Europe -- and we've deployed those and we are pleased with our progress.

This is overwhelmed by the market challenges and the structural issues that we had in Europe. That consolidation will play a dey benefit and as you look at the UK there's a significant consolidation going on, the same that we see in the Continent that is improving the overall structure.

But yes, the answer to your question, that the opportunity is there is significant because of the micro segments. But it is being overwhelmed by the market dynamic.

The consolidation benefits, is that largely capacity coming out of the system or do -- in flowing through to pricing eventually. Is that what you are seeign in the UK or in the Continent and looking forward for greater growth in Europe?

Well, given that there are so many players in Europe right now, that makes it a key challenge. It's a market and an industry that if you look at any of this -- the posted and the analyses that are done on Europe, all of them state that consolidation is required. Consolidation is needed to be able to make a much more healthy and right-sized industry serving these markets.

So that will and should help in the future and that is why we are seen the consolidation going on right now. It is a very attractive market at the end product line, at the end customer focused area, but it's an industry structure that is very inefficient and creates the negative dynamics that we see right now.

Just lastly, on Europe. You talk about addressing the European performance issue by the year end or before year end.

A, is that enough time to have seen through the retooling and restructuring to see how you can better compete or how you can compete in this tough market? And B, can you remind us what options you are considering as far as what you might do to address European performance?

We have embarked on a very in-depth analysis and strategy for Europe. We are looking at the key options that we have. We have those options well-developed. Given our background, we are very analytical-driven, we are going to get the right solution. We are not going to have a knee-jerk response to this and the whole focus we have is on maximizing the shareholders' value.

That is our key focus. How do we maximize our shareholders' value by doing the right decision for Europe? And, therefore, we want to make sure that we have enough time but not too much time. We are very impatient but we are not going to jump in and make a rash decision. We have the analyses done and we are driving those to get to a conclusion and that is why we have given us to the end of the year. We hope to do it much earlier, but we will do it as soon as we have concrete knowledge and made a concrete decision and we will show that with you as quickly as possible once we make that decision.

But we -- please be confident that we will get to a positive outcome here.

That's great. Thanks very much.

Thank you very much. We appreciate your time. Thank you and if there's any other questions please send those to Roland and he will make sure he gets right back to you. Thank you very much for your support, your attention and we are going to get back to work and make sure that we can show progress. Thank you very much.

Thank you and this concludes the Quebecor World Inc. conference call. (technical difficulty)