Quad/Graphics Inc (QUAD) 2007 Q2 法說會逐字稿

Welcome to the Quebecor World Inc. conference call. I'd like to introduce Mr. Roth, your speaker today. Please go ahead.

Thank you. Welcome to the Quebecor World conference call. I'm Tony Roth, Vice President of Corporate Communication. Today, we'll be reviewing the second quarter 2007 results.

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.

There will be a slide presentation and the presentation is available in the webcast portion of the Investors Section of the Quebecor World website at quebecorworldinc.com. 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, President and Chief Executive Officer; Jacques Mallette, Executive Vice President and Chief Financial Officer; and Roland Ribotti, Vice President of Investor Relations. I will now turn the call over to Wes Lucas to begin the presentation.

Thank you Tony. Welcome to our second quarter update. We appreciate your support and your time today and your interest in our fine company. Today I will review 2007's second quarter.

In summary, you will hear today that we have continued progress in our five-point transformation plan. We've improved most of our businesses. Six of our businesses, you will hear that we increased and improved our performance or has been flat, and two businesses that are already restructured in last year, they've had significant improvement. Where, in contrast, in three businesses we have significant declines due to restructuring as we retool these businesses.

Our retooling is nearly complete -- 18 new and relocated presses installed year to date, and we're very pleased with our execution initiative, which I will discuss in detail, where the Wave 2 has produced 47 high-quality new projects that we've launched with $11 million in new expected annual savings to contribute to our already-up in-line Wave 1.

I'll also talk about Colorscope, a recent acquisition to expand our value-added services. This acquisition is a self-funding acquisition and will contribute Day 1.

We were honored by Sears in their Annual Supplier awards; we're very pleased with this honor. We've been recognized out of about 40,000 suppliers in three specific categories, and the one we're most pleased with is Supplier of the Year. We've been recognized for a commitment to service, quality, innovation, delivery, and over-all performance.

I will review our five-point transformation and update each one of these.

First, always starting with the customer, delivery will be $300 million in annualized revenue and the recent progress gives us confidence that we will achieve this. We've expanded our integrated, multi-channel offering with more high-value-added solutions.

We're integrating products and services such as at Sears -- one basis for receiving these awards, where we're integrating retail flyers with catalogs and direct mail and other services before and after print. We continue, like at Sears, to be able to win more with retailers and catalogers as we provide a multi-channel solution.

Also, to create more value for our customers, we're providing services before print. The Colorscope acquisition expands our high-value capabilities, especially at the high end. Colorscope brings new West Coast facilities in San Francisco and Los Angeles and brings capabilities in China with specific relationships.

After-print logistics -- as it becomes more and more important because of the postal costs rate increases, we're able to expand our co-mail capabilities.

Also in customer value, we provided awards of recognition of excellence in the Gold Ink Awards, where we received four gold medals, most of any of our major players, and two dozen other total awards. We're very pleased with this.

In the area of magazine and books, we continue to combine premedia, print, and other logistics to create more value.

Turning to the second initiative, best people, we will deliver a new program by the end of this year, fully deployed. Recent progress is around training, coaching, new people that own the processes and a good succession planning program.

One key result is that, in our goal to reach zero accidents and our goal to be the safest place to work in our industry, we've had significant progress this quarter -- 18% fewer loss time accidents versus last year and 23% fewer recordable accidents. Two good examples are at Taunton, we were honored by the Massachusetts State Safety Council Award; and also, in Covington we celebrated 1 million hours without a loss-time accident. We are truly on our way to zero accidents.

The third initiative, great execution. I'm pleased with our progress to achieve $100 million annualized productivity improvements. And as I said in the last call, this is creating the capability to deliver $100 million every single year. We have that confidence because of our recent progress. In Wave 2, in the second quarter, we had 47 projects. These were launched and they're delivering results. These have estimated savings of $11 million in total savings.

Because of this, we're now launching Wave 3 and Wave 4 in the second half of the year. The training has now already begun in this August and we're launching 70 projects. These 70 projects, contributing to the other 47, are in high-impact, immediate response, and immediate improvement areas that give us savings, less waste, better improved operations.

We listed some specific projects -- in Dubuque, Versailles, Edmonton, Jonesboro, Stillwater, and there's many more. These total projects, as we roll them out, are across 40 facilities. And as we look to roll these out across all our 120 facilities throughout the platform, we'll have over 150 people trained as project leaders, and these can deliver specific results; and we'll have 200 projects by year end. These 200 projects will have a total benefit of $30 million in run rate by the end of the year and this is the basis for our confidence to achieve the $100 million over all.

To give you one concrete example, in Versailles, Kentucky, we have a project to reduce waste in a [Lithaban] Press. Matt Crockett is driving this project and he kicked this project off focused on savings target. And the original target, as you see on page 6, is 590,000. This project was so successful that Matt and his team increased their projected savings to $1.1 million. Over all, to date their savings are $343,000. Matt and his team are a true success. In the areas that they've delivered on this, in make-ready time, it's 40% faster. That's speed and time out of the system in terms of money. Paper waste -- 48% less. Inversion changes -- 20% less. Real bottom-line results. We thank Matt and his team for this. And there's many more.

Turning to our fourth initiative, retooling. This initiative we kicked off and we will finish this and complete the retooling by the fall 2007's busy season, coming up here in just a short while. Recent progress is that we have 18 presses installed year to date and these new presses are performing according to plan and in fact, most of them are ahead of schedule. We're very pleased with the learning that we've achieved in running these startup curves. These enable us to continue to close more plants and take less-efficient capacity out of our system. And in the second quarter, we closed the Phoenix, Arizona, plant and we announced that the Vancouver, BC, Marine Drive plant will be closed by year end.

The fifth initiative, the balance sheet, will be summarized by Jacques in his section on financials.

But for now, before I turn it over to Jacques, I'd like to add some color for the businesses. First, I'd like to cover businesses that have been proving good fundamentals. For instance, our targeted direct marketing business, where we are a leader in this market, has good strong market dynamics. It's one of the areas that in our industry that has good growth in margins in volumes and sales. And because we are the leader, we have been able to drive high-margin sales growth by integrating new products and services. New sales by areas and customers such as City Bank, CFM Advertising, [Arlandi], Sears Home Improvement, and Inner Workings.

Another good market area is our pre-media. Good service, high return on capital employed business. We've experienced in the second quarter good improvement in terms of earnings, mainly driven by new and renewed volumes at Kohls, OfficeMax, and Nickelodeon. And, in the future, we believe that this will continue to grow through high-end focus from our Colorscope acquisition.

Logistics also experienced good growth in earnings in the quarter. This is mainly due to strong market growth, pushed forward by the postal increases, which heightens our demand for this. We saw both sales and EBID increase. We've expanded our third party logistics and provide services to other printers. And, because of our leadership position, we're able to provide these services to other printers and be able to enhance this business over all in terms of growth.

In addition, we have new to renewed sales at Scholastic and HFM. And, to meet the new demand we've received from the market, we've added a co-mail machine and we've locked up the option for additional machines from a leading supplier.

In Latin America, as a leader in this market, we've seen good growth. In this quarter we saw good, strong market growth from Peru, Colombia, and Mexico; good market dynamics, good geographic expansion here; and good demographics for our print market and our print products.

Specifically, we saw stronger book and Bible sales from the US as Latin America is our low-cost alternative to China for our customers in the US. And locally, we saw sales from [Hola] magazine, Yellow Book, and Thomas Nelson.

Next, I'd like to turn to businesses where we saw significant improvements. These businesses saw significant improvements because of restructuring that we did in the past. For instance, magazines. We saw significant improvement in earnings in the quarter resulting from the 2006 retooling of the platform. In addition, we also reduced our costs because of the execution initiatives that we discussed previously.

Nearly all our plants showed strong improvement year over year. And in addition, because of our new capabilities, we saw new volumes from our customers such as Agnes Journal, B&P Media, Highlights for Children.

On another positive note, over all for the market across the industry, magazines reported a 1% increase in the over-all total media spend from 18 to 19% in the quarter -- a nice positive light for an industry that we've seen flat growth in the past.

Books. Books is another area we saw significant improvement resulting from 2006 retooling. Here, we saw lower costs over all because of the completion of our retooling projects and operational efficiencies. Very good work here, and we're very pleased with our book business.

In addition, a real highlight was the new Harry Potter book set new records, both in terms of our sales and production records. We're very, very honored that Quebocor World was the largest printer globally for Harry Potter books. And specifically, we are printing the majority of the US version. Over all, we exceeded our own specific production expectations and plans for the Harry Potter book and, because of the large volume, we achieved a new record for printing more than 64 million pages in a 24-hour period in our Fairfield plant.

In addition to the benefits from retooling in the Harry Potter series, we saw new volumes from trade and educational segments, specifically at Simon and Schuster and McGraw Hill.

Turning to stable businesses in the second quarter, directory and retail. In directory, we had a successful startup for our Hazleton and other plants and we had the successful startup of the Yellow Book contract; it's a $90 million contract that we announced before that is now currently moving into our platform. And we saw new volumes at Oden and Century Telephone and other independents.

Our retail business was also flat, with a favorable product mix and reduced costs from the closure of the Phoenix plant and new sales from specific customers.

Turning to business with declines -- however, offsetting all these positive improvements that I just described in year-over-year results, we saw declines in specific businesses because of the current restructuring and retooling.

In catalog, we've been restructuring the over-all network and in the second quarter, and also in the back half of the year, we'll continue that. We're moving volumes between plants and essentially causing inefficiencies and temporary waste.

Specifically, we've had significant restructuring for the over-all catalog network. We're essentially fundamentally training a new capability across the network. Examples are, for instance, rebuilding the Corinth plant and installing a new gravure press and three web offset presses, two M3000s and one M1000, and building a fundamentally new bindery capability. To fill these plants and other in the network, we've closed our Elk Grove plant and Beamsville plant.

So over all, the catalog faced these challenges. But in the future, we'll have a new high-end capability, much more efficient with lower waste and better profitability in the network.

Another business that has declined because of retooling and restructuring is Europe. Europe, we saw the startup of the new gravure presses in Belgium, which will be the most efficient plant for gravure in Europe. We met this, though, because of our sales at our Lille plant, with weaker pricing and lower volumes in France. These lower costs, with the new restructured network as we're putting things in line, did not offset the lower prices and volumes. We did have a better (inaudible) some new and renewed sales.

Canada was also impacted by restructuring and saw declines in the quarter. Mainly this is due to the strong Canadian dollar, which hurt the US exports and reduced profitability. We met this with plant closures, retooling, and revitalizing our network, and we're right in the middle of that process.

As a bright spot, we have new and renewed volumes from Best Buy Canada, My Travel, Lawton's Drugs, and Home Depot; and in Vancouver, our Marine Drive facility was announced for closure by year end.

Thank you, and I'd like to turn this over to Jacques for a financial discussion. Then I'll return to summarize for 2007 and our outlook for 2008 and then turn it over to your for our questions. Jacques?

Thank you, Wes. Before I begin to review this quarter's results, I will review some of our recent balance sheet initiatives and progress.

As part of our financing plans, we redeemed $119 million 6% senior subordinated notes at the end of the quarter.

This quarter, we reclassified our Series 5 preferred shares as a liability. Accordingly, dividends paid on these shares will, from now on, be presented as a component of net income. As well, this change has affected our calculation of debt-to-capitalization ratio.

In order to provide more financial flexibility to the company, we have launched, on August 3, a tender offer and consent solicitation for a majority of our outstanding private notes. It is too soon to comment on the probability of success of this offer and we'll communicate in due course the final results of the offer. If the offer is successful, we plan to finance our tender through drawings on our bank facility, which was only drawn by $100 million at quarter end.

As part of our financing activities, we're also in discussions with our bank syndicate for revisions to the credit facility in order to provide increased flexibility for the company in the future.

We're also working on a number of other financing initiatives to better position the company going forward. The implementation of these initiatives will depend on the outcome of the tender offer.

In conclusion, and despite market rumors that probably arose as a result of our tender offer, it is important to note that we are in compliance with all of our financial covenants and that we expect to remain compliant going forward and strengthen our balance sheet over time.

For our quarterly operating results, consolidated revenue in the quarter declined 6% year over year to $1.36 billion. 3.5% of the revenue drop is explained by lower paper sales and currency impact; 2.5% is due to lower volume resulting from temporary inefficiencies related to our retooling and restructuring activities as well as price decreases in some markets.

On an adjusted EBITDA basis, second quarter results were 13% lower than last year's due to reduced revenues resulting from the temporary reduction in volume, lower profitability of approximately $3 million in Canada due to the stronger Canadian dollar, and the timing of certain G&A expenses. This was partly compensated by cost reductions, including lower labor costs and less outsourcing.

CapEx were $58 million for the period, declining by over a third versus last year as we approach completion of our retooling initiatives. We also eliminated 1,800 positions year over year.

In North America, revenues were down 2.3% when adjusting for FX impacts and paper sales. That was due to plant closures and retooling activities, especially in the catalog group and in Canada.

Operating results were up notably in the book and magazine groups thanks to initial benefits of prior retooling efforts, but were down in divisions being restructured.

Adjusted EBITDA was down 6%, but margin rose due to reduction in paper sales, cost reduction, and efficiency benefits.

Year over year, the North American workforce was reduced by more than 1500 positions, or 6.7%,. In Q2, we closed our Phoenix facility and started initial restructuring at our Marine Drive facility in British Columbia.

CapEx was essentially flat and should decline going forward as we conclude our North American retooling program. Our focus is now on completing this retooling program and restructuring to continue to reduce costs and get the full efficiency gains from the retooled platform in order to maximize revenues and reduce waste and extra freight costs.

In Europe, revenues were down nearly 1% in the second quarter due to the sale of the Lille facility and generally weaker market conditions. Costs remain high due to transitional issues in France and Belgium. Sweden and Finland continue to produce strong results and we had a very successful press startup in Austria.

Year over year, the European workforce was reduced by nearly 350 employees, or 8.5%. CapEx dropped over 80% with the conclusion of the European retooling program. All of our new presses are now up and running and we have resolved all of our labor issues in France so we should now start reaping the benefits of the investments and restructuring, starting with the second half of this year. We also continue to conduct our strategic analysis of this market segment.

Turning to Latin America, revenues rose 22% year-over-year thanks to a recovery in Peru, favorable FX impact, and strong sales from Mexico and Colombia. The increase was driven by both improved product mix and higher volumes. Although adjusted EBITDA rose over 50% in the second quarter, we believe there remain significant opportunities to further reduce costs and we have, therefore, initiated cost reduction measures in Mexico, Colombia, and Peru.

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

Thank you, Jacques.

Our primary objective in 2007 is to make significant progress on our 5-point transformation and continue this progress. We will focus on execution so that we maximize our cash flow and profitability during the peak season. And in 2007, we'll finalize the retooling and we'll start to realize the benefits, not only for the back end 2007 but specifically for 2008; continue to drive out costs, honoring and with the highest respect for our people; and improve our balance sheet, as Jacques is focusing on. As we committed, we will address our European performance issues by year end. And our objective is to do what is necessary to ensure that we are fully prepared for 2008's performance.

For 2008 -- our primary objective for 2008 is for a successful turnaround in 2008 to achieve the full benefit from our five-point transformation plan and continue to build traction, build our company's capabilities, deliver on the $300 million in higher value-added sales from our customer value initiatives where we're making significant progress and the $100 million in lower costs and higher efficiencies from the execution initiatives, which we're fully confident, based on the examples that I've been providing you today and that we've seen in the second quarter.

We'll continue to improve our business's fundamentals, not only for the near term but for the long run. And using cash flow and strategic actions, with lower capital expenditures in the future, we will continue to improve our over-all debt position, balance sheet, and position ourselves for long-term earnings growth.

Our key message -- demonstrating consistency and, similar to last quarter, key message is that that we're on the right track and we're staying our course. We're showing benefits and we're achieving expected results from the five-point transformation plan. We are driving the fundamentals in our business and, as we've talked about today, we have concrete evidence of our progress with our customers and operations. Yes, we have a ways to go, but we're pleased with our progress and we have a solid plan for success and we anticipate a full turnaround for year 2008 and beyond.

We thank you very much for your interest today, and we open it up to questions.

(Operator Instructions) The first question is from Vince Valentini, TD Newcrest. Please go ahead.

Thanks very much. A lot of questions, but let me just limit it to two -- one operational and one balance sheet.

The operational first. I've got to tell you, Wes, when I listen to you go through the presentation, I find it hard to believe you're talking about the same company I'm looking at the financial statements for.

In the North American division, you're citing-- you have eight different segments there. You're saying only two of them had worse performance than last year, two were better, two were significantly better, and two were stable. Yet when I look at the results you put up, EBIT was down 7% year over year. So there's something that doesn't make sense to me there. Like there's got to be a lot of improvement ahead in terms of margins and retooling benefits still to come, but yet your presentation seems to suggest you're already getting those benefits in basically six out of the eight subsegments.

Yeah, for operation; good question. And that's why we have that on the first-- on the second page. And as I stated, there were three businesses that declined, and as I stated, significant declines. So you're absolutely right, and that's why it's not a simple story. We had two businesses that significantly improved -- that's magazines and books. And they had significant improvements. Why? Because we restructured and retooled these businesses in 2006.

However, we have three businesses that declined because they're right in the middle of the restructuring. So therefore, we have confidence that when we focus on these businesses and we retool them and restructure them, we see significant improvement. And these are very high double-digit earnings improvements year over year. And that's what we see out of magazine and book.

However, in the three businesses that are right in the middle of restructuring, which as we talked about -- and I gave you examples for catalog, with our Corinth restructuring and the closedown of the different plants; and specifically with what we're doing in Canada and in Europe, those are in the middle of the restructuring program. So that is the offsets, when we look at the two that are significantly up and three that are significantly down, essentially eliminating those improvements.

To help us understand that trajectory, can you quantify the three that are significantly down? In aggregate, what type of hit you're talking about year over year, EBIT or EBITDA?

Yeah, when we look at the over-all hit, it's essentially of the three that are down that are about a 50% higher reduction than the two that are up.

Okay, we'll work with that math.

The balance sheet issue is probably more for Jacques. You seem to be saying you're fine on all the covenants, but correct me if I'm wrong -- the debt-to-EBITDA covenant steps down to four times at the end of September; the interest coverage covenant is 3.5 times. Those are the levels you were at at the end of Q2. So you're basically right at the edge of the covenant on both these measures and on the debt to capital, you have a little bit of wiggle room but, as you've sort of said, you're going to look to write down the goodwill for Europe, and that would push the debt-to-capital ratio up close to the 60% covenant in the bank line.

So can you give us a little more comfort, why you brush that aside so quickly and don't think there's any risk of tripping those covenants or having to be in a bit of a distress mode of refinancing under adverse conditions?

Well, Vince, as you know, we have very strong bank relationships. We've had a waiver that was obtained back in December last year. We are in discussions with our bank right now. We should have waivers or amendments in the very near future to make the proper accommodations in terms of ratios. So this is not a surprise to us and we're just proceeding with the proper requests with the bank at the present time.

So to be clear, Jacques -- it's not that you won't trip the existing covenants; it's that you're quite confident you'll get a waiver from those covenants so the current ratios I cited won't be valid, you'll have new ones that are more flexible? Is that what you're saying?

Yeah; again, we like to have more flexibility than required, so that's why we are in discussion with our banks and we'll go for increased flexibility. And we also are working to meet the covenants anyway.

Thanks.

Next question, please?

Thank you, Vince. The next question is from Tim Casey, BMO. Please go ahead.

Thanks. A couple of things. I guess-- I'm trying to resolve what the net impact of these changes are going to be. You're implying that you'll have $30 million worth of run rate from these changes by the end of this year. So should we assume that there's going to be a full carry-through of that into '08 and then more? Or are there offsets to that that you expect to materialize in '08 as you work through the transition in some of these businesses -- I guess particularly the three you cited.

Yes, Tim. Good question -- the answer is yes and more so. So the $30 million that we have as a run rate will flow through to 2008 fully and the $100 million that we'll get in 2008, we'll get a portion of the additional 70 and then the full 100 will roll into 2009. And in addition to that, we will need to work on another 100 for 2009. Because the objective for our continuous improvement plan is that we'll have $100 million each and every year to dovetail on top of each other. And that's the compounding effect of a continuous improvement program. But your math is correct, and the first year it's a little delay and then you get the full benefit the following.

Okay, thanks; that's helpful. A question for Jacques -- you note in the release that the carrying value of your European operations is a little over $160 million and you're reviewing that. Is that just the goodwill portion or is that the total value? Because the numbers were substantially higher in terms of total assets at year end.

Yeah, that is goodwill.

That's only goodwill. So that is-- there could be-- you're reviewing the goodwill portion only at this point?

Yes, correct.

Okay. And lastly, you cited books as an area where you've had significant turnaround. I'm just wondering -- obviously, you printed a lot of Harry Potter books; and unless she writes another one real soon, that's not going to be around. Was that a material financial impact or is that something that will get picked up with other business as you go forward?

No, it was a-- the fundamental improvement is based on the retooling in 2006 that flowed through from magazine and book. And that is the essence of our turnaround story, is that where we focus, we get the results and that gives us confidence in the future as we focus on retooling in the other businesses. And that is probably the bedrock of our turnaround story is that we can execute well, and where we focus we deliver the results, such as book and magazine, and that's what we're focusing on in catalog and Canada and the other businesses.

Thank you.

Thank you, Tim. The next question is from Bob Bek, CIBC World Markets. Please go ahead.

Hi; thanks very much. Just-- given the weakness we've seen in Europe, Wes, the $30 million run rate number for '07 -- is that net of potential continuing drag in Europe or were you expecting, perhaps, to see benefits there to contribute to the 30? Because that doesn't look too likely, given the tooling that's going on. I realize you're doing the strategic review, but I want to get a sense as to how much of an anchor Europe is going to be to that 30 and what it could be without Europe.

The 30 is specific improvements from the initiatives, okay? The execution initiatives. And that's-- you put that off by itself. In addition to that, it's the retooling that we have that's coming in from the capital investment.

Then let's talk about Europe. Europe -- yes, as you stated, that is a drag. But that's why we focused on this. And when you look at our financials as a negative, that's an area that we've committed to get to a resolution this year and come back to you and make sure that we've communicated that well. So that'll be in addition to that $30 million, if you separate those two.

And the good news is that you know that we've been through a lot of labor disruptions in France as we were completing our restructuring. We had some of those even in the second quarter. All of those are now complete. So we have completed all of these discussions, we don't have any labor situations anymore in France.

Our new state-of-the-art facility in Belgium is up and running. Again, the technology we've put there is really state of the art. We will continue to get benefits over probably the next 18 months out of that press as we really get the maximum efficiency.

We expect to have good improvement in Europe already the second half of the year because the retooling is behind us. We are ramping up; all of our presses have started up and are now running and we see regular improvement in productivity. And we need to get back some of the top line that we lost as we were going through some restructuring and shutting-down of plants. So Europe should, in our mind, improve starting with the second half.

Okay, that's helpful; thanks. Also, Wes, we're looking at a proposed merger on the retail inserts -- Vertis and American Color. Can you talk at all whether you think some of that continued consolidation -- how that might play to the pricing and to your position? It's a material part of your business, so I just want to get your thoughts on that market.

Yeah, that's a material part in retail. It's also where we have a No. 1 position and it's integral with our multi-channel strategy. So we believe that the combination of Vertis and ACG is a positive for the market and the industry. It'll help our customers and it'll help the over-all industry on whole. So we're very pleased with this.

Okay. And just a last question, I guess, for Jacques. You mentioned about increasing the balance sheet flexibility. Just a question -- given that the parent company, Quebecor, is requiring some financing and backed off the bond market, are there any implications at all for your flexibility with your banking group, given that your parent company could be looking for financing? Is there any sign there at all we should watch for?

I don't believe so. Everything that is required at Quebecor Inc. or Quebecor Media, as far as I'm concerned, is in place. And we have plenty of capacity in place at Quebecor World; all we're looking for is a little bit more flexibility on the financial covenants for the bank facilities, that's all.

All right; thanks very much.

Thank you, Bob. Next question is from David McFadgen for (inaudible) Cormark. Please go ahead.

Yeah, a couple of questions. Can you tell us how many presses you have left to install in the third quarter and the fourth quarter?

Currently-- we want to get these done before the busy season, but we essentially have three.

Okay. And are they all in North America?

Yes, they are.

Okay. So after those three are installed, that's it -- you're totally done?

Yes. We have one in Edmonton; we need to complete Jonesboro, essentially for the two main ones for that.

Okay.

And we also, as we talked about our restructuring on the West Coast, the third one's -- just to be complete for your analysis, it's Pittsburgh.

Okay.

Any (inaudible) installation in the future would just be part of normal CapEx; that is the end for the major retooling effort.

And that's what Jacques is indicating, is that we wanted to redesign our network in a very messy period and it's like renovating a house -- you want to get it done quickly, get it all done at once because it's a dirty process that creates a lot of inefficiencies. And if we're living in the house while we remodel it, we need to get it done quickly. And our objectives would get that done as fast as we can and, as Jacques indicated, any more is just regular ongoing improvements to our operating structure.

That answers the question. You gave a number when you talked about the benefits of retooling -- you said your magazine and books EBITDA was up 30%. I assume that's for the second quarter?

Yes, that's true.

And so what would the revenue performance have been in those two divisions excluding paper and currency?

We don't provide all of the detailed information by business.

Okay. I was just trying to get a handle on the benefits of the retooling on the revenue line as well. But you don't want to provide that?

Again, as we indicated before, in terms of our retooling it is capacity neutral. If you look at our numbers, we've had volume reductions created by all of the temporary inefficiencies as we were removing presses, moving presses around, starting up presses, and not being at full efficiency. So our plan is to really focus now on getting all of these efficiencies, which will allow us to regain some of the volume loss. But over all, this restructuring and retooling was meant to be capacity neutral.

And as you look at this, we did have some, of course, volume as we said no to customers during the program, the retool. And we'll be picking up those volumes as we come back later on. So you can actually view it as even higher than the 30% improvement in EBITDA because as we go forward now, we'll have the capability not to say no to customers in the future but to say yes. Because when you're going through a retooling program such as that, sad to say, you do have to say no to some customers. Just to be clear to help you in your modeling.

And you gave us a number for the $100 million in cost savings -- a $30 million run rate at the end of this year. Can you give us the same metric for the $300 million in incremental value-added revenue that you expect to achieve by the end of '08? What you might be at in run rate in terms of the end of '07?

We are confident in hitting the $300 million and we will do that the next quarter call for a quarter-by-quarter amount as progress. We just want to make sure that we have consistency to be able to track that each quarter. Glad you pointed that out but that is part of the plan, to have that for the next quarter.

Okay.

Thank you. Can we move along to the next question please?

Okay, thank you, David. The next question is from Drew McReynolds, RBC Capital Markets. Please go ahead.

Thanks very much. Just for clarification -- I guess for you, Wes. Just the run rate, same, the $30 million. If I look at $5.5 billion in consolidated OpEx that you guys reported in 2006, how do we model in this $30 million in 2007?

Thank you, Drew. As you look at the $30 million, it'll be fully dropped down to the bottom line in terms of the $30 million in benefits. And on top of that, the $100 million will be a run rate. And we're not sure how much we'll scale that in first, second, third quarter as we scale that in next year. So how much of that total 100 you'll see in 2008. And that's one thing that we're modeling right now. We are confident, though, that you'll get all of the 30 and then a large part of the second 70, but how much of that, we're not sure yet.

Okay. And just as a follow-up, just to be clear here -- are we looking at this in absolute terms? I.e., a year-over-year decline in your OpEx or is there a general inflationary increase in consolidated OpEx of which you chop off $30 million on a run-rate basis in '07 and then $100 million on a run-rate basis in '08 and each year thereafter?

Yeah, that's the proper way to look at it. We have a few dynamics here. The reason why we have a continuous improvement program that delivers $100 million each and every year is because you need to have that $100 million to offset new inflation and other increases.

And on top of that, you have a capital program that's in addition to the 100. And that was a key discussion point when we introduced the continuous improvement is that the $100 million should be without any capital, or very little capital. And the idea behind this is to create a capability to generate significant cash flow by having low capital required projects that have very high return on capital employed.

And you need this for the specific reason, as you just stated, that you have costs inflation in other areas and you need that to have a consistent earnings improvement quarter over quarter. And that's our goal as a company. In addition to that, we'll have our larger programs, which are capital based, but we want to reduce our capital in the future so that we get back to our historical numbers where we used to have a very high free cash flow delivered to the bottom line to our shareholders.

Okay, that's actually quite helpful.

Very good. Thank you, Drew. That's good. Did you have another question? Drew?

Thank you, Drew. The next question is--

I didn't mean to cut you off, Drew.

The next question is from Chris Li from Merrill Lynch. Please go ahead.

Hi; good afternoon.

Hi, Chris.

Hi. Just a question on CapEx. CapEx this quarter was down quite a bit compared to last year and last quarter. As the retooling will be largely completed for the fall season, can we expect the CapEx level to remain similar to the level in Q2 for the second half of '07, or is there a bit of seasonality where CapEx tends to be higher in the second half of the year?

Well, again, CapEx are very rarely spread evenly throughout the year. I would say on average we would typically have a little bit more in the first half than the second half as we are slightly less busy so it's less disruptive to the operations.

In terms of trends, we're clearly trending down in terms of over-all CapEx. I think we mentioned in the previous call that we have around $75 million of lease buybacks that are coming at the end of the year -- that's really more like a financing thing than anything else. And we have new leases in place, or coming in place, that compensate for that. Other than that, our CapEx should definitely revert back to more traditional and normal levels, and that's starting definitely with the fourth quarter in 2008.

And just to follow up on that, I noticed on Slide 19 of your presentation where Wes outlined the 2008 plans, the wording is very similar to Q1's presentation, except I remember in Q1 there was also a line that said CapEx of 250 to 275 in 2008. But that was missing in this quarter's presentation. Does that mean that-- I take it from what you just said that your long-term CapEx guidance, you're still kind of saying that 250 to 275 range? Is that right?

Chris, you get some gold stars for that. [Laughing] You're absolutely right. And it's-- one thing that-- as we go forward, we are very pleased with the installation of the presses; they're running extremely efficiently. And the programs that we put in place are delivering at or above plans.

So therefore, we would anticipate, or would like to plan -- like to plan -- a lower CapEx in the next periods just because we've had so much capital just recently. And so as we've been telling that it's back to historical levels, we've taken off the exact number because we hope to deliver less than historical levels so that we can generate more cash flow. And that's our intent, but we didn't want to actually put it in as a document, say as our plan, yet. But as we get closer to 2008, we will communicate that and because of your highlight, Chris, we'll specifically address this in the third quarter, fall.

We're just finalizing our three-year plan right now so we'll be in a position to firm up that number after we've completed that plan in the next two months. And currently, again, we see the benefits of focusing. We've spent a lot of money and keeping our teams focused on getting the maximum out of the previous investments and increasing the efficiencies is really what yields the best return for us right now. So we want to make sure that we accomplish that before spending on any large CapEx.

And as we-- the whole focus there is to get our net worth in place so that we can drive good high cash flow operations and part of that will be to reduce the capital required in the future. And that's one reason why we pulled that line off. So good call, Chris.

Can I just sneak in a couple of quick number questions? I noticed there was a big jump in the intersegment expenses this quarter. It was about $10 million; last quarter, it was only $2 million. Is there any sort of one-time items in that number or can we-- just for modeling purposes, shall we model $10 million going forward or is there just some variability from quarter to quarter?

I don't think there's anything special to report on that. We can call you back on it to give you a more precise answer.

Okay.

Chris, it's Roland. I'll give you a shout.

Great. And just one final one on the debt. Do you know roughly what percentage of your debt is floating rate versus fixed?

It's less than half.

Less than half floating?

Yes. Next question, please?

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

Thanks very much. Seeing that you guys are going to have your three-year plan done for next quarter, is there any way we're going to get maybe some guidance going forward?

Eric, we have discussed-- in the fall, we'll have an Investor Day and we also are trying to arrange for a plant visit with analysts and we think that would be a good time to be able to talk about over-all strategy and our three-year plan and going forward to help you with your modeling. In terms of guidance, Jacques?

Again, for those of you who are familiar with the new laws that we have in place in Ontario, we're not necessarily favorable to get into guidance. It's been the policy of the company for a long time and we manage the business for the long run; we don't set short-term objectives to the public. We want to create value for the long run so we prefer not to provide guidance, and focus on creating value for the long run.

Eric, we will, in the future, give you longer-term as opposed to quarterly guidance in terms of how we're managing the business and setting up our objectives.

Okay. And then, on postal rate increases -- I know those came through back in May. What kind of impact have you been seeing so far, and any re-throughs on direct mail or your logistics business?

Well, the good news is that we, as a complete solution provider, we can help our customers be able to provide different multi-channel vehicles for advertising. So if we were just a cataloger in one specific segment, that would hit us harder. But for instance, we would move from direct mail-- or, catalogs, which is probably the biggest hit, catalogs, to direct mail and other areas. Or our logistics business is significantly helped with co-mail and other options. So when I sit down with each division, I hear negatives in some areas and positives in others. So we'll see where this comes out.

The one positive we have seen, though, is that print continues to be a very attractive mix in the over-all multi-marketing spend. It's not intrusive and it provides a much higher impact per ad dollar than the Internet and other vehicles and we continue to see that have a lot of staying power. So I really question what will be the over-all impact. There have been a few knee-jerk reactions, but we've been pleased that we have even more high value-ad discussions with our customers, helping them to optimize their over-all marketing mix.

So I guess it's to early to say, then, that-- the increase in logistics may or may not offset a decline in direct mail or catalog?

I think that's fair to say. And we're actually quite optimistic about the future given the viability that we have for our multi-channel marketing sell with a physical product in different channels. So it'll move between catalogs and direct mail and retail inserts and so on. So at the end, I don't think we'll see a hit.

Okay. And last question -- on the press, on the press installs -- is there any way of getting a quantification of what the drag is per press and how long it takes before you actually-- let's say, how many quarters out from here before we're actually running at-- the system's running at full efficiency and all these costs up front, or inefficiencies up front, have run through the system?

The answer will be yes, at the Investor Day. We'll go through a good description of before and after on a press with a specific example. We'll show you the startup curves and we'll give that in great detail. And that'll be a deliverable that we'll commit to that you can really understand this and see it in action. We'll use that with videos and such. So that's great. Thank you, Eric.

Thanks.

We'll move now to the last question, please.

Thank you, Eric. And the last question is coming from Randal Rudniski from Credit Suisse. Please go ahead.

Thanks. I've got, I think, a three-part question. First of all, the question pertains to operating leases. There's been a bunch of lease financing that was secured late last year and I was wondering, Jacques, if you could quantify the impact that that made to, I guess, your lease expense, or you rent expense, that you include in OpEx?

I can give you a ballpark number -- you're asking very precise questions. Maybe $5 million, roughly, in terms of increase in expense hitting the EBITDA.

And that's in the quarter?

Yeah.

Okay, thank you. Second of all pertains to the reclassification of the preferred shares as a liability as opposed to capital stock. For your covenants, do the preferreds get redefined as debt as opposed to equity?

No, the preferred shares are preferred shares so this is not debt. However, they are now out of equity so they are no longer part of the equity definition. So we go with the accounting. So that has an impact on equity; it doesn't have any impact on debt.

Okay, thank you. And then, finally, maybe a question for Wes. In terms of the 2008 outlook, you basically said, I think, that you're calling for a successful turnaround in 2008. And this is going to be a little bit of a vague question, I think, but how would you define success in terms of a turnaround in 2008? Would success be a stable EBITDA? The Street has forecast, I think, a 15% increase in EBITDA. Can you give us any sense as to how you would define success?

The definition we see for 2008 is to make sure we have a platform to have consistent earnings improvement quarter over quarter going in the future -- that's how we define success. We're in the long-term cash flow generation business and we want to make sure our shareholders as well as our customers benefit from an improved company. And I think that would be a good definition to describe our vision and our strategy for our company long term. At the Investor Day it'll be coming up and we can describe that fully for what we see for 2008. But over all, it's to provide a consistent earnings improvement quarter over quarter. And where we're starting, we should have a steep curve as we go forward.

Terrific; thank you.

So that's a great-- thank you, Randal, I appreciate it.

I'd like to just summarize that we appreciate your support and your interest in our fine company. We are focused on improvement. We appreciate the engagement that you give us and we look forward to continue to report on our progress. We're going to get back to work and we look forward to talking again in the third quarter conference call and we'll communicate with you in the interim about our over-all Investor Day where we can answer many of your questions in complete detail. Thank you very much.

Thanks a lot. And this concludes this Quebecor World Inc. conference call.