Quad/Graphics Inc (QUAD) 2007 Q3 法說會逐字稿

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

Thank you. Good morning and welcome to the Quebecor World conference call for the third quarter 2007. This call is being webcast, and forward-looking statements are subject to Safe Harbor provisions. This conference call and the accompanying PowerPoint presentation are being broadcast live and can be accessed on the Quebecor World website. The presentation and archive of the webcast will be available on the Quebecor World website following the conference call.

This quarter, in addition to our quarterly results, we will also be discussing the announcement of the sale/merger of our European business with RSDB.

Joining me today from our offices in Montreal are Wes Lucas, President and Chief Executive Officer of Quebecor World; Jacques Mallette, Executive Vice President and Chief Financial Officer; and Roland Ribotti, Vice President, Investor Relations, and Assistant Treasurer, Quebecor World. Wes will begin today's presentation with a description of our European transaction and progress on our five-point transformation plan. Wes?

Thank you, Tony. Topics for today's call -- we're going to focus on one area, A., solving our three largest near-term challenges. We will discuss the sale and merger of our European business, which we signed today, Nov. 7, very pleased with that announcement, and we will discuss that in detail. Second, we will discuss strengthening our balance sheet and eliminating our liquidity concerns, and third, the completion of our three-year retooling program, which we've just recently completed.

And B., we are reporting our third-quarter financial results. Clearly, these results demonstrate that we have much work to do, and we will review that with you.

And C., our focus now can turn to our core business and improving the fundamentals in the Americas.

We appreciate you spending time with us, and we thank you for that and your interest in our Company. And the key messages that you will hear today is that, one, we're making good progress; two, that, however, we have much work to do; but three, we are confident that, based on this progress, that we will have significant improvement in turning around our business.

First, I would like to start with in terms of solving our three largest near-term challenges, the most significant challenges that we focused on during my tenure as I joined as CEO. First is the sale and merger of our European business.

First, covering the deal terms, we signed that today, November 7, 2007, and we expect to close this by year end. It's contingent upon the normal regulatory approval and RSDB shareholder approval, but no other true contingencies before closing.

The proceeds total approximately $341 million. Approximately $213 million of this will be cash, $50 million in a note, and then the rest in equity, which consists of 1.4 million in shares, 29.9% of the outstanding shares of the new company, and this new merged company, between Roto Smeets and Quebecor World, will be called RSQ, Roto Smeets Quebecor.

Cash will be paid at closing, and we will apply this to debt. We believe it will close by year end, and this will be about $112 million for securitization. That's the balances as of September 30. And the balance of the cash will be applied to other debts, subject to normal closing adjustments.

The note is market-based, and it will mature in eight years and be repayable from years four to eight. The 29.9% equity is in RSQ, which currently is RSDB, traded on the Euronext Amsterdam Exchange, and this is an independently publicly traded company.

The benefits to Quebecor World is that this successful deal optimizes the value of our European business. For many years, we developed this business, invested in Europe, and we met challenges, but we have improved this business and created the leading business in Europe in terms of the printing industry. This deal optimizes that value. Essentially, it's a liquidity event for us.

We create a combination as the leading player in Europe, in the European market, under RSQ, and the benefits for us is that in the short term, we receive cash to reduce our debt and strengthen our balance sheet. However, in the longer term, Quebecor, we will be able to participate in the upside of our ownership of RSQ and benefit in this execution of the strategy as the leader in Europe. This will eliminate essentially future funding requirements in Europe and eliminate specifically the direct responsibility of our European business.

We will have an improvement in our EBITDA margins immediately and our cash flow profile going forward, and this will allow us to focus on our core business in the Americas and use our resources, in capital, time and talent, to specifically focus on the Americas, where we are a leader in driving cash flow. Overall, then, in the short term, we receive cash and reduce our debt and strengthen our balance sheet, and in the long run, we benefit in the upside.

So let me spend a little bit of time talking about RSQ. The opportunity here with RSQ is that we create the leading player in Europe, about $1.7 billion in sales, over 6000 people, and it's the broadest European network. There's significant cost synergies here in terms of both scale benefits, opportunities to share resources, cut costs. There's much lower capital needs because of the network of combining the two platforms, and the many efficiencies that are normally in a consolidation.

In addition to that, we have significant value for the customers for RSQ, because of our broader product line, more capabilities by combining the two companies, much more expanded geography, and higher quality and service. This team will be led by what I believe is the premier number one team in Europe, both at the CEO level with John Caris, and also each of the country leaders. We will be able to combine our strong country general managers in each one of the countries from Quebecor with RSDB's strong country leaders to create what I think is the best team in Europe.

RSQ will be publicly traded and an independent company focused only on Europe, and this is important. It's an independent company, self-funded, and therefore it can focus just on Europe and reap the benefits of executing its strategy in Europe outside and independent from Quebecor.

The governance will be that we will have two out of the five Board seats. I will sit as Vice Chairman, and we will have some key votes requiring four out of the five on the Board. The opportunity here is that for not only to receive cash in this deal to reduce our debt, but in the long run create the leading player in Europe under RSQ by combining and creating the player within the European industry to help in the consolidation. You can read more about this on RSDB's website at www.rsdb.com.

The second key milestone is that we are solving our balance sheet concerns and liquidity concerns. Recent actions -- we've amended our credit facility, which has committed availability of $750 million. This provides more flexibility in terms of our covenants and it eliminates near-term liquidity concerns and uncertainties. We have full redemption of our Series A to D private notes, which again eliminated some restrictive covenants within those notes, provides much enhanced flexibility in our financing.

In terms of our asset sales, we have had sale in terms of sale leaseback transactions providing proceeds of about $14.5 million. We sold a shared facility with Quebecor Media for C$49 million, and of course the $213 million coming in from the sale of Europe with the notes, $50 million. These recent actions are a significant step forward in improving our balance sheet, but a longer-term solution will be announced shortly.

Because of regulatory constraints and other filing requirements, we cannot provide the details today, but this is a longer-term solution aimed at strengthening our balance sheet, addressing the upcoming maturities of our financial instruments, and stabilizing the capital structure, and we look forward to be able to share with you shortly about those details.

The third key milestone is the completion of our three-year retooling program. These have significant benefits long term, but as you know have significant pain in short term around inefficiencies with putting in this program. But the long-term benefits are significant.

We installed 24 new Web offset and gravure presses during these last three years. We've essentially had -- the 40 existing presses were relocated and 80 presses were permanently decommissioned or sold. Year to date, in 2007, we have stepped up the retooling program to deliver on our commitment to finish this by year end, which we have.

We have had eight new Web offset and gravure presses installed recently in 2007 and over 20 presses permanently decommissioned and almost 20 existing Web offset presses and gravure presses we relocated, a significant amount of work in 2007, which resulted in much pain in terms of inefficiencies and relocations.

Overall, during this program, we had -- 21 plants were closed or sold, and nearly 5000 positions were removed during this overall retooling. This is a significant program overall, and we're very, very pleased with getting through this and delivering on our promise to complete it before year end. This resulted in significant temporary inefficiencies, extra costs and disruptions, but we're pleased that this will be behind us, and we're well positioned for growth in the future.

To give you an example, one area where we have had significant improvement in terms of the retooling was our book business. What we did is we retooled our book network, we installed six new presses and upgraded the bindery, one new press in Versailles, one new press in Taunton, two in Fairfield, two in Buffalo. We decommissioned 31 presses and closed our Kingsport facility. This resulted in 1000 positions eliminated in restructuring.

And while we have been doing this, reducing our costs, we've had significant customer wins with companies such as -- customers such as Harlequin and AAA, and with a very successful lead in the Harry Potter publications.

Overall, we've had a significant improvement in our profit within book, as we reported in the past. So we are very pleased that we can demonstrate that where we retooled, such as in book and magazine, we've had the significant improvement in profit. So that gives us confidence.

Now, when you look at our overall results, yes, in this year we have had some significant pain where we're currently restructuring, such as in catalog and directory in Canada, which have overwhelmed these benefits in places such as book and magazine. But this gives us confidence that as we look into the future and we get behind the retooling to be able to focus on our business, we will be able to improve our overall financials for our Company.

And how will we do that? Well, it will be focusing on our five-point transformation plan, and the recent progress that we have had in this areas, around the three areas -- customers, people and execution. And this will be a foundation as we go past the retooling program so that we can improve our business with little capital requirements in the future, to reduce our capital expenditures, to improve our cash flow.

So therefore, these are important programs that we will be reliant upon in the future as we move from spending capital to improve our business to being able to do it with quick-payback, low-capital programs. So to be able to improve our sales and improve our margins and start to replace the customers that -- the volumes, as you've seen, that have been reduced, we're focusing on our customer value initiative. This will be able to bring back in those sales volumes that, during the relocation of presses and plants, that we have seen a drop in our volumes.

This is coming through building multichannel solutions for both retailers, catalogers and other branded goods companies by creating more value-added and winning new customers, by creating integrated solutions, by combining these product, service, Internet and new technologies to run on this new retooled platform, to be able to drive new volumes and growth.

This has already produced results, where this year we won 27 Gold Ink Awards during the quarter for superior performance. Also, our Dyersburg magazine facility won a Premier Print Award, demonstrating that after we've retooled, we have superior quality and performance in addition to the lower cost.

In Premedia, we've focused on high-return projects and won new customers at such places as OfficeMax, Forbes and Ethan Allen. We are also growing our third-party logistics, building on the platform for good margin improvements within logistics, which you've seen in our numbers.

The other area is a focus on our people. Hughes Bakewell joined us as President for Direct Marketing, a world-class leader, and we're very pleased to have him join us to be able to grow this high-growth targeted marketing area, which we have seen significant growth. John Miller joined in terms of focusing on our sales for this area. Ben Schwartz joined for our Senior Vice President for People and Leadership and will be taking over the people program in this initiative going forward.

And we're pleased that we're creating a safer place to work. We've had significant milestones, such as Taunton celebrating 1 million hours of no lost-time accidents. And we've had 22 North American locations with no lost-time accidents this year. So we are a safer place to work overall as a company.

The third key initiative is our execution initiative. Wave III and IV, we've launched 71 projects in the third quarter, which delivered estimated savings of about $12 million. And in Latin America, we're kicking this program off.

The Wave II projects have true value dropping to the bottom line, such as in logistics -- our load optimization program brought in $468,000 of savings; the Merced saddle-stitch project, about $1.4 million. In Taunton, another waste reduction program brought in significant savings, same with Lebanon. These projects in our Wave II give us significant confidence as we roll this out.

In total, we have 48 facilities now with projects, with 153 people, and we will kick off the fifth wave in the beginning of 2008. All these programs give us great confidence that we will be able to deliver the annualized improvement in run rate of savings of about $100 million from this program. This is important, as it is cash and improvement in costs with very little capital.

So that is our three key milestones in terms of the sale of Europe, which we delivered on the promise to be able to deliver that by year end as a solution, and I'm pleased that we delivered on that promise; strengthening our balance sheet, we talked about; and also completion of our three-year retooling program.

I'd like now to talk -- a review of our report for our third-quarter financials and turn this over to Jacques Mallette, our Chief Financial Officer. Jacques?

Thank you, Wes. I will now review the financial results for the third quarter of 2007.

Consolidated revenue in the third quarter was down 9% versus last year. It's important to note that two-thirds of that decline is due to lower paper sales, which really has no impact on the margins, as papers flow through to the customers. The rest of the decline was due to lower volumes, which mainly reflected the impact of closures and retooling and restructuring throughout our North American platform.

Adjusted EBITDA declined 17% year over year due to a combination of lower revenue and higher expenses from a greater number of press startups and unfavorable foreign currency trends versus the U.S. dollar. Compared to last year, we eliminated 1100 positions and will realize the full benefits of these actions next year.

CapEx declined 24% year over year as we neared completion of the retooling program. While there may be a slight increase during Q4, we expect CapEx to fall to between $100 million and $150 million for the next two years.

In North America, revenue was down 11% versus last year, due mainly to, again, the lower paper sales, which accounted for two-thirds of the decline, and lower volumes, reflecting the closures of several facilities --- Elk Grove, [Lake Lahara], Lincoln, Phoenix, Washington and Marine Drive -- as well as the negative short-term impact of retooling and restructuring at other facilities.

Adjusted EBITDA declined 15% year over year due to the following group trends. I'll start with the improved businesses. Direct marketing, strong market dynamics, unfavorable product mix. Premedia, we had improved margins due to cost reduction efforts and load leveling. We had new or renewed sales to OfficeMax, Forbes, The Sports Authority, Sears, Primedia, Hachette and Kohl's.

Logistics business, we have an expansion with third-party printers, new co-mailing machine, and we're proactively targeting multichannel marketers to mitigate postal rate increases.

In the book business, lower costs due to retooling, the closure of the Kingsport facility. We also had a favorable product mix and additional revenue from McGraw-Hill and Pearson Education.

In the magazine segment, significantly improved costs due to execution and retooling initiatives and the positive outlook in consumer, Sunday and Spanish-language publications.

Now, for those businesses currently undergoing restructuring, in catalog, we had one new press and three relocations since Q2. We had new or renewed volumes with Eastbay Catalog, Bloomingdale's Direct, Highlights for Children and Mrs. Fields Gifts.

Canada had a negative impact due to the strengthening of the Canadian dollar that did hurt the export to the U.S. We had lower volumes in magazine and catalog due to the closure of Lake Lahara and Marine Drive plants. We had press relocations in Montreal and Edmonton to improve productivity, but we did have some new volumes from House & Home, [Osprey] Magazine, Home Depot, Sears and [Hivashrik]. In the directory group, volumes were up significantly due to Yellow Book.

Turning to Europe, revenue was flat as the favorable foreign exchange impact was offset by lower paper sales. Volumes were down due to the sale of the Lille facility and the closure of the Strasbourg facility in France.

Adjusted EBITDA fell in the quarter due to lost volumes and higher expenses related to plant closures, retooling and restructurings. These factors were partially offset by sharply higher volumes in Belgium. The drop in CapEx in Europe again reflects the completion of the retooling initiatives.

Turning to Latin America, revenue rose sharply due to strengthening local currencies versus the U.S. dollar, as well as significantly higher Bible and directory export volumes to the U.S. markets. The latter trend demonstrates the success of our Latin American platform as an effective shorter lead time alternative to offshore production in the Far East.

Adjusted EBITDA rose 3% as the higher revenues were partially offset by higher expenses due to local currency appreciation versus the U.S. dollar and temporary startup costs incurred to support higher volumes.

This concludes the overview of the financial performance. I'll now turn the floor back to Wes.

Thank you, Jacques. As you can see in our financials, we have much work to do in our core business, the Americas, and we look forward to be able to do that. We can see that today, we believe we're at a turning point. Now, our ability to focus on our core business and fundamentals.

We've solved or are solving our three significant challenges at Quebecor. One, we can checkmark for sale and merger of our European business and as we promised, the commitment to sell this by year end. We are pleased that we have announced that today.

Second, we will, by the year end, we will have a checkmark around strengthening our balance sheet, where we've made recent progress in strengthening this and eliminating near-term concerns, but we will announce shortly a longer-term solution, which we will be very pleased to share with you the details and look forward to sharing that with you in the near future.

And the third, we have another checkmark around completing the retooling. We believe this is a big success for us, because it gets behind us the inefficiencies of plant closures and moving customers around, and we can now focus on the core business. And that's what I'm pleased about. We see it as a turning point that we can focus on the Americans to drive earnings and cash flow growth.

As you can see from Jacque's report, we have much work to do -- focus on sales and margin improvement, growing with customers, based on our customer value initiative and building the capability through our people initiative. Also, we will reduce costs aggressively and improve our productivity improvements.

And this will be through our execution program, where we will turn from before, using capital, we will now be able to optimize our retooled network, because we will have a stable platform that we can run this strong network based on the new assets that we have in North America. And in the future, we will have much lower capital expenditure levels, targeted at a much lower level, and we will be able to have fast payback return projects at this much lower capital level.

Lastly, we will be able to explore strategic opportunities to maximize shareholder value in the Americans, being true to our history about being very focused on deals that enable us to create value for our shareholders. We will continue to explore those in a focused area around the Americans to be able to create value for our shareholders.

So thank you very much for your time. We now open it up to questions.

(OPERATOR INSTRUCTIONS). Bob Bek, CIBC World Markets.

Wes, can you talk a bit about how much of this Q3 decline in North America was market driven and how much is the restructuring and the disruptions? I'm just trying to get a sense as to just how weak the market is, because obviously we're seeing some continued pricing declines and you had mentioned the volumes. I just want to know how much of that volume decline is restructuring related and how much is market related?

Good question. In North America, we do see volumes in different markets, some are increasing and some are declining, but we have some areas that are strong growth, such as in direct, and we also, as we stated, we saw good, strong areas in our services, Premedia and logistics and such.

So overall, the volume is not the key issue for the market per se. We do see some pricing pressure in the marketplace, and that is part of the fact of life, that focus on creating extra value for our customers and be able to fight. So given that, looking into the future, we see continuing more stable volumes in the market, and maybe in terms of pricing pressure, but given that environment, as we look at our overall numbers, a majority of this is because of moving plants around, essentially moving customers around, and also, we had a big hit from the noncontract volumes that we lose while we're closing down one plant and moving volumes to the next. Those we believe will be able to come back quicker and easier in the future.

The push to finish the restructuring ahead of the key selling season, I guess this didn't pay off? Is that, or am I not -- we expect to see those numbers in Q4? This would be the key selling season reporting, would it not be?

Well, the key push was to get it done this year and do it before the big season in terms of when you look at October and November. And so therefore, we had about two-thirds of the quarter with the most extensive restructuring. So in fact, in our push to get this behind us to serve our customers best, to be able to ensure that we did not disrupt our core customers and the large customer contracts that we have, we did have significant new efficiencies right in the heart of the third quarter, the second and these two months.

I just have a clarification on Europe with Jacques, I guess. How are you going to account for the 29.9% stake? Just want to be clear. And you'd mentioned in the presentation that, looking at RSQ, its further acquisitions in Europe, would you have any capital commitments to any acquisitions that that entity makes? I'll leave it there for others.

The accounting treatment will be equity accounting, so we will no longer consolidate on our financial statements. It will be basically one line in the assets and one line on the P&L.

With regard to future consolidation, we have no commitments at all to invest further in Europe. There is no corporate guarantees whatsoever provided to Europe, either. So that's the investment we've got, and there's clear possibilities that this corporation issues equity in the future to fund acquisitions, and we have no commitments to fund or maintain our equity participation.

Bob, the one point around the markets that you asked about, if you look into the future, we will be seeing some challenges with postal increases around catalogs, and that's one area that is a challenge, because the postal increase will affect certain segments of the catalog market, especially smaller catalogs, because of the big increase. But we're counteracting that with co-mail, with logistics solutions and working with our customers to offset that. The other key challenge we see is retail consolidation for retailers is another area that is a dynamic, just to add to your focus in the future.

Tim Casey, BMO.

A few things. Jacques, can you walk us through the cash-in, cash-out on the European transaction? The $213 million in cash, but some of that has to go to securitizations, so how much will be left to apply for debt reduction? And I guess where I'm going with that is will you have enough capacity or cash from this transaction to redeem the prefs in March? And then I've got a follow-up. Thanks.

If you look at the cash-in, cash-out, we had approximately, say, EUR80 million of securitization in place in Europe at the end of Q3. We obviously need to deliver this business on a debt-free basis, so there is EUR80 million that would go against securitization first, and the rest will go against on-balance-sheet debt reduction. So EUR80 million goes to off-balance-sheet and the rest goes to on-balance-sheet reductions

With regard to the preferred shares, as you know, we have been putting in place several initiatives to deal with our balance sheet. We have now redeemed the private notes. That took care of some restrictive covenants that we had. The preferred shares, Series 5, we need to address by January. And we do have liquidity available right now, but we would have some restrictions on our bank debt, and therefore we plan to announce shortly future financing initiatives that will give you a little bit more indication on how we intend to deal with the preferred shares. But we're not in a position to make any announcement at this point in time.

So this cash, the net cash, the $120 million in net cash you received, that is not allocated to the press; that's got to go address your other --

Of course. Initially, it's going to be allocated to debt reduction, principally our bank revolver.

In terms of the long-term solution, it's hard to think of what your options are other than equity issue. I mean, why can't you talk about that?

As I just told you, we're considering initiatives in the future, and we just can't announce initiatives before we're ready to do so. So I'm not in a position to make any further comments.

Can you rule out an equity issue?

I will not make any further comment.

The one thing we do have is that we're focused on a longer-term solution, and we will be able to announce that in the future.

Any clarification on timing, when you will announce that?

What we're saying is that it should be announced shortly.

Wes, the second question is on the five-point plan, you have consistently reiterated this $100 million in a run rate by the end of '08. And we've talked about this before, but how should we think about this on a net basis? Because obviously the performance of the EBITDA you've been reporting because of the inefficiencies has declined this year. So how should we think about the $100 million? Is this a net improvement, or is it an improvement that will be offset by other declines in the business going forward?

Good question, Tim. And as we've said before, it's important that we have an internal engine for improvement in productivity that's not related to capital, so that we can drive higher cash flow. And this will be used to offset the cost increases that we have that come into the Company from inflation, wage increases and others.

So it's the productivity improvement that we have that has to be improved each and every year to be able to offset those increases. So that's a key element for us overall in the future for continued cost reduction, and we need to do this each and every year.

So the reason why we pushed this as a key part of our strategy is that we need to move from capital as a productivity improvement tool to internal efficiency improvements without capital. And this will be able to drive significant cash flow. And it will be not by some inflationary measures, but that's why we need to focus on this each and every year, to do it in 2008 and in 2009 and '10.

In addition to that, our focus is not just on cost and productivity improvement, is on sales and margin improvement. And that's why the customer value initiative there is also very important, to be able to, now that we have a stable platform, to win back volumes, because we do recognize that we have much to improve in that respect, because we have had a volume decline as we have retooled. And now that we can focus on a stable platform, we can win back those volumes. A big part will be the spot customers that go in after they're on contract, but also looking at new sales increases. We've proven that recently with some key customer wins, and having a new platform helps us with customers, being able to run on new equipment.

I recognize the fact that a lot of the business is based on operating leverage and variable costs. But are you able to quantify what you know now in terms of hard cost increases going forward, perhaps in terms of health care or things like that? Is there a hard cost increase you can give us?

We are looking at all areas of productivity improvement, as you said, health care, how do we manage that, and also energy costs is a big focus for us to improve in our energy. And as we have said in the past, waste improvement is probably the biggest and quickest payback, paper waste reduction, and also other efficiency areas. But to go into those details, we don't disclose those specific areas.

All we can say is that we're introducing several measures to keep these costs in line.

David McFadgen, Cormark Securities.

Just a couple of questions. In the presentation, you gave us the example for your book business and how it has improved as a result of the retooling. Can you tell us what the same result was for the magazine platform?

On a year-to-date basis, magazine is about the same in terms of percentage. And so therefore, those are the two areas that we retooled in 2006, which give us confidence for improvement in the other areas going forward. However, we recognize we have much work to do in our core area in the Americas and in catalogs, directory and in Canada, where we have major retooling going on, that's a key focus for us. And therefore, that's an important area to drive that improvement.

So when you talk about the significant temporary inefficiencies in particular, you point out the fact that there were a fair bit of those incurred in the third quarter, as you say, a push to finish. It would really help us out if you could quantify what those were so we could sort of see what the base business is doing. Can you help us out with that?

In terms of as we look forward in 2008 and going forward overall, we will be able to get the retooling behind us. And what the effect of that is going to be important for us as we manage through the process of going from a restructured environment to a more stable environment. And so we will have those significant improvements in those other businesses.

However, as in the marketplace, we have a market that is pretty much flat in volumes and has some pricing pressure, so that will be the key for us as we forward, is to continue to reduce our costs aggressively, and that's why the execution program is so important, and then to start to add back the volume. And that's why the customer value initiative is important. But as we've said, we don't give guidance looking at our numbers into the future.

So recognizing that you don't give guidance, would it be safe to say that in the fourth quarter of 2007, you're going to start to see or we will start to see the benefits from the retooling above and beyond those two sectors that you talked about?

Again, you are asking a very precise question with regard to specific quarter results. As you know, we don't provide guidance. All we're saying is that the retooling was completed at the end of October, so clearly, we should start reaping the benefits of the retooling. We will have a stable platform where we can focus on productivity gains, growing the top line, bringing the efficiencies in. And you know, we are there starting in November, basically. Again, some of the recent startups are still not at the normal speeds, but we will see that in 2008.

Andrew Mitchell, Scotia Capital.

Just a quick clarification on a question asked by David first, and then I will hit mine. On the book business example, as David asked, when you apply that to magazines, did you say you would be flat on year-to-date EBIT versus 2006?

No, what we said was about the same.

About the same, meaning (multiple speakers) 76% improvement or--?

In the same magnitude of percentage for magazine as book in terms of the year-over-year improvement and year to date.

Secondly, I was interested whether you can give us any sense or whether we should anticipate any material free cash in the fourth quarter or any material change in the trend in the fourth quarter?

In terms of the fourth quarter, we will still have fairly large CapEx in the fourth quarter to complete the payments on the retooling. We also have some leases coming to expiration that we will basically have into CapEx as well.

Moving into 2008, as we mentioned, we expect to reduce our CapEx for the next two years to around $100 million to $150 million a year. Of course, that takes into account the fact that Europe is no longer consolidated. But given this reduced level of CapEx, and we're able to do that, as you know, because we have invested heavily in the last three years, it should obviously have an impact on free cash flow.

Then secondly, can you talk about how your customers are reacting to the expected slowdown in U.S. growth, and whether you can provide any sense for your magazine division's exposure to housing-related magazines?

As we look forward, yes, you're correct that advertising has been impacted in both retail and in catalog. This has been retail, mainly consolidation, and also the slowdown in the economy, but also in the consolidation of the retailers, that's a key area. And then the catalogs are impacted because of postage and also because of the slowdown in the economy.

So as we did see some more robust volumes, it will be a little bit more calm as we look into the future, but it's not dropping off a cliff.

And when you made the statement in terms of Conde's announcement in The Wall Street Journal, if that's who you are referring to in terms of home magazines and such, we do have -- we don't see that in terms of the housing issues or crisis affecting so much in terms of big swings, but yes, that is impacting magazines in terms of advertising spend within some of the magazines that are focused on the home.

It's one reason why, when you start looking at the comments around fourth quarter and first quarter 2008 and such, we are in a long-term improvement program in turning around our business, and we do have many significant challenges. But we're confident in the long-term success of the Company in turning this around. We have a lot of work to do, and this will take some time, but we're confident in the end result.

Eric Mencke, UBS Securities.

Just back on the whole retooling initiative and the inefficiencies, in the past I think you equated the inefficiency for press, either moving it or installing a new one, at about $1.5 million to EBITDA. Is that still a pretty accurate number?

In terms of that actual number, I don't think we reported that number in the past. I will ask Roland and Tony to be able to get back to you. But it is of a significant percentage of the cost write-off because of inefficiencies.

And I think we found the inefficiencies are even higher than we anticipated, mainly because, and I know when you have an environment where you're moving things around, you lose a lot of the spot or those customers that can come in and out of your platform, and that has been a key challenge in our big volume losses. And that's why we are focused now in the future to be able to, on the stable platform, to drive revenue growth and just essentially start to turn this around over the next coming quarters.

Just two quick follow-ups. In the write-up on the quarter, it seemed like you guys emphasized that the competitive environment seemed more intense than it had been maybe in the first part of the year. Is that the case, and have you seen more pricing pressure and have price declines accelerated? And then follow-up is how much of a percentage of your contracts are coming up for renewal next year?

In terms of pricing, we did not intend to be able to signal in terms of an increased pressure or declining pressure. We see continued pressure in terms of pricing. And we think that will continue as we look forward. And that's one reason why we're focused on the Americas, to be able to improve our business, and we are pleased to get the retooling behind us. So we don't see any acceleration or deceleration in terms of that in terms of pricing pressure.

In regards to contracts, we have the normal contract renewals that are coming up, and there's nothing that is going to increase or decrease as we look forward into the next several quarters. And we continue to do well in terms of renewing contracts, and we don't see a big spike. If you're looking to change something in your model in that regard, there's nothing anticipated.

Randal Rudniski, Credit Suisse.

Pertaining to the retooling activities, is the program, really, is it over at this point? Like, did you complete it in the third quarter, or as you focus on the core U.S. business post-selling Europe, are there further initiatives that will arise in 2008 that could present the potential to influence the results in 2008?

We wanted to put a stake in the ground to ensure that we were behind in the big retooling and restructuring that we kicked off three years ago, which was a massive, significant program that I wanted to review the -- when you think of 21 plants closing, that is a significant restructuring.

We want to move from that, which is a company in flux and in a turnaround state on the platform, to a situation where we are more stable. But let me be clear -- being stable, of a normal industrial platform, you do have changes, and we will have to invest in a platform, but at a much more modest level. And it should be significantly reduced over the next period in terms of our capital program, much -- at a very low, modest level on quick-payback projects that provide good cash return.

Therefore, in 2008, we don't foresee the dislocations that we've had in the past in terms of any big capital programs. However, we will then now turn to our execution program, where we will reduce our costs in SG&A in overheads, in supply chain, and doing more with what we have with high-return projects with very little capital.

That's the key. That's why the execution program is top of mind. We're going to focus on customers, people and execution, so that we can reduce our capital expenditures in the future and be able to improve our balance sheet to generate high cash flow.

This won't happen overnight. Let's be very clear -- this is a turnaround that now we are focused on 2008, '09 and so on going forward, so that we have consistent improvement as we look to the future. But we have a lot of work to do, as you can see in our numbers. But because of our successes, we're confident of the future.

And just one follow-up relating to the sale of the European division. The shares that you receive in Roto Smeets, are these subject to any kind of lockup, and is it your intention of reducing your stake there over time, or do you consider that sort of a strategic investment?

We have a six-month lockup on our shares. And again, as we explained before, we expect this to be a very good investment as the industry consolidates in Europe. So we can benefit from the upside, and we think we are better positioned to benefit from the upside by keeping a portion of our investment in Europe. But we will evaluate the situation over time with regard to our participation, as mentioned before. And it's not our intention to invest any more money into Europe. But we will probably stay around for some time to reap the benefits of our previous investments and of the consolidation in Europe.

We would like to say thank you for your time today. We appreciate it. I think we have crossed those three main milestones with the sale and merger of Europe; with improving our balance sheet, which will announce shortly; and third, which is the completion of retooling. We have a lot of work to do in terms of our focus on North America, but now we are pleased that we can focus on the Americas and concentrate on that to drive earnings and cash flow.

So thank you for your time today, and we will get back to work.

Thank you, and this concludes the Quebecor World conference call. Thank you.