Commentary & Analysis
FREE: Quebecor World Continues Restructuring Initiatives and Files Lawsuit against RRD: Summary of Q3 Earnings Call
By Susan Kelly November 4,
By WhatTheyThink Staff
Published: November 4, 2004
By Susan Kelly November 4, 2004 -- Quebecor World, Inc. (NYSE: IQW) reported net income of $59 million or $0.37 per share as compared to $55 million or $0.34 per share for the same period last year. Operating income for the quarter was $115 million down from $117 million for the year ago period. Consolidated revenues were reported at $1.63 billion, up slightly from $1.60 billion from last year. Reported consolidated net income for Q3 was $48 million compared to $60 million in 2003. Topics of this summary: President and CEO Comments Quarterly Overview Global Performance Guidance Q & A President & CEO Comments President and CEO, Pierre Karl Peladeau, opened the earnings call with a shocker news release that they have filed a lawsuit in Chicago (Cook County filing) against RR Donnelley and three former Quebecor World (QW) employees to prevent them from using or disclosing QW trade secrets. No further comments were made about this matter. Peladeau went on to recognize that third quarter has not shown the same level of improvement as previous quarters but he is convinced that they are making the tough cost reduction decisions to move the entire organization in the right direction. Raine Analyst Take: Is it a coincidence that this lawsuit, announcement comes on the heels of RR Donnelley’s announcement that they have finally resolved their high-profile multi-year employee lawsuit battle from the Lakeside Press? It appears that Quebecor World is pulling out all the stops to duke it out with their number one competitor for tonnage print. Analysts reminded Quebecor World executives about the state of their highly leveraged balance sheet, debt-to-capitalization ratios and liquidity concerns; especially since Q3 results did not significantly impact their financial position in which is normally one of their strongest quarters. Quarterly Overview QW continues to pursue its plan to reduce cost and create greater efficiencies. Rigorous attention to cost reductions showed SG & A expenses over $45 million below with what they were last year.. The reduction is due to lower discretionary spending, and workforce reductions. A focus has also been on Quebecor’s manufacturing platform and capital investments. As a result, the company closed one of its magazine facilities in Illinois and downsized operations at a book printing facility in Tennessee. Overall global restructuring plans will show an elimination of 1482 jobs in 2004. The company continues their plan to undertake a strategic investment plan in purchasing 22 new offset presses over 2005-2007 for the magazine and book platforms. The plan is thought to be capacity neutral as the company dismantles some presses and idles others. The plan is expected to cost $300 million over the next three years with 1/3 of the equipment coming on line in 2005. The ROI on the investment is sufficiently more than the cost of capital to provide an adequate return to shareholders. Global Performance In North America the print market witnessed some improvements, however this segment suffered from pricing pressures across the board. Peladeau confirmed that QW is experiencing price pressures in all markets around the globe. Operating income increased to $113 million as compared to $109 million for the same period a year ago. Revenues were basically flat at $1.29 billion, compared to $1.28 billion for the year ago period. Magazine segment, consumer ad pages grew 4%. Vogue magazine published its largest issue in history. In general they saw ad pages up to 20% for some publications. DMA says pages will increase by 6.8% in 2005. Retail segment revenues increase 4% and also showed a volume increase. Long-term contracts have been renewed: Best Buy and Kohl’s. Volume and revenue increases were primarily due to cost control/containment efforts. QW sees an increased demand for versioning. Book volumes were up 3% but revenues were flat. Reorganizing the book platform was a right decision as they are now making money since they closed their Kingsport facility. The Canadian market showed an increase of 7% in volumes however the rising Canadian dollar is squeezing margins. QW’s direct marketing and games business is growing. They feel this is a locally driven market and analysis needs to be done plant by plant. In Europe, revenues were $296 million showing an 8% increase excluding currently impact. Operating income was $9.3 million as compared to $6.2 million a year ago. Europe continues to suffer a negative pricing environment. Success in Europe, however, is due mainly to French operations where cost reductions are having a positive impact. QW is underway to close a plant in Stockholm leading to the elimination of 282 positions and $12-13 million in restructuring charges by the end of the year. New low cost competitors are coming onto the scene from Poland, Hungary, and Czech Republic. Latin American operations posted revenues of $45 million, compared to $41 million a year ago period. Volume increased 25%, year to date revenues were up 5%. Guidance Although officials at Quebecor would not give specific guidance in terms of range, the company stated capital expenditures for 2005 - 2007 should be $250-$350 million. Capital expenditures for 2004 have been reduced to be $150 million from $200 million. Q & A QW would not comment on the specific impacts with magazines disruptions as a result of the Effingham plant closure and the drag on EBITDA. Analysts drilled down on the supposed “one-time cost event” and wanted assurance that impacts are limited to one quarter. U.S. Election impacted QW results indirectly. QW reports this through increased magazine pages which is reason for the spike of ad pages 20-25% in 2004. Eastern Canada sales are the most impacted by the rising Canadian dollar and QW has tried to protect this with forward contracts for customers and suppliers. Moody’s report was quoted with regards to their concerns about overall leverage, liquidity, and the ongoing business risk. In general, analysts are not comfortable with QW’s liquidity position and balance sheet ratios and they not seeing enough traction in improving financial results fast enough. Analyst wanted to see to a better alignment of their credit profile with their restructuring and investment risks. Stockholm has 2 gravure presses versus the 9 offset presses in Effingham, thereby QW executives do not see this closure as disruptive and will not impact the financial statements. QW would not detail where the $45 million reduction SG&A came from and cautioned analysts that they are now expensing stock options and taking provisions for performance incentives. As it relates to energy prices; one third of their demand for the balance of the year is hedged compared to current prices. Hedging is lower than that for next year but prices have spiked up so rapidly that QW has not been able to improve their position for 2005.