Commentary & Analysis
FREE Quebecor World Reports Weak Q1, Sends Shockwaves About Selling Off Commercial Business: Summary of Q1 Earnings Call
Quebecor World announced reduced profits from the 2004 first quarter,
By WhatTheyThink Staff
Published: May 19, 2005
Quebecor World announced reduced profits from the 2004 first quarter, due to charges from the closing of a Canadian facility and other workforce reductions as well as asset impairment. Net income for the quarter was $16.3 million, or $0.05 per diluted share, on $1.62 billion in revenue. A year ago, the company posted net income of $35.8 million, or $0.20 per share, on $1.55 billion in revenue. Revenue growth was essentially flat after excluding the benefit of foreign exchange.
The company also cited its lackluster first quarter performance on its lagging North American commercial business, which produces printed materials such as annual reports and marketing collateral. Quebecor World’s CEO and President, Pierre Peladeau, said “We have determined this business to be non-core and are currently pursuing exclusive negotiations to sell this business and similar facilities in Canada.” The commercial business is made up of approximately 12 facilities, and accounted for $45 million of revenue in the first quarter.
Topics of this summary:
- Quarter Highlights
- Segment Performance
- Raine Radar
- Q & A
- Quebecor loses two key customers, one in US and one in the UK
- The company announces the closing of a facility in Quebec, Canada
- Quebecor sells Torcy, France facility to a group led by local management
- Adding to the retail business, the company purchased a facility in northern California, previously operated by American Color Graphics
Revenue during the first quarter was $1.233 billion, up 3% from last year. Excluding the effect of foreign exchange and paper sales, revenue fell 1%. SG&A costs decreased in the first quarter, due primarily to savings from the 2,500 employees let go during 2004. Magazine revenue was down 7%, retail was up 11%, catalog was up 2%, book & directory was up 1%, and commercial print revenue was down 15%. Company management noted that while total magazine ad pages are up, weekly magazine ads were off by 1%, which is a large source of revenue for IQW. Canadian sales were up 13%, or 5% excluding foreign exchange.
Revenue for the segment was $332 million, up 5% from last year. Excluding the effects of foreign exchange, sales were essentially flat. Volumes were up somewhat, with gains in the French magazine market, but prices have continued to fall. Margins were also negatively impacted by the loss of a major customer to the Corby, England facility. SG&A costs were down, due to last year’s headcount reduction of 350.
Revenue for the segment was $57 million, up 21% from 2004. Most of the increase was due to currency translation. Volumes were up 14%, centered in Book and Directory markets. SG&A costs were down, benefiting from last year’s headcount reduction of 320 employees. The company is trying to position this segment as a low cost alternative for publishers who are outsourcing to China.
Quebecor World expects second quarter profits to be below those achieved in the second quarter last year as well as this quarter. The company believes the problems it saw in the first quarter, such as a weak commercial segment in the US, the loss of two major customers, and continuing pricing pressures, will continue into the second quarter.
Only 3 months ago, the stock rose 10% on the day of the earnings call. This time however, the stock plunged 13%. The optimism of last quarter, including strong hints at plans for acquisitions, has been replaced with news of planned divestitures and lost customers. QW has been on a roller coaster of financial news and events for that last three years. QW experienced significantly worse performance than competitor Donnelley this quarter, including losses in Magazine despite increasing US magazine ad revenue. It is very likely that QW will be examining its business plan to see if it can better position itself, hopefully in time for the second half of 2005. Now that QW has called it quits in the commercial segment, their options for growth are limited to tonnage print; another tough market that is slowly but surely becoming commoditized.
Q & A
- Scrap paper sales were flat in the first quarter.
- Quebecor is pursuing a share buyback program that it believes will add value to shareholders, despite the concern about a possible debt downgrade if performance in the second half doesn’t improve.
- The company does not expect to take any special charges related to the sale of the commercial business.
- The primary competition for commercial print is Cenveo, Consolidated Graphics, and a large number of smaller regional printers.
- Other than commercial print, Quebecor World seems confident that its business units are “core.” The company was quick to add that this does not mean there may not be some further reorganizing of smaller facilities.
- The company expects to let go an additional 400 employees, primarily due to the closing of one of the Quebec facilities.
- Quebecor believes the commercial print business is a “relationship” driven segment that would be better run by local management.
- The company is looking into selling the commercial print facilities in as few transactions as possible, and will likely sell them all together.
- Quebecor is trying to integrate the Latin American and US segments as tightly as possible to try to compete with Chinese production.