By Jan Stoddard of Raine Consulting October 30, 2003 -- Quebecor World Inc. (NYSE; TSX: IQW) announced that for the third quarter 2003, the Company reported net income of $60 million or $0.38 per share. This compares to net income of $99 million or $0.64 per share in the third quarter of last year. Operating income was $125 million in the quarter compared to $168 million during the same period in 2002. Quebecor World's quarterly earnings call and web cast, was conducted by Jean Neveu, President and CEO; Claude Helie, Exec VP and CFO; and, David Boles, COO, Quebecor World North America. Editor's Note: While this quarter's net income was an improvement over last quarter's recorded loss, it is still a long ways from last year's same quarter results of $99 million net income. Price per share is still significantly deflated. With news of rebounding direct marketing, new titles in demographically based publications and retailers holding out hope for the Holidays, there may be some (albeit slight) indicators for continuing improvements in the fourth quarter. Hopefully, this goes for all of the print industry.   Call Topics: * Chairman Comments * Financial Reporting * North American Market Update * European and Latin American Markets * Q&A Chairman Comments Mr. Neveu began by noting that the third quarter results lower than last year was no surprise. Significant overcapacity resulted in lower prices impacting Quebecor World in all markets, especially North and Latin America. He noted that they were disappointed by the September results, in which they had expected better performance in September, typically a strong month. The Quebecor World risk management forecast is two-fold; one, to rigorously look at cost structure in all areas of business and, two, to secure increased sales volume. Restructuring initiatives as an on-going process are essential to generating improved margins. On the hand, Quebecor World is renewing contracts and gaining new business. Revenues were $1.59 billion compared to $1.62 billion in the third quarter last year. Impressions were up, but overall revenues dropped due to lower prices. Mr. Neveu concluded, “To summarize, it is tough out there and the competition is fierce. There is no magic pill quick fix, but we believe we are taking the right steps to deal with the current issues and charting the course for the future.” Financial Reporting Mr. Helie, Exec VP and CFO, stated that results continue to be affected by weak market conditions. U.S. consumer magazine pages were down 4% in the third quarter compared to last year. US print shipments declined on a dollar basis by 6% in August, and decline of 2% year to date. Capacity utilization (measured by the U.S. Federal Reserve Board) was 76.5% in September, the lowest level since March of 2002. Echoing Mr. Neveu, Mr. Helie stated that Quebecor is aggressively reducing costs and protecting sales volume. During the third quarter, consolidated revenues decreased by 2% (or $27 million) to $1.6 billion. Adjusting to currency impact of $56 million and lower paper sales, revenues were down closer to 4%. Operating income was $125 million, or $120 million before a $5 million net reversal of earlier restructuring charges. Excluding restructuring impairment and other charges, operating margin was 7.5% down from previous year 10.4%, but a significant improvement from 6.1% from last quarter. This trend is expected to continue through the fourth quarter. North America : revenues were down $42.0 million or 3% ($1.28 billion compared to $1.32 billion in the third quarter of 2002), operating income was $110 million (margin of 8.6% compared to 11.9% during the same period last year). Nearly half of the decrease in sales was contributed to decrease in sales in the book market; the other half due to lower pricing in long run segments (magazine, catalog, and retail inserts). On a positive note, Quebecor World is seeing signs of improvement in direct mail sales and the weakness of the commercial printing has abated somewhat in recent weeks. Some segments, such as retail and logistics, experienced increases in volume but this was offset by volume reductions in the book/directory group and in magazine/catalog offset. Despite important contract wins during the quarter, these results reflect the difficult magazine advertising market, as well as book publishers' desire to reduce inventories. Europe: revenues increased by 8% in the third quarter to $268 million compared to $248 million last year primarily due to the positive impact of currency translation operating income was $7.5 million. In France ( representing half of the European platform ), the division posted positive earnings in the month of September. The European print market is also suffering from price pressure due to excess capacity resulting in reduced margins in most countries with the exception of the United Kingdom. Latin America: revenues for the quarter were $40 million compared to $45 million in the third quarter of 2002. Operating income and margins were affected by price erosion and overcapacity. This was particularly evident in Peru and Brazil. The Company is seeing improving results at its operations in Mexico, Colombia and Argentina. Cost containment included streamlining the workforce and cutting overhead expenses: Since 2001, over 5,000 positions have been eliminated worldwide (nearly workforce by 1,174 employee positions in the first nine months of 2003). Impact of cost containment was partly seen in the reduction of SGA expenses that declined by decreased by $13.9 million compared to the same period last year. Of this total, $8.1 million of the decrease was due to restructuring initiatives implemented this year including reduction in force and the consolidation of corporate functions as well as the relocation of certain sales offices into plants. Year to date, SG&A expenses were reduced by $22.6 million, excluding specific charges for bad debt (approximately $15 million) and the impact of currency translation. This is despite pressures from escalating pension expense and health costs. Free cash flow of $40 million was generated during the quarter. Funds from operations were $60 million, including investment of approximately $100 million in working capital. Capital expenditures were $36 million (in line with last year). Financial expenses were $46 million and debt-to-capital ratio was stable at 47%. North American Markets David Boles, COO, Quebecor World North America covered three areas: 1. Performance of North American Product Groups : •  Magazine/Catalog Group : While advertising pages were down almost 4% for the quarter, however some specific categories are doing well (travel, teen, and women's magazines). Overall volume and revenue is really a mixed bag and down slightly for the quarter. Significant erosion in the magazine offset market largely offset by growth in our catalog market with year-over-year growth (albeit with lower pricing). The Quebecor World strategy of partnering with the largest publishers is paying off because they are the ones launching new magazines with specific demographics such as the teen market. Customers launching new titles include CondeNast, Bauer, Dennis Publishing and Viacom. •  Catalog Group : Catalogers are cautiously optimistic about the Christmas season, but they are seeing increases in volume in case-by-case basis. Third quarter renewals included Viking, Office Depot, Avon, Williams-Sonoma and Ethan Allen. •  Retail Group : Volume is up, but significant price erosion has hurt revenues and margins. Quebecor's offset/gravure combination that allows for national and regional advertising campaigns is still strong with significant ‘wins' from Wal-Mart, J.C. Penney, and Home Depot reflecting increased market share. •  Commercial Direct Group : As noted this is one group that is showing some positive results this quarter which could be an indication of some recovery in the industry. This spot market leads both downturns and recoveries. Order activity for direct mail orders is picking up for both the fourth quarter and into 2004. •  Book and Directory Group: The ‘book in presses' was down for the quarter and there is also negative price pressure. Publishers are still reducing inventory that is impacting order size. State and local government constraints are affecting orders for school textbooks. •  Canada: Canadian operations have shown increased revenue due to currency translation to U.S. dollar. However, pricing is very competitive. A significant win was the renewal of Canada Wide Magazines , the largest independent magazine publisher in Canada. 2. Isolated problem areas with specific plants (plant fixes) impact lower year-over-year results. Plans include: •  The Kingsport, TN book facility now making money again as took systematic approach to bring back on track including outsourced inefficient processes, de-commissioned older less productive equipment, reduced workforce (same output), reduce waster. •  The new Riverside, CA offset retail plant had experienced start-up problems. Last press is now in and running with planned increased of 30% for October in month-over-month volume, gained 75 hours in schedules, and re-organized manning for 24X7. 3. Save and Sell Strategy: Mr. Boles noted, “We can't simply save our way back to double-digit margins, we have to couple cost costs with volume increases at reasonable prices.” The business is a good mix of long-term contracts (allowing capital investments) and short-term (fill-in gaps maximizing asset utilization at spot prices). In North America, this mix of one year or less is 50/50 with staggered renewal dates. Question and Answer Session with the Analysts 1. The competitive landscape in North America is the same cast of characters according to Mr. Boles. The commercial print market is much more fragmented, but in retail, magazine and catalogs the activity is still among the top five players in those segments. The level of competition has intensified, but the players have not. When asked if any of the players are approaching bankruptcy, Mr. Boles noted that insolvency has only been among small printers and anything else is speculation. 2. The bulk of the pension contribution ($64 million) will be made in the fourth quarter and will show up in the cash flow (cash disbursements) section. There should be no up-tick in expenses in the fourth quarter. 3. Third quarter margins improved from the second quarter, and improvement should continue to fourth quarter. 4. Capital expenditures for 2003 year-to-date are $205 million (compared to $140 million last year after nine months). However, over $80 million of operating leases were taken in during first and second quarters. Mr. Helie anticipated up to an additional 15-20% increase from $205 for the year. Without giving guidance, he expected that 2004 would be same total or slightly higher. 5. Today's NDA announces another 70-head cut in the fourth quarter, but with the pricing pressures will there be more? Quebecor World will continue to reduce costs across the platform, as well as headcount to meet margins. In the coming months, they will be reviewing the platform for additional facility consolidations in 2004. 6. The prediction that margins will improve sequentially in the fourth quarter are based on continuing price pressures, reducing costs, continuing to reduce specific operational problems (see examples in North American comments). 7. When asked if the pricing decline was specific to spot pricing or contract, Mr. Boles noted that spot pricing has been consistently unfavorable in 2003 and does not see that changing. The longer-term contracts are affected by a lot of factors from quality of customer, opportunities for growth and value added. Mr.Boles noted that from 2002-2003 was a watershed year and there was significantly more than normally had been the case. However, pricing pressure is nothing new for this industry and he anticipates that the impact on a go-forward basis will mitigate somewhat. From 2003-2004, there would be a lesser amount of contract renewals. 8. If extremely weak market conditions and pricing are industry conditions, how has RR Donnelly & Sons that has increased their margins year-over-year for the last four quarters in a row? Mr. Neveu explained one of the reasons that RR Donnelly had different results was that it started with a lower base and it was easier to increase. Quebecor was at double-digit margins in 2002 and 2003. You also need to look at geographies where Quebecor is in Latin America, Europe and North America, as well as things specific to certain operations. 9. When asked for insight as to what can turn this pricing environment around, is it just a matter of waiting out the cycle or will something have to give, Mr. Boles noted that there are two pricing dynamics. Transactional pricing which tends to be far more volatile than contracts. Longer-term contracts need to be supported with investment in plants and equipment. An economic recovery will have a near term and more dramatic impact on transactional pricing. With respect to longer-term contracts, Mr. Boles noted that price degradation in contracts has been occurring for years. Quebecor has the advantage for dramatically lowering the cost base in many ways. This arises from the fact that it is a fragmented company that has come together quickly through acquisition and consequently “has opportunities that others don't”, especially with blue chip customers. He would not confirm another large restructuring in the first quarter of 2004 citing “there are many ways to skin a cat.” 10. Capacity utilization has not been the problem this year according to Mr. Boles. The ability to grow earnings, with pricing going down year after year, reflects the ability to reduce costs and act as consolidator for the industry. 11. Certain segments of the commercial print market are not doing better on a year-over-year basis (short-run sheetfed). On the web side, there has been a significant pickup. On the direct marketing, they are seeing certain fortune-500 types reinvigorate their promotional activities with new types of campaigns. They see this as a leading indicator that things could be stabilizing. 12. When asked if overall pricing (or specific sectors) were down more than 8% this year, Mr. Boles noted that isolated contracts may be down more than 8%, but overall it is not even close to that. On the direct marketing side, the issue has had to do with volume not being there and not pricing. It is a highly “niched,” specialized market. 13. According to Mr. Boles, the plant issues had been very significant and now they are on a steady trend of positive changes. Further improvement is the next step. Further plans for cost containment and application of the 80/20-rule (“where 80% of your operating problems are in 20% in of your facilities, and a high degree of operational focus yields a nice degree of return for management focus”). 14. The Board has approved a dividend of $0.13 for this quarter (and previous 3-4 quarters). They are in the process of doing the business plan for next year and they will advise from that point.