Commentary & Analysis
FREE: Quebecor World Working Hard for a Turn-around and reports Q1 Earnings Improvement: Summary of Quebecor‘s Q1 Earnings Call
Quebecor World Inc.
By WhatTheyThink Staff
Published: May 12, 2004
Quebecor World Inc. (NYSE: IQW) today announced net income for the first quarter of $36 million or $0.20 per share. For the same period last year, Quebecor posted net income of $24 million or $0.12 per share. Operating income for the quarter was $94 million up from $74 million in the first quarter of 2003. Consolidated revenues were essentially flat at $1.55 billion as compared to $1.54 billion for the first quarter of 2003.
Topics of this summary:
- Highlights of Accomplishments
- Worldwide performance
- North American Operations
- Q & A
Quebecor's newly appointed President and CEO Pierre Karl Peladeau began today's earnings call with a highlight of the company's accomplishments over the course of the quarter.
Editor's Note: Pierre Karl Peladeau is now back running the business trying to turnaround his family's company. He is noted for his passion to play exclusively in the publishing world and become a celebrity figure, not unlike the late John Kennedy Jr.; however the past financial performance of Quebecor World has necessitated a hands-on approach to save this legacy business. It was clear on the call that analysts wanted leadership assurances to complete a turnaround given that little-to-no guidance was offered.
- progress on and attention to Quebecor's global platform
- decommissioned equipment
- lowered costs
- improved efficiencies
- progress on realigning the cost structure
- development of a 3-year strategic plan
- development of a global business strategy
Peladeau pointed out these accomplishments show a clear future plan taking shape and under this plan the company will be more focused.
Revenues in Europe were $315 million for the quarter a 3% increase over first quarter of 2003. All European divisions showed improvement during the quarter with the exception of Austria. Operations were positive mainly due to improvements in France which is reaping the benefits of restructuring, cost containment, new technology and volume increases. France also has a competitive advantage due to the network of Gravure facilities.
In Latin America, Quebecor reported the general economic environment has improved as compared to last year and revenues during the quarter were $47 million as compared to $45 million. The revenue increase was due mainly to a positive currency translation.
North American Operations
Quebecor's North American operations still suffer from pricing pressures that have been partially offset by higher volumes. Revenues in the Quarter were $1.19 billion as compared to $1.23 billion for the same period last year.
- The magazine group saw a 6% decline in revenues but a 4% increase in volumes even though consumer ad pages were down. Magazines in the auto and personal health areas were strong and financial and travel magazines showed some improvement.
- Market share in the Catalog segment remain strong and the segment saw a 2% decline in volumes; prices in the quarter were relatively stable.
- The Retail group recorded in increase in revenues and a 7% increase in volumes.
- The Commercial/Direct group revenues were down 13% due to lower prices and reduced volume. Two major customers scaled back on operations during the first quarter.
Q & A
- Prior to opening the call to questions, CEO Peladeau clarified a question asked at the end of the shareholders meeting by stating that although he would act in the capacity of President and CEO for as long as the Board of Directors wished him to serve, he did not mean to imply that his position was interim.
- Capital expenditures in 2004 will be $250 million. However, Quebecor will spend $200-$300 million in addition to typical maintenance capital expenditures. The $200-$300 million was characterized as Quebecor making an investment in the catalog and magazine side of the business. The company plans to decommission 3 machines and add 8-12 new presses. Even if the presses were ordered today, delivery would take 12-14 months, thus the expenditure investment will most likely not take place in 2004, but rather in 2005 and 2006. The earn back on the investment cannot be characterized in terms of months, although no earn back period was specified in today's call. The earn back rate is considered to be acceptably higher than the current internal hurdle rate. Peladeau characterized the rate of return as a 3:1, that the labor required for three machines will be reduced to labor for one machine with additional cost savings through automation associated with new machines. Decommissioning old presses and installation of new presses is anticipated to be capacity neutral, if possible.
- Pension costs are trending up for 2004 and are expected to be 5-10% higher than 2003. Payments to the pension fund are usually made during the third and fourth quarter. In 2003, Quebecor contributed $78 million to the pension fund.
- True to the company's previous silence on giving guidance, officials did not intend to give second quarter or yearly guidance in today's call. Quebecor only stated it is working hard to produce results and analysts are obliged to work with the data previously provided.
- Some additional granularity was given regarding North American operations if only to indicate that the NA business experiences seasonality and the expectation is for additional business as the year progresses. NA President David Boles stated that the operation has made significant strides that are beginning to pay off in 2004. Previous cost cutting measure and efficiencies and productivity improvements are now bearing fruit.
- A $5.1 million legal claim was settled in the first quarter with a U.S. supplier. The tax element is 40%.
- Although the company's tax rate was higher in the first quarter, the expected tax rate for the remainder of the year is in the mid to high 20's.
- When questioned on the strategy of the company's build vs. buy strategy, (i.e. building internal capacity and efficiencies, vs. acquiring a company), Quebecor stated it would consider acquiring other companies, however, there are not too many that interest Quebecor. Quebecor restated its focus on the strategy of building internal capacity and decommissioning the lowest capacity machines and/or repurposing them.
- Quebecor expects to see an impact from the International Olympics in the second quarter of 2004.
- Although Quebecor does not disclose its covenants to the public, officials today did state that covenants are usually on a 12-month rolling average basis and are improving.
- Quebecor reported no disruptions from union issues in the U.S. although a union campaign is underway. Approximately 30% of employees in U.S. operations are unionized.
- In North American operations, volumes increased but organic growth was down a negative 2%. Previously negotiated contract price decreases have now gone into effect beginning in 2004.