Quebecor Reports Poor Results, Net Income Falls on Lower Sales
Press release from the issuing company
Nov 7, 2006 -- Quebecor World Inc. announces for the third quarter 2006 net income from continuing operations of $19.2 million or $0.09 diluted earnings per share compared to net income of $30.9 million or $0.16 diluted earnings per share in the third quarter of last year. These results incorporate impairment of assets, restructuring and other charges of $11.6 million or $0.08 diluted earnings per share compared with $17.2 million or $0.12 diluted earnings per share in 2005. Excluding impairment of assets, restructuring and other charges, diluted earnings per share were $0.17 compared to $0.28 in the third quarter of 2005. On the same basis, operating income in the third quarter was $55.7 million compared to $80 million during the third quarter last year. Consolidated revenues for the quarter were $1.55 billion compared to $1.58 billion in the third quarter of 2005.
"Our financial performance in the third quarter and year-to-date is not acceptable and does not meet the high expectations for our shareholders' investment," said Wes Lucas, President and CEO, Quebecor World Inc. "In the third quarter, we started a comprehensive and integrated 5 Point Transformation Plan, which should deliver short term benefits in 2007 and 2008, and create long-term earnings and free cash flow growth. All five of these initiatives are now underway, and are focused on achieving concrete financial and qualitative targets to deliver increased shareholder value."
Third quarter actions on 5 Point Transformation Plan
Customer value: Set initial target of at least a $300 million annualized revenue benefits based on the Customer Value Initiative, run rate by the end of 2008."The initial focus is on creating more value for our customers then just the printed product, by creating and providing complete, integrated, high-value solutions for our customers, " stated Mr. Lucas. The Company is driving more solutions and value before the printing process in terms of providing marketing campaign services, creative for ads, data optimization, content management, and complete solutions in premedia. The Company is also driving more solutions and value after the printing process in terms of providing comprehensive mail list optimization, co-mailing and complete logistics services. As an example, the recently announced long-term $1 billion CDN agreement with a major directory customer that contains new high value services before and after the printing processes including ad page makeup and logistics solutions.
Best People: During the third quarter, the Company started a process to build its organizational capabilities and to ensure the right people with the right skills are in the right positions. A key deliverable is that all teams and leaders have development plans and training programs. "The objective of our People Initiative is an increased execution capability and more value for our customers and shareholders, as our people are by far the most valuable part of our Company," stated Mr. Lucas.
Great Execution: Set initial target of at least $100 million annualized cost savings and productivity improvements, run rate by the end of 2008. In the Third Quarter, the Company kicked off a productivity and continuous improvement program based on Six Sigma and other proven approaches. This program will focus on high impact improvement areas with low capital requirements and high returns. Even though the Company is only at the beginning of the process, it is already working on high-return improvement projects in such areas as reducing paper waste, improving quality, increasing press speeds, and driving working capital improvements by eliminating inventory. The program will build a continuous improvement culture throughout the organization that is fact-based, and focuses on low-capital projects to maximize cash flow and shareholder value.
Retooling program: The Company's three-year retooling program is on schedule and is being optimized to be completed by the end of 2007. In the third quarter, Quebecor World initiated start-ups on five new wide-web offset presses, three in its U.S. magazine platform, one in its U.S. book platform and one in Europe. Two additional presses were started in the fourth quarter, one in the magazine platform and one in Europe. To date in 2006, nine new presses have been installed in the U.S. platform and two presses in Europe. The startup of this new equipment, the closing of old presses and the transfer of volume to other facilities, is creating some temporary inefficiencies that have negatively impacted third quarter and year-to-date results.
Balance sheet: The Company is committed to strengthening its balance sheet in a responsible manner, and is taking serious actions to increase shareholder value. The dividend is suspended on subordinate and multiple voting shares. The Company is also evaluating strategic and tactical actions to further strengthen the balance sheet, to return to a strong free cash flow position and to provide additional financial flexibility.
"We are setting goals and objectives, both financial and qualitative, that must be met as we move forward to demonstrate to all our stakeholders that we are 'making our numbers' and delivering measurable results to improving our performance," said Mr. Lucas. "We are extensively communicating these objectives both internally and externally so that our people know what is expected of them, and our shareholders know how we are progressing. We will be making regular reports and updates on the progress of our transformation plan and setting additional targets as we move forward."
Third Quarter Restructuring Initiatives
In the third quarter, the Company recorded restructuring charges of $11.6 million, which are composed of cash items related to workforce reductions at facilities in Europe and North America. The 2006 restructuring initiatives affected 1,948 staff positions in total, of which 1,247 positions were eliminated as of September 30, 2006 and 701 are still to come. The resulting productivity improvements can be concretely seen in that fact that out of the 1,948 positions to be eliminated, only 292 new positions will be created in other facilities.
In North America, revenues for the third quarter were $1.24 billion, slightly down from $1.25 billion in 2005. On a year-to-date basis, revenues were $3.54 billion in 2006 compared to $3.56 billion in 2005 mainly due to lower prices and unfavorable product mix compared to last year.
Retail revenues for the third quarter of 2006 were up 5.9% from the same period in 2005. For the quarter, the increase in revenues is attributable to volume from new sales of offset retail inserts and to component price increases that helped mitigate increased costs.
Catalog revenues for the third quarter of 2006 decreased by 1.8%. Volume increased slightly but not enough to offset lower prices in this segment. Year-to-date revenues and volume increased in the catalog segment due to new customers and increased sales with existing ones, reflecting the development of the Company's offering of a complete marketing solution to enhance the marketing of branded goods companies' products and to increase in-store traffic for retail customers.
Combined Magazine & Direct revenues for the third quarter of 2006 were down 4.8% compared to the same period in 2005. Revenue decreased in the third quarter mainly due to lower volumes in both groups. The decrease in the Magazine Group is due in part to the closure of the Brookfield facility announced earlier in the year and lower page counts from major publishers. Direct mail revenues were up 4.9% year-to-date overall, but down slightly in the quarter due to the timing of volumes from key customers.
Book and Directory revenues for the third quarter of 2006 were down 2.4% primarily related to reduced capacity as a direct result of retooling activities by removing older presses and installing new presses in the book platform. Volume increased in the Directory group as the Company started to realize new volume from important contracts signed in 2005. These contracts will represent an additional 160 billion printed directory pages per year starting in the second quarter of 2007.
In Canada, revenues were lower in the quarter primarily attributable to the strong Canadian dollar negatively affecting Canada's print volumes and the sale of one of the Company's facilities earlier this year.
Logistics' revenues increased 4.4% in the third quarter of 2006. The revenue increase for the quarter is due to the success of the Company's integrated end-to-end solution in providing value-added services. One of those services is the Company's industry-leading co-mail services to magazine and catalog customers. The Company is increasing those services by adding a third co-mail machine at its Bolingbrook, Illinois facility. The new machine will be installed in the first quarter of 2007.
Premedia revenues for the third quarter of 2006 were down 2.4% from the same period in 2005. The decrease in revenues for the third quarter was attributable to a lower page count that was partly offset by a positive change in a higher value work mix.
European revenues for the third quarter of 2006 were $244.1 million, down 9.8% from $270.7 million in 2005, largely driven by poor market conditions in the United Kingdom and the restructuring of the Company's operations in France. On a year-to-date basis, revenues were $758.1 million in 2006, down 14.5% from $886.2 million in 2005. The implementation of the European retooling plan that began early in 2006 has impacted volume in certain countries for the third quarter of 2006, especially in France, as a result of plant closures and temporary press start-up inefficiencies. In France the Company is in the middle of a complete restructuring of its operations with the disposal of certain facilities in 2005, the downsizing of the Corbeil facility in the first quarter of 2006, the shutdown of the Strasbourg plant in the second quarter of 2006, and the recently announced closure of the Lille facility in the second quarter of 2007.
Latin America's revenues increased 12.6% during the third quarter of 2006 to $61.2 million from $54.4 million in 2005. On a year-to-date basis, revenues were $170.5 million in 2006, down from $177.2 million in 2005. Overall volume increased for the quarter, positively impacting operating income.
Free cash flow
Free cash flow year to-date amounted to an outflow of $9.2 million compared to an outflow of $39 million during the same period in 2005.
For the first nine months of 2006, revenues were $4.47 billion, down 3.3% from $4.62 billion in 2005. Operating income before impairment of assets, restructuring and other charges for the first nine months of 2006 was $167.3 million compared to $270.2 million in 2005. Impairment of assets restructuring and other charges for the first nine months of 2006 were $65.1 million compared to $82.3 million last year. Loss per share from continuing operations was $0.06 compared to diluted earnings per share of $0.20 in the first nine months of 2005. Excluding impairment of assets, restructuring and other charges, diluted earnings per share from continuing operations were $0.36 compared to $0.77 for the same period last year.
To maximize shareholder value in the near and long-term the Company believes it is prudent to strengthen the balance sheet. Therefore the Board of Directors suspended the dividend on Multiple Voting Shares and Subordinate Voting Shares. This action was taken in light of the Company's current investment program in North America and Europe. The Board declared a dividend of CDN$0.3845 per share on Series 3 Preferred Shares and CDN$0.43125 on Series 5 Preferred Shares. The dividends are payable on December 1, 2006 to shareholders of record at the close of business November 20, 2006.
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