QuebecorWorld and Chapter 11

As the dust settles on life after Chapter 11, the one piece of good news is that the Canadian judge in this case will force the company to be completely candid with its results. In addition, the filing still permits management all the flexibility in negotiating with signing bonuses and other incentives to retain existing contracts or close new ones.

As we wait for the 4th Quarter EBITDA, it is important to understand the value of the World Color operations on this quarter vs. those of Europe (a fire sale waiting to happen) or the small contribution of South America (it should be sold quickly to raise cash). When KKR sold World Color to Pierre Karl in 1999, this was a finely tune machine under the superb leadership of Bob Burton. It can return to its position of prominence once it leaves the yoke of the Montreal leadership and the new CEO has a strong operating experience in printing.

The metrics of the investments in 64 page technology and the plant rationalization must be clearly understood by the bankers who will help World Color exit or the PE folks that will take this good company off the hands of Montreal. Part of the perception problem with the World Color recap was the lack of good data for the financial analysts to track its progress. Remember, as noted in an earlier analysis, the 64 page press is 3.2 times more productive with the same crew than a 32 page M 1000. The new press will generate approximately 848MM equivalent four color 32’s vs. the 265MM off the M1000. The blended cost reduction across the platforms enable any printer to pass along significant price reductions and still improve margins as long as they continue to take out the “tired iron.” Hence, the $125MM in capital expenditures will not be enough for World Color to keep up with RRD or Quad. How much more will be easy to compute once we know the age of the remaining presses and the number that must be retired?

When we see the 4th Quarter broken out by geographic territory, it should provide a better vision of the success of the 2005-2007 Mann Roland investments. We already saw the improvement in the 3rd Quarter book business based on its necessary and less costly investments in new presses. Once we have more news on 2007, I will update the forecast for QW performance in the slowdown year ahead.

In the meantime, sales management in the US will continue to a good job of keeping customers informed and the pressrooms will continue to do a good job of meeting contract demands. All that is needed now is a new World Color entity, a decent balance sheet, reasonable cash flow expectations, a line of credit to permit continued investment in the press room, and the right CEO to lead.