A LOOK AT 2008 AND SOME COMMENTS ON QUEBECORWORLD

Trying to forecast 2008 “Big Print” revenue is tricky at best right now. "Big Print" includes RR Donnelley, QuebecorWorld, Cenveo, Quad Graphics, Brown Printing, Vertis, Valassis and a host of mid size printers similar to Continental Web, Publishers Press, and Lehigh Direct. Will print have a repeat of 1978 and 2001 or will it be a softer landing the industry faced in 1991-92?

Unfortunately, all the macro economic data on shipments and profits included “Little Print.” Little Print is the 20,000 commercial printers that make up the bulk of the $100B market. Shops from 5 to 100 have been the backbone of the industry and local markets for years. CGX is a good example of an 80 division roll-up of little print while VistaPrint is the best case example of a little print portal making a business card commodity into a winning formula.

There is nothing different in these markets today than what we have faced since the 1950's. There is always a capacity imbalance that permits one printer to aggressively go after incremental new business and prices have never been very stable. Management screaming about capacity issues, aggressive competitors, price erosion, yada yada yada should be ignored...it is like blaming the weather. The sun continues to come in the East! Those that made bad acqusitions instead of investing in pressroom and technology constantly refer to "yada yada yada". Even QW with its poor leadership and now bankruptcy invested in new presses. That $1.2B investment is not the reason QW was forced into bandruptcy. Chapter 11 for North America was the leadership or lack thereof from Pierre Karl and his management team since 2000. Basically, QW was simply late to invest to keep up with the changing nature of print since the 1950's. Same holds true for Vertis and American Color Graphics. Those two companies are running presses that were new in 1990 or earlier in some plants.

If this were an economy emerging from a slow period, newfound sales and productivity would be paying for the increases in commodity costs, as the print markets have been doing since mid-2003. However, when entering a slow period, there are no newfound sales. Ad pages have been down against 2006 for the last 5 months of 2007. The good news is that DM continues to be strong as pieces in the Post Office were 3% higher than 2006. The FSI market will be “iffy” as retailers look at media budgets for 2008 and a consumer pullback.

In a slowdown, there are no increases in productivity through extensive capital investments in pressroom and other software technology advances. We saw that in Big and Little Print from 2000 to 2005. When there is little to no revenue growth from existing contracts and incremental new volume is tougher to land, there is no help paying the higher variable costs in inks, paper, transportation, wages and utilities. Hence, sales at best may remain level or drop slightly in 2008 while profits will take a hit though not as drastically as we sawy in the 2000-2002time period. Incremental volume will be priced aggressively to fill open time and one shot buyers will do better price wise in 2008 than in the past three years.

It is an unfortunate fact of life that variable cost increases have not been recoverable in the past decade like we saw in the last century. Prices do not go up in this segment. Since the mid 1990's, COLA increases became extinct. Prices began to drop each year anywhere from 2-4% and that trend continued right through to 2007. At best, all printers strive to keep them in check year over year. Fortunately, press productivity has been better than price erosion for those printers who invested wisely. Hence, RR Donnelley and others who did invest are doing well. Vertis, America Color, and now QW sit in their ruins due to no investment or very late to the party.

Even if a few printers try to increase price, there is always the risk that customers will not be willing to pay. Media buyers will find another printer who will not be as pricey. Customers may change their buying patterns or will find alternative uses of the media communication dollars. This means that fewer impressions may be sold at existing prices and if a printer chases incremental volume, they will get new customers at lower prices. Hence, a printer’s total revenue may not change and it since it can not pass along the increased costs, profits are reduced.


Lastly, QuebecorWorld will continue to meet its customer's needs. While dealing with this is never easy, customers should remain loyal and committed to QW inspite of their short term financial issues. In reading through their filing, they have covered the need for exceptions to meet paper rebates, contract signing incentives, and renewal options that will permit sales to keep existing customers and add new ones. The other good news, QW did spend $1.2B of its debt on new high speed presses, techonology and rationalizing its platform by creating mega plants from a host of smaller ones. The bad news, it still has $1B in volume from Europe that contributes nothing to EBITDA and the financial markets or buyers certainly know this. When looking at its 4th Quarter, make sure you look at North America results and see its year over year improvements. Hopefully the European sale will come back on the radar screen as simply an exit with no cash gain. There was just one major investor that did not like QW retaining any equity upside in the spin off.

While I was shocked to see their cash burn in the last half of the year and the need to file, operationally the company is better today than it was in 2005. All the heavy lifting is done. Now they just need a good CEO to head up the World Color operation and get away from any association with Montreal.