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Oce profit falls 70%, plans 600 further job cuts

Monday, July 07, 2008

Press release from the issuing company

July 4, 2008 -- Comments by Rokus van Iperen, chairman of the Board of Executive Directors:

‘The adverse economic conditions again impacted our markets in the second quarter and therefore affected our results. Sales of continuous feed systems decreased, due in part to developments in the financial sector. The slowdown in the construction sector in the United States is continuing and is now also making itself felt more in Europe. In this segment we sold fewer wide format printers than in the same period of last year.

A positive factor is that we were able in the second quarter to continue to grow in the office and printroom market, the wide format graphics market and in Business Services. This growth results from our strategy of continuously investing in strengthening our distribution power and in an innovative and competitive product portfolio.

The improvement of our business processes and the resultant reduction in our costs is the third main thrust of our strategy. The savings program announced in April will reduce the costs in 2008 by Euro 80 million. In the first half of 2008 savings of Euro 20 million were achieved. Of the reduction of 350 jobs that was announced in April, 80% has meanwhile been completed.

In response to the economic situation and elaborating on the program of 2008, we have identified in the past period further possibilities for cost savings, which will lead to an additional decrease in costs of Euro 50 million in 2009. As part of these savings about 600 extra jobs will be discontinued. We have started on the implementation of this.’

Summary of second quarter 2008

Adverse economic conditions and foreign exchange rate effects again impacted our markets in the second quarter and therefore affected our results.
Océ’s revenues decreased organically in the second quarter by 2.3% [excluding fax by –1.7%]. This decrease was mainly caused by a decline in non-recurring revenues, whilst recurring revenues, excluding fax, remained virtually the same on an organic basis.

Customers of the Strategic Business Unit [SBU] DDS postponed bigger investments in continuous feed systems, due in part to developments in the financial sector. In the office market and the printroom market DDS grew thanks to the success of the Océ VarioPrint 6000 series, the color printers of Konica Minolta and the strengthening of our sales organization in Europe. Also in the present economic situation the SBU OBS again achieved an organic increase in revenues. The slowdown in the construction sector continued, with the result that the SBU WFPS sold fewer printers in this market. In the graphics market WFPS increased its revenues thanks to sales of the Océ Arizona 250 GT via its own organization and via Fujifilm.

The normalized operating income amounted to Euro 20.2 million. The decrease as compared to 2007 is principally attributable to lower revenues and exchange rate effects. Océ is implementing a savings program of Euro 80 million, of which Euro 20 million has meanwhile been realized in the first half of 2008. Savings of Euro 60 million will be achieved in the second half of this year. In response to the economic situation and following a careful analysis, a supplementary savings program has been drawn up of Euro 50 million in 2009, involving the discontinuation of 600 jobs. The expected one-off total restructuring costs will amount to Euro 45 million in 2008 and Euro 20 million in 2009.

Results Océ Group

The very strong euro, which rose in the second quarter against the US dollar [15%] and the Pound sterling [15%], had a substantial impact on results.

Total revenues in the second quarter amounted to Euro 704.7 million. On an organic basis the decrease was 2.3% [including exchange rate effects –9.3%]. The share of color continues to grow and now accounts for 25% of revenues [2007: 18%]. We achieved this growth through our strong color product portfolio consisting of our own and partner products.

Non-recurring revenues decreased organically by 5.3% [including exchange rate effects by –11.5%].

Recurring revenues, excluding fax, remained virtually the same on an organic basis [–0.1%; including fax –0.9%]. If the fax activities and exchange rate effects are included, recurring revenues decreased by 8.4%.

Océ increased gross margin, excluding one-off items, to 40.2% [2007: 39.7%1]]. Including one-off items, gross margin amounted to 39.1%.

Operating expenses amounted to Euro 266.0 million [2007: Euro 280.0 million]. After adjustment for exchange rate effects, operating expenses remained practically unchanged, despite the one-off items and the expansion of the European direct sales organization for the office segment.

On balance, normalized operating income decreased to Euro 20.2 million [2007: Euro 29.6 million]. Of this decrease Euro 5 million was caused by exchange rate effects, after hedges. Including one-off items, operating income amounted to Euro 9.2 million. Of the one-off items, the greater part [Euro 12.0 million] was incurred to implement the savings program of Euro 80 million in 2008.

Balance sheet, RoCE and cash flow

By comparison with the second quarter of 2007 the balance sheet total decreased at the end of the second quarter 2008 to Euro 2,414 million [2007 second quarter: Euro 2,611 million] reflecting the reduction in accounts receivable, the sale of fixed assets and exchange rate effects.

The net debt/EBITDA ratio amounted to 1.9 [2007: 2.2], which means that it is slightly lower than the sought-after bandwidth of 2 to 2.5. Net Capital Employed at the end of the second quarter was Euro 1,244 million [2007 second quarter: Euro 1,394 million]. In relation to normalized operating income the RoCE amounted to 6.8% [2007: 6.6%].

Free cash flow in the second quarter was Euro 3 million [2007: Euro 12 million].
Cash flow from operating activities was Euro 35 million [2007: Euro 38 million].

1] In 2008 and in the comparative figures for 2007 the transportation costs from distribution center to customer are fully included in the gross margin.

Results of SBUs

Digital Document Systems [DDS]
Revenues in DDS amounted to Euro 389.5 million. Organically, revenues decreased by 4.8%. The share of color increased to 22% of revenues [2007: 15%].

Non-recurring revenues decreased organically by 9.2%. In the office segment we accelerated the growth in revenues. This acceleration was achieved through an expansion in the number of sales staff in Europe and through the availability of the full product portfolio of Konica Minolta. Sales were also higher in the printroom segment, notably for the Océ VarioPrint 6000 series and the color printers of Konica Minolta.
Sales of continuous feed systems decreased, partly because of developments in the financial sector, which we had already reported in the first quarter. Our market position remains strong and DDS booked several important and substantial orders. Direct Group, a leader in direct marketing in the United States, bought 47 printers in the second quarter, including the recently introduced Océ VarioStream 8750 and the Océ JetStream 2200 in addition to the Océ VarioPrint 6250. Some of these machines were delivered in the second quarter. In addition Océ in the United Kingdom sold GBP 3.8 million worth of black-and-white and color continuous feed printers to T-Systems, a subsidiary of Deutsche Telekom. These printers form the core of two new print centers which together have a printing capacity of 500 million A-4 sheets per year. These systems will be delivered in the third and fourth quarter.

In the second quarter recurring revenues, excluding fax and the effect of the sale of ODT in January 2008, were in line with those of last year on an organic basis [including fax and ODT –2.3%]. The share in recurring revenues of the color printers and the Océ VarioPrint 6000 series increased again.

Normalized operating income amounted to Euro 0.4 million [2007: Euro 0.3 million]. Including one-off costs the result amounted to –Euro 5.6 million.

Océ Business Services [OBS]

Revenues in OBS amounted to Euro 104.2 million. Organic growth was 5.4%. OBS continues to grow in view of the fact that, despite more difficult economic conditions, customers are still outsourcing their document activities.
In the United Kingdom OBS is taking over printing and distribution activities for the Cambridge Assessment Group, one of the world’s leading examination institutes. This assignment has a duration of 5 years, represents a total value of GBP 40 million and will start to contribute to revenues later this year.

Operating income amounted to Euro 2.5 million [2007: Euro 4.4 million]. The decrease is among others due to higher costs involved in the start-up of major projects with new customers.

Wide Format Printing Systems [WFPS]

Revenues in WFPS amounted to Euro 211.0 million. On an organic basis the decrease was 1.0%. The share of color increased to 32% of revenues [2007: 27%].
The slowdown in the construction sector in the United States is continuing and is now becoming more visible in Europe. As a result WFPS sold fewer wide format printers in this segment than in the previous year. In the wide format graphics market WFPS expanded revenues thanks to the strong product portfolio and the Océ Arizona 250 GT in particular. On balance, non-recurring revenues increased organically by 2.8%.

Recurring revenues decreased by 2.9%. That resulted chiefly from lower print volumes in the design engineering market and fewer Imaging Supplies deliveries. Against this, however, there was an increase in recurring revenues from the Océ Arizona 250 GT population.

Normalized operating income was Euro 17.2 million [2007: Euro24.9 million] as a result of higher R&D expenditure and extra costs for the start-up of the Océ ColorWave 600. Including one-off items the result was Euro 12.3 million [2007: Euro 24.7 million].

Strategy

Océ’s strategy is focused on three main thrusts: boosting distribution power, offering competitive products and improving business processes.
One of the strategic markets is the graphics sector. At the end of May/early June the four-yearly drupa was held, the trade fair for the graphics market. This is by far the biggest trade fair in this industry in the world. The drupa fair brought confirmation that customers and suppliers share the same vision as regards a more far-reaching digitization of the graphics market. The greater proportion of the print volume world-wide is currently handled by conventional analog printing presses. Only 12% of the volume is printed using digital techniques. Digital printing techniques have strongly improved in recent years, resulting in better print quality and lower costs. They also offer major benefits such as the opportunity for personalization and print-on-demand. This is why an increasing volume is not being produced on analog machines but digitally. In terms of distribution power and product portfolio, DDS and WFPS are well positioned to help customers make the transition to digital printing. If customers make investments despite the current adverse economy, then their investments are in digital technology, which is focused on the future.

Digital Document Systems

DDS has an excellent sales and service organization that is specialized in providing support for high volume printers. Besides this, DDS has a strong product portfolio which also includes the color printers of our strategic partner Konica Minolta and the Océ VarioPrint 4000 and 6000 series. Other machines on display at drupa were the Océ JetStream 750, 1500 and 3000. These printing systems enable full color printing at speeds of 714 to 2,865 ppm, the highest speed currently available in the market. At the drupa trade fair this product series attracted a great deal of attention, as did the Océ ColorStream 10000.

Wide Format Printing Systems

WFPS has the most extensive direct distribution power in wide format in the digital printing industry. This distribution strength has been further enhanced in the graphics market following the acquisition of the French company Intersoft, a distributor of printers, scanners and print media that focuses on promotional material in retail chains. In addition, Intersoft develops and sells specialized workflow software that enables promotional campaigns to be implemented faster and at a local level.

WFPS has a very strong product portfolio for the wide format graphics market. At the drupa trade fair WFPS announced that its product portfolio would be further strengthened by adding the Océ Arizona 200 GT and Roll Media options. The Océ Arizona 200 GT is eminently suitable for customers with lower print volumes who still want the same quality as the successful Océ Arizona 250 GT.

Océ has also launched the innovative Océ CrystalPoint color technology, a fundamentally new and environmentally friendly technology that combines the benefits of toner and inkjet. The first product to incorporate Océ CrystalPoint technology, the Océ ColorWave 600, is a wide format color system that is twice as fast as competitive systems. It was greeted with great enthusiasm by our customers. The required time to ramp up production means that the impact of the Océ ColorWave 600 on revenues will become visible only at the end of 2008.

Improvement of business processes

As its third strategic thrust Océ is improving its business processes, which enables it to reduce its cost base. The savings program that was announced in April this year will bring down costs by Euro 80 million in 2008. These savings are being realized via three types of initiatives: corporate excellence projects, a reduction in out of pocket expenses and a cutback in the number of jobs. Of the announced reduction of 350 jobs, 80% has already been realized. In response to the economic situation and elaborating on the program of 2008, further costs savings have been identified. Océ will reduce costs additionally by Euro 50 million in 2009. This will lead to the loss of around 600 jobs. We will implement this reduction in a careful and structured manner and it will be focused on all countries and disciplines, with the exception of sales. All savings referred to above are exclusive of volume effects, inflation and restructuring charges. The expected one-off total restructuring costs will amount to Euro 45 million in 2008 and Euro 20 million in 2009.

Outlook 2008

The Océ strategy, based on strengthening distribution power, a full-line and competitive product portfolio and optimizing the business processes are continued unabated. We are of the opinion that this strategy and the additional measures we are taken to reduce costs will enable us to counter the impact of the adverse economic conditions as much as possible. In view of the uncertain economic situation we are not giving any forecast for the results for the full 2008 financial year.

 

 

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Wide Format Editor

Richard Romano

Richard Romano, Section Editor/Senior Analyst
Richard has written about communication, graphics hardware and software trends for the past 15 years.

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