Oce Reports Q2 and Six Months Results, Sales Down 15.7%

Wednesday, July 09, 2003

VENLO, Netherlands, July 8 -- Oce N.V. today reported unaudited results for the second quarter and six months ended May 31, 2003. The figures stated in this report are unaudited. This report has been prepared on the basis of Dutch GAAP; as compared to the Annual Financial Statements for 2002 changes have taken place in the accounting principles (see the text in the overview "Changes in shareholders' equity" on page 6). Results second quarter 2003 The higher relative margin and the cost reductions were insufficient to compensate for the decline in revenues, with the result that second quarter net income decreased by 32.1% to US$ 22.3 million or US$ 0.25 per share based on 83,393,583 shares, being the weighted average number of ordinary shares outstanding, compared to US$ 32.8 million or US$ 0.38 per share based on 84,111,878 shares, being the weighted average number of ordinary shares outstanding at the end of the first half of fiscal 2002. In the second quarter revenues declined by 16.2% to US$ 814.3 million. The autonomous decline in revenues amounted to 7.1%, slightly less compared to the first quarter. Both in the DDS Strategic Business Unit and in WFPS the revenues decline was mainly attributable to the fact that sales results lagged behind. The gross margin increased to 42.0% (2002: 41.3%). Operating expenses decreased by 9.8%; on an autonomous basis the decrease was 2.2%. Interest charges and tax charges were substantially lower. Results first six months 2003 Revenues amounted to US$ 1,611 million, which was 15.7% lower than in the previous year. The autonomous decrease in revenues amounted to 7.4%. The strength of the euro had an additional negative impact on revenues. Revenues also declined (by - 2.5%) as a consequence of the strategic choice to withdraw from activities in the low volume segment in most countries. However, the principal cause of the lower revenues is still the reluctance of customers to invest in new systems. Sales of printing systems (hardware, software and professional services) decreased by 18.9%. The gross margin increased by 0.4% to 41.5%. This increase was the net result of a positive foreign currency hedging result of 1.1% and a negative volume/mix effect of - 0.7%. The decrease in the margin due to volume/mix effects was caused by the increasing significance of Facility Services, lower lease revenues and under-utilisation of manufacturing capacity. Operating expenses showed a decrease of 11.3%, of which 4.3% was autonomous. Attention continues to be strongly focused on reducing costs. The reduction in jobs as well as lower depreciation due to the withdrawal from the low volume segment are helping to bring costs down further. The cutback in job numbers has been increased from 1,100 to 1,350. Of this increased target, 85% has meanwhile been achieved. As a result of this extra reduction the planned total savings will be US$ 17.6 million higher in 2004. Of the reduction in the unprofitable low volume machines 64% has been realised. The new market approach, which stems from the restructuring operation and has a tighter focus on serving specific customer segments, has now been operating in practice for six months. The new concept has received broad-based support and the sales organisations are fully confident that the extra efforts to realign the organisation will bear fruit. Operating income before depreciation and amortisation (EBITDA) amounted to US$ 193.3 million (- 21.5%). Operating income (EBIT) decreased by 32.1% to US$ 89.2 million. Financial expense (net) decreased by 45.5% compared to 2002 and reached a level of US$ 19.5 million. This decrease is attributable to the further reduction in the volume of loans and the lower interest rates. The tax charge decreased to 30.3%. This is mainly due to the fact that the income achieved in the United States represents a smaller proportion of the tax burden, partly as a result of the relatively weak dollar. On balance, the decrease in costs was not enough to offset the effect of the decline in revenues. Net income for the six months amounted to US$ 47.2 million or US$ 0.54 per share based on 83,418,583 shares, being the weighted average number of ordinary shares outstanding, compared to US$ 63.2 million or US$ 0.73 per share based on 84,111,774 shares, being the weighted average number of ordinary shares outstanding at the end of the first six months of fiscal 2002. As part of the outsourcing of the lease activities much time and attention is being devoted to the adaptation of the administrative systems. This is necessary because in the business model that is applied by Oce the machines that are installed on the customer's premises are closely monitored. The lease portfolio cannot be fully transferred until the systems of Oce and those of the leasing partner have been fully attuned to each other. The aim is still to ensure that the lease portfolio will have been transferred almost in full before end-2004. The other preparations for the transfer, such as the due diligence and the assessment of the creditworthiness of new contracts, are proceeding according to plan. With retroactive effect as from the start of the financial year pension liabilities will be reported in line with the IFRS accounting method. This method leads to more transparent reporting and also reduces the volatility of the result because of pension costs. The IFRS method of accounting for pension liabilities is based on the "projected benefit" principle, which takes future salary increases into account as well as various other factors. This leads to a difference from the pension liabilities that were calculated using the method that Oce previously applied. To cover the difference a provision of US$ 302 million before tax has been included on the balance sheet and charged to shareholders' equity. The new calculation method will, in the event of a situation that is comparable with 2002, give rise to a higher regular annual pension charge. In the first six months this increase in the pensions provision amounted to US$ 5 million. The change in the accounting method will have no influence on cash flow. Apart from the change in the accounting method a payment of US$ 29 to US$ 35 million gross will be made to bring the financing percentage of the Dutch pension fund up to the required level. This payment will not affect the profit & loss account but will be charged to the pension provision. Results by Strategic Business Unit In Digital Document Systems (DDS) revenues amounted to US$ 1,112 million. Revenues decreased by 15.2%, of which 7.2% autonomous. The decrease in machine sales and in revenues from software and professional services (non-recurring) amounted to 28%. Autonomous revenues from service, consumables and interest lease income (recurring) were 2% lower. This decrease is the result of the downward trend in machine sales over the past two years. Facility Services booked an autonomous increase of 2.1% in revenues. The operating income of DDS amounted to US$ 58.4 million (2002: US$ 75.3 million). The new products have been well received by the market, customer trials have been successfully completed and the products are now fully available in the market In Wide Format Printing Systems (WFPS) revenues amounted to US$ 498.9 million. This represented a decrease of 17.0% on 2002. On an autonomous basis the decrease amounted to 7.9%. Sales from printing systems (hardware, software and professional services) decreased by 22% (on an autonomous basis by 13%). The (recurring) revenues related to machine sales decreased on an autonomous basis by 6%. Operating income in WFPS amounted to US$ 30.8 million (2002: US$ 56.0 million). The Oce TCS400, the color printer for the TDS market, was very well received by the market. Balance sheet The balance sheet total decreased by US$ 402 million as compared to the end of May 2002. The balance sheet was extended as a result of the latent tax claim that has arisen because pension liabilities are now provided for in line with the IFRS method. The decrease in the balance sheet total was largely caused by a decrease in long term financial lease receivables (- US$ 120 million), in trade debtors (- US$ 221 million) and in rental machines (- US$ 73 million). Inventories showed a slight decline. This was the result of foreign exchange effects. As a percentage of revenues, inventories were higher because of the introduction of new products. As a consequence of the calculation of the pensions liabilities on the basis of the IFRS method and due to exchange rate effects, group equity decreased by US$ 275 million to US$ 875 million, which represents 27.9% of the balance sheet total. Free cash flow amounted to US$ 52.2 million. Prospects Economic circumstances are not showing any improvement and the investment climate remains poor. In addition, the weak dollar will impact on revenues and income for the remainder of the year. In the second half of the year costs will be reduced further. In the light of the uncertain economic situation it is not possible to make a pronouncement about the results for full fiscal 2003.