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Oce group reports decreased revenue thru Q2

Friday, July 30, 2010

Press release from the issuing company

In the first half of 2010 total revenues amounted to € 1,289.9 million (31 May 2009: € 1,333.7 million), a decrease of 3.3% compared to the first half of 2009. Excluding exchange rates effects, the decrease was 3.5%. The sale of printing systems (non?recurring revenues) decreased organically by 2.2%. Revenues from service, inks, toners, media, rental, interest and business services (recurring revenues) decreased organically by 4.0%. The share of color continues to grow and now accounts for 33% (31 May 2009: 30%)

Gross margin The relative gross margin was 36.9% (31 May 2009: 37.2%). The normalized gross margin was 38.2% (31 May 2009: 37.3%). The increase was the result of several factors. Compared to the first half year of 2009 the changes in currency exchange rates caused a positive hedge variance of € 3.1 million, leading to a gross margin increase of 0.3% point. The gross margin increase for DDS and WFPS in total amounted to 0.6% points. The increase was mainly due to the better utilization of the supply centers in Venlo and Poing and the savings program. The gross margin includes a total of € 16 million integration costs following Océ's decision to impair tooling and inventories due to changes in the product portfolio from certain OEM suppliers to Canon.

Operating expenses Operating expenses as a percentage of total revenues amounted to 38.1% (31 May 2009: 35.9%). Normalized operating expenses amounted to 36.0% (31 May 2009: 36.0%), due to the savings program. In constant currencies operating expenses declined by € 16 million. Net R&D capitalization amounted to € 20.1 million which is € 5.1 million lower compared to the first half year of 2009 (€ 25.2 million). The integration cost recorded under operating expenses amounted in total to € 27 million due to the fact that Océ impaired intangible assets related to supply contracts with certain OEM suppliers as well as to the expected harmonization of Océ IT systems with Canon. Additionally, Océ incurred advisory fees related to the Canon transaction. Operating income The operating income amounted to ? € 15.9 million (31 May 2009: € 17.1 million).

Operating income as percentage of total revenues amounted to ? 1.2% (31 May 2009: 1.3%). Normalized operating income as percentage of total revenues amounted to 2.1% (31 May 2009: 1.4%).

Finance expenses Finance expenses (net) amounted to € 58.2 million (31 May 2009: € 19.3 million). Océ, through Canon, has refinanced both the multicurrency revolving credit facilities and the United States Private Placements. The total finance expenses related to the repayment of borrowings and the unwind of interest rate swaps amount to € 40 million. The refinancing by Canon does not include financial covenants or commitment fees and is at more favorable interest margins than the aforementioned facilities. The positive effect from the refinancing is not included in the above mentioned integration cost and will be visible in finance expenses from the third quarter onwards.

Taxation In the first half of 2010 taxation amounted to ? € 26.9 million (31 May 2009: € 1.2 million). The income tax effect of in total € 20 million results from the abovementioned items, from changes in the valuation of tax assets and liabilities and from reassessments of tax risks. With respect to the valuation of tax assets, as a consequence of the change of control, tax assets in Germany and the United States were (partially) forfeited due to local tax laws.

Net income (loss) Net loss for the six months ended 31 May 2010 amounted to ? € 100.8 million (31 May 2009: € 1.0 million net income). Net loss per ordinary share attributable to holders of these shares amounted to ? € 1.21 (31 May 2009: ? € 0.01). For the first half year the total effect of integration cost on reported net income amounted to ? € 103 million.

Balance sheet

Intangible assets Due to the integration with Canon, Océ has impaired supply contracts with certain OEM suppliers, internally developed software and purchased software for a total amount of € 22.5 million.

Inventory and property, plant an equipment The gross margin includes a total of € 16 million integration cost following Océ's decision to impair tooling and inventories due to changes in the product portfolio from certain OEM suppliers to Canon.

Borrowings As a result from the integration with Canon, the US Private Placements have been redeemed and the drawings under the multicurrency revolving credit facility have been discontinued. Both have been replaced with loans of Canon. The early redemption of the US Private Placements caused a loss of € 20 million.

Derivative financial instruments Due to discontinuation of the drawings under the multicurrency revolving credit facility (see borrowings), Océ has unwound its interest rate swaps which were intended to hedge (cash flow hedge) the drawings under the multicurrency revolving credit facility. As the forecasted transactions of the hedge are no longer expected to occur, Océ has reclassified the loss accumulated in the hedge reserve of € 20 million to the income statement.

Cash flow
The cash flow before financing activities (free cash flow) amounted to ? € 124 million (31 May 2009: ? € 48 million), a decrease of € 76 million compared to the first half of 2009. The cash flow from operating activities amounted to ? € 78 million, a decrease of € 83 million compared to the first half of 2009 (€ 5 million). This decrease was largely due to integration cost and to lower cash flows from both inventories and accounts receivable. This was partly compensated by a higher cash flow from creditors. The cash flow from investing activities amounted to ? € 46 million (31 May 2009: ? € 53 million). The cash flow from financing activities amounted to € 112 million (31 May 2009: € 177 million). The decrease was largely due to the refinancing of both the multicurrency revolving credit facilities and the United States Private Placements by loans of Canon. The cash dividend distributed to holders of ordinary shares was nil (31 May 2009: nil). The cash dividend paid to holders of financing preference shares relating to the financial year 2009 was nil (31 May 2009: € 2.0 million).

SBUs results first half year 2010

Digital Document Systems (DDS)
Revenues in DDS decreased by 3.9% to € 718.3 million (31 May 2009: € 747.6 million). On an organic basis revenues decreased by 3.9%. The share of color in revenues increased to 28% (31 May 2009: 25%) driven by Océ's production color continuous feed systems. Non?recurring revenues amounted to € 227.4 million (31 May 2009: € 233.5 million), an organic decrease of 2.8%. Recurring revenues amounted to € 490.9 million (31 May 2009: € 514.1 million), an organic decrease of 4.3%. The market deterioration resulted in lower print volumes and subsequently lower revenues in Office and black & white continuous feed. DDS grew its revenues in production cutsheet and continuous feed color.

Wide Format Printing Systems (WFPS)
Revenues in WFPS amounted to € 343.4 million (31 May 2009: € 353.8 million), an organic decrease of 4.4%. The share of color in revenues increased to 47%. (31 May 2009: 45%). For example as result of the newly?introduced Océ ColorWave 300 and Océ CS2400 color systems for the Technical Documentation market. To further strengthen its color portfolio for the wide format Graphics Arts market, Océ launched in June the high?speed Océ Arizona 550 XT flatbed printer which has double the speed of the Océ Arizona 350 XT systems.

Non?recurring revenues amounted to € 122.0 million (31 May 2009: € 120.7 million). Organically, nonrecurring revenues decreased by 1.0%. Recurring revenues amounted to € 221.4 million (31 May 2009: € 233.1 million), an organic decrease of 6.2%.

Océ Business Services (OBS)
Revenues in OBS amounted to € 228.2 million (31 May 2009: € 232.3 million), an organic decrease of 1.1%. Revenue growth in Europe continued. The United States is facing a decline in the traditional Mail business, which could only partly be compensated through growth in new services.

Integration with Canon

Share deal
Canon and Océ announced on 16 November 2009 that they had reached conditional agreement to combine their printing activities through a fully self?funded, public cash offer.

On 28 January 2010, Canon and Océ jointly announced that Canon will make a fully self?funded public cash offer for all the issued and outstanding ordinary shares of Océ at an offer price of € 8.60 per share. Canon obtained control over Océ on 9 March 2010, owning 77,41% of the share capital.

Canon and Océ
Canon and Océ will work towards creating the best combination in the printing industry. The priorities for 2010 remain unchanged and encompass growth through cross selling opportunities, the co?operation in technology and product development and the preparation of the next step in the integration. In the second half of 2010 we expect the first commercial results via cross?selling of Canon products in Océ channels and vice versa.

Océ and Canon are currently assessing the adequacy of all change of control related items and are in the process of evaluating valuation principles. As a consequence, additional entries or changes in Océ's assets and liabilities may be processed.

Risk profile
The assessment concerns the identification of the principal risks, which were subdivided into five groups. The following three groups of risks related to the three strategic pillars:
1. Lack of sufficient distribution power.
2. No full line competitive products and services portfolio.
3. Failure to implement the Operational Excellence program successfully.

The two additional groups of principal risks were:
4. A (temporary) significant decline in the demand for products and/or services.
5. Risks relating to the cash flow or the availability of liquid funds or financing.

Risks in second half year of 2010
In our view, the nature and potential impact of the risks as mentioned in the 2009 Annual Report will not be materially different for the second half of 2010 for groups 1, 3 and 4.

In addition the following should be noted:
- For strategic pillar 2: The risk has decreased due to introduction of own new products as well as access to full Canon assortment.
- Regarding financial risks: Canon, being our parent company since March 2010, refinanced the external loans. As a Canon subsidiary, Océ is no longer restricted by external covenants as described on pages 98 and 99 in the 2009 Annual Report.

 

 

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