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Creo Reports Sales Increase of 10% in 2004

Press release from the issuing company

VANCOUVER, British Columbia--Nov. 17, 2004-- Creo Inc. today announced its financial results for the fiscal year and fourth quarter ended September 30, 2004, reported in U.S. dollars. Revenue in fiscal 2004 was $635.8 million, an increase of 10.0 percent from fiscal 2003, in line with company guidance. Earnings were $11.5 million for the year, up from $5.5 million in fiscal 2003. Earnings were 21 cents per diluted share for fiscal 2004, compared to 11 cents of earnings per diluted share in the previous year. Earnings in fiscal 2004 included approximately 14 cents per diluted share of restructuring and severance expense and accelerated depreciation related to cost reduction activities, a non-cash intangible asset amortization charge of approximately 5 cents per diluted share, and a one-time gain of approximately 16 cents per diluted share from the sale of an investment. Fourth quarter revenue was $167.1 million, an increase of 11.2 percent from the fourth quarter of 2003. The company reported a loss of $1.3 million for the quarter, a decrease of $3.7 million compared to earnings of $2.4 million in the fourth quarter of 2003. The loss per share was 2 cents per share in the fourth quarter of 2004, compared to earnings of 5 cents per diluted share in the fourth quarter of last year. The loss this quarter included previously announced items of approximately 4 cents per share of restructuring, 3 cents of severance expense and accelerated depreciation, and 1 cent of non-cash intangible asset amortization. Consumables revenue reached $24.3 million this quarter, an increase of 105.2 percent compared to the fourth quarter of last year and a 12.6 percent increase compared to the third quarter of 2004. For the year, consumables revenue grew by 62.3 percent to $76.8 million compared to fiscal 2003. "Creo's performance in fiscal 2004 establishes a strong foundation for growth in earnings and shareholder value," said Amos Michelson, chief executive officer of Creo. "We doubled earnings and demonstrated tremendous growth in our first year as a digital plate vendor, exceeding our goal to increase consumables revenue by 50 percent. We also achieved our goal of 10 percent total revenue growth. All economic segments showed revenue gains over the prior year - with the most significant improvements in Asia-Pacific and in our OEM business. However, the strength of the Canadian dollar and cost of entering the digital plate business, together with pricing pressure in the computer-to-plate (CTP) market-reduced gross margins in the latter half of the year. In light of these factors, we announced a broad-based cost-reduction program on October 6. We are now implementing this program which we expect to produce annualized savings of $24 million by the third quarter of 2005. These measures, together with the continuing operational improvement in our plate business, will help offset gross margin pressures and drive increased earnings through fiscal 2005." Mr. Michelson continued, "We are confident that the steps we are taking to streamline our operations and strengthen our competitive cost position will provide a strong platform to deliver another strong year of earnings and revenue growth. The successful execution of our digital media strategy will continue to be our primary focus in the year ahead. Existing and future Creo customers look to Creo for innovative solutions, including consumables. We have been ramping up plate production through the year, and we expect orders from our customers will exceed our existing plate capacity within our forecast horizon. In October we announced plans to double production capacity at our West Virginia plant by the end of calendar 2005. We have also negotiated the purchase of land in Germany to begin construction of a European plate facility that we expect to begin production in late 2006 and will ultimately provide an additional 20 million m2 (215 million ft2) of annual plate-production capacity. Other priorities for 2005 include a focused and continued attention to managing costs while balancing mid and short-term objectives, increasing sales efficiency of both direct and indirect channels, and positioning Creo to take advantage of the growth opportunities in digital printing." Gross margin in the fourth quarter of 2004 was 40.7 percent, compared to 44.1 percent in the fourth quarter of 2003. The cost of ramping up Creo's plate business to meet customer demand for digital plates, changes in product mix, and pricing pressures on CTP systems reduced gross margin in the second half of fiscal 2004. Gross margin in fiscal 2004 was 42.4 percent compared to 44.6 percent in fiscal 2003. Severance costs of $0.5 million were included in cost of sales in the fourth quarter of 2004 and $1.0 million were included in fiscal 2004. Total operating expenses were $69.6 million for the fourth quarter of 2004, including the previously announced expenses of $2.6 million for restructuring and $1.8 million for severances and accelerated depreciation. Total operating expenses in this quarter increased 10.5 percent compared to the fourth quarter of 2003 but were substantially unchanged excluding other expense, restructuring and severance costs, accelerated depreciation, intangible asset amortization and the impact of foreign currency. Total operating expenses in fiscal 2004 of $266.3 million, including the previously announced expenses of $4.3 million for restructuring and $3.9 million for severances and accelerated depreciation, increased by 7.5 percent compared to fiscal 2003. Before the impact of foreign currency, intangible asset amortization, severance and restructuring costs, accelerated depreciation, and financial and other income, total operating expenses in fiscal 2004 decreased approximately 3.2 percent compared to fiscal 2003. Cash flow from operations was $4.6 million, reflecting year-end inflows from certain accounts and trade payables and accruals related to the restructuring activities. Cash on hand at quarter end was $82.6 million compared to $59.0 million at the same quarter end last year. Weighted shares outstanding were 55,121,336 for the fourth quarter of 2004 and weighted shares outstanding (diluted) were 53,573,425 for fiscal 2004. Fiscal 2004 Highlights Creo entered the plate market in September 2003 and has grown to be the fourth largest digital plate vendor in the world in just one year. In fiscal 2004, the company acquired two plate-manufacturing facilities - one in South Africa and the other in West Virginia - for an aggregate acquisition cost of $26.7 million, net of working capital. Creo-branded plates are now in use in commercial, newspaper and packaging printing in nearly every region of the globe, with approximately eight percent of existing Creo customers - and approximately one-third of new customers - using Creo plates. Creo signed an agreement with Xerox Corporation to resell mid-range and entry-level production color digital presses in Canada and the United States in January 2004. Together with Xerox, the company also introduced the industry's first fully integrated production workflow for digital and commercial printing. Creo raised net proceeds of $48.4 million in an offering of 5 million Creo common shares in March 2004. Proceeds from this offering will support the capital expenditure requirements over the next two years for the capacity expansion in the West Virginia plate manufacturing plant and construction of a new plate-manufacturing facility in Germany. In May, Creo exhibited at Drupa 2004, the largest trade show in the graphic arts industry. Creo demonstrated a full range of complete prepress solutions for packaging, newspaper and commercial printers. Important new products launched at Drupa included Brisque 5.0 and Prinergy Evo as well as the Magnus(TM) VLF, the most productive very-large-format computer-to-plate device available today In July, Creo's Board established a Special Committee of independent directors charged with evaluating and assessing Creo's current business plan and considering a full range of strategic options with the objective of enhancing shareholder value. Creo's Board anticipates that the evaluation process will be completed during January 2005. At the Graph Expo trade show in Chicago, subsequent to the end of the fourth quarter, Creo demonstrated a formidable array of new workflow products, including Prinergy 3.0 and Synapse Director. Outlook Mark Dance, chief financial officer and chief operating officer of Creo, stated, "We expect to see another year of strong growth, and are expecting 10 percent growth of overall revenue in 2005 and a second year of 50 percent plus growth in consumables revenue. We achieved our revenue and earnings targets in the fourth quarter of 2004 and we expect stable revenues and earnings, before restructuring and intangible asset amortization, in the first quarter of 2005. We will begin to see the impact of the cost-reduction initiative announced on October 6 reflected in increased gross margins and reduced operating expenses in the fiscal second quarter, with the full impact of the $24 million of annualized savings apparent in the third quarter. We are committed to achieving our target of eight percent earnings before tax in the fourth quarter of 2005." The company provided the following outlook for the fiscal first quarter ending December 31, 2004: Revenue between $165 million and $170 million; Earnings per diluted share between 0 and 4 cents per share, after approximately 2 cents per diluted share in restructuring costs to be paid in the first quarter of 2005 to complete the North American consolidation program and 1 cent per diluted share of intangible asset amortization. The guidance is based on foreign exchange rates on November 8, 2004 and weighted shares outstanding (diluted) of approximately 56,000,000.