Highlights second quarter:
- Total revenues stable at € 676 million
- Normalised operating income € 20 million (2009: - € 12 million)
- Normalised net income € 7 million (2009: - € 14 million)
- One-off items of € 103 million impacted net income
- Net income - € 96 million
Comments by Rokus van Iperen, Chairman of the Board of Executive Directors:
"Customers continued to be cost conscious amidst ongoing economic uncertainty, especially in North America and Europe. Nevertheless certain markets showed clear signs of recovery, particularly Asia as well as the graphic arts market.
Océ realized revenues of € 676 million, exactly the same amount as last year. We significantly increased our EBIT, excluding certain Canon related one-off items. This improvement reflected the better utilization of the supply centers as well as our action program related to approximately 2000 job reductions in 2009 and 2010.
As already anticipated in the first quarter earnings release, Océ absorbed substantial one-off items in the second quarter, following completion of the offer by Canon. These one-off items amounted to € 103 million on reported net income and €48 million on free cash flow.
The second quarter was marked by the successful completion of the transaction with Canon on 9 March 2010. In the second half of 2010, our compelling combination is expected to show the first commercial results via cross-selling of Canon products in Océ channels and vice versa."
Combination Canon and Océ
The priorities for 2010 regarding the combination Canon and Océ encompass the growth through cross-selling opportunities, the co-operation in technology and product development and the preparation of the next steps in integration.
In the second quarter Océ prepared the introduction of Canon hardware and software products. Océ is training sales and service forces on Canon products and is preparing marketing plans and distribution.
For the Wide Format business, a joint project has started to determine the cross sales opportunities in which both Canon and Océ can deliver a stronger portfolio of Wide Format products to their respective customers. Canon will also sell selected Océ high volume products in certain of their markets and channels.
As a first result of the product development cooperation Océ showed at the IPEX 2010 fair the Canon imagePRESS C7000 connected to Océ PRISMAprepare prepress software. Reactions on IPEX from customers, industry analysts and press on the new combination were very positive.
Océ Group results second quarter 2010
Following the completion of the offer by Canon, Océ anticipated substantial one-off items. The next paragraph contains a detailed explanation of these one-off items. This paragraph provides an overview excluding these one-off items.
- Total revenues in the second quarter amounted to € 676 million, in line with 2009. The organic decrease was 2% compared to the second quarter of 2009.
- Our share of color continues to grow and now accounts for 33% of revenues, up from 30% in the same period last year.
- Non-recurring revenues amounted to € 189 million, an increase of 2%. The organic decline was 1%.
- Recurring revenues amounted to € 487 million, a decrease of 1%. The organic decrease was 2%.
Our action program continued and was almost fully implemented. The increase of the normalized operating income was partly the result of the cost savings program. In the second quarter Océ realized a cost reduction of € 26 million, exclusive of inflation and restructuring cost. Year to date Océ also realized a headcount reduction of 460 FTEs compared to the fourth quarter of 2009 (first quarter 310 FTEs, second quarter: 150 FTEs).
Gross margin and operating income
In the second quarter of 2010 normalized gross margin, excluding normalization items, was 38.4% (2009: 35.4%). The increase was the result of several factors. Compared to the second quarter of 2009 the changes in currency exchange rates caused a positive hedge variance of € 3.1 million, leading to a gross margin increase of 0.4% point. The gross margin increase for DDS and WFPS in total amounted to 2.5% points. The increase was mainly due to the better utilization of the supply centers in Venlo and Poing and the aforementioned savings program.
Normalized operating expenses amounted to 35.4% (2009: 37.2%), thanks to the savings program. In constant currencies operating expenses declined by € 16 million. Compared to the second quarter of 2009, this includes a € 3 million release as a result of final settlement of share-based compensation. Net R&D capitalization amounted to € 11 million which is € 5 million lower compared to the second quarter of 2009 (€ 16 million).
On balance, normalized operating income amounted to € 20 million (2009: – € 12 million).
Operating income amounted to € 20 million (2009: – € 12 million).
Finance expenses and net income
Finance expenses (net) amounted to € 7 million (2009: € 7 million). As a result of the refinancing of Océ's debt by Canon, the finance expenses decreased compared to last year. In the second quarter this decrease was fully offset by foreign exchange effects.
On balance, net income was € 7 million (2009: – € 14 million).
Earnings per ordinary share for net income attributable to shareholders was € 0.07 (2009: – € 0.18).
Balance sheet and RoCE
The balance sheet total was € 2,336 million, compared to € 2,465 million at the end of the second quarter of 2009. Net Capital Employed was € 1,175 million, compared to € 1,218 million at the end of the second quarter of 2009. In relation to normalized operating income, RoCE amounted to 3.3% (2009: 3.5%).
The aforementioned balance sheet and Net Capital Employed amounts include the Canon related oneoff items.
Free cash flow
Free cash flow in the second quarter decreased to – € 12 million (2009: € 17 million), due to lower free cash flow from inventories and trade and other receivables, which was partly compensated by higher free cash flow from creditors.
The cash flow from investing activities was – € 22 million (2009: – € 27 million).
As already announced in the first quarter earnings release disclosed on 2 April 2010, Océ anticipated substantial one-off items in the second quarter as a consequence of the change of control following completion of the offer by Canon on 9 March 2010. The table above provides an overview of the one-off items in the second quarter income statement.
The gross margin includes a total of € 16 million one-off costs following Océ's decision to depreciate tooling and inventories due to changes in the product portfolio from certain OEM suppliers to Canon.
The one-offs 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 future harmonization of Océ IT systems with Canon. Additionally, Océ incurred advisory fees related to the Canon transaction.
Océ, through Canon Inc., has refinanced both the multicurrency revolving credit facilities and the United States Private Placements.
The total one-off finance expenses related to the refinancing amount to € 40 million. The refinancing by Canon does not include financial covenants or commitment fees and is at more favourable interest margins than the aforementioned facilities. The positive effect from the refinancing is not included in the abovementioned one-off items and will be visible in finance expenses from the third quarter onwards.
The income tax effect of in total € 20 million results from the abovementioned items and from changes in the valuation of tax assets and liabilities. For example, as a consequence of the change of control, some of the tax assets in Germany and the United States were (partially) forfeited due to local tax laws.
For the second quarter the total effect of one-off items on reported net income amounted to –€ 103 million resulting in a cash flow effect of in total –€ 48 million.
In the second quarter the cash flow effect from the one-off items related mainly to finance expenses as a result of the refinancing. These expenses were recorded in cash flow from operating activities such as changes in trade and other liabilities and interest paid.
SBUs results second quarter
This paragraph provides an overview of the development in the Strategic Business Units, excluding the Canon related one-off items described in the previous paragraph.
Digital Document Systems (DDS)
Revenues in DDS amounted to € 374 million. Organically, revenues declined by 3%. The share of color increased to 28% of revenues (2009: 25%) driven by Océ's production color continuous feed systems. Based on 2009 product placement data Océ led in this segment with a market share of 26% including inkjet and toner-based technologies, in the US and Western Europe. In the first half of 2010 Océ received a significant number of orders in this segment, also for its newest product, the Océ JetStream 1000. The Océ JetStream 1000 is perfectly suited for transaction, direct mail, TransPromo, digital book and manual printing and produces 1010 A4 duplex pages per minute.
Non-recurring revenues amounted to € 122 million. Organically, revenues declined by 4%.
Recurring revenues amounted to € 252 million. Organically, revenues declined by 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.
Normalized operating income amounted to € 3 million (2009: – € 18 million). EBIT improvement was realized thanks to cost savings and better utilization in the Venlo and Poing supply centers.
Wide Format Printing Systems (WFPS)
Compared to the second quarter of 2009 the WFPS revenues showed recovery. This was mainly driven by revenue development of Technical Document Systems in the United States and Asia. Although the non-recurring revenues showed recovery, the recurring revenues were still lagging behind due to decreasing volumes and price pressure.
Revenues in WFPS amounted to € 185 million. Organically, revenues were in line with the prior year. The share of color increased to 47% (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 Art 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 system.
Non-recurring revenues amounted to € 67 million. Organically, revenues increased by 7%
Recurring revenues amounted to € 118 million. Organically, recurring revenues declined by 3%.
Normalized operating income was € 12 million (2009: € 2 million) thanks to cost savings and better utilization of the Venlo supply center.
Océ Business Services (OBS)
Revenues in OBS amounted to € 117 million. Organically, revenues decreased by 2%. 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.
Normalized operating income amounted to € 5 million (2009: € 4 million). The improvement in operating income is the result of improving gross margin and tight operational expense management.
In 2010 customers are anticipated to remain cost conscious amidst ongoing economic uncertainty. Nevertheless, customers are expected to invest in systems and services that directly add value to their business. Therefore Océ will continue to introduce innovations for all market segments.
Canon and Océ will continue to work towards creating the best combination in the printing industry. The priorities for 2010 remain unchanged and encompass the growth through cross-selling opportunities, the co-operation in technology and product development and the preparation of the next steps in 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 anticipated substantial one-off items following completion of the offer by Canon. The largest part of these one-off items is included in this second quarter earnings release.