Canon Inc (CAJ) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for holding and welcome to the Oce conference call. At this moment all participants are in listen-only mode. Later we will conduct a question and answer session. I would like to hand over the conference to Mr van Iperen. Go ahead please sir.

Thank you. Good morning ladies and gentlemen. Welcome to this conference call, also on behalf of Jan van den Belt and Pierre Vincent who are present at this meeting as well. This conference call can be followed by audio liven stream. Today we will talk about the financial result of the third quarter which was disappointing, and particular in revenues, which had its impact on profit as well. We will discuss with you the reasons behind this development, especially in DDS, and update you on the actions in order to improve the situation. The development of Oce can as you know not be judged on one single quarter only. The results of the strategic actions have to be measured over a longer period of time. In that respect, the year to date results and the outlook for Q4 are important indicators.

In the second quarter report, we indicated that the revenues would continue to grow in the second half of the year, driven by all parts of the group. WFPS, Oce Imagistics including business synergies, and the other parts of DDS. Well, WFPS and Imagistics delivered according to plan. The other part of DDS, however, declined, with approximately 4% or roughly EUR17m. We mentioned in our press release of last week two reasons for the decline, namely shortage of components and price pressure.

The shortage of components was caused by new European legislation on the usage of components in electronic units, such as printer circuit boards. Although the market was aware of this legislation well ahead of its introduction, global availability of new parts became a problem in the months after July 1st. Despite fixed delivery commitments, our suppliers were not able to deliver all the parts in time. In some cases only one or two parts were missing, with the consequence that the machines could not be delivered. As the situation has in the meantime strongly improved, we expect that we will deliver most of the backlog during the fourth quarter. This incident shows the increased complexibility of global supply chain management. Mr. [Ontonsgaard] who recently joined Oce, has taken the lead on a dedicated project to improve our supply chain management, in order to reduce delivery times and logistic costs further.

We mentioned price pressure as the other reason for the slow-down of revenue growth in DDS. Therefore, I would also like to make some remarks about the market. Oce's strategy is aiming at growing the number of machines in its field, to generate more recurring revenues. We are pursuing that by passing on the cost price reductions of our manufacturing outsourcing efforts to the customer. This gives us the opportunity to compete in large tenders with extra strength. The competition for these big tenders is fierce, but we are convinced that this strategy is the best way to drive the recurring revenues in the longer run to a higher level.

Tendering is becoming more and more important. In order to be more successful we have further adapted our pricing policies. On the other hand, timing of these tenders is hard to predict, as well in awarding of contracts as also in actual deliveries of machines. And this leads to a more erratic revenues picture whereby a few large orders can positively or negatively influence the results of one quarter. Hence my observation on the need to look at our results over a number of quarters, rather than one quarter on its own. At this point in time we have a healthy order book on DDS, which will positively impact the DDS revenues in the fourth quarter.

Oce is fully aware of the fact that this somewhat unpredictable development of revenues is causing difficulties in evaluating the long-term development and value of our company. We are striving for further improvements of our revenue forecasting, but we will not be able to increase the visibility in such a way that surprises, positive or negative, can completely be avoided.

Now let's go over to the next topics of the agenda of this meeting. First I will guide you through the developments per basis unit, after that the overall results for the Group, and I will wrap up with some conclusions and the outlook.

Let's start with the developments in DDS. As already said, revenues in DDS were disappointing, totaling EUR527m. Last year they were EUR443m, so we are talking about an increase of 19%. In this increase, Imagistics contributed with about 25%. The revenues of DDS, excluding Imagistics and exchange rate effects, showed a decline of some 4%. Non-recurring revenues were 15.1% higher than last year, including a currency effect of minus 1.1%. Imagistics contributed approximately 29%, whereas the rest of DDS declined organically with some 12.5%. The recurring revenues were up 20.7%, and recurring revenues to positive contribution of Imagistics was some 23.5% on a constant currency basis. And excluding Imagistics, the recurring revenues were down around 1%. The swing, as already mentioned in my introduction, was caused by market factors and delays in deliveries. The operating profit in DDS was minus EUR4.3m against minus EUR4.7m last year.

It is reassuring to see that Imagistics is performing according to expectations, and thereby playing a positive role in DDS. This investment in distribution power is paying off. The integration is ahead of plan, and has virtually been completed. The predicted cost synergies for 2006 will be met, as synergies from cross-selling successes are being realized daily. A good number of contracts have been closed, in which the combined strength of Oce and Imagistics was decisive. The business synergies of the combination contributed year to date EUR3m to the group EBIT, and EUR8m of cost synergies have been realized. The planned synergies for the full year, business synergies 5m and cost synergies 10m, will therefore be met.

In order to realize all synergies forseen, it is necessary to harmonize business processes and IT systems between Imagistics and the rest of Oce. It has been decided that as far as information management is concerned, Oce Imagistics will be integrated in a worldwide Oce common system based on SAP technology, and this integration will take place in 2008/2009.

Last remarks on the expectations for DDS concerns one of the three pillars of Oce's strategy, namely competitive product portfolio. As already said, we are starting the last quarter with a healthy order book. New product introductions like the Oce Varioprint 6250 will strengthen Oce's competitive position. The 6250 has been very well received by industry analysts and the market in general. In the fourth quarter, deliveries to the U.S. and some European countries will start up. The impact on results will be fully realized from 2007 onwards.

I would now like to move to the developments in WFPS. Wide Format Printing has been able to continue the strong performance in the third quarter. Revenues in the quarter grew by 3%. In constant exchange rates this was 4.9%. Both non-recurring and recurring revenues increased in all business groups. Non-recurring revenues were up 5.3%, which on an autonomous basis was 7.2%. The recurring revenues increased with 1.9%, on an autonomous basis it was 3.9%. The shortage of components has also led to a delay in deliveries in part of the WFPS portfolio. I am glad to say that also here the shortages have been resolved, and that the delays in deliveries to the customers will for the biggest part disappear in the fourth quarter. The operating profit for WFPS was EUR21m, against EUR18m last year.

Wide Format is performing very well. Machine sales are up in color as well as in black and white. We see this both in the technical and in the graphical markets. New products like the Oce TCS300 for the technical documentation market, as well as the Oce Arizona 250 for the graphical market, will accelerate the growth in color and underline our commitment to offering the best product portfolio to our customers.

On Oce total Group level, the third quarter revenues grew with 14%, meaning an organic growth of 15.8%, revenues amounted to EUR740m. Non-recurring revenues grew with 11.6% or 13% corrected for foreign exchange effects. Recurring revenues rose 14.9% or 16.8% in constant currency. The gross margin was 41.7%, being the same level as last year. Excluding Imagistics, the gross margin was down 1.1%. This decline is caused by more aggressive price setting in the sale of printing systems and also due to volume mix effects.

In the preceding part of this presentation, I already touched upon two pillars of Oce's long-term strategy, being a competitive product portfolio and investment in distribution. The third pillar is operational excellence. The restructuring measures taken in the U.S. and Europe are starting to get visible in operating expenses. OpEx, excluding Imagistics, declined 1.1% compared to last year. This reduction was for an important part achieved because of the restructuring in Europe and the United States, as well as the integration of Oce Imagistics.

In the third quarter, the EBITDA was EUR66.7m and the EBITA was EUR25.9m. The operating profit came to a total of EUR16.7m. Last year's EBIT was EUR13.2m, however to come to a comparable figure a few adjustments have to be made. As again said, as already said, EBIT of Q3 2006 was 16.7m. The adjustments for restructuring and integration costs is a plus of 0.8m. The cost of share-based payments 1.2m, and the difference in this income, 1.7m. So, if you add those effects together, we get a comparable figure for operating profits of EUR20.4m in the third quarter of 2006.

The financing costs for the third quarter were EUR14m, included in this amount is the change in the mark-to-market value of the interest rate derivatives. In the second quarter this value showed an increase of 4.6m. In the third quarter the market value of these derivatives declined under the influence of the lower long-term U.S. dollar interest rate. And this reduction in value of derivatives of EUR2m is included in the financing costs for the third quarter, bringing this to EUR14m.

Taxes contributed EUR3.4m to the results, this positive contribution resulted for the larger part from activation of fiscal losses. The net profit in the third quarter was EUR6.4m, a decline of 25% compared to the third quarter of 2005. The free cash flow in the quarter amounted to EUR22m. Year to date the free cash flow was minus EUR9m. For the whole year a positive free cash flow is forecasted.

Interim dividends. We are committed to a stable and predictable dividend policy. The interim dividend for book year 2006 will be EUR0.15. The ex-dividend date will be October 4th, and a dividend will be payable on October 28th of this year.

Ladies and gentlemen I would like to round off my introduction with some conclusions and the outlook for the remainder of the year.

The results of Oce in the third quarter were disappointing, especially DDS, excluding Imagistics, didn't meet our expectations. WFPS continued its strong performance, and also Oce Imagistics did well, both in terms of business development as in the integration. We expect that the revenues of DDS will benefit in the fourth quarter based on the good product portfolio and the fact that we have solved delivery issues. The revenues of Oce Imagistics and WFPS are also expected to be good in Q4. The operating profit for the full year is expected to be around EUR90m.

When we take at -- and when we take a look at the developments of Oce in the longer time frame, we are confident that we are heading into the right direction, despite possible deviations in individual products. We have the right products, our distribution power in the U.S. has strongly improved, and the first results of our operational expense program are becoming visible.

Ladies and gentlemen, so far my introduction. May I invite you now for your questions.

Ladies and gentlemen, we will start the question and answer session now. [OPERATOR INSTRUCTIONS]. There's a question from [Wim Chaeler] of ABN AMRO, go ahead sir.

Yes, good morning, this is Wim Chaeler of ABN. Actually I've got a couple of questions. First of all on the price pressure. Can you give an indication or a rough number, how much the 12.5% decline in the DDS segment is related to price pressure and how much to volume effects, and also whether it is sustainable, and what are you going to do about it to improve this going forward?

That's the question?

That's the first one

Okay. When we take the decline in DDS's revenues. 4m was caused by the deliveries.

The second question, is this price pressure going to stay in the market, well there has always been a price pressure between 3 and 5% over the years. At this point in time, the price pressure was certainly in the third quarter somewhat higher. So you can expect that we expected the price pressure will continue in the market also in the future, sometimes somewhat higher, sometimes somewhat lower.

What are we doing about it? I think that the main element in our strategy today is reducing the cost prices of our machines by moving the manufacturing to the local cost mid-Europe and Far East. After the 50% had been realized at the end of 2006, we will continue to move more manufacturing in the years 2007 and 2008. In addition to that of course innovation, meaning offering new functionality, more productive machines, higher reliability, i.e. other measures of countering the continuous price pressure in our market.

Okay, if I take into account the progress you already made in shifting production to Asia, I estimate you have to realize approximately 40m in cost savings already from the production you already shifted. And that should yield about 7% as a relief to your prices, which basically means that you can lower your prices by around 7% already. And still your gross margin on a Group level is going down with 110 basis points. Can I assume that the price pressure was even in excess of 10%?

No, that's not what you can assume. It's between 5 and 9% for this quarter. The other reasons for the margin pressure are in the volume and the mix, less machines, more Outsourcing Services, more Imaging Supplies.

Sorry, you said less machines?

Yes. And more Services and more Imaging Supplies in the mix.

Yes.

The mix of the revenues.

Okay, supplies. Okay, and then maybe a question -– if I take all the, let's say, one-off elements into account, you have of course the EUR75m EBIT, excluding one-offs you reported last year.

Yes.

Then looking at Imagistics, and what they reported before you acquired the company, it should maybe do some EUR36m in EBIT for the full year. We can add some EUR15m in synergies, some additional EUR25m in cost savings, and then we should deduct EUR15m in additional amortization and EUR15m in increased R&D costs. That still, let's say, gives me a ballpoint figure of about EUR120m that you should have reported for the full year, whereas you're guiding for, let's say -– yes, EUR90m. So I'm missing about EUR30m somewhere, maybe partly related to lower leases, lower lease income. But still, I'm missing about EUR20, EUR25m at least for the full year in terms of EBIT. So where is that going?

Well let me start on this one. It's Jan van den Belt.

Yes.

The –- your sums went just across me, but I understand what you're saying. The one thing that you're forgetting, on the one hand, you do get in fact, and we're realizing in fact that the synergies, cost synergies. We are realizing the benefits of the reorganization and restructuring, and we're seeing that. On the other hand, and that's a point that I would really like to make once more -– once again, we've got in fact a salary bill in Oce of EUR1.2b. If you get 2 to 3% wage rise, which we do get in fact across the board, that is between EUR25 and EUR35m cost increases without doing anything.

So the measures that we take you do see back in fact if you look at our operating expenses over time. You see that our operating expense is correcting for Oce, which is you will actually see them going down. And that's the result of, on the one hand, increases in, for instance, the wage bill, which you see. On the other hand, you see the efficiency increases and the effects of the restructuring and reorganizations and the synergies. And a net effect of that is a reduction in fact in your operating expenses, and a reduction in fact in your cost of goods sold.

What was the total wage bill for the full Company?

EUR1.2b.

EUR1.2b. Yes, okay. I've already had some numerous discussions of course with Mr. Vincent and it was a very well painted picture of how the increase in the recurring revenues, that's where the operating leverage within Oce is coming from. Year-to-date, you had 1% increase in the recurring revenues, but still, let's say, the underlying increase in the operating expenses of the wages is, let's say, not fully offset by the increase in recurring revenues alone. Is that correct also?

Well the point –- once again you're going pretty fast there in fact. It's an -– but what we do see, and that is -- once again, you do see, and there you get the other factors coming in as well. If you look in fact at our gross margin, and that's what you should look at if you take the recurring and non-recurring revenues and the increase in recurring revenues into account, you do see that, including Imagistics, in fact we've maintained our gross margin compared to last year. If you take Imagistics out, we have actually seen a reduction in our gross margin of just over 1%, and we've explained in fact that by our price policy. And our prices, we have been aggressive in fact in pricing.

The second thing of course if you do that, you get a mix effect in that thing, and you do get -- of course these are two negatives as far as the margins are concerned. On the other hand, we -– by the way we've also got an exchange rate effect, which -- a hedge effect, which worked negatively. But the last thing you get there, you get positives as well. And the thing that you mention, rising recurring revenues, will positively contribute in fact to that -– to the gross margin.

Now, these facts taken together have lead to 1.1% reduction of our gross margin, excluding Imagistics.

Okay, well we'll have to move on to other questions. Maybe I'll step in back in the line again.

Thank you.

Thank you.

Next question is from Mr. Stephen Ganeau, Petercam. Go ahead, please.

Yes, good morning. I'd like to ask a follow-on question on what was previously mentioned regarding the salary bill you have to pay on an annual basis. On the one hand, you're facing cost inflation of some 2 to 3%. On the other hand, at the top line, we see a rather deflationized scenario. Does this mean that, going forward, you will have to accelerate the relocation which you already -– the relocation which has already started, which has already been more aggressive than initially, or more pronounced, than initially indicated? Could you have to move one step forward again?

Yes. Yes, you're fully right. I think those two developments are working against each other. Prices -– costs are increasing year-over-year and prices are under continuous pressure year-over-year. So we really have to drastically reduce the cost of goods sold. And that means that we will not stop by moving manufacturing to low cost countries by the end of 2006, but that we will continue this process in the next years. We expect that, ultimately, around 80% of the original manufacturing volume will be produced in low cost countries.

And this 80%, do you have a deadline?

At the latest at 2008.

Okay.

Perhaps I can explain it a little bit differently. The products that we release from engineering from now on are mostly directly manufactured in the Far East. We will not start them up again any more in the Venlo factories. So it's not just moving, it's also the start-up of new manufacturing directly in those countries.

Okay. And could this imply that we, apart from the restructurings that have been announced, that in coming quarters we could see some additional announcements?

No, we will lose around 100 employees here in Venlo over the years. We expect that we can realize that by natural flows and by replacing those people in other positions.

Okay. The launch of the new 6250, is it -– it's quite a new target market for Oce. Is it therefore correct to say that there should not have been an anticipation effect at a top line in Q3?

No. You know we launched the machine in March or April. The first two machines were put in what we call a [batter] trial with two customers in the Netherlands in July. That [bat] trial is running very well, customers are delighted about using that machine. And next step is that we will launch around 15 machines in the fourth quarter as well in some countries in Europe and in the United States, and then the ramp-up will take place from 2007 onwards. So we are on schedule, and feedback is unchanged, positive.

Okay. And given that it's a bit partially a new segment for Oce, there was no -– you do not think that there was a real delay in orders by existing customers or potentially --?

Quite the contrary. We had to keep back the salesforce until we have the availability in the ramp-up of manufacturing.

Okay. And then a last question on -- you mention in the press release EUR8m capitalization of development costs. Could you explain why suddenly in Q3 we have this EUR8m capitalization which was -- while there was no material amount in the previous quarters?

Well the, as far as capitalization of R&D expenses are concerned, that is an -– it's an IFRS requirement that you do do it. We've had, and we've announced that as well, we have had an increase in research and development expenses. And we are in fact working, both in WFPS and in DDS, to take a 6250, the machine we just discussed in fact [inaudible], at extremely competitive and promising equipment. And, for that reason, we did have to capitalize more in this quarter R&D expenses than we did in normal quarters before. And that was also the reason that we did make special mention of it.

But, of course, capitalization of R&D has been going on and it's not the first time and it's definitely not the first year. This time there was just a very large amount in fact and, for that reason, we did mention it.

And suddenly -– why suddenly in Q3? Were there some extra development activities in Q3 --?

Well no, it's -– this is of course -– these are not expenses that you make only in Q3. It is of course a build up. But if you see in fact the expectation of, for instance the 6250, there is no way you can avoid in fact capitalizing these costs.

Yes, you could say that one of the triggers is the very positive feedback of the market, which is taking place already from the spring of this year, and being confirmed by the first customer contracts in that batter trial.

Okay, so if I understand well, there is also some capitalization related to expenses that were made in the previous quarters, because [the] product proves successful for launch?

It includes in fact expenses in the quarter and in the previous two quarters.

Okay, thank you.

[OPERATOR INSTRUCTIONS] There is a question from Mr. Jan Willem Berghuis, Kempen & Co. Go ahead, sir.

Yes, I have a few questions. The first one is, again, on the capitalization of R&D. Can you indicate what was the level in Q1 and Q2? And also, going forward, what will be the quarterly run rate? I hear that you're sort of accumulate those R&D costs over the first three quarters. But what is, let's say, the past and the future for this particular item?

Well, the past in fact I can easily give you because that's a fact. The future is more complicated. But it's -– and we've capitalized in the first two quarters for, I think, EUR4.5m. EUR4.4m, to be very precise.

Per quarter?

No, no, no. In total.

In total.

From the first two quarters. And then what is going to happen in the fourth quarter, I do not know, but I assume in fact that there will be capitalization of R&D. Well I assume, I know there is going to be capitalization of R&D expenditure as well because we're still working, for instance, on machines like the 6250.

Yes. Okay, but will it be again -– will be higher than EUR10m, like you had in Q3?

Well we didn't have EUR10m in Q3, we had EUR8m. But it's going to be higher? I don't expect so because we've, in the 6250 in particular, we did some expense we did not take into account. We took into account in the third quarter. So I would, with -– if you want me to be more precise, I wouldn't -– I would count more on what you saw on previous quarters than on the -- third quarter will be a little bit higher I would say.

Okay. And the EUR8m is therefore a year-on-year increase?

Yes.

Okay. And second question on the recurring revenues in DDS. It's down by 1%. Can you give me the reason? Is that in facility services or was there another component of the service revenues going down?

It is indeed in population-related revenues.

And why is that? Obviously one quarter of lower machine sales wouldn't have that much an impact I would assume.

No, you know we are moving around the zero point here.

Yes.

So plus 1%, minus 1%. If, for instance, there have been shipped rather big number of toners in one quarter, you have a huge effect around this zero. So let's say you were right. This is something like a [mamo-tanker], it's not moving drastically from one quarter to the other. And certainly, let's say the delay in sales of machines is not causing this in the third quarter separately.

No. But is it, as you indicate, Imaging Supplies, or is it Business Services or is it [inaudible]?

No, Imaging Supplies is part of recurring revenues in Wide Format Printing.

Okay.

Which grew with 3.8%

Exactly.

Business Services is indeed part of the recurring in Digital Document Systems, and Business Services grew.

Grew, in fact. The main reason in fact that we -– you have to indicate, is that is in toners. And toners in fact you get this strange situation that sometimes you get large orders which fall in one quarter, and then you see that the quarter is extremely good and the next quarter is less good. That is really an erratic picture and had we been at plus or minus, as far as I'm concerned, 3%. It would have gone from 3.5 to 2.7, nobody would have worried about it. It's just that we get this point from plus to slightly minus.

Yes.

Which is obviously not what we want. But, quite frankly, the toner impact has been quite substantial.

But I assume these are part of the sort of pay-per-click contracts. And I assume there is less printing volume there. There has been less printing volume, or is it --? I assume that you have monthly contracts that are running on certain volumes, pay-per-click, and --

No, but you have, in this case, you do get stocks at customers.

Okay.

Customers do get orders in fact. They do get -– they order in fact toners, they get toners and then they don't order toners in the next quarter. That's the sort of thing that happens.

Okay.

It's not clicks.

Okay.

This is especially in the very high volume continuous-feed business.

Okay.

In the normal cut-sheet business, it's an integrated part of the maintenance contract. You are right.

Okay. And for the very high volume, you don't see that as a trend, reaching a trend --?

No, the click volume measured over the first nine quarters in continuous-feed is growing.

Okay. And another question on the Imagistics revenues. You indicate it's according to plan. Obviously it's somewhat difficult to calculate. But, if I calculate, I think the Imagistics revenues are down year-on-year, maybe not too much. Is that correct?

It's flat.

Flat, yes. That is okay.

Yes.

That's before currency effects.

Yes, and there's a growth in multi-functionals and a decline in fax.

Yes, okay.

Which is something that we've always foreseen, always have.

Yes.

Yes, okay. Okay, thank you very much.

Okay.

The next question from Mr. Frank Claassen, Rabobank. Go ahead, sir.

Yes, good morning. A question on the top line. Did you see any major differences between the U.S. and Europe development of the top line?

In DDS, well with the exception of Imagistics, no, there is no difference. It's across the board.

Okay.

In DDS.

Yes.

And WFPS, the growth also was as well in the United States as in Europe.

Okay. Then on tax, we have again seen a plus due to tax- offsetable losses. What can we expect for the coming quarters? Are there more -– is there more to come on that side, or we can we expect a normal tax rate again?

Mr. Vincent.

Yes. Thank you for asking. I think that the trend that we have seen in the third quarter will not accelerate, but it will not -– in either way. So not to the plus and not to the minus. I think that the amount that we look -– we are looking at, at this moment will be stable across the board.

And so what can we expect for the coming quarters? As a normal tax rate or is it -– will it again be a plus?

No, I'll have two things. The normal tax rate is between the 20 to 25%. For the fourth quarter, we expect a tax rate of about zero. So, for the whole year, a plus then.

And for next year 20 to 25% would be --?

Yes.

Would be okay. Alright, thank you very much.

There's a question from Mr. Cornelis Bos, ING. Go ahead, sir.

Yes, good morning. A question on the weakness in DDS. Can you perhaps specify if weakness is especially in the office segment or in the high-volume production segment?

And, secondly, can you give some more, let's say, feeling for the tendering processes? And if that is, let's say, causing pricing pressure on both machine sales but also on services sales? Thank you.

Yes. You know that the tendering process is taking place in all segments. It's more determined by the size of the contract instead of by the size of the machine. If you want to -– if a customer wants to buy 25 continuous-feed machines, he is tendering as well as for 300 office machines. So that's across the board. It's a general trend in the market.

The weakness in DDS in the third quarter is also across the board. So there are no real deviations. Again with the exception of Imagistics, who is mainly active in office, it's across the board. So also in high volume and in continuous-feed printing.

Related to that tendering, if you talk about price pressure in offering to the market, it again depends a bit on the type of contract. You can imagine that in very high volume contracts also the price of the service is very important for the customer. So the tendering is taking place as well for the machines as also for the service requirements.

Okay, thank you.

The next question from Mr. Sven Weier, UBS. Go ahead, sir.

Yes, good morning, gentlemen.

Morning.

Three questions, if I may. First one is again on the recurring revenues. I'm still struggling a little bit with recurring revenues being flat. Also, basically machine sales have been going up for the last three years. Is there still also an impact from the transition from analog to digital? Or maybe you can still shed more light on this?

The second question is can you please remind me again of the year-on-year cost savings that you realized? And if the incremental capitalized R&D are part of that?

And the third question is what is behind your guidance for the full year in terms of Q4 sales and gross margin? Thank you.

Let me start with the first question. That was the development of the recurring revenues. You rightly stated that the sale of new machines over, let's say, the last three years, indeed, starting at 2004, was growing. And it has positively impact the machines in [fube], especially in digital, black and white and in color. And those new installations have indeed had a positive effect of the recurring revenues.

Yes, on the other hand, there is still an analog population out there. And the estimation today is that around 10% of the recurring revenues is still being generated by analog machines, and those machines are still coming back from the markets. So there is indeed a plus and a minus effect in the development of the recurring revenues.

And the second question?

The second question was on the cost savings year-on-year, the amount, and if the EUR8m incremental R&D capitalization is part of that?

Well the -– you have to -– let me just give a split-out in fact of the savings as a result of Imagistics, the cost synergies and the savings in fact as a result of the restructuring efforts that we have made. As far as Imagistics are concerned, we put in the press release as well that we've already realized EUR8m cost synergies. That's EUR8m. And we -– this indicates, at the end of last year, that in 2006 we had realized EUR20m savings in fact in Europe as a result of the restructuring. And an additional 5m on top of the [20m] there that's cost synergies, in the U.S.

Now, of that 25m, we have realized almost 20m year-to-date. So both on the synergies in -– as a result of the acquisition of cost synergies, as a result of the Imagistics acquisition. And, on the synergies or on the savings as a result of restructuring reorganization in Europe and in the United States, we will actually reach those targets that we have set.

Now the -– on the savings, if you take your total operating expenses, obviously a capitalization does not come into operating expenses. So if you take the total operating expenses, the EUR8m research and development capitalization will not be an operating expense. But I have to say that we have also spent more on R&D this year. So R&D expenses outgoings have increased compared to last year. And of those extra amounts we have capitalized in fact EUR8m in the quarter.

Over which period do you amortize these capitalized R&D?

Five years.

Five years, okay. And on the Q4, sales and gross margin, what's behind your budget there?

We are not unveiling the specifications for revenues and for gross margins. We have carefully evaluated for ourselves what the EBIT performance will be in the fourth quarter, and that's the only guidance that we give.

But you were talking about the 4m delays according to the new legislation. Is that all going to be delivered in Q4 then, or most of it?

Yes.

Okay, many thanks.

Okay.

There is a question from Mr. Jan Willem Berghuis, Kempen & Co. Go ahead, sir.

Yes, just one follow-up on the capitalized R&D levels. So it was EUR4.5m in the first half of the year, EUR8m in Q3. And if you look at last year, it was zero I assume because that was before IFRS? Correct?

No, no, no. Last year was already IFRS, but of course the amounts that we did capitalize were substantially lower. I think, for the total year, and once again I'm quoting now from the top of my head, that was something between EUR1m and EUR2m in fact we capitalized.

EUR1 and EUR2m. Okay. And yes, isn't it fair to take that into account in the normalized EBIT comparison? Because you do take into account, yes, option charges etc., those kind of effects.

Yes but this -– and it's -– this is -– we have started in fact the year with the normalization that we've taken. So we have done this, we have continued to do it.

Yes.

I think that by the end of this year, as we come to the fourth quarter, we'll do a very thorough re-analysis in fact on the special effects, where I think the main emphasis will be on the restructuring cost on pensions and things like that, and less on things like lease income and capitalization of R&D expenses. Because, as far as I'm concerned, or as we're concerned, this -– the reduction of this income is something which has happened. The capitalization of R&D cost is something which will happen in fact in time. They are normal expenses then of their normal loss of income and their normal capitalizations, which then amortize in fact over time.

Yes.

I don't think this -– so that we will come back in fact in the fourth quarter and we'll give you a detailed analysis of it.

And final question, the amortization was still at the same level as the last quarter?

Yes, the amortization in fact is –- it's fairly linear in fact because you know the amount that you're amortizing in fact in the year. You spread it over the four quarters.

Yes, okay. Thank you.

There's a question from Mr. Wim Chaeler, ABN Amro. Go ahead, sir.

Yes, good morning. If you look at the full-year forecast of EUR90m EBIT, and then I think you should realize something about EUR32m in the last quarter. And if I look at fourth quarter last year and I take out the EUR35m in one-offs there, you realized EUR33m. Is this correct?

Yes.

And that basically implies that the cash up effect of, let's say, delaying orders in the third quarter, the synergies, the contribution of Imagistics two additional months, and the cost savings there, are, let's say, all taken away by increased cost base and by maybe some pressure from the gross margin. Is that also correct?

Well, it is, if you say it that way, it is correct. But the one thing you should look at is we had an extremely good fourth quarter last year. And if you look historically, it's been a very good fourth quarter. And, for that reason, it's going to be quite a -– if we in fact reach the level of last quarter, we'll be extremely happy.

Okay. Okay, that's it. Thank you.

There are, at this moment, no further questions. One question from Mr. Cornelis Bos, ING. Go ahead, please.

Yes, could you actually specify on the Varioprint 6250 what your budgets are for 2007? Or, also what your potential capacity is in the number of machines?

Yes, in very general terms I can answer that question. Not in budget terms for next year because it's a little bit early to talk about budgets, on one hand, and on the other hand, you don't unveil budgets anyhow. But, in general, you could follow the next reasoning.

The 6250 is aiming at the very high volume cut-sheet printing environment, which today is dominated by Xerox, their so-called DocuTech and DocuPrint machines. We know that there is a worldwide installed base of around 25,000 machines, of which around 5,000 machines per year are expiring in their contracts. So the market potential per year, if you would not add additional placements, is around 5,000, and Oce is aiming at 20% market share, so 1,000 machines per year.

It is, of course, a little bit difficult to commit ourselves in a start of year already to this 20%.

Okay, thank you.

Mr. Iperen, there are no further questions at this moment.

Ladies and gentlemen, thank you very much for your attention. If you have follow-up questions, please don't hesitate to call Mr. Pierre Vincent. Goodbye.