Canon Inc (CAJ) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for holding and welcome to the conference call of Oce first quarter results 2007. At this moment, all participants are in listen-only mode. Later we will conduct and 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 our CFO, Jan van den Belt, our Vice President Investor Relations, Carlo Schaeken, who are present in this meeting.

Let's first take a look at today's agenda. I will start with an update on the latest developments in the strategy 2007/2010 that we have presented to you in January. Thereafter, I will summarize the financial results of the first quarter and give our outlook for the remainder of 2007 and, of course, we will conclude this conference call with a questions and answers session.

But first, I will elaborate on the progress on the strategy. In January, we had presented the strategic direction for Oce with three main elements; distribution power, competitive products and services, and operational excellence. And although we are only one quarter underway, we can report a few important results already. We increased our distribution power. We announced in January growth through Oce Imagistics. In the first quarter we saw sales increase of Oce print equipment via Oce Imagistics. We also announced the introduction of this successful, you could call it, Imagistics model in Europe. As presented in January, the first area of actions concerns the creation of a full line product portfolio by completing the Oce portfolio with carefully selected and tested OEM products. We have made good progress in this area via the expansion of the core cutsheet portfolio and I will elaborate on this when discussing the products and services part of our strategy.

The second area of action relations to the creation of a combined office and high volume focused sales organization. Such a combined sales force exists in the UK, the Netherlands, Belgium and Switzerland. They successfully sell our full line product portfolio and we are now in the process of creating these combined sales organizations in the other main European countries. For the increase in distribution power, we have also announced two strategic partnerships. Oce will team up in Asia with the Founder Group, one of China's biggest technology business. As part of this partnership, Founder will sell Oce digital equipment, such as the VarioPrint 5000, and our productive color machine, CPS 900, in the Chinese corporate and commercial markets.

In addition, we entered into a strategic partnership with Fuji Film to sell the new Oce Arizona 250 GT worldwide. In a display geographics market, Fuji Film is strong in the offset and screen print segments, whilst Oce display geographics is strong in reprographics, sign making, and point of sale activities. Via Fuji Film, we can bring the Arizona 250 GT faster and more successfully to additional markets. Therefore, we expect this partnership to bring a substantial increase in the sales of this recently launched machine. In this way, we will expand our distribution power via two strong partners which, in 2007, will already result in additional non-recurring revenues followed by increased recurring sales.

As mentioned before, the second pillar of our strategy relates to competitive products and services. In both WFPS and DDS we have launched various new in-house developed products as well as new products from our OEM partners. As said earlier, in WFPS we introduced for the display graphics market the Oce Arizona 250 GT. This in-house developed machine can print text and illustrations of photographic quality of up to 2.5 meters in length for indoor and outdoor use. In WFPS, we also introduced three additional OEM color machines for the technical document market. These new products have been added to existing in-house developed products such as the TCS 500.

In DDS, the Oce VarioStream 9240 was introduced at Oce's OpenHouse exhibition in March. As the world market leader in continuous feed digital printing, Oce now offers its customers the possibility of upgrading within one high volume product family from pure black and white printing to full color digital printing. The Oce VarioStream 9240 will be fully available early next year. Furthermore, the cutsheet color product line at DDS was completed with various color OEM machines with speeds up to 65 pages per minute. We consider these new machines complementary to our CPS range as each line offers unique capabilities. Within -- with these new machines, we address a wider array of applications at our customers.

In high volume, Oce introduced the Oce VarioPrint 6200 and the Oce VarioPrint 6160 which can print respectively 200 and 160 images per minute. The sales and the ramp-up of manufacturing are progressing well with the result that Oce can now offer its customers a complete family of high volume and very high volume cutsheet printers based on our new Gemini technology.

With these recent introductions in WFPS and DDS, Oce now has one of the strongest product portfolios in the marketplace, and its position to capitalize on [growth]. As communicated in January, our own R&D will concentrate, in DSS, on developments for segment five onwards and color print systems, and we will cooperate more with technology partners. For example, for pre and post-processing equipment. We have initiated programs to adjust our R&D processes for this changed way of working and increase our innovation power without expansion of our R&D staff.

In the last pillar of the strategy, operational excellence, we also made good progress. Let me update you on a number of areas. The transfer of production to our manufacturing partners in Asia continued as planned and we are still on schedule for a transfer of 60% of [final] manufacturing value by the end of 2007. Steps have been taken to further improve working capital. The result is that inventories, account receivables and creditors all improved as percentage of revenues compared to the first quarter of 2006.

Ladies and gentlemen, this concludes my overview of operational excellence actions. All in all, the execution on the three strategy pillars is on track and we certainly expect that the effects start to materialize in the coming quarters. That brings me to the first quarter of 2007. First, I will elaborate on the financial result of total company and, subsequently, the developments per the complete business units.

The revenues in the first quarter were EUR729 million. In constant exchange rates, the revenues grew with 0.8% compared to last year's first quarter. Please note that we have included CaseData in this number since it's a minor acquisition. Excluding CaseData, revenues grew organically with 0.4%. Including exchange rate effects, revenues decreased by 3.3%. The non-recurring revenues were virtually flat on an organic basis year-over-year. We are pleased with the growth of the recurring revenues for the sixth consecutive quarter and the increase was, in this quarter, 1.1% organically, yet 41.6% relative gross margin was at the same level as last year. The gross margin was positively influenced by good manufacturing results, resulting in better factory coverage. Operating expenses were 38.7% of revenues. Correcting for exchange rate effects, operating expenses were at the same level as in 2006.

The resulting operating income was EUR21.3 million. Although lower than in 2006, special factors have to be mentioned here. In 2006, the release of pension provisions influenced the operating profit positively, provisions for restructuring had an opposite effect but, on balance, operating results benefited by EUR8.1 million from one-off items.

In the first quarter of 2007, EUR5.5 million in R&D expenses were capitalized against EUR0.4 million in 2006. As you know, capitalization of R&D expenses will be a permanent feature. Financial expenses were EUR10 million, down from EUR12.6 million a year ago and taxes contributed for an amount of EUR0.8 million to net profit. All this has led to a net income of EUR12.2 million.

Next, some comments on our balance sheet and cash flow. The balance sheet remains solid. This is reflected in our net debt over EBITDA ratio of 2.3. It is also reflected by our EBITDA over interest coverage which is, for the first quarter, 7.1. The constant attention for the balance sheet, as well as the strengthening of the euro, resulted in a shortening of the balance sheet, with EUR180 million compared to the end of the first quarter of 2006. Exchange rate effects explained EUR126 million of this reduction, which brings the total balance sheet of EUR2.567 billion.

For the cash flow. For the cash flow review, I would like to start at the operational cash flow. In the first quarter of ever year, Oce has to make significant payments for bonuses, commissions, holiday pay, and related social security and taxes. Therefore, the operational cash flow was EUR19 million negative. This is, however, much better than the operational cash flow of minus EUR52 million in the first quarter of 2006. The improvement in the operational cash flow is mainly driven by better working capital management.

Next, the cash flow from investing activities which, as in previous years, benefited from the sale of the existing leads book. As our leads book has been largely sold, this cash inflow diminishes. Compared to the first quarter of 2006, the cash inflow from the sales of the leads book was EUR11 million lower.

The free cash flow, which is the balance of the better operational cash flow and the higher cash outflow from investing activities, was minus EUR53 million versus minus EUR64 million in 2006. We will continue to focus on improving working capital and cash flow, and we expect that for the full year, the free cash flow will be close to the level reached in 2006. Return on capital employed was at 5.5%, still well below the target of 13% set for 2010.

That concludes the overview of the performance of Oce. Now, I will briefly discuss the results of the strategic business units, starting with Wide Format Printing Systems.

Wide Format Printing Systems had again a very good first quarter. In constant exchange rates, the revenues were up 4.8%, totaling EUR205 million. Non-recurring revenues recorded a 10.7% increase. This is the highest growth in eight quarters. In recurring revenues, the higher sales of toner and inks drove the organic growth. Recurring revenues were up 2.1%.

The operating income in WFPS in the first quarter was EUR18.1 million, which is almost 6% higher than the first quarter of last year. WFPS had a good start of the year 2007 by delivering strong growth in non-recurring and recurring revenues, and a higher EBIT compared to the first quarter of 2006.

Then DDS. The revenues in DDS declined to EUR524 million, which is an organic decline of 0.7%. At the request of a number of analysts and shareholders, we will indicate the effect of the declining Imagistics [legacy] fax business on our revenue. This decline of fax business cost almost 1.5 points of revenue growth, so without the impact of fax, we realized an organic growth of 0.7%.

Non-recurring revenues declined by 5.2% in constant exchange rates. We have ended the quarter strongly, resulting in an order backlog that is significantly higher than the backlog at the end of first quarter 2006. The recurring revenues in DDS are up organically, with 0.8%. Fax decline cost almost 2 points of recurring revenue growth, so excluding fax, the growth was 2.7%.

Business services showed a good performance, and grew with almost 6%. The operating income in the business unit DDS was EUR3.2 million. Whilst WFPS started 2007 very well, in DDS the results are still far below appropriate levels. And that brings me to the outlook for the rest of the year.

Ladies and gentlemen, those of you who follow Oce more closely, know that normally we don't indicate an outlook for the whole year after quarter 1. However, based on the progress that we made in the implementation of our strategic plan, and the good sales development in both business units, we would like to make a statement this time.

WFPS had an excellent start of the year. We expect that we can continue this trend for 2007, driven by strong new products, as well in TDS as in DDS. Also, the partnership with Fuji Film will contribute to this growth.

DDS didn't show good results in Q1, but we see encouraging business developments. The order backlog has grown substantially compared to last year. Oce Imagistics is gaining momentum in selling Oce products. New self developed and OEM products will drive growth of sales. Recurring revenues are growing, and business services is developing well.

The operational excellence projects will bring lower operating costs and working capital, and combined with growth in sales, and recurring revenues, we expect that the results of DDS will improve during the course of this year.

Well, ladies and gentlemen, so for my introduction. May I invite you now for your questions?

Ladies and gentlemen, we will start the question and answer session now. [OPERATOR INSTRUCTIONS]. Go ahead please. There's a question from Mr. Niels de Zwart of Rabo Bank. Go ahead sir.

Good morning. Niels de Zwart, Rabo Securities. My first question is again, of course, on the fax business. Could you maybe give us a bit more feel for how much of your revenue is still derived from faxes coming from recurring and non-recurring revenues? And could you maybe hint us a bit more about how the other machines, or the other non-recurring revenue, excluding faxes, did in DDS in Q1? Those were my first questions.

Well, the revenue stream coming from fax is in the meantime less than 10% of Oce Imagistics, and those revenue streams are only coming from recurring revenues. It's only the sale of consumables to the existing population. So there's no influence on the non-recurring revenues.

Okay, thank you.

Next question is from Marcel Achterberg, ING. Go ahead sir.

Yes, hello gentlemen. There's two questions I've got. First of all is about the order backlog in DDS. Could you tell us how substantial the increase has been, and what the pricing and gross margin in that backlog are compared to previous quarters? And then I have a follow up question.

Shall I take it? Well, first of all, we will not give the number of the order backlog, the order portfolio, but there has been a substantial increase compared to the first quarter of 2006. And, as I already said to someone this morning, if we say it's a substantial increase it's not EUR1 million. It is obviously -- it's a real increase.

As far as pricing and gross margin are concerned, well, quite a bit of this backlog is, in fact, in new products, and in particular, the 6250 of course. And the pricing and the gross margin there are good.

And is the order backlog also up sequentially from the previous quarter?

You mean from the fourth quarter.

Yes. Because the substantial increase is on a year-on-year basis.

Yes, it is compared to last year because you should -- at least, we look at what can we expect from the second quarter compared to the second quarter of last year. But if you look at it sequentially, the 6250 is definitely up compared to the end of the fourth quarter because the machine is really selling well now.

Okay. And then could you also tell us a little bit about -- on developments on a geographic basis. What is happening in the US and how is the pricing environment?

Well we do not see substantial differences between pricing in the US market and the European market. And the development is comparable between the two markets. As already said, Oce Imagistics is already gaining momentum in the sales of Oce machines which is of course in the US market. But on a total the developments are comparable.

Okay. Thank you.

Our next question is from [inaudible]. Go ahead sir.

My next question would again be on DDS, on the recurring revenue growth -- sorry the non-recurring revenue growth, the organic one. Could you maybe give us a bit of insight into how that decline splits up between prices and volumes? In other words do you see price erosion increasing or at what level do you see it at the moment?

No, there is no increase of price pressure. It's similar to last year. We do not see a big difference there.

So when you speak about levels it's about 3, 4% is that a good guesstimate for --?

Yes. We always say between 3 and 5% on a yearly basis.

May I add one thing there? We have been able, as you have seen in fact the company as a whole, and that applies in fact to the individual business units as well and DDS in particular because I refer to that. We have been able to withstand price pressure by maintaining our gross margins. Our gross margins. So there is price pressure as [inaudible] says and there has been price pressure in fact you know all the time. But obviously there are ways of countering that. And as we have shown this quarter, we are able to withstand it.

Okay. Thank you. And my next question would be on WFPS. You reported a very high non-recurring revenue growth on organic basis. Could you maybe give us a bit more insight whether you really see that as a result of the launch of new products and are you actually gaining market share, or is it just the overall market which is really enjoying strong growth?

No, we -- yes, of course the positive economy really helps the sales of machines in the technical documentation market. But I can assure you that the growth of more than 10% in non-recurring revenues means also an increase of market share. As well in black and white machines as also in the color machines like the TCS 300 and 500, which are now around nine months available.

Okay. Thank you very much.

The next question is from Mr. Jan-Willem Berghuis, Kempen & Co. Go ahead sir.

Yes good morning. I have a number of questions. Maybe first of all on the recurring revenue growth of 1.1%. I assume that is still including ex-CaseData and can you tell me what it was excluding, this acquisition?

Yes I can.

He has to look it up Jan-Willem.

Yes. It's on its way. No, no. It's here. The recurring revenues in fact, excluding CaseData, we grew, [as a] company 0.7%.

Okay. And then the next one is on the gross margin. You mentioned Jan that you are able to withstand some margin pressure. If I look at your -- just looking at your gross margin, also at your operational cost, I'm trying to see the effects of all the cost savings. And if I look at the gross margin, I think there is a hedging profit in it. So can you tell me what's going on in the gross margin? So the hedge effect year-on-year and if possible the absolute hedge gain that is in the gross margins and possible other effects.

And can you then tell me whether the gross margin organically, so to speak, increased or decreased? Because in my calculations there is still pressure on the gross margin.

And similarly on the operational cost, the press release states that year-on-year the operational costs are basically flat. Well I would have expected maybe some lower costs due to the restructuring program that has been set in. So in general can you comment on what are the trends in the gross margin and the operational costs? Because I don't see a favorable trend here.

And maybe can you indicate what it will do in the remainder of the year because maybe the cost savings will only kick in later this year?

Well let me -- that's a lot of questions, so let me try to go through them one by one. Well first of all as far as the gross margin is concerned, you're asking about the hedging results, the impact of hedging. Let me first of all, say that of course the hedges, all we do with the hedges is try to smoothen out the impact of currency fluctuations, exchange rate fluctuations.

So whilst in the first quarter of 2006 we benefited from a strong dollar, which you see in fact in your gross margin, it was that effect has been offset by hedges which then had a negative impact in fact on that gross margin.

The opposite is the case in 2007. We had a weaker dollar, had an unfavorable impact obviously on our gross margin, but that was offset to some extent, not in full but to some extent of course, by the hedges. So if you look in fact at the impact of hedges on your gross margin, we had in 2006 in fact, a positive impact of the fluctuation in the exchange rates, and in 2007 a negative impact. So the fact that we actually maintained our gross margins at the same level I think in fact is a positive. That's one thing.

We had in total last year -- you wanted to know the impacts, we had a negative effect in fact on the gross margin and then in 2007, of course we had a positive impact. And that difference does exist, but I feel that you shouldn't use that as a reason that we had in fact a negative, that the fact that we maintained our gross margin at 41.6% was negative because there was a positive hedge result in 2007. That positive hedge result offset the negative impact on the gross margin of the weakening of the dollar.

Yes. I tend to disagree because the hedge gain next year, if the dollar stays at the same rate, the hedge gain will disappear while the weak dollar rate will continue to impact the gross margin and the sales levels. But maybe we can talk on that later.

I have some other questions. On the order book you mentioned that 6250 was a great contributor in the order book. Can you indicate whether the order book also increased excluding the 6250? And can you also tell in what quarters this 6250 will be delivered? Will it be primarily Q2 or will they be spread over the remainder of 2006?

Yes, to your first question the order book also increased in other product lines than the 6250, although the 6250 forms an important part of that increase. And we are ramping up as well in sales as in manufacturing since the first quarter. So we expect that the effect of the 6250 will work through all the three coming quarters.

Okay. And then my final question would be has there been any impact from the sale of leases in the first quarter on the P&L?

Yes, the sale as far as leases are concerned we had a negative impact because the interest income from leases was lower. And the exact amount is, yes, I have to look at that but it was about EUR1 million.

Okay. But there was no book gain in Q1?

No, because as you've seen we haven't sold in fact many leases. It was only [EUR0.5]. It was EUR1.2 million in fact the lower interest income [lease]. May I come back in fact on your previous question? First of all if you want to compare 2008 to the first quarter of 2007, the impact on the gross margin of hedges in fact was 0.2%. So that is the number that you actually compare 2008 to 2007 if the exchange rate stays constant. Yes.

Okay.

That's one. And the second question, you had a question on operating expenses. And once again, we have actually -- we have maintained our operating expenses at the same level as we had in 2007. And the only reason that you can do things like that with a wage bill which we've said before rises by about 3% per annum or EUR1.2, 1.3 billion, the only way you can do that is by saving, in fact, in other areas. It's the only way that you can do it.

So the operational excellence projects do have, in fact, an impact on our operating expenses.

Yes and just offsetting the wage inflation. Okay, that's clear. Thank you very much, it was very helpful.

Our next question is from Mr. Stephen Ganeau, Petercam. Please go ahead sir.

Yes, good morning. A question on the free cash flow guidance you are providing for 2007. You are guiding for about stable free cash flow in '07 compared to '06. In '06 there were some, what I would call, rather one off items such as income taxes and sale of lease portfolio. The guidance you provide for '07, does this exclude those items or do you still account on perhaps in the remainder of the year to have some lease portfolio proceeds and to further increase the income tax benefits?

Well the number we are giving here is an absolute number so we're aiming at roughly the same number that we had last year, which was EUR119 million positive. And, yes, there will be, obviously there will be still some sales of lease portfolio. It will be lower than in 2006 but there are other areas of working capital, for instance, where there is scope for improvement and we will work on that.

Okay. And on the income tax benefit. Last year I believe it was some EUR44 million. Do you expect a similar amount this year or --?

No, not a similar amount, but we do have some income, in fact, from there but certainly not at that level, no. It's another area and we are working quite hard on that.

Okay. Then a detailed question on the cash flow statement. There is an expenditure in intangible assets for some EUR10 million. Could you explain what it actually is?

Well there are two things there. The intangible is R&D expenditure, the capitalization of R&D expenditure, and the other one is capitalization of software.

Internally?

Yes. So R&D 5.5 and then there's [software] 5.5 and then there is internal -- internally and external. It's also, of course, the cost of purchased software. And that is, in fact, it's the remainder. So it's IT and R&D.

Okay. And on, responding to a previous question, you indicated that the competitive environment is not, has not been really changing in the last quarter so the last quarter. After the sale of the IBM printing business, have you seen another attitude by the acquirer?

Well, it's a little bit early to make firm statements on that but what we do see, at this point of time in the market, is some uncertainties with the existing customers of Repro IBM, and we also see some uncertainty in the, with the employees of the acquired company. So, on short term, we do not see this as a negative development for Oce.

Okay. And then perhaps a final question, could you up-date us on the [inaudible] position for the coming year?

On the hedge position?

Yes, the recurring hedging policy. There are no major changes I assume?

No, there are no changes and we are still continuing with exactly the same hedging policy as we've been having in place for the past few years.

Okay, thank you.

The next question is from Mr. [Peter Olsen], Kepler. Go ahead sir.

Good morning. First maybe a clarification on a question from Jan-Willem about the order book. You stated that the order book was up, even excluding the impact of the 6250. Was that on year-on-year or quarter-on-quarter?

No, compared to the first quarter of 2006.

And how does that compare to Q4, excluding the impact of the 6250?

By the end of 2006 you mean?

Yes.

It's comparable. The growth compared to the end of 2006 is mainly 6250.

Okay, that's clear. And then the outlook for DDS. In your press release you indicate that you expect your results to improve over the year. I can imagine that you have internally budget for non-recurring sales for DDS. Can you give an idea how much of that budget is going to be [go for the value] order book?

No we cannot do that. I am sorry.

Okay. And then maybe on cost savings. If I remember correctly you said with the full year results that for 2007 you were looking for EUR21 million in savings from headcount reductions from 2006. How much did we already see in Q1 and how much is still to come?

I think, if you look at the phasing of the headcount reduction, the headcount reduction was more or less finalized by the end of last year. So we will see a relatively equal phasing over the quarters of this year. I would like to make one additional remark that headcount reduction is not only reflected in the development of the operating expenses because part of that headcount reduction was in the service organization which is reported in gross margin. So part of let's say the ability that we maintain our gross margin levels is also thanks to a reduction in headcount of service.

[inaudible] but actually that means that also in Q2 and Q3 there will be some benefit from these savings?

Yes, sure.

Okay. And then maybe on the announcement by Xerox yesterday that they intend to acquire Global Imaging. I assume that as one of the competitors of Oce Imagistics in the US, do you see any threats or opportunities arising from this news?

No, I don't think that the competitive landscape will substantially change. As I read in the press release, they will change their product portfolio from the present suppliers to the Xerox equipment. I cannot really estimate what that means in the market in terms of disturbance or opportunity. It is a little bit early to tell. So, and indeed, as you said, in the competitive environment, GIS was an important competitor of Oce Imagistics. Well it will remain an important competitor but they're now under the umbrella of Xerox.

Okay, that's clear. And then my final question is on taxes. In Q1 there was a tax benefit. While you initially guided for, I think a tax rate of 20 to 25% for this year, what should we look for for the coming quarters?

Well the, obviously the 20 to 25% is the rate if you go through the various countries in which we operate and we would see -- you can scrape off a longer period of time. But, I think that certainly for this year it will be on the lower side of that. So, I think that the taxes this year, and we've started of course with negative taxes, so with a contribution factor result, that will, during the year, there will obviously be and we will have, we will pay taxes so taxes will become positive and so we will start paying taxes. But if you look at a rate, [inaudible] rate for the year but it's on the lower side of the range we've given you.

Okay, that's clear.

[OPERATOR INSTRUCTIONS]. There is an additional question from Mr. Sven Weier, UBS. Go ahead please.

Yes, good morning. A couple of housekeeping questions initially. The first one is on capitalized R&D. I was just wondering what kind of amortization you had in the first quarter on capitalized R&D and how that compared to a year ago? And, also on capitalized R&D, are you still forecasting lower capitalization of R&D this year than last year?

On research and development, Carlo is looking the number up, in fact, how much did we did depreciate on that with the amortization. Well, sorry, I have to come back on that number.

Okay. Then the second question I had, the amortization related to the intangibles you acquired was Imagistics. I think you indicated earlier in the mode of 15 or EUR16 million for the full year. Should we just divide that by four to have the number for Q1 or--?

Yes.

Okay. And then the third housekeeping question would be on other provisions. I was just wondering if you could give us an indication about the net charge for other provisions in the P&L and how that compares to a year ago?

Well, it's not a number that we would usually provide to you and so--.

But is it about the same or is it lower or higher?

Well, you know, you're talking here about provisions which are not provisions for accounts receivable, stocks and --

Yes. Maybe the provisioning, in general. The provisioning in general.

Provisioning in general is a very wide subject because you can talk about, for instance, we have this year you get some -- sell some releases for restructuring provisions. That is one thing. And on the other hand, you do get provisions for stocks and for accounts receivable for instance and for other things and, quite frankly, our policies have not changed in that respect. So, as far as accounts receivable and stocks are concerned, if they come down, you might see some of these provisions in fact coming down as well because the levels have come down.

As far as restructuring is concerned, we will have some releases of provisions there because we will still pay some of the consequences of the restructuring that we've done. So that is in fact, and that is what you can expect.

Is it due to the better economic environment you probably have less need to have any adjustments for receivables, I would guess.

No. It's our policies for receivables, apart from specific receivables, of course, and that is the majority. We have seen over the past few years that there has been a slight decline but it's -- that is -- but we do not change our policies there. What you can actually -- what you can expect is that, on stocks, that our stocks will be coming down and, for that reason, the absolute number of provisions will come down as well.

Okay. Then a question on the gross margin. I think last year Q1 was having the best gross margin. Do you see the same kind of seasonality this year or do you see a chance of having this being a sustainable figure for the full year?

The development of the gross margin during the remainder of the year.

Yes. Well, I'm -- if you look at gross margins, if you look at the average gross margin in 2006, the average gross margin for the year was 40.8%. It's 41.6% in the first quarter. So we didn't -- we were not off to a bad start but we had exactly the same position, of course, last year.

But is there any structural reasons for having the highest gross margin in Q1 or could it be also the same in Q4?

We expect at least an upward trend thanks to the sale of the 6250. This is a good product but it's impossible to predict exactly how the gross margin over the remainder of the year will develop.

Okay. And then a final question would be just on the US development. I think that for the DDS business you're generating quite a substantial chunk in the US. Are you not seeing any sign of an economic slowdown in your business there? Is there absolutely no indication for that?

No. The good order intake, also in DDS, is the same in Europe as in the United States. As a matter of fact, I think that the speed -- the growth of the sale of DDS in the US is more related to the fact that Oce Imagistics is gaining momentum than that we have external influences.

Because I'm still a little bit puzzled by the development of your machine sales in Q1. If I look back, last year you actually had the weakest count in Q1 of '06 where I think non-recurring was down mid-single digit. So I would have at least expected a more positive development because the [compass] was really weak there.

Yes. If you say that you are a little bit disappointed by the development of non-recurring in the first quarter, I share your feelings but, on the other hand, if I look at the substantial increase of the order portfolio, I see it more as a timing issue than as a structural issue.

Okay. And on capitalized R&D, any number you have?

EUR1.4 million in the first quarter.

And that was up year-on-year or what was it a year ago?

Yes. That was up. It was about EUR1 million up.

And on the full year you still see the capitalization of R&D down or flat or?

Well, we had -- last year we had, in particular because of the 6250, we had quite a spurt, in fact, towards the end of the year. So I would expect, in fact, the capitalized R&D to be below last year. But it's -- we started off at 5.5 for the quarter and I wouldn't be surprised if you don't -- you would see similar numbers, in fact, in the coming quarters.

Okay. Thank you very much for the answers. Thank you.

Next question. The next question is from Mr. Wim Gille, ABN Amro. Go ahead, sir.

Yes. Good morning. A couple of housekeeping questions. First, on the provisions which were down EUR10 million to a level of EUR19 million. Is that solely related to a decline in the working capital?

Wim, can you tell me where you got that number from?

From the cash flow statement. Sorry, the balance sheet. The end of the first quarter 2007, the last line. [inaudible]. It's EUR19 million and it was EUR29 million at the end of the year.

Yes. Okay.

So is this solely related to the inventories levels or are there any other impacts and does it have an impact on the P&L?

The second question I have is on your net debt level. It is, of course, up to a level of around EUR683 million at the end of the quarter. If I look at the cash flow projection of, let's say, the second quarter where you will likely pay your dividend, I don't expect a lot of cash inflow in that quarter as well, so probably your cash flows will be rather back-end loaded in this year. So could you give us an indication of whether that's a correct assumption? And could you also give me an overview of your bank governance and how I should look at that?

And a final question is on depreciation and CapEx. Depreciation is down from 52 to EUR50 million and CapEx is substantially below this depreciation level and also below what we've seen for the full year. So could you give us a little bit of guidance on CapEx for the full year?

Well, I'll start on the last one. In fact, our capital expenditure isn't all that much lower than depreciation because the one thing you have to take into account is also rentals. In the rentals, in fact, we have spent quite a bit. So that is not --

Is that in the operating cash flow?

That is the operational cash flow. That's right. Yes.

Okay.

You see that for rental equipment we have taken up there, in fact, EUR18 million. Yes?

Okay. So that brings it more in line with the depreciation and it's also in line with [is it] full year projections?

Now, that's the depreciation question, then the cash flow and covenants. As far as the cash flow is concerned, yes, we will pay, in fact, a dividend and actually that's about EUR35, 36 million, in fact, in the second quarter. That will come and, for that reason, and you see it if you go back in time, you see a similar pattern; that we've had this quarter a fairly substantial outflow in the first quarter and second quarter because of the payment of dividends. You can also see an impact in the third and the fourth quarter; you see cash flow coming [above quarter]. So that is, in fact, what we are expecting for this year as well.

Okay.

And as far as the covenants are concerned, we -- Mr. van Iperen did mention, in fact, the numbers in his presentation. We are, in fact, at 2.3 for the net debt EBITA and 7.1 of EBITA of interest [payment]. So that is some -- we feel these are good numbers.

That's well within your covenants or --?

It's well within our covenants. Yes. So that's not the issue. As far as provisions are concerned, you see that our long-term provisions did increase a bit and our other provisions did come down. And, of course, you can expect a reduction of provisions with the -- in particular, with our restructuring provisions. There we do have, in fact, a reduction, but the exact number here of 29 to 19, I will have to look at them. I will have to come back to you on that one.

No problem but let's say from my point of view it's more important. So it's a reduction for the restructuring provisions which basically means it doesn't have an impact on the first quarter P&L?

No. It doesn't have any impact at all because, on the one hand you have a cost and the other one, you have a provision which you release so, in fact, the net impact is exactly zero.

Okay. And then on the gross margin, again, Jan-Willem already mentioned it. In the first quarter you actually had a, let's say, a drain on your gross margin because of the foreign exchange hedging and in this first quarter this year you have a benefit of the gross margin related to the foreign exchange. So could you give us a comparable gross margin in the first quarter of 2006, ex-foreign exchange hedges, and a comparable number in 2007, ex-foreign exchange hedges?

Yes. But the difficulty we have with that, and maybe I didn't explain myself very well then, but the difficulty I'm having, the gross margin, if you take a gross margin before hedges, the gross margin itself has been affected by exchange rate movements. So if you have a strengthening like we had in the first quarter of 2006, a strengthening dollar, you benefit in your gross margin before hedges. If you haven't hedged at all you benefit from --

Your cost of goods sold?

Yes. That's -- you benefit from that. And what you then get, you get, in fact, a hedge result to compensate for that and so if I -- I can give you those numbers but don't start to --.

Extrapolate on them?

To extrapolate on that because that would really make -- you'll come to the wrong conclusions. The only thing, and that's why I gave the number to you Jan-Willem, in fact, of 0.2%, if the exchange rate stays absolutely constant from now onwards and we continue to hedge then, in fact, in 2008 we have a negative impact of what -- of the benefits we had in 2007 of 0.2%. That is the most relevant number.

Okay. That's fine. Let me see. If you -- a final question from my side is if we exclude the fax business your recurring revenues in the DDS segment went up by 2.7%.

Yes.

Could you give us an indication what the recurring revenues would have done if you exclude the business services?

I would -- well, the point is, again, we are not giving those numbers, in fact, split out, we do give the total numbers, so I would prefer not to do that.

Okay. Maybe if I rephrase the question. Business service is quite an important part of the recurring revenues in the DDS segment, if I'm not mistaken. So, to give a little bit of -- get a little bit of feeling about the utilization of your service staff in the fields in DDS, did it actually improve or did it not improve in the first quarter?

The -- as far as DDS is concerned, how [services] have done?

No. Whether there's actually an improvement in the recurring revenues in DSS excluding business services because that's the best indication you have for improving the service -- the utilization rate of your service people in the field.

Yes. Well, the -- we're not, once again, we're not giving those numbers. We're giving, in fact, recurrent revenues and we're giving you the non-recurring revenues. We're not splitting it down because in the recurring revenues we do have things like leases. Well, leases have come down as I have told you. You've got imaging suppliers, well, not in DDS because you were talking about DSS, but you've got toners, you've got software maintenance, you've got hardware maintenance, you've got rentals. All those things are in and you're -- if you start taking out one thing, like business services, you're not getting a good view of what we're doing on recurring revenues.

Okay. Thank you.

Our next question is coming from Mr. Marcel Achterberg of ING. Go ahead, sir.

Yes. Just one final thing. The increase in inventories during the first quarter, is that also related to the ramp-up of the 6250 [you have] production levels?

Broadly so because a number of those machines have already been shipped to customers but are still in their trial period and as long as they are not built they will be in our stocks.

Okay. Thank you.

Next question is coming from Mrs. Lucy Cottrell, Independent Minds. Go ahead, madam.

Right. Morning. A few questions. Firstly, I'd like you to talk a bit about the new Arizona machine and I'm interested in two things. Firstly, the issues of ramping up production. What the plans are there?

And secondly, in that context, what is the planning in terms of when you'll start to deliver them under the OEM deal with Fuji Film? And, linked to that, I'd also like you to talk about machines sold either through your own distribution or Fuji Film. How does the money work in terms of the very lucrative inks? Do you get a split on machines sold everywhere or on machines sold through your own distribution? What's the pricing of the ink to you? In other words, how does the whole math of that work?

Alright. The first question, Lucy, was about ramping up manufacturing.

Yes.

We are slowly but surely gaining speed there. We started to manufacture and to deliver the first machines in the first quarter. It will accelerate in the second and in the third quarter. I think that in the third quarter we will be on the anticipated speed that we need, and we have agreed with our partner, Fuji Film, that we will equally divide the machines which become available for sales. You can imagine that we have committed a certain number of machines for this year to our OEM partner and we will deliver accordingly.

Is that what you wanted to know about the deliveries to OEM?

Yes. And particularly, are you satisfied? Can you give us some idea what the Q3 -- if you like the acceptable level you hope to be at by Q3 in the ramp-up? How many machines can you theoretically deliver a quarter on the Q3 production planning?

I'm sorry but we don't unveil the numbers that we are going to produce this year. I can tell you one thing. At this moment, the machine is more bought by customers than sold by Oce. So there's more demand than supply, which is good news of course.

Is it -- but is the gap a bit too big? If this is going to be a real hit, given that it's a very attractive machine, you've got two sets of distribution, are you just going to have something where you miss the opportunity, the full potential of it because you just can't get to the production capacity within an acceptable timeframe?

No. We will be able to increase our manufacturing according to the demands, but it's a matter of, let's say, a few months before we are up to speed, as already said.

Okay.

And then how the money flows you said, yes?

Yes.

Well, we don't unveil, of course, the prices that we have agreed upon with our OEM partner for the machines and what about the inks, Carlo.

Lucy, we will deliver our own inks to our own machines.

I see. And then Fuji inks to Fuji machines?

Yes.

Yes.

So, basically, when you sell a machine via Fuji, in terms of the very profitable tale of service and supplies, that's money in the pocket for Fuji, isn't it?

Yes.

And you're just selling that. You just make the margin on the machine?

Yes. But we deliver the supplies, the parts, of course, of the machine. But let's say the ink is in the pockets of Fuji.

Okay.

So we deliver the machines and the spare parts etc. But what I would like to emphasize is there is such a big market potential that we are convinced that this is a very good step to increase, let's say, the sale of display graphics within Oce. Especially because Fuji is addressing other market segments than Oce and, together, the increased distribution power is certainly very well benefiting to Oce.

Okay. Good. Then my second question comes on to the global imaging deal. As I understand it with global imaging, it's been a series of semi-decentralized businesses that were acquired over many years and each of them had their own dealerships. I suppose if I look at it and say what are the long-term implications?

On the positive side, I guess Imagistics might pick up some business, if Xerox is going to chuck other people's machines out over the next 18 months, or at least in terms of new sales, that gives you an opportunity to do some selling for other people. On the other side, I suppose, if I'm a manufacturer, this shows me the danger of third party distribution. A point you've always made. Do you think that this will make your key suppliers on the Imagistics side just put slightly more emphasis on their own distribution rather than Imagistics for defensive reasons?

No. I would say, Lucy, that the OEM suppliers, at this point in time also delivering to GIS, will be more receptive to Oce.

Is that a very -- is that a naturally optimistic assumption?

No. It's a fact. You know those suppliers have their own distribution channels. That's correct. And perhaps they will try to increase those distribution channels as well in the future. But, in the meantime, I'm convinced that they have to work on the remaining distribution channels. And one of those distribution channels is Oce.

A question that follows on from a number of previous questions, on the 6250. To an outsider, it seems a tremendously long time lag, even within the range of your normal time lag, between when the machine was shown and you started taking orders and when it's impacting on the results. When I look at the awful result in DDS, you can't have much impact from the 6250 yet.

Now, you did explain that, of course, it's not only getting production up to speed, but it's also the machine arrives, it's in the trial period, and therefore, you can't book it in the results, even if it's already at the customer. But can you give us some idea? Are there real bottlenecks in the supply of the 6250? Are there a lot of customers out there that should have had it already and are frustrated? And when, in terms of the delivery, is it going to be at a satisfactory level? Is that still an issue?

No, let me take you through the timetable of that project. We launched the machine one year ago, so that was more or less six months before we had first customer installations. We wanted to make sure that the product was also under customer circumstances performing excellently, which it does.

But what we did is we conducted what we call a customer trial for three months, as well in Europe as in the United States. That was from September until December. We were very satisfied with the results of that customer trial, as well from the machine performance as also the performance of the service and the sales organization, so we released the machine for what we call general availability at the beginning of Q1. And parallel to that, we ramped up our manufacturing.

So what you see now is gradually increasing sales, increasing our order book, and increasing manufacturing. And we do not see any, let's say, delivery issues coming up for the remainder of the year.

Okay, that's very good. Then, just a little question. I'm still not clear in my mind within the R&D that you capitalize, exactly what's in there for this quarter. Does it work that this would be mainly a number related to the 6250s? And do you capitalize, or are you allowed to capitalize that R&D spend when you get orders, or just when the thing looks like it's a winner in an abstract sense? And how much of a value judgment is there in deciding how much you can capitalize?

Well, there is, Lucy, there is in fact, on how much you can capitalize, there is not too much of a value judgment. You basically -- the value judgment is on whether a product is going to fly or not going to fly. And that is, you take a decision in fact at a certain stage in its development.

We're following, in fact, a product from the beginning until the very end so, in fact, in terms of expectations, number of units sold, and the income from that. But at some stage, you feel it's a flyer, it will go, and it will actually be a commercial success. From that moment on, and it's a defined moment, it's a process where we give authorizations to do further things. You start capitalizing it, and then there is no value judgment. It basically is -- you know exactly what you can capitalize and what you cannot capitalize.

Then, as soon as the product becomes commercially available, it has passed a certain stage in that development cycle, so it's basically delivered to customers; totally cleared to delivery to customers. You stop capitalizing and you start, in fact, amortizing.

So the process is totally clear, and there's no value judgment. The value judgment is, at some stage, will the products fly or not?

So if we do see a period of time, coming back to an earlier question, where we have, if you like, abnormally high levels of capitalized R&D, what you're saying is it's like in subsequent quarters, we'll have a slightly level than expected of amortization?

Yes, over a period of years, you will get the impact of that in your amortization. That's correct, yes.

Okay, that's good. And then, to end maybe with a rather direct question. I accept that you're saying very much that you're just on this edge of really getting going with the 6250, so that this, in the next couple of quarters, all other things being equal, we should see the 6250 rescuing DDS a bit. But of course, you've explained a very clear timetable in terms of 6250 deliveries, but it sounds like you were a bit disappointed by what you saw when you got the figures in for the first quarter from DDS. How much was DDS below your budget for the first quarter?

We don't unveil budgets, Lucy. And yes, you are right, the 6250 will be a very important element in the recovery of DDS, but in addition to that also, let's say, the rollout of the Imagistics model in Europe will be as important as that. So we started in January with the implementation of this strategy, and we really are making good progress there. It's not only like I said in the introduction, the building of an OEM portfolio with our partners, but we also see already first very encouraging sales results in the first quarter already. So it's more than just 6250.

Okay, great. And my final question, to end on a happier note, [cobalt]. What's the timetable for that? Can we just confirm that?

We are still on track. No further negative surprises.

Okay, thank you.

Okay.

We have a question from Mr. Peter Olsen, Kepler. Go ahead sir.

I had a follow up on the operational excellence project. When you announced this project early this year, I understand that the plans for the harmonization of the IT were not yet finalized. Have these plans been finalized, and how does that impact the savings you were looking for?

Well, the harmonization of IT, the business processes, what we do, we basically -- you harmonize processes, you adjust your organization, and you implement IT systems. We are in full swing there. It's going on. And as usual, in implementation of IT projects, and we've all been part of that, it's quite a complicated and thrilling issue in fact to do. And we're in the midst of it, and it will take 2007 and at least 2008 as well to do it in Europe and the rest of the Oce Group. So it will take some time, and we'll get the benefits gradually over time.

We've now implemented the system, or we're in the last phases of ironing out the wrinkles in Germany. And in the course of this year, certainly, Germany should start seeing the first benefits of that. And then we're rolling it out consecutively in Europe, and we'll definitely get the benefits from that in time. We'll also get the cost of it. As you know, it's obviously, in the implementation of IT systems, it's not a cheap process, so you get costs and you get benefits, and the two should initially offset, and then the benefits should overtake the costs.

Does that mean that '07 there will be a net cost then?

Yes, but the point is you get, on the one hand you get a cost; on the other hand you get an amount which is going to be capitalized. And then, later on, when the programs are running, you start amortizing that capitalized IT. I said before that of the EUR10 million that we did in intangibles, the investment intangibles, about half of that is, in fact, is IT capitalizations. Once you start operating that software, you start to amortize it as well. So you get, on the one hand, you get some of the items you cannot capitalize, others you can capitalize. And I think net, we've already taken that into account in all our thinking. This year I think the IT costs might be just slightly higher in fact than the [inaudible]. But that is only not because the IT program isn't correct, but in the initial stages of any IT project, there are costs that you cannot capitalize.

Okay.

Does that answer your question sir?

Yes, it does.

The next question is from Mr. Stephen Ganeau, Petercam. Go ahead sir.

Yes, hello. I've a follow on question on one of the previous questions. On the one hand, you indicate that financially speaking, DDS did not have a good start. On the other hand, we will see the 6250 and the rollout of the Imagistics model in Europe having a favorable impact. Do you believe this will be enough to satisfy your financial targets for DDS in the remainder of the year? Or would you not exclude that you would have to take additional restructuring measures in DDS?

Well, Stephen, you missed two other elements which are very important to the development of DDS as well. One is the development of the recurring revenues, which is moving into the right direction. And the other one, is [business] services. And we anticipate, as far as we can see today, you never can give guarantees, but as we see it today, we don't need restructuring charges for the remainder of the year.

Okay, thank you.

There are no further questions at this moment sir.

Alright. Well then, I would like to thank everybody for participating in this call. And, as you know, Carlos Schaeken, the successor of Pierre Vincent will be available for follow up questions during the rest of the day and the week. Thank you and goodbye.

That concludes the Oce conference call. Thank you for attending, and have a nice day.