Canon Inc (CAJ) 2008 Q2 法說會逐字稿

All right, since it is shortly after 11.30 we'll start and perhaps people will still come in but that doesn't matter.

Welcome to this Analyst and Investors Meeting of Oce, talking about the second quarter results. Also a welcome on behalf, of course, Mr. Jan van den Belt, our CFO, and Mr. Carlo Schaeken, our Investor Relations Manager.

We think that Jan and I will do the presentation together, that it will take around 40 minutes. And after that, of course, there's time for questions and answers.

This is the buildup of the presentation. After, a summary of the second quarter. Mr. van den Belt will take over and he will lead you through the financial results, the analysis behind it. Then we will talk about the results of the three strategic business units, update you on the Operational Excellence program, which we have expanded, as you have read in the press release. And then we finalize with some conclusions.

Let's start with the summary for 2000 -- the second quarter of 2008.

The results of Oce in the second quarter have been impacted by two main factors. One is an economic slowdown in a few of our markets. And the other is, of course, the very strong euro against the U.S. dollar and the British pound.

The printing industry is affected by the reluctance to invest, especially in the financial sector and also in the construction sector. We have seen this trend already in the United States in the first quarter. What we did see that is also in Europe the construction sector is delaying, especially in Spain, the U.K. and, to a lesser extent, in the Nordics.

And this, of course, has impacted our revenues. We see a decrease in total revenues and in non-recurring revenues, the outright sales, whilst the recurring revenues were flat if you exclude for the special factors like Fax and the sale of Oce Document Technologies.

The normalized EBIT which, in this case, is the true indicator of our business going forward, fell as a result of the lower revenues and the currency effects, to roughly EUR20m.

Is it all bad? No. We also saw in some segments growth, driven by expansion of our sales force, especially in the office in Europe and a strong product portfolio combination of Oce and Konica Minolta products. We did realize growth in the segments in the corporate markets, the office and the print room. In Business Services, of course the outsourcing, and also growth in Display Graphics in the Wide Format applications in the graphic arts market. And certainly the partnerships with Konica Minolta and with Fuji Film play a very important role in these developments.

As you know, the third element of our strategy is what we call Operational Excellence. We are continuously and in a structural way improving the efficiency of our organization, reducing our costs, our working capital. And the implementation of the total amount of EUR80m and savings for 2008 is in this framework on track.

In the first half of 2008 we reduced around EUR20m of our costs, and the other EUR60m will come in the second half.

Part of this implementation we reduced 280 job positions in the first half. The target is 350. But we have extended this plan going forward in response to the economic situation. And that means that the -- we have an extension built on the existing plan so, in total, an additional saving of EUR50m in 2009, and a further reduction of 600 job positions.

I'll come back later on the, let's say, on the details of the restructuring program, but now I would like to give the word to Mr. van den Belt, who will first take you through the Group financial results.

Thank you, Rokus. Ladies, gentlemen, I'll talk about the financial results as it says here, and here you've got the overview. You can see that, after six consecutive quarters of organic growth and revenues, there was a decrease in this quarter organically of 2.3%. And including the exchange rate effects, the decrease was 9.3%.

And that comes because non-recurring revenues, that's the sales of machines and software in Professional Services, were down by 5.3%. And, in particular, continuous feed revenues felt the impact of the worldwide turbulence in the financial sector.

In Wide Format, the technical documentation market was impacted by the slowdown in the construction sector in the U.S., but also more and more in Europe.

Organically, recurring revenues was stable if the impact of the rapidly declining Fax sales are excluded. And including the Fax sales recurring revenues were down by 0.9%.

For -- and that I think is an important point to mention, for the total of the Oce portfolio, 25% of the revenues are now in Color, against 18% last year. And it is both in DDS and WFPS that we have made a substantial increases in Color sales.

If we go to the gross margin, you can see that as a percentage of revenues it's down from 39.7% to 39.1%. But this decline is fully explained by substantial restructuring costs that we took in the second quarter, and that, if you correct for that, the gross margin even went up, and I'll come back to that later.

Operating expenses. There was a market increase in the operating expenses percentage of revenues. And corrected for incidental factors, the increase is slightly less than is shown there, it was 1.4%. But in absolute terms you can see that the operating expenses went down by EUR14m. And that decline is fully explained by the relative weakening of the U.S. dollar and also very much pound sterling.

Organically, there was only a slight increase in operating expenses and this, taking into account inflation, already reflects the first impacts of the cost savings program. This program, whereby we'll save EUR80m in 2008, has an impact both on the cost of good sold, that's the gross margin, and on the operating expenses.

In the first half, as Mr. van Iperen already mentioned, the total savings realized were EUR20m and 280 job positions were reduced, two eight zero.

Operating income fell, as you can see, by two thirds, but I will come back on this in the next slide when we talk about the normalized numbers. But an advance message here is that normalized operating profit was down by about 32%. And normalization is obviously also an issue with net income.

Return on capital employed at 7% was higher than in 2007, when it was 6.3%. And on a normalized basis return on capital employed was 6.8% against 6.6% last year. And on this slide, the last thing I would like to point to is the continuing reduction in our net capital employed, which you see at the bottom of the slide.

What we normally do, we show you, and that is the one thing that we really would like to look at, is the operating profit excluding incidental expenses and income, the so-called normalized operating income. And, in general, these normalizations relate to restructuring expenses, to pensions adjustments and one-off impact on operating profit of divestments.

And in the second quarter 2007 and 2008 there were restructuring expenses. Whilst in 2008 there was a one-off benefit in this quarter relating to the divestment in the first quarter of Oce Document Technologies, we realized an additional profit on that sale.

Corrected for these effects, and there you get a real like-with-like comparison, the normalized operating profit in 2008 was EUR9.4m lower than in 2007 or a reduction, in fact, of 32%. And, once again, anticipating on what I'm going to say later on, of that difference of EUR9.4m, EUR5m is the net effect of exchange rate losses we've made. That is after hedging.

In order to give you a slightly better view of the one-off incidental effects, this slide you'll find an overview of the profit and loss account up to the operating profit on a normalized basis.

Revenues are, of course, unchanged. But the gross margin as a percentage of revenues, and here you can see it, is up compared to 2007 in spite of fear competition -- fierce competition and a change in the product mix which we have, in line with our strategic objectives, we've been able to maintain our relative gross margin. I think that's an important statement to make here.

The decline in operating expenses for the quarter is fully due to exchange rate effects. And operating expenses in 2007 included the operating expenses of Oce Document Technologies, which we divested in 2008. So excluding the exchange rate effects and these incidental factors, operating expenses slowed -- has showed a slight increase in the quarter and year to date.

Operating income. I would like to highlight that more than half of the gap between the normalized results in 2007 and 2008 is explained by the exchange rate losses which were EUR5m after hedging.

You may notice that in the presentation this time I've not included the balance sheet. The numbers of the balance sheet are in the press release, you can see them there. And the movement and development of the individual items are reflected in the cash flow statement and that's why we haven't included it. But, of course, any questions you have on the balance sheet you can pose later. But the message there is that we continually get our assets down over time.

In this statement, which is the cash flow statement, which, by the way, is a year-to-date presentation. So it's not for the quarter, it's year to date. The first item I'd like to highlight is depreciation and amortization. That is about EUR10m lower than it was in 2007 and that's the result of exchange rate effects and the disposal of assets in 2007 and 2008.

But the item which really catches the eye is the increase in working capital by EUR70m. And in the next slide I'll show you the individual components of working capital, but it's clear that in the next two quarters this is the area where we will take additional action. Our working capital is not going to end up with those numbers. Our working capital should come down.

The main reason, by the way, of the increase in working capital is an increase in inventories. And the reason that our stocks in our inventories went up is due to the fact that we -- our OEM products stock increased and lower sales, in particular in continuous feed in the technical documentation market, led to, and I would like to emphasize the word, temporary increases in stocks.

And on accounts receivable, that's the other side of the story, we had a very solid reduction as we had in previous quarters.

But getting back to the cash flow, overall the free cash flow is EUR106m negative, meaning that in the second quarter we had this small surplus of about EUR3m.

For the year, however, we are forecasting a positive free cash flow, whereby, of course, next to the proceeds of the Arkwright divestment, in particular the improvement in working capital, will contribute heavily.

If you go to the ratios, and here we get an important part of the working capital explained. But as far as the ratios are concerned, and I'll take them one by one, the net debt over EBITDA is higher than at the end of 2007 but it's still below what we call the safety or the comfort zone of between 2 and 2.5. Between 2 and 2.5 we would like to be but, of course, if you're below it gives you an extra cushion to catch fluctuations in your cash flow.

EBITDA from net interest, interest cover, well, that's fully adequate. I don't have to go into that.

The solvability, which is equity over assets, is down from the first quarter, when it reached the target of 30%. This fall is due to two factors. First of all in May we paid the dividends, EUR42m, in one fell swoop. That goes, of course, off your equity. And we had high cash balance at the end of the quarter. So this ratio, even though it's below 30%, it will recover during the year to 30% again. So not an area for concern.

Gearing. Net interest-bearing debt over net interest-bearing debt plus equity is below EUR50m, where we want it to be, and it will stay below there.

Inventories as a percentage of revenues, as we discussed, too high. Our target is to get to close to 10%, whilst at the moment it is at 12.5%.

Now the good -- the very good news is the accounts receivables over revenues, you see it coming down, in fact, over time. From 16.6% in 2005 we're now at 12.9%. We have -- one of our targets is to be best in class in this area and we are getting close to that. And the best in class we've defined as between 11.5% and 12%. So we're getting -- really getting close. We're doing well there.

Payables. Accounts payables as a percentage revenues. It's structurally on the way up and there is scope for further improvement here and you will see that.

And I would like to draw your attention to the fact that we have shown here comparisons between the second quarter of 2008 and the year-end numbers for the years 2005, 2006. Of course, as you know, at a year end these ratios are normally better, in fact, than in the intermediate quarters.

Well, finally, and that's a thing that I would like to mention here is that return of capital employed at 7%. If you include the incidentals, 6.8%, if you do it on a normalized basis, it is too low. And it's the one ratio in this slide which is not yet developing satisfactorily. The others, in my opinion, are.

Ladies, gentlemen, this is where I would like to leave the financial numbers in the first instance and like to hand to Mr. van Iperen.

Thank you, Jan. All right, let's take a look at the strategic business units, starting with Digital Document Systems.

Also in the second quarter, I said it already in my introduction, the printing industry was affected by the developments in the financial market. In our case, that resulted also in the second quarter in a steep decline of the sales of the so-called continuous feed printers. As a result of that, the total revenues in DDS declined with minus 4.8% organically. The non-recurring, even with minus 9.2%. The recurring revenues were stable, again if you exclude the effects of Fax and ODT. And the normalized EBIT ended up at the same level as last year.

If you take a closer look to what is behind this, here you see the progress that we show in DDS in the implementation of our strategic plan. We realized growth in cutsheet systems driven by the expansion -- the planned expansion of the sales force in office in Europe, with around 100 sales reps over the first half year, and also the success of the Oce 6000 series combined with the Konica Minolta color machines mainly.

I just mentioned the slowdown in the financial sector on the sales of continuous feed. Having said so, our market position in that continuous feed market remains strong. We don't lose customers. Customers delay their investment decisions. And we continue to gain new contracts as well. On the next slide, I will show you some examples of that for this continuous feed business.

The co-operation with Konica Minolta is progressing well. As you know it's on one side mutual distribution of each other's products, and the other side also joint product development.

On Drupa, the world's largest exhibition in the printing industry, we launched more versions of what we call the Oce JetStream family, full color inkjet machines. These were well received. Oce has now the broadest product portfolio in very high volume color inkjet printing in a range between 750 pages per minute up until 2,800.

Because of the importance of this industry for the future of Oce, I'll come back later on Drupa shortly.

In conclusion, what we see is that DDS is making good progress in the execution of the strategic plan. The progress realized in cutsheet printing is very good. It's of course now a little bit hampered by the development in continuous feed, but I'm convinced that that business will come back as well. We have a very strong position there. We don't lose customers. We don't lose market share, so it will come back.

The enforced operational access program will further reduce costs, which is so important for DDS and working capital.

These were the examples I mentioned of major contracts. First one is a company called Direct Group. It's a leading U.S. direct mailing company and their target is -- their objective is to print large-scale fast personalized mails. Oce sold in this old IBM customer 47 printers, one JetStream 2200, 14 times the Oce 6000 and 32 Oce continuous feed machines. So really a combination of the three very high volume technologies that we have.

Part of that deal has already been delivered in the second quarter and the rest will be done in the third quarter.

Another example of good continuous feed deals is T-Systems. It's the daughter Company of Deutsche Telekom. They are building a new U.K. print center for 500m pages A4 per year. And they use two Oce color machines in continuous feed and three Oce very high volume cutsheet printers. So what we see is the combination of very high volume continuous feed, very high volume cutsheet. The software that belongs to that really gets big customers to Oce.

In Business Services, we realized a growth in the second quarter on an organic basis, 5.4%. What we did see in Business Services that also in economic difficult circumstances customers continue to outsource these kind of activities.

The EBIT development of Oce Business Services in the second quarter has been affected by the startup of a few very big contracts, mainly in Europe.

Also here, I really would like to mention a fantastic contract that we gained in the second quarter with Cambridge Assessment Group. It's the largest assessment institute in the world -- in Europe, sorry. And they are delivering assessments to up to 8m candidates per year in 150 countries. So huge volumes. And Oce will there execute all print and distribution operations in a contract which is worth GBP8m per year for five years.

Then we go to Wide Format Printing Systems. Construction market, 60% of technical documentation is in the construction market. And the slowdown in the construction market in the U.S. of the first quarter continued in the second quarter. What we now see that it also expands in Europe and especially in Spain, in the U.K. To a lesser extent in Nordics, we see a slowdown of this market.

And the printing industry has, of course, been impacted by that as well, as well in non-recurring revenues and now also in recurring revenues. Total revenues for Wide Format declined as a consequence of this. It's 1% organically.

The non-recurring, we were still able to grow with 2.8%, but that's fully, fully thanks to the growth that we realized in Display Graphics. There's a decline in the sales in TDS. And the recurring revenues is declining with almost 3% organically because of lower print volumes and less media. Lower activities means lower prints.

The development on the EBIT has been influenced by R&D investments, startup costs for the Oce ColorWave 600. We are now in the ramping up phase of that product. By the way, this ramping up is going according to plan and the restructuring expenses, of course, are also partly related to Wide Format Printing.

Execution of the strategic actions in Wide Format. Growth in Display Graphics is continuing. The total size of the Display Graphics market today is around EUR4b and growing relatively fast, 6% to 8% per year. And we think that another EUR6b of printing, which is now in analogue printers, will shift over time to these digital applications.

Oce is growing strongly in this market. It's mainly driven by the strong Arizona 250 GT, as well, via our own sales force as also via the partnership with Fujifilm.

You have seen that we have acquired a relatively small French software and services Company in this field, called Intersoft. They deliver unique print on point of purchase applications for the retail market. So they deliver the software, they deliver the services and that, in combination with Oce printers, delivers a full solution for this growing market application. And the concept will not only be applied in France but it will also be rolled out to the other countries.

On the product side, we have expanded this Arizona family with a lower volume version, the Arizona 200 GT. We have added Roll Media options so that you can print on vinyl, on textile, etc. And, as already said, one of the main elements of the second quarter was the launch of the Oce ColorWave 600. Very well received in the market. The balancing act between sales and availability of products is something that we have to manage carefully this year, but it's going well.

Yes, yesterday evening late, we agreed on the sale of Arkwright. Arkwright is a manufacturing Company of coated media in Rhode Island in the United States. And Arkwright is no longer part of the core business of Oce.

We have found an interested party called the Diatec Group. It's an Italian Company, also in -- active in paper and media. And they have acquired Arkwright. The financial impact of that is a net cash flow of EUR17m, an operating book loss of EUR4m and then an effect of the currency translation differences that up until now had been included in the Group equity, so a very technical issue, of EUR18m, which will have, all in all, a P&L effect in the third quarter of EUR22m and a reduction of the capital employed of Oce is more than EUR21m.

We expect that the closing will take place in the second half of this year. It's mainly in Rhode Island and a small operation in Venlo in Europe.

Drupa. I said I would give you a short feedback on Drupa as well. Drupa is the world's largest exhibition in the professional printing industry. And what you really see in 2008 compared to the last Drupa in 2004 is that the professional printing market has embraced digital technology without hesitations any more.

The trends going from analogue to digital, the trends to -- certainly also to color applications is clearly recognized. Oce has already a successful business in this graphic arts market. But we have also experienced during this exhibition that also the market sees Oce as a well positioned Company to become more successful, based on products like the VarioStream series, the ColorStream series in the continuous feed, the JetStream inkjet, but also on the wide format side, the ColorWave 600 and the Arizona.

Only products is not enough. Our direct sales organization, with a high quality service is an absolute prerequisite to make that happen.

Then operational excellence. This is the overview of where we stand with the original reduction plan that we communicated to you in April. EUR80m savings in total, consisting of, all in all, EUR58m direct costs of which EUR16m has been realized in the first half. EUR22m reduction of personnel cost, of which still only EUR4m is realized in the first half of the year.

I said it already, 280 job positions have been reduced out of the target of 350. And the related restructuring cost to those 280 positions is EUR17m. So, the implementation of this cost restructuring plan is on track and in the second half of this year we will realize the EUR60m adding up to the EUR80m.

But during the second quarter we have worked on a further extension of this plan. In response of the further economic slowdown we built out this plan further and we have increased the savings with an additional EUR50m, which will take place in 2009.

Realizing this EUR50m savings implies that we have to reduce our job positions with another 600 employees, a combination of Europe and United States, also a combination of the supply centers and the operating companies. All functions are related, with the exception of sales. All of the functions will be reduced.

So, all in all, the total savings plan that we have now in place will lead to EUR130m in savings, of which EUR80m in 2008 and EUR50m in 2009. The related restructuring costs are EUR45m in 2008 and EUR20m in 2009.

Which brings me to the conclusions. Yes, there a few -- there are -- no, a few -- there are two very important markets, which influence the results of Oce, financial sector and also the construction sector. In the other segments, like Display Graphics, business services and the corporate market we continue to grow. That means that Oce will continue to implement its strategy in which we strengthen our distribution power, continue to invest in our product portfolio but, on the other hand, continuously reduce our operating costs.

We are of the opinion that this strategy and the additional measures that we are taking in terms of cost will enable us to counter the impact of these adverse economic conditions as much as possible. But in view of the uncertainty of the developments, we do not give any outlook for the rest of the year.

That concludes our introduction and we are now having the discussion with you.

Yes, good morning. Arun Rambocus from Kempen. A few questions. First of all, what has actually changed compared to three months ago which made you decide to go deeper into your organization, because if I read through my notes I think you already mentioned Europe -- the construction side in Europe and Spain as a worry back then? So, what has actually changed?

And is this really the maximum you see? What if your conditions deteriorate further? Do you have any follow-up plans to cut in deeper? That's for the first question.

Second question is on the dividend. What is your view on the dividend? Well, and can you maybe repeat your policy on the dividend? And is that something you think, the level of last year, could that be sustainable?

Those are the questions?

For now yes.

Let me start with the first one on why did we decide to cut further than what we decided in the first quarter. Well, going forward in the second quarter, if you recall in the first quarter we were still growing in sales. We grew at around 5% or 6% in non-recurring revenues in the first quarter. We see now in the second quarter that the non-recurring revenues declined with 5%.

So that means that the effect of the deterioration in the financial sector and the construction sector continue and even had a stronger effect on our results in the second quarter than in the first. So, we decided to -- when we were, let's say, implementing and analyzing the cost cutting that we announced at the end of April -- at the beginning of April, to look as far as possible in cutting costs without changing the strategy, without changing the business model of Oce. And this is the plan that we came up with, meaning that we are going to cut another EUR50m.

Is this the end? This is the plan that we have defined for ourselves and this is the plan that we are going to implement for the next 12 months.

Okay, dividend policy, Jan?

Yes, our dividend policy is to have a stable or gradually increasing dividend in line with our results. That is what we have said and we have to, of course, be aware of it, it's all part of the policy as well, to cover it from the net income or from the free cash flow. And the condition precedent is, in fact, healthy balance sheet ratios and that is our policy. It was our policy and it is our policy and we would like it to stay our policy.

And, of course, the dividend, we have just had our Annual Shareholders' Meeting, where we declared a dividend for this year. And it will come up again, in fact, in April next year. But our dividend policy is completely unchanged.

If I recall, maybe I'm a bit of a veteran following your company, but if I compare this downturn and to the previous downturn and the previous downturn, your earnings were smoothened out by the incomes of leased portfolio. And that clearly was a good reason to keep the dividend at a certain level. But now it seems that your earnings are becoming more volatile. You could also think of the fact that your policy should change according to that when -- I'm just thinking out loud.

Yes, well, we've -- obviously when we started to sell the -- this portfolio we indicated that volatility would become larger as a result of that and we have never hidden that fact. But it hasn't led to -- well, we have changed our dividend policy, but what we are saying now as a dividend policy is completely unchanged with the results we have and with the results we will have.

Maybe a final question for you on the cost savings. What should we assume as retention for the cost savings? So, if you save EUR50m in '09, what is the reasonable retention for our model? Is it 50%, 70%, 100%?

What do you mean by retention?

So, to what extent will you fully take those cost savings in your P&L or maybe you partly have to pass it on to -- lower your prices and pass it on to the end client to become more competitive?

Well, the savings are related to all functions, so including we talk about service. And you know that the cost of service are in the gross margin. It's related to the logistics, to the manufacturing, to R&D, to administrative people. So, there are categories related to the operating expenses and some to the gross margin.

We are now working on the plans. Also, we are discussing with the social partners about this. So, it's too early to give you a detailed information on who is going to go where and when. As soon as we have worked that out we can give you that information, so you can see then what cost will be in the margin and what costs were in the OpEx.

But that's not what I mean. What I mean is historically if you implement cost savings, how much of these cost savings will be retained?

Well, we've-- and if I may go ahead?

Yes, sure.

We have in the past made some indications, of course, on the impact of inflation on our, for instance, our personnel costs. And in order to cover those you have to sell more, make more gross margin or -- and/or, in fact, make savings. So the one thing that we show you is the numbers, which were not taken into account, that there is inflation, that there are other factors as well at play. So do not add EUR80m, in fact, to the operating profit of last year and say that's going to be the new operating profit.

But what we're doing, of course, is in order to make a good operating profit possible we take these measures. And that will actually -- that will help us achieve the operating profit we want to achieve.

Okay. And what has your inflation overall been in the first half of this year? You talked about 3% wage inflation. But overall how much has your cost bill increased because of input costs and whatever else contributes to that?

Yes, I haven't got a rough-and-ready figure because, on the one hand, in cost you're helped, of course, by exchange rates. If you measure it in euros that does, of course, help. On the other hand it's -- we've obviously been faced with, both in the operating expense and in the cost of goods sold, with very rapidly rising fuel costs. That logistically is important for us.

And the example that Mr. van Iperen will always tell you, we've got about 10,000 people running cars in Oce. They run about 50,000 kilometers a year, one in 12 per car and it is -- on that it's -- this 4,000 liters per person. Multiply that by EUR0.50 increase in costs and times 10,000 you get to very large numbers. So, the exact number I do not like to give. But if you look at -- if you talk about personnel cost, you talk now about 3% to 4%, in fact, worldwide, yes.

There is one remark to be made to that otherwise you make perhaps wrong calculations. If you talk about personnel cost, the personnel cost for business services, that's around 7,000 people, and the personnel cost for service, that's around 5,000 people, are in the gross margin. And certainly in the maintenance contract for service we have built in a clause for indexation.

So the inflation is mostly affecting the operating expenses. And you have seen that the operating expenses were around EUR500m in the first half of the year. So then you can at least make some calculations for yourself.

Wim Gille from ABN or RBS nowadays. With respect to the EUR130m cost savings, can you give us an indication on what is cost of goods sold and what is operating expenses?

And maybe a bit of a follow-up on Arun's questions, only a different way of asking. You're currently stepping up the restructuring efforts vis-a-vis the first half. If I look at the first half you have your operating expenses in euro terms relatively stable. So should I actually start to look for a decline in your operating expenses mainly in the second half?

Then I get a question on your outlook. You do not give a specific outlook for 2008. Do you still reiterate your, let's say, 2010 targets? And based upon the implementation of the strategy, I can only assume that that is the case. And in other words, you guys still look for a relative stable gross margin going forward and a 13% return on capital employed target for 2010. That will be my first two questions.

I think it was three, but we'll answer them all. The first question that you said was how is the EUR130m savings in the cost of goods sold and in the operating expenses. It's a little bit early to tell, because we are now in the implementation of those plans and we are, for instance, also laying off people in the supply centers, in Venlo and in [Boeing].

And what we do is we are now starting the discussions, having talks with social partners, like a works council, trade unions, etc. The intention is that by the end of our third quarter, so the end of August, we exactly know and everybody involved knows what's going to happen. So what I also just promised to Arun is that we can give you in the third quarter result exactly where the savings are going to, whether to CoGS or to OpEx, because it depends on how many people in the different disciplines will be leaving.

Can I -- may I make a comment?

Yes, sure.

On addition to that, if you look back on the first two quarters, it is roughly half and half. The savings you have on the service side, the maintenance side and on the general administration side were roughly equal. How to build that out for the future reductions that is exactly what you were referring to. But at least the feedback on the first half is half and half.

All right. Then the second question was what can we expect for the operating expenses in the second half of the year. There are some factors that we cannot really influence, like oil prices, etc. But what you really can count on is that the EUR60m will be realized in the second half of the year, again divided between cost of goods sold and operating expenses.

And then your last question, do you reconfirm your ROCE target of 13% in 2010. The answer is yes. The way to get there is changed. I think you will recognize that. When we started the plan in the beginning of 2007 we said we will realize this ROCE target by growing our top line, average is 5%, maintaining our gross margin at a stable level and control our costs.

Well it's obvious for everybody that we shift the focus from top line to costs at this point in time. It would be a little bit foolish not to do so. But we are also pleased to see that even under these circumstances we were able to maintain our gross margin on the same level as a result of moving manufacturing to Asia, reducing service technicians, adding new functionality to our products. And we are convinced that that gross margin will remain on this comparable level for the remaining period. So, we reconfirm the 13% ROCE for 2010.

Frank?

Yes, Frank Claassen, Rabobank. A question on the reorganization charges. Can you please help us out a little bit? If I understand it correctly, Arkwright, the sale will lead to a minus EUR22m on the operating income in Q3. Can you again try to explain how that works on the financials?

Very technical.

That's one question?

Yes, and then --.

Well, let me start on that. The first and the easiest one to explain, if you -- it's -- basically it's an asset sale that we do. So the price that you actually get and the value of the -- the book value of the assets, there is a difference of EUR4.3m and that's the EUR4.3m. That's a loss. That's one.

The second thing is, over time, and [Mr. Schaeken] will explain it to you in the minutest of details, but over time we've made losses, in fact, on the equity investment we had in Arkwright. That equity investment has gone down in euros. In dollars it hasn't gone down. But in euros it has gone down. You take that into your -- what you call the cumulative translation differences in your equities, whether it's in equity, simply goes down as a result of it.

If you, under the accounting rules, if you divest of the activity, only if you divest, it has to go in equity from cumulative translation differences to retained earnings. So, you have to actually loop it through the profit and loss account to get it into retained earnings. So that loss that you make there of EUR18m is an item which has already been incurred. It's got no impact on your equity overall and has no cash impact. It is purely an accounting exercise that you do.

So the EUR4.3m is an actual loss, in fact, on book values. It doesn't have a cash impact, but it is on book values. And the other one is a pure accounting issue. But it has to go through your operating results because of accounting rules.

Okay. And if I understand correctly this EUR45m charge for '08 does include this EUR22m and --? Okay, because you -- initially at Q1 you said that the reorganization charges related to the layoffs would be EUR20m. And now we end up with a figure of EUR45m. Where is the difference?

Well, the point is it's -- we're talking -- we're not talking only about layoff charges. We're talking about restructuring expenses overall. So you get restructuring expenses throughout the organization and provisions being made. You come to a figure of EUR45m, yes.

So -- and that does not yet include the sale to Arkwright?

And as well -- that's right. Of that EUR45m, it is EUR20m of that refers to -- that was in the presentation. EUR25m refers to the EUR600m in 2008. There's the 600 -- to the 600 people that are going to -- 600 job positions that are going to be reduced. You get EUR20m in 2008 and EUR20m in 2009. So you have to deduct that from the EUR45m. You come to EUR25m, which was shown on the presentation as well. And you have some additional expenses and then you come to the figure that we have shown before.

Okay. But if I add it all up, that's quite substantial charges in '08. Then of course it also depresses your net profit. Coming back on the dividend, you've got, if I remember well, EUR0.64 last year. Suppose that you would end up in your profit below the EUR0.64, would you be willing and able to nevertheless pay out a stable dividend, so higher than your total profit? Or would be -- the net profit level will be at -- be the maximum level?

Well let me repeat our dividend policy. We basically said what we want to do, we want to actually be able to pay the dividend out of net profit or out of the free cash flow at healthy balance sheet ratios. So what you're trying to do, you're trying to make us project, in fact, for the future, which, as we've said, we will not do.

Okay, so -- but it's -- technically the net profit level is not a constraint for you to --.

Net profit and free cash flow are the items which determine, in fact, the level of our dividends and our dividend policy to show, in fact, stable or rising dividends in line with profit developments.

All right, thank you.

Can I ask you a question about that?

Yes.

You're going to get both of them to be higher or if either one?

No, it's one of the two. It's either net profit or free cash flow, and preferably both.

Next question?

(Inaudible) Securities. What is the percentage of the machine production that you are producing in Asia now?

Out of the original Venlo manufacturing, 80% -- at the end of this year 80% will come from Asia.

And the Fax business in the U.S., will -- the impact next year will that be vanished or we will see next year?

A few millions.

A few millions?

Yes.

Okay, thank you.

Yes, madam. Sorry.

Yes, hello. Stefaan Genoe, Petercam. I'd like to come back on the question regarding the retention rate of the savings at the bottom line. We talked about the inflation cost on -- the inflation on salary costs. You mentioned 3% to 4% worldwide. But I -- it's -- I can hardly imagine then across the world you're seeing 3% to 4% inflation on your salary costs. I don't assume in each country the salaries are linked to the inflation. Could you give us more -- some more color on your most important countries, for example, the U.S. and other countries how it works?

Not by heart Stefaan, we come back to that.

Okay. But I assume in the U.S. it's -- salaries are not inflation linked?

No. You're right.

The part in the U.S., of course, the variable salary is a more important element than it is in Europe, for instance. So it's very much related in fact to the performance, in fact, in terms of sales and profit.

Yes, but I can imagine in these difficult markets that the variable parts, it should not increase too much compared to last year.

No. You can also count that we will do with all the power that we have within our management to, let's say, to limit the rises for the years. And the -- okay, the legal indexation, like in Belgium, you cannot avoid. But you can imagine that also the discussions that we will have with our people about salary raises 2009 is a totally different story than last year.

When will most of those discussions take place?

For the Netherlands it has already been done and that will come back in July. So, we have now a collective agreement for the Netherlands until July 2009. And that implied a raise of 4% which is, as you know, average at this point in time in the Netherlands. But the discussion in July 2009 will be a totally different one and that's what I mean. It goes for a lot of countries as well.

Okay. And second, decisive factor for the retention rate is, of course, the price pressure, a more difficult market environment. How does the pricing environment evolve in your most important markets?

Not substantially different than one year ago. The main element that we face is that customers delay their decisions. So the 3% to 5% that we gave you roughly as a rule of thumb is applicable.

Okay. And then we've talked also about -- and I think in Q1 about the difficulties in the financial sector in the construction sector. A third important sector is the graphic art sector for Oce. We've seen some warnings in that sector also, but you're not specifically mentioning it here. How do you see this sector both in the U.S. and in Europe today? And are you also witnessing first signs of a slowdown for you also there?

I can only witness about the second quarter, if you don't mind. And what we did see, of course, in the second quarter is that some professional printers were waiting for that -- with their decisions until they have seen on Drupa all the new things. And as I said in my introduction, we really have enjoyed great interest in the Oce products.

How that does materialize in the second half of the year I cannot say, because it's not only dependent on whether the customer is interested in the product. It's also dependent on, indeed, how his own business evolves in the second half of the year.

And we are a few weeks after Drupa, is it still too early to see a different pattern from the previous Drupa?

Yes. What happened is we wrote more than double as many serious prospects on this Drupa compared to the Drupa of 2004. And these are now all distributed to the sales force and people are very actively giving follow-up to these sales leads. But in a few weeks I cannot say whether that has worked out already or not. It's too early to tell.

What we will try to do is to give you some insight when we report about the third quarter what the impact of Drupa as far as we can find it back has been. It's now too early to tell.

Okay. And then a final technical question, you mentioned in the press release the net debt/EBITDA ratio. I was wondering whether the banks and the governments are looking for the EBITDA adjusted for the rental depreciation and for the amortization of development costs.

The -- what we have, there are some small adjustments that we do make, but virtually you can work with the numbers that we do publish. So it isn't -- and the adjustments are so small that the numbers that we have here are really -- are a good reflection. In fact, you can calculate them from the numbers and on the way that the banks calculate them, and they come back with the same numbers.

Okay, thank you.

Yes. Jan-Willem Berghuis, Kempen Capital Management. Some small, let's say, housekeeping questions. On the capitalization of R&D, can you give a guidance for the second half or for the full year what the absolute investments will be this year? I think in the first half it was EUR33m. So, you give obviously the net number in the P&L, so maybe the absolute number for the full year, some rough guidance there.

And secondly, can you indicate how much were the hedging gains in absolute terms in the second quarter? So you already gave the EUR5m impact, but what would have been the impact if you were not hedged?

And then finally, on your guidance of a positive free cash flow for the year, I think -- I just wanted to confirm that includes divestments and acquisitions, and also the dividend I assume?

Jan, go ahead.

Well, as far as the hedges are concerned, the absolute amount is EUR7.4m, in fact. I can't -- it may be [5], but it is EUR7.4m, may be EUR7.3m, but that is the number. But we had -- last year we had EUR2m positive so the relative number is, in fact, EUR5.4m. And the total impact was about EUR10.4m negative. So the net number is EUR5m.

Sorry, Jan-Willem, you'll have to repeat --.

R&D capitalization.

R&D capitalization, how much that was. I think that gross we are now -- the gross number we are reckoning with is about EUR30m for the year, the gross number of the capitalization number. Sorry the -- yes?

And can you help me out because I think in the cash flow it says investments and intangible asset is EUR33m, but maybe that includes some acquisitions.

No, no, no. That is split between -- it is net EUR18m, in fact, in research and development and EUR15m in IT, so it is IT as well. It's not just research and development.

And can you give for both these numbers rough full year guidance for the IT and the R&D? So for R&D is it EUR30m for the full year, so it would be less in the second half?

Yes, that's correct. Because you get, in fact, a large -- the bulk, in fact, of the capitalization has to do with the ColorWave, with the CrystalPoint technology. And as far as IT is concerned, yes, we're continuing, in fact, with the implementation of SAP. So it's slightly less we think in research and development, and roughly the same level as in the first half in IT.

Thank you. And on the guidance, you can confirm that it's including your dividend the free cash flow, positive free cash flow?

The positive free cash flow, no, no. The free cash flow that we, in fact, is always without dividends. So it's before dividends. We pay the dividends out of the free cash flow.

And including the divestment?

Including divestments, correct.

And the acquisition you did?

And acquisitions, yes.

Yes. Okay.

Yes?

Niels de Zwart, Fortis. My first question would be on the cash impacts you expect from the restructuring charges you are taking both in 2008 and 2009.

My second question would be on working capital. You specifically mentioned that getting down your inventory position is a key focus point for you going forward. At the same time, your business model is changing, more of the OEM business in your inventories. So what can you do to get that lower? Isn't there just a structural rising trend from that?

And a third question would be could you update us on the rate at which you are hedged for the coming period?

You start?

Yes. The cash impact, what we are assuming is that around the EUR15m to EUR20m of the total provisions we will not pay out. So of the EUR45m that we have said, we'll pay out about EUR25m to EUR30m. The rest will be, in fact, cash-wise, will come in 2009. That's one thing.

You were asking about inventories and structural rise, in fact, in inventories. Well the answer to that is basically is no. What we're trying to do, we're trying to get a structural reduction in inventories with strategic alliances or alliances that you do have, in fact, with OEM manufacturers, like we've done now with Konica Minolta. You see -- initial you see a bit of an increase, but that will actually be corrected as well.

As you get more products, in fact, in your portfolio, for that reason you get slightly more stocks. We also had the fact that we, in particular in continuous feed and in the technical documentation market, we had slightly lower sales. You get a temporary increase in inventories but no structurally -- we're in fact on the way down as far as inventories are concerned. And, as we indicated, we want to get to around 10% of revenues.

It depends on the agreements that you make with your partner on the OEMs, whether you take vendor managed inventories or not, and this kind of concepts are now worked out.

And on the hedging?

On the hedges, the rates, I have to look it up but I'll be with you within 10 seconds because it is -- otherwise I'm not giving you the correct numbers. And I just hope that I'm getting to the right page on time. But it's always, of course, just the page before that you do not have in front of you. Here. 11. Yes, here we go.

The rate, in fact, as far as the U.S. dollar is concerned is 1.45 that we are now hedged 12 months ahead. It's not for the rest of the year, but it's 12 months ahead, and it's about U.S.$200m. And as far as the pound is concerned, we have got a rate of EUR0.75 to the pound, or 1.34 if you translate it, and it's around GBP40m.

Okay. Thank you.

Some follow-ups. Rokus, getting back on your comment on the extra cost savings, you specifically mentioned that you're not touching your sales force base, right?

That's correct.

What makes you think that this is the time to keep your commercial staff and space whereas you see contradiction trends in your end markets, right? How long can you keep up with that, and how much of your personnel base is the commercial side of your staff?

Okay. Okay.

Second question is on the logistics side, it's a point I never thought of myself, but how much of your cost base is actually logistics? And, Jan, can you maybe be a bit more specific on the inflation on that side, because that must be horrific as well?

And the third question is on inventories. We know that this industry has been facing severe price pressure over the past few years, is this, in the current market circumstances, a thing which is accelerating? Another way to reduce your inventories, like we've seen in other businesses, is to lower your prices, right? That will help to lower the [channels] as well. How are you guys doing on that side?

Yes. It's good to hear that you are thinking with us. The first one is about the sales staff. We increased our sales staff in Europe because we entered into a new segment, which is the office segment that we got access to because of the cooperation with Konica Minolta.

In general, if the economy is slowing down you need more sales efforts to create sales. If in an easy economy, between brackets, you need five sales cycles for one deal and it takes you three months, then easily in a difficult economic situation you need 10 or even 20 sales cycles and it takes you six months. So the workloads and the activity level of the sales force is of extreme importance to get your top line going again. So if you start cutting your sales then you automatically organize a decline of the top line.

Certainly, if you take into account the very competitive situation in which our present assortment is, there's no doubt what so ever in the industry, also the feedback from exhibitions and from customers is that the present offering of Oce in these three segments, wide format, continuous feed, cutsheet, is very competitive. So up until now we did not decide to cut in sales. The expansion for this year 2008 is now done. This is the level that we want to maintain for 2008.

Do you follow the reasoning behind it?

Yes, a bit. But there will always come a point where your sales staff is completely underutilized and you have to start to cut there as well.

No. That's what then you didn't understand my message.

I understand it, but I've seen these things before.

I've seen it all before.

Thank you. Explain me after the meeting.

Can I on logistics costs?

Yes.

We have about 8% of our revenues on our logistics costs, and we've got a fairly tough program to get the logistics costs down. But, as you have seen in the presentation of Mr. van Iperen, that of the EUR15m target that we have, only EUR3m has been realized. And one of the reasons, of course, that that has not been EUR6m or EUR7m, it's not as much as that by the way, but that it isn't slightly higher is because logistics costs have obviously been under pressure.

We've been able to contain it for a good while by longer-term contracts where you have contracts with your transporters, but it's an area where, of course, inflation is playing a role and we, once again, we're working quite hard to counteract that. But, yes, if you've got logistics, if you've got, in fact, rising fuel costs, you'll see logistics costs rising as well.

Inventories. Lower prices. Well, the point is that is in inventories you -- we like to get the inventories down not by lower prices. We like to get the inventories down by selling more, and that's what we're after. So it's not going to be -- if you go to lower prices and you go to inventories, that will actually hit your P&L account immediately and that's what we don't want to do.

What is the current pricing trend on your new equipment? Do you see already an erosion or is it stable? Can you give an indication on that side?

Well, we have -- on new equipment one of the ways to counteract price pressure is to get new products to market because new products, in fact, have higher prices. And what we're seeing, we're seeing that we are getting new products, we're getting new products, our own products and products from third parties. We're getting, in fact, more color, which is an upward pressure on prices as well. So if you look, for instance, at our gross margin at the end of the day, you do get all the cost increases that we've been -- the inflationary pressure that we've been talking about. You get the price pressure still. We are maintaining our gross margins. So it also means, in fact, that in terms of your prices, you must be able, in fact, to keep that up, and that's what we're doing.

Thank you.

Peter Olofsen, Landsbanki Kepler. A question on TDS. You mentioned the U.S., Spain, and U.K. specifically as the markets where you are seeing weakness. What has been the revenue share in recent years of these markets?

And then on the business services business, in the first half the margin there was between 2% and 3%. I understand there are some costs related to new --.

Contracts.

Contracts. To what extent should we consider this to be a temporary effect, or is this something that will go in every year? Every year you will have new contracts.

Yes. Well, to start with the last one, this is a specific situation. There will always been startup costs but the, let's say, the part of the influence of these startup costs in this quarter is exceptionally high, and the effect will go away in the second half of the year.

When I take the construction sector, U.S.A., Spain, the U.K., I think you must count at around 50% of the total. So roughly 40% U.S., 6% to 7% the U.K., 3% to 4% Spain.

And the other 50% is doing quite well?

In the second quarter, yes.

But are there any signs of slowdown there?

I don't know the revenues of June yet. It's only the second or the third day.

Maybe coming back to business services, I understand that these other costs will level off in the second half of the year. What would you consider to be the, well, more normal profitability for this kind of business?

We have a target EBIT level of 5% to 6%.

So by the end of this year, it should be at --?

No outlook. No outlook. Yes, Wim.

I think a couple more questions. First, on Arkwright, we do have, let's say, a lot of detail on the financial impacts of the deal itself. But could you give us a bit of a feeling or flavor to what extent Arkwright was profitable or not so that we can have a bit of an impact on what it's going to do to 2009 estimates, which I think is more important?

Second question is on the Fax business. It still has a negative 0.8%, 0.9% impact on your recurring revenues which gives me the indication that you are losing about EUR20m annually on that part. How big is that Fax business still, and can I fully exclude it in 2009? Or I think your question has been there before but --?

And then finally on Drupa, you give us a bit of a quantitative color on it? And you're quite optimistic in that sense, but simultaneously you warned that from leads to conversion into an invoice is going to take a while probably. Could you give us a bit of feeling on where your order book currently stand compared to last year as to have a better feeling on what the current trend is?

Let me start with the first one. That was Arkwright, yes? Arkwright had revenues of around EUR45m yearly, and a breakeven result on EBIT level.

And the second one was the impact of the declining of the Fax business. I think you are more or less right. It's easy to calculate if you know the recurring revenues and the percentage point. The decline is going on with, at this point in time, 40% compared to last year. So let's assume comparable declines for next year in your model. But, as always, you know that if a business comes really to the end they will be a little bit like this, and that's not -- I cannot really predict that.

And then you had a question about Drupa. The impact of Drupa on the order book is not yet there because Drupa ended June 10, or something like that. So if something happens it will only be as early as possible in the third quarter.

And how is your current order book compared to last year?

The current order book is improving compared to Q1, but still lower than last year.

Yes?

And I have a follow-up question on the tax rate. You had a nice plus last quarter, what can we expect going forward with all the restructuring charges? Can we expect more pluses for the rest of the year?

I would assume, in fact, in your models that we do not pay tax this year.

And does that also apply to 2009 or --?

Well, we're not going to give any figures on 2009, but we've said, in fact, that for the next two to three years calculate with about 10%, max. 15% tax. We're not getting to the 20% that we see longer-term.

Okay.

Yes?

(Inaudible). One question. Am I right to assume that your expectations for the coming years are based on the assumption of a stable dollar, a stable oil price, the normal economic development? And, if not, what would be the impact? And if that's so, what would be the impact if there is a continuing depreciation worldwide?

Yes. I think that's an extremely difficult question.

Not the first part.

The first part was based on what? Yes.

Based on what your assumption [of it.]

Yes. Of course, at the beginning of the year or before the year starts you make a budget. And during the year you see whether you make your budget or not. And one of the factors that influenced that budget is, indeed, development of economy, currency, etc. So during the year, when you are executing that budget, you adapt your policies like, for instance, now we reduce our cost.

We will make our next projections for the coming years in the next three to four months. And we will try to estimate as good as possible what we think what will happen. But it's really -- if we would talk one year ago we would sit in a totally different situation that we are today. So it's very difficult for me to make a concrete statement on what if, if not, etc., because it's so uncertain these developments that I cannot really answer your question.

Well, you can answer what were your assumptions that you had in your last projection. And is it so that the 13% profitability that you projected [for 2010], is that based on the assumption of last year when the economy looked more favorable, that you did not expect that increase in oil prices, and that you were not expecting much further decline in the dollar?

The assumptions at the end of last year were based on what we knew at that time. We --

Yes. But if you [know something] your assumptions can be different.

Yes. We reiterated the target of 13% for 2010, and we will build the plan to make it happen under the existing circumstances.

All right. That answers the question. Thank you.

Okay.

Two follow-ups then I'll quit, by the way. First question is on if you compare the sales of your own products compared to Konica Minolta or some of the other products that you are distributing towards Imagistics, can you tell us how your own products are selling compared to those other products? That's the first one.

And the second question is what is your competitors' behaviors in winning service contracts? Do you see a change there? Are your competitors getting more aggressive as the market's getting more tight?

And maybe a final question is on Drupa. Did you see any products from competitors that sort of worried you or surprised you in a positive of negative way? Thank you.

Yes. Did you mean service contracts?

Yes.

No. There's no difference in more aggressiveness than normally. There -- it is a very competitive market, of course, but that has always been, and there's no real material change of behavior compared to one year ago.

About the success of Oce products versus Konica Minolta products, the most successful lines in the cutsheet markets are the 6000 series, which is an Oce product, as you know, and the color OEM machines of Konica Minolta. Those are really also seen in the market as top of the bill today for those applications, and that makes our portfolio so strong.

And the last one I missed.

On Drupa.

Drupa?

Looking at product launches of your competitors.

Yes. No. No real surprises because everybody did the same. We did as well. You didn't want to run the risk that you got lost in the massive exhibition, so everybody had pre-Drupa views or exhibitions or whatever. And so what has been shown on Drupa was already known before. No real surprises or changes or whatever.

Thank you.

I suggest, ladies and gentlemen, that we start to round off. It's almost 1 o'clock, so 1.5 hour. A few last questions, please.

A question on DDS and the non-recurring revenues. It seems that cutsheet is growing and that continuous feed is declining. Can you maybe shed some light on the kind of growth you are seeing in cutsheet and what kind of declines, because to get to a 9% decline with growing cutsheet, the decline in continuous feed should be quite substantial?

That last remark is valid, but we do not unveil, let's say, detailed sales results on detailed product lines. That's competitive information, and we do not give that.

And are you willing to provide then maybe the mix between cutsheet and continuous feed?

No.

Okay.

Last question. No questions any more? Then I thank you very much for the discussion, and we will see each other next time. Thank you.