As usual the presentation consists of the following components: first of all a summary, then a short description of the profile, then we will take a look at the financial results of the Group and the individual business units, and finally there are a number of sections about the future, the corresponding strategy, production, leasing and the outlook for 2005.

 

Let's start with a summary of the second quarter. In itself the second quarter was lower than the first quarter, and also below our own expectations, in terms of both the sales of printing systems and the development of revenues from service. However this development is absolutely not structural. The order intake for new printing systems is showing a very positive development (I will come back to that in more detail shortly), with as highlights the colour printers, both in DDS and WFPS, as well as the new high-volume black & white printers in DDS. Even though the recurring revenues in the second quarter showed hardly any improvement over the first quarter, we can still see that revenues from service contracts are currently increasing in a number of countries. That means these countries have turned the corner—from a decline in service revenues to an increase. This does not yet apply to the Océ Group as a whole, but it is already happening in a number of countries. We also expect, through these signals, that the whole company will turn this corner during the second half of 2005.

 

The financial results show that the profitability of DDS in particular is under heavy pressure. The loss of the revenues from lease contracts and the weak dollar up to 31 May led to a decline in the result of DDS, and with it of the whole Group, by more than € 20 million.

Growth is the best way to achieve a structural improvement in profitability, and the cornerstones of our growth strategy are competitive products. As far as that is concerned I would like to repeat, and to emphasise, that particularly the colour machines that we offer in the three important segments—the office market, the printing market and the drawing office market—are highly successful. The second important factor is that we are expanding the sales force, this will strengthen our power in the market, and the third is that we are reducing our cost prices by relocating our production to Asia, which means that we will be able to drive our growth in the market through more aggressive prices.

In addition, we believe it is inevitable that the focus on cost control in supporting functions and the reduction of working capital, which has reached an excessive level, will be crucial factors in supporting the recovery of profitability. I will explain that in more detail shortly. Based on the changes that we are now seeing, Océ will indeed turn that corner in the second half of 2005, and will be back on track again at the end of the year.

 

In brief a few minor changes in the profile. Here you can see a breakdown of the revenues by region: the USA, Europe and the rest of the world. We can see that Europe is starting to show a relative increase in the mix. The USA has declined from 36 to 35%, and Europe has increased from 57 to 58%. The distribution of revenues in the rest of the world is stable.

The shares of the non-recurring and recurring revenues have also remained stable, relative to both the preceding quarter and the start of the year, with the non-recurring revenues accounting for 28% of the total.

 

Here you can see the development per business unit, and you can also see what has happened in DDS in particular: revenues in the office segment have declined by 1%, while those in the commercial market have increased from 17 to 18%. Business services are stable, and the same applies to Wide Format where the breakdown of revenues has remained stable relative to the beginning of the year.

 

The competitive position of Océ: here you can see an overview of the competition in DDS for both the office, or corporate, market and the commercial market: Canon, Ricoh, Xerox, Konica Minolta and IBM. In business services: Xerox, IKON, Pitney Bowes and the combination Williams Lea/Bowne which, as you know, have merged.

If we look at our position then there are no major changes. I know that there has been some confusion in the market in recent months about the position of Océ in Transaction Printing. This was caused by an incorrect report issued by Cap Ventures about the results of Océ in the continuous feed market in the USA in 2004. That was corrected after a reaction by Océ. The conclusion is that, also in 2004, Océ sold more continuous feed printers in the US market than IBM. This means that if anything our market position there has strengthened rather than weakened.

In the High Volume/Very High Volume Document Printing market, our number 5 position is unchanged. We are making good progress with the new 2090 to 2110 family, but for the sake of honesty I have to say that the gap to the number 4 is still very large. The positions in Commercial Printing and Business Services are at present unchanged.

Now the situation in Wide Format Printing: here again there are few changes. The only positive movement that I can report for Océ in this area is that we have moved up from number 4 in the Display Graphics market to number 3, thanks to the good sales of our Display Graphics range. For your information: Hewlett-Packard is the market leader, and Epson is number 2.

This was a brief introduction about our position relative to our competitors.

 

Now I would like to look at the financial results for the second quarter. Revenues in the second quarter, at € 640 million, were 6.1% lower than in the same quarter of the preceding year. Of this decline, 2% was caused by currency differences and 2.9% by the divestment of the lease portfolio. In organic terms the decline was therefore 4.1%.

The relative gross margin declined from 43% to 40.2%, a change of 2.8%. Of this 2.8%, 1.7% resulted from lower interest income from leases, 1% from volume mix effects, the relationship between machine sales and service, and 0.1% – in other words hardly significant – from the hedge result.

The operational costs declined by 4.3%, of which 1.3% was due to a release of the provision for doubtful debtors. On the other hand extra costs were also incurred, especially for reorganisations. If we look at the head count of Océ at the end of the fourth quarter of 2004 and compare that with the head count at the end of the second quarter of 2005, then we see a reduction of 400, in particular in service, a small number in R&D, as well as production and G&A. Part of the costs of this were already charged in 2004, especially the production part, as you know, but the costs associated with these personnel changes are also included in the current account for the first half of 2005.

As I already said, the emphasis in the coming half year will remain on operational efficiency, although without making any sacrifices in distribution effectiveness. We will continue to invest in the expansion of our sales force, both in Europe and in the USA. On the other hand, we will constantly strive to reduce costs in the supporting functions.

The operating income was € 13.6 million, which was € 20.6 million lower than in the second quarter of the preceding year. In organic terms there was a growth of € 2 million, but the operating income was negatively affected by currency effects and by the sale of lease contracts for a total of € 22.6 million. The financing costs declined from € 4.8 to € 3.6 million due to the lower debt level, and taxes made a contribution of € 1 million to the result because of R&D credits that can be deducted from taxable income. An investigation into R&D claims in respect of past years has almost been completed, and this may have a positive effect on the tax charge for the full year.

The net income in the second quarter was € 10.6 million, amounting to a net income per share of 12 euro cents.

 

On balance: total assets were € 2.15 billion, a decline of € 189 million relative to the second quarter of last year. The majority of this decline was of course caused by the divestment of lease contracts to a value of € 279 million, and on the other hand by an increase of € 110 million in liquid funds. The second quarter was concluded with net debt of € 229 million. Interest-bearing debt declined by € 100 million and is now € 454 million. The solvency ratio is now 35% which, as you know, is significantly higher than the minimum of 30% specified by Océ.

The free cash flow in the second quarter was € 35 million, which is a substantial improvement over the first quarter of this year. The difference between this second quarter and the second quarter of 2004 was caused primarily by the fact that we sold significantly fewer lease contracts in this year's second quarter than last year.

 

And now the charts which are at the core of our business model: here you can see the development of the non-recurring revenues, excluding the book profit on the sale of lease contracts. We have eliminated these not only from the figures for 2005, but also for comparison purposes from the preceding years. Then you can see that especially in the second quarter the sales of printing systems increased by only 2.5%. That is just as disappointing for us as it is for you. There are a number of reasons for this decline. First of all, we are comparing the second quarter of 2005 with the strong growth in the second quarter of 2004. The comparison is therefore an unfavourable one. In addition, the increase in demand for colour printers has resulted in delivery delays in the factory. At present the delivery times from the colour printers factory have increased to around eight weeks. Our people are working overtime, both through the week and at weekends, and work will continue during the holiday period; we intend to do everything possible to significantly reduce the delivery times by the end of the summer, because as you can imagine a delivery time of eight weeks is a difficult story in commercial terms. However it also means that we are convinced that the 2.5% which you see here is not a signal for a further decline in the rest of the year. If we look at the order intake, which shows the level of interest in the market for our products in all three segments, once again driven primarily by colour, but also for black & white, then we expect that the growth in the sales of printing systems in the second half of the year will be significantly better than the 2.5% that you see here.

Here again, for your information, are the developments at a number of competitors. The figures that you can see here are taken from quarterly reports and annual reports of the companies shown. In the left column you can see the results for the financial year 2004, with at the far left the organic development of revenues and next to that the machine sales of those companies, and as you can see there are three companies that unfortunately do not report this separately: Canon, HP and Ricoh, at least for 2004. You can see that HP has also started to publish these figures in 2005. And you can see that Océ compares favourably, both in 2004 and in 2005—and to keep it honest we have added the Q1 and Q2 figures for Océ to show the first half-year. These figures show that as far as machine sales are concerned we are clearly making inroads in the market.

 

The recurring revenues: here too there is no observable improvement in Q2 relative to Q1: -4.8% in Q2 compared with –5.0% in Q1. You can also see that within the total recurring revenues, the 'population-related revenues' have declined slightly relative to Q1. As I said earlier this is an overview for the whole Group, based on actual increases. In a number of important countries within the Group where the service revenues are again increasing, we expect that this will take place for the whole Group in the second half of the year.

Here you can see a breakdown of the recurring revenues. As you can see, the population-related revenues for DDS remained the same and at WFPS these are more or less fluctuating around the zero line, last time 0.2 and now 0.1. I think the most important thing is that the population-related revenues in DDS are now starting to show an improvement.

Business Services continued to show a decline, at approximately half a per cent. You know why this is: we have decided, especially in the USA, to place much more focus on the profitability of the contracts. This will also have an effect in the second half of the year, although of course it will lead to some pressure on the growth of revenues. Imaging Supplies is showing a positive development and that really is the case: this is a segment which we believe at the moment is showing a sustainable development. Interest from lease contracts: this will obviously continue to decline as a result of the sale of the lease portfolio. However, as these two charts show, Q2 has not brought what you and we had hoped for.

 

The Strategic Business Units:
DDS provides us with the poorest slide in the presentation. As you can see the EBIT declined from € 18 million in Q2 2004 to a break-even in Q2 2005. This decline in EBIT is due primarily to the sale of the lease portfolio. However that does not detract from the weakness of the underlying business. This is caused—and we have discussed this with you on past occasions—by the fixed costs structure associated with DDS, the service organisation in the countries, but also elements of R&D and production, in relation to the present revenues. It also means, if we're talking about the sense of urgency, that the things that will have to be improved are concentrated mainly on DDS. As I already said in my introduction, the most important and the most sustainable way to improve profitability is through growth. Growth in the sales of printers, growth in the recurring revenues. As far as the sales of printers are concerned: the slowdown in the second quarter is not structural. We can see that the order intake is continuing strongly and will recover in the second half of the year, driven by colour and high-volume cut sheet.

We can look at the trend in the recurring revenues in two ways: you can compare Q2 of 2005 with Q2 of 2004, or you can look at how this trend develops through the quarters as we take the corner which I referred to earlier. Then we can see that this trend is showing an improvement over the successive quarters. But let me repeat: in a number of countries we are now already back to a positive development. We therefore expect that those 12% more machines that we sold in the first half of the year will contribute to the effect on the recurring revenues in the second half of this year.

If we look at profitability, then there are a number of actions in progress. On the one hand we have taken actions to improve the profitability of the Business Services activities in the USA, in particular. The effects of this will be seen in the second half of this year. In addition, there is again a stronger focus on cost control. I have already told you about the 400 jobs that we have phased-out in the past half-year. By far the largest proportion of these will have an impact on the results of DDS in the future. In addition we have seen – and this is related to all kinds of factors such as the ramp-up of production and the relocation of production to Asia – that the inventories have increased. These will have to be reduced again. As you know our benchmark target is 11% and we are now at something like 12.8. Here too projects have been started to reduce these inventories as far as possible in the coming six months. This means that a number of actions are now in progress, and these are being implemented with the highest sense of urgency right through the organisation. However this does not detract from the fact that we will take all the measures that we consider necessary. These are the plans and actions that are at present being executed.

 

The developments at WFPS are significantly better. As you can see, the EBIT for Q2 2005 is € 13 million, compared with € 16 million for the same quarter of 2004. This difference is due entirely to the sale of lease contracts. If we compare the first half-year of 2005 with that of 2004 and eliminate the incidentals of the lease contracts and the currency effects, the operating result in fact shows an increase of € 7.5 million. WFPS is in good shape and well on track. Driven by colour, which adds extra margin in WFPS, especially in the recurring revenues, but also driven by good levels of sales of, let's be honest, the black & white systems. You can also see the development of the recurring revenues here.

What actions are we taking in Wide Format Printing Systems? These are slightly different, as you will understand. In WFPS we also expect the revenues to increase further in the second half of the year, driven by colour, in both the technical and graphics markets. The product portfolio that we have now developed in DGS, consisting both of our own products and OEM products, is proving to be successful in the market. We therefore expect that specifically for WFPS the recurring revenues will grow in the second half of this year, in terms of both population-related revenues and Imaging Supplies. And that means the profitability of WFPS will show a further improvement in the second half of this year.

 

Strategy: as far as this Board of Executive Directors is concerned the targets that we defined at the beginning of 2002 remain valid. Although to be realistic I have to say that we have so far not made a great deal of progress. However we still believe that these are the targets that we have to aim for to ensure the long-term continuity of our company: achieving a top 3 position in the strategic market segments; in Technical Documentation that is already the case, in Display Graphics it is coming a lot closer as you have seen, and that also applies to Productive Printing in the Corporate and Commercial segments. Business Services will again have to start growing, both organically and through acquisitions, and we are still a long way from achieving the financial targets. However we believe that measures will have to be taken and implemented to ensure that those financial targets are also achieved.

 

According to recent reports by market research agencies there are few changes in the segments in which we operate. You can see here that Technical Documentation is more or less stable, even showing a slight decline, and there is a growth in colour within technical documentation applications. Display Graphics is showing a good level of growth. Corporate Printing – and I am referring in particular to the high end of the market – is growing at 5%. The Commercial Printing market is showing a relatively strong growth of 11%, and in the Document Management segment this is 9%. In other words there are no problems with the potential of the core segments of the Océ business.

 

The growth of DDS: investing in distribution. We are currently recruiting representatives in both the USA and Europe, as well as some other countries in the rest of the world. That process is continuing. But I would like to emphasise that this is a long-term process that requires patience and care. On average a sales person only starts to be productive a year after joining the company. So we are also looking for a good balance in 'how many people can you recruit at the same time?' in terms of integration, in terms of training and in terms of cost development. Next to that we are aiming for growth by means of acquisitions, also in the area of distribution.

The development of our product portfolio is being continued, where in DDS of course colour is extremely important. I think that 50% of our R&D capacity is now focused on colour, both in continuous feed and in cut sheet, but in addition to that it is certainly the case in the DDS market that there are still many opportunities in black & white at the high end of the market.

I have already referred to the relocation of production to Asia: by the end of 2006 the target is for 50% of the original 'Venlo production' to come from that region, and we are looking for higher-added-value solutions in Business Services.

Cost reduction should go hand-in-hand with the investments that I have just described. We have now defined cost-reduction programmes, with target settings and projects in IT, in Logistics and in Purchasing and, as I said earlier, we are currently following a targeted approach to reduce the inventories and the 'days outstanding' in DDS.

 

WFPS: a similar story. Despite the fact that Océ has a high market share in Wide Format, we still see that there is room for growth in the Corporate Market in the USA, as well as in Germany and in Asia. In these regions we have not yet reached the limits in terms of market share, which is why we are making investments in sales. The search for acquisitions that will support our growth aims in those regions, in particular, is also continuing.

In Wide Format, product development is concentrated even more strongly on colour than in DDS. In Wide Format this accounts for 60 to 70% of the total R&D capacity. Here too we are of course continuing to keep our black & white range competitive and attractive, but this refers more to market updates in terms of new design, different speeds or different folders, and no longer in the basic technology, in contrast to DDS. The focus in Wide Format is on colour, colour, colour. And you have already seen that: in Technical Documentation it is only the colour segment that is growing, and of course in Display Graphics the whole business is about colour.

WFPS is of course also fully involved in the Océ-wide cost-control programmes that I just referred to under DDS.

 

An update about the status of our production activities: at present a number of units and machines are coming directly off the lines in Asia and Central Europe. The TDS 100 is the first machine—and that is a milestone—to be produced there, and is shipped directly from Asia to our customers. In other words the system never passes through Venlo, and this is the first of many others that will follow. We have started with the preparations for a second phase which will ultimately lead to 50% of our products coming from low-labour-cost countries by the end of 2006. As you can imagine, this is a tremendous task, and all those concerned are working with a great deal of effort, drive and motivation to get the job done, including the people in Venlo who are directly involved. The cooperation with the manufacturing partners is excellent. You are already familiar with the benefits: our manufacturing costs are around 30% lower on average in those regions, and we also get a more natural hedge of the dollar-euro exchange rate.

 

Finally, leasing. At the end of the first half-year of 2005 the lease debtors on Océ's balance sheet total € 349 million. Last year at the same time this was € 646 million. At present 60% of the original lease portfolio has been outsourced. The result of this is a temporarily high level of liquid funds and a low net debt position, and a solvency ratio of more than 35%. As a result of this strong balance sheet position, the further sale of the lease portfolio has been slowed down. We therefore expect that the value of the lease portfolio at the end of this year will be € 300 million. But if a situation should arise in case of an acquisition in which we require greater financing freedom than is currently available, then these assets can quickly be changed into cash. Everything is ready for us to do that. The relationship with the partners has been worked out, the way in which the assets will be transferred is completely in place, and the portfolio has been prepared for the transaction.

Here you can see the relationship between the commercial and financial results. The revenues from the commercial activities were € 631 million, compared with approximately € 662 million in the same quarter of the preceding year. The operating result from commercial activities was € 7.5 million, excluding the profit on the sale of lease contracts. In the second quarter of 2004 this was still € 9 million, which represents a decline of around 18%. However in organic terms the result increased by 4%. Revenues from the financial activities declined because of the sale of the lease contracts from € 20.5 million to € 9.1 million. And the operating result on the financial activities still amounted to € 4.8 million.

 

That brings me to the outlook for 2005.
As I said right at the beginning: the second quarter was disappointing in terms of both growth and profitability. But based on the developments in the business that we can see today, in both non-recurring and recurring revenues, Océ adheres in full to the outlook for 2005 which we announced in January. I can assure you that we are working at that with the highest possible sense of urgency within our company. We will do everything in our power to achieve our objectives for 2005.
That concludes my presentation."