- Organic sales growth (+5%): OP North America (+5%), OP Europe (+6%), OP Australia (+3%), ASAP Software (-1%) and Graphic Systems (+21%)
- Operating result up 16.5% at constant rates to EUR 68.7 million, excluding special items*
- Net result EUR 32.3 million; EPS increases to EUR 0.18 (EUR 0.16 Q3 2005); excluding special items* EPS increased to EUR 0.19 vs. EUR 0.16 a year ago
* As of 1 January 2006 items with an exceptional or incidental character will be separately reported as special items and explained in our commentaries.
FINANCIAL HIGHLIGHTS
| Amounts in EUR million |
Q3 2006 |
Q3 2005 |
D in EUR
|
D at constant rates |
| Net sales |
1,520.7 |
1,490,8 |
2.0% |
5.0% |
| Gross contribution |
448.5 |
444.6 |
0.9% |
3.9% |
| Operating result |
63.6 |
61.2 |
3.9% |
6.9% |
| Net result |
32.3 |
29.3 |
|
|
| Net result per ordinary share (EPS) (in euro) |
0.18 |
0.16 |
|
|
CEO’S STATEMENTCommenting on the third quarter 2006 results and the outlook, Frans Koffrie, Buhrmann President and CEO, said: ‘We are satisfied with our solid performance in the third quarter. We continue to focus on profitable sales growth, building on our strong position in the large account segment. In North America we delivered above average growth in the mid-market segment. Also pleasing is that facilities supplies enjoyed another quarter of double-digit sales growth, reflecting the success of our single source supplier strategy. Our European performance is promising with good sales growth and improved gross contribution. This was underpinned by the acquisition of ATG, which provides us with an even stronger platform for growth in Europe.
We increasingly focus on ensuring that we target sales opportunities where we can achieve levels of customer profitability which allow us to achieve our 6.5% operating result target for office products business over the medium term.’
THIRD QUARTER PERFORMANCE
Net sales improved to EUR 1,521 million, an increase of 5.0% at constant rates. Organic sales grew 5%, driven primarily by our North American and European Office Products divisions and the strong performance of our Graphic Systems division. In general, market conditions are solid and our strategic initiatives aimed at growing sales, such as the extension of our product range and our mid-market sales are contributing.
Group gross contribution grew 3.9% at constant rates to EUR 448.5 million. The beneficial effects of our preferred supplier and private label initiatives and increased focus on customer profitability are expected to support our gross contribution development in the fourth quarter and beyond.
Operating result increased to EUR 63.6 million, up 6.9% at constant rates. Excluding special items, operating result increased to EUR 68.7 million, an improvement of 16.5% at constant rates. Total special items were an expense of EUR 3.8 million, net of tax. Net result improved to EUR 32.3 million. Excluding special items and fair value changes, net result improved 17.5% to EUR 34.3 million. EPS increased 12.5% to EUR 0.18. Excluding special items and fair value changes, EPS increased 18.8% to EUR 0.19 versus EUR 0.16 a year ago.
ADDITIONAL FINANCIAL INFORMATION
For the full year 2006 we project cash interest expenses (i.e. including dividends on Preference Shares A) of approximately EUR 87 million, which includes the costs for financing the acquisition of ATG. Capital expenditure is expected to be about EUR 80 million with depreciation at about EUR 100 million. The full year 2006 cash outflow reported under ‘Other operational payments’ (from current provisions for restructuring) is expected to be 40 million. Cash tax payments are estimated to be around EUR 35 million while the effective tax rate, excluding any special items, fair value effects and dividend on Preference Shares A, is forecasted to be approximately 20% in 2006. For the fourth quarter 2006 cash flow from operational activities is estimated to be around EUR 100 million.
For our North American operations we expect to incur special items, gross of tax, for USD 5 million of costs in the fourth quarter 2006 and an additional USD 13 million in 2007. This will bring the total project cost to USD 73 million compared to USD 79 million previously indicated. Expected savings are USD 47 million run rate of which USD 19 million of savings are to be realised in 2006.
OFFICE PRODUCTS NORTH AMERICA
| Amounts in EUR million |
Q3 2006 |
Q3 2005 |
D in EUR
|
D at
constant rates |
| Net sales |
784.8 |
784.7 |
0% |
3.8% |
| Organic growth |
5% |
|
|
|
| Gross contribution |
262.0 |
269.2 |
(2.7%) |
1.1% |
| Operating result |
39.3 |
41.1 |
(4.5%) |
(2.6%) |
| Average Capital Employed1 |
572.5 |
540.4 |
6.0% |
10.7% |
| Ratios |
|
|
|
|
| Gross contribution / net sales |
33.4% |
34.3% |
|
|
| Operating result²/ net sales |
5.4% |
5.2% |
|
|
| Operating result²/ Average Capital Employed |
30.0% |
30.5% |
|
|
1 Average Capital Employed excludes goodwill.
2 Excluding special items (see also the remarks under Basis of Presentation).
North American sales increased 5% organically, supported by solid employment and overall market conditions. We are encouraged by the progress made in terms of driving sales and profitability in a period of such organisational change. We substantially completed the migration of our back office functions and are receiving favourable customer response. The streamlining of our organisational structure has been finalised with limited disruption and the first positive effects of our improved segment visibility are starting to emerge.
Our office products sales performance was marked by strong growth in mid-market. Facility supplies, document and print management and promotional marketing showed the strongest growth within our different product categories. We are pleased that our focus on mid-market is paying off, with above average growth in this segment. Our facilities supplies business continued its double-digit growth, demonstrating the success of the product range extension initiative. Likewise, the acquisition of Coastwide Laboratories is increasingly seen as a cornerstone of our strategy as we are expanding its proprietary range in environmentally sound cleaning products across North America.
Gross contribution increased by 1.1% at constant rates, which corresponds to a decrease to 33.4% as a percentage of sales. Higher office paper purchasing prices had a negative impact on gross margins, which has been partly mitigated by a more favourable client and product mix. Most of the paper price increases will have been passed on to our customers by year-end, resulting in improved gross margins for the fourth quarter. Our private brands programme now represents 27% of our office and computer supplies sales, compared to 25% prior year.
Excluding special items, operating result was EUR 42.7 million, an increase of 7.6% at constant rates (impacted negatively by 2 business days less than a year ago). Operating result decreased by 2.6% at constant rates to EUR 39.3 million, due to the costs incurred for streamlining and centralising our organisation.
OFFICE PRODUCTS EUROPE
| Amounts in EUR million |
Q3 2006 |
Q3 2005 |
D in EUR
|
D at
constant rates |
| Net sales |
243.5 |
224.5 |
8.5% |
8.3% |
| Organic growth |
6% |
|
|
|
| Gross contribution |
80.6 |
72.1 |
11.8% |
11.6% |
| Operating result |
0.9 |
0.2 |
445% |
441% |
| Average Capital Employed1 |
136.1 |
120.1 |
13.3% |
13.5% |
| Ratios |
|
|
|
|
| Gross contribution / net sales |
33.1% |
32.1% |
|
|
| Operating result²/ net sales |
1.1% |
0.1% |
|
|
| Operating result²/ Average Capital Employed |
8.0% |
0.6% |
|
|
1 Average Capital Employed excludes goodwill.
2 Excluding special items (see also the remarks under Basis of Presentation).
Office Products Europe had another good sales quarter with organic sales growth of 6%. Underlying market conditions developed positively in most markets. Sales growth was driven primarily by a strong performance in the large account segment and a double-digit growth in facilities supplies. Germany, the Benelux and the UK showed mid-single digit sales growth. Most other countries, like France, Ireland and Austria posted double-digit sales growth. Veenman Netherlands continued the strong performance we have seen in prior quarters, while Veenman Germany posted modest improvements, despite lower sales levels.
The acquisition of Andvord Tybring-Gjedde (ATG), the leading office products group in the Nordics, was completed at the end of September. The combination presents us with an excellent strategic and geographical fit, giving us market leadership positions in Norway and Sweden and improved access to the Danish market. It brings a strong platform for further expansion in the Nordic region and the Baltics and will enable us to improve our offering to international customers and leverage central services, merchandising and certain other areas such as transport and warehousing. The integration of the Swedish activities has commenced following permission of local anti-trust authorities. Total synergy benefits are expected to be EUR 5 million with the majority being realised in 2007.
ATG had a good third quarter with sales of EUR 78.3 million, 11% up at constant rates on a pro forma basis, and an operating result of EUR 5.9 million reflecting an operating margin of 7.6%. ATG has been consolidated as per 22 September 2006. We are very pleased with this transaction and are confident about the business developing favourably going forward.
Gross contribution increased 11.6% at constant rates to EUR 80.6 million. This represents a 100 basis points improvement to 33.1% as a percentage of sales, driven by the success of our merchandising programme and the increase of private brands, currently representing 23% of office and computer supplies sales.
Operating result improved from EUR 0.2 million to EUR 0.9 million. Excluding special items of EUR 1.7 million, operating result amounted to EUR 2.6 million.
OFFICE PRODUCTS AUSTRALIA
| Amounts in EUR million |
Q3 2006 |
Q3 2005 |
D in EUR
|
D at
constant rates |
| Net sales |
193.0 |
188.8 |
2.2% |
6.8% |
| Organic growth |
3% |
|
|
|
| Gross contribution |
58.5 |
57.6 |
1.6% |
6.2% |
| Operating result |
15.3 |
15.1 |
1.0% |
5.6% |
| Average Capital Employed1 |
72.1 |
59.8 |
20.5% |
27.6% |
| Ratios |
|
|
|
|
| Gross contribution / net sales |
30.3% |
30.5% |
|
|
| Operating result / net sales |
7.9% |
8.0% |
|
|
| Operating result / Average Capital Employed |
85.7% |
101.8% |
|
|
1 Average Capital Employed excludes goodwill.
Office Products Australia sales increased 6.8% to EUR 193.0 million at constant rates. This improvement in sales was attributable mainly to the good performance of facilities supplies, furniture and promotional marketing products, highlighting the success of our single source supplier concept. The IT business continued its shift away from low-margin large customers to the more attractive small and medium-sized customer segment. A total of five acquisitions with annualised sales of AUD 58 million have been completed year-to-date. One of these transactions is in the field of educational supplies, which bolsters the good progress we are making in this new product category.
Gross contribution and operating result grew in line with sales. Project OneSource, our rationalisation programme aimed at addressing duplicate legacy operating costs, is nearing completion resulting in some additional costs in the third quarter. These legacy costs are a direct result of the rapid growth the company has experienced in the past number of years. Recognising this, we have made substantial changes both in streamlining the management structure and restructuring the organisation along functional instead of geographical lines in order to improve market responsiveness and allow the business to continue its growth trajectory.
For reasons of capital efficiency, an increased dividend pay-out ratio from 50% to 65% has been decided upon. Additionally, an off-market buy-back of AUD 50 million is being considered.
ASAP SOFTWARE
| Amounts in EUR million |
Q3 2006 |
Q3 2005 |
D in EUR
|
D at
constant rates |
| Net sales |
180.2 |
192.8 |
(6.5%) |
(2.5%) |
| Organic growth |
(1%) |
|
|
|
| Gross contribution |
15.2 |
18.1 |
(16.2%) |
(11.4%) |
| Operating result |
2.7 |
6.2 |
(56.9%) |
(50.4%) |
| Average Capital Employed1 |
30.0 |
21.1 |
41.7% |
46.7% |
| Ratios |
|
|
|
|
| Gross contribution / net sales |
8.4% |
9.4% |
|
|
| Operating result / net sales |
1.5% |
3.2% |
|
|
| Operating result / Average Capital Employed |
35.5% |
116.6% |
|
|
1 Average Capital Employed excludes goodwill.
Consistent with the soft quarter experienced by the software distribution industry, ASAP Software reported a 2.5% sales decline at constant rates and organic growth of (1%). Year-to-date sales grew 7.7% at constant rates, reflecting the underlying positive sales trend. We continue to invest and focus on growth opportunities in small and medium-sized businesses and the further development of higher margin IT service businesses. Gross contribution was EUR 15.2 million, down 11.4% at constant rates. Operating result fell to EUR 2.7 million. For the fourth quarter 2006 we expect operating result to be markedly higher than for the third quarter. Full year 2006 operating result is expected to be slightly below the 2005 operating result.
GRAPHIC SYSTEMS
| Amounts in EUR million |
Q3 2006 |
Q3 2005 |
D in
EUR
|
| Net sales |
119.2 |
100.0 |
19.2% |
| Organic growth |
21% |
|
|
| Gross contribution |
32.1 |
27.6 |
16.6% |
| Operating result |
6.3 |
1.8 |
250% |
| Average Capital Employed1 |
92.0 |
94.8 |
(2.9%) |
| Ratios |
|
|
|
| Gross contribution / net sales |
27.0% |
27.6% |
|
| Operating result / net sales |
5.3% |
1.8% |
|
| Operating result / Average Capital Employed |
27.7% |
7.7% |
|
1 Average Capital Employed excludes goodwill.
Graphic Systems realised strong sales and earnings growth in the third quarter. Organic sales increased 21% to EUR 119.2 million with all regions contributing, most notably Italy and Belgium. Strong double-digit sales growth in machinery was accompanied by solid growth of Triple S sales, which represented 31% of total sales in the quarter.
In general, sales in the graphics industry are driven by replacements as we have seen hardly any capacity expansion to date. Order intake developed well and continues to show an upward trend. In combination with a well-filled order portfolio we continue to feel confident about our performance in 2007. Gross contribution rose 16.6% to EUR 32.1 million. The division’s operational costs and average capital employed remained well-controlled. Operating result improved strongly to EUR 6.3 million. Assuming timely delivery of machinery by Heidelberg, we expect operating profit for the full year 2006 to double versus last year’s reported profit of EUR 9.4 million.
CORPORATE
Under ‘Corporate’, operating costs for ‘Holdings’ as well as the net surplus of the funding side of our defined benefit pension plans relating to inactive members amounted to EUR 0.9 million negative (Q3 2005: EUR 3.2 million negative)
Total operating costs were EUR 5.5 million (Q3 2005: 6.4 million). A net contribution of EUR 4.6 million (Q3 2005: EUR 3.2 million) was recorded for the expected return on plan assets and interest on the pension obligations, due to the surplus status of our Dutch pension fund (Coverage ratio at 30 September 2006: 150%).
For the full year 2006 we expect to record a net contribution of approximately EUR 18 million for the expected return on plan assets and interest on the pension obligations. The operating costs for ‘Holdings’ are expected to be about EUR 27 million.
TAXES AND FAIR VALUE CHANGES
Taxes amounted to EUR 4.9 million (Q3 2005: EUR 5.8 million). The tax effect on special items was EUR 1.4 million positive. Underlying taxes were EUR 6.1 million, excluding fair value effects, special items and dividend on Preference Shares A, reflecting an effective tax rate of 12.6%. The tax rate for this quarter was particularly influenced as a result of a favourable settlement of a tax dispute.
The total impact of fair value adjustments, net of tax, was EUR 1.7 million positive in this quarter (Q3 2005: EUR 0.2 million positive).
SPECIAL ITEMS
In the third quarter, operating result included special items of EUR 5.1 million negative (EUR 3.8 million negative, net of tax). EUR 3.5 million (USD 4.8 million) of special items were incurred in Office Products North America and EUR 1.5 million in Office Products Europe for Veenman Germany.
For North America, total project costs in the third quarter of USD 4.8 million was impacted favourably by a reversal of an accrual taken in the first half of USD 3.6 million. Savings amounted to about USD 6 million in the quarter. Going forward we expect expenses of USD 5 million in the fourth quarter and USD 13 million in 2007, primarily related to adapting the US logistical infrastructure to the new organisation.
CASH FLOW, ROCE, NET DEBT, FINANCING AND FINANCIAL COSTS
Cash flow available from operational activities was EUR 16.3 million positive versus EUR 19.1 million in the third quarter of 2005. Average working capital as a percentage of sales (on a four-quarter rolling average) amounted to 9.1% (Q2 2006: 8.7%). Inventory levels have crept up, particularly due to increased sourcing out of Asia of private label products.
Return on capital employed (before goodwill and special items) was 30.1% (Q3 2005: 29.0%). Including goodwill and special items, return on capital employed was 10.7% (Q3 2005: 10.6%).
Net interest-bearing debt increased to EUR 1,451 million at the end of the third quarter versus EUR 1,143 million at 30 June 2006. Total consideration for the acquisition of ATG was EUR 271 million. The translation effect related to the depreciation of the US dollar versus the euro increased net interest-bearing debt by EUR 21 million in the third quarter 2006.
The leverage ratio (net interest-bearing debt excluding Preference Shares A and financing fees / EBITDA) increased to 3.9 times versus 3.0 the previous quarter as a result of the acquisition of ATG at 22 September 2006.
For the quarter net financing costs, excluding special items, were EUR 21.5 million (Q3 2005: EUR 21.3 million). EUR 2.8 million of these costs related to the dividend on preference shares (Q3 2005: EUR 2.8). Cash interest was EUR 17.8 million (Q3 2005: EUR 17.0 million) and non-cash interest amounted to EUR 2.8 million (Q3 2005: EUR 1.9 million).