Corporate Express Q3 2007: Good performance in Europe and North American sales broadly in line with market

Strategic initiatives and organisational changes being implemented to transform company

• Net sales up 7% at constant rates to EUR 1,575 million
• Organic sales growth 2%, excluding ASAP Software; North America -1%, Europe +7%
• Net result EUR 16.2 million (Q3 2006 EUR 32.3 million)
• Implementation of announced strategic initiatives under way

FINANCIAL HIGHLIGHTS

PETER VENTRESS, CEO CORPORATE EXPRESS

“We are encouraged by the strong performance of Europe, Australia and Printing Systems. Organic growth for Europe was 7% in Q3 with above average performance in the mid-market. In the US we have been busy simplifying our organisation and energizing the sales effort. Having stabilized our service capabilities there is still work to be done in the coming quarters and all efforts are focussed on this. North American organic growth of -1% is more or less in line with market growth. Although market conditions in the third quarter trended in line with the second quarter, we remain cautious regarding US market conditions.

While market growth - driven largely by GDP developments - is fundamental, we firmly believe the main growth drivers to be our own efforts in growing our share of wallet; improving category offering; building a stronger mid-market position; and strengthening our geographic footprint. Over the coming months we will take significant steps to transform the organisation into a more operationally focused business. Our third quarter results which demonstrate pressure on gross contribution and the demanding circumstances in the US serve only to emphasise the importance of the strategic initiatives we have embarked upon.

The past weeks we have put considerable effort in explaining our strategic initiatives in road shows to our shareholders, employees and customers. I am pleased to report that these audiences have been receptive to our “Focus. Execute. Deliver.” approach. In the coming months we will further implement the announced organisational changes, centralising key support functions and re-directing marketing and sales groups. Sales excellence programmes are already running in the US, UK and Germany to strengthen our capabilities in winning greater share of wallet among our large clients and in revitalising our approach to the key mid-market sector.

Clearly we cannot expect instant results from these key strategic initiatives but as we have previously stated we would expect to see the results of our operational improvements coming through during 2008.

Once we have implemented the new organisational structure and built up momentum in implementing our strategic initiatives I am very confident that Corporate Express is well positioned to grow.”

FOCUS. EXECUTE. DELIVER.

At the end of the third quarter we announced the outcome of our strategic review. Corporate Express is well positioned in an attractive, increasingly global market, although we have to improve drastically on operational execution and performance. Management therefore is implementing a series of strategic initiatives and organisational changes.

To focus efforts, four key strategic priorities have been identified that will deliver profitable growth.

• Increase share of wallet of large customers
• Improve category offering
• Grow mid-market share
• Strengthen geographic footprint

To support the operational focus a newly formed Executive Management Group will lead the company operationally. Next to the Executive Board members, it consists of senior geographical and functional leaders. Through this team we will be able to better share best practices and improve overall cost efficiency. Clear, specific targets and key performance indicators will be applied throughout the company.

Corporate Express is confident that these changes and initiatives will result in average annual organic sales growth of at least 6% for Global Office Products for the period 2008-2010. Although growth in the US office supplies market is currently subdued, European markets are showing a healthy development. Given our business model and sales growth targets the company will be able to generate EBITDA-margins of at least 7% for our Global Office Products business, including overhead costs.

OPERATIONAL FOCUS - LOGISTICS

Our ability to deliver office supplies to our customers is supported by an extensive, state-of-the-art logistics backbone. Technologies like Pick-to-Cart, Pick-to-Voice and RFID support our handling processes in our distribution centres. Using mobile Proof-of-Delivery enables our US drivers to capture signatures electronically, improving the visibility and service for our customers regarding their deliveries.

After proving itself extensively in our US operations, technologies such as Pick-to-Voice are utilised in our European and Australian operations as well, showing the benefits of being a global player.

Logistics is one of our key capabilities. Therefore continued investments are made in new technologies and capacity to support the quality and efficiency of our operations in addition to emphasis on capacity utilisation.

In the United States we currently have 25 distribution centres supported by an extensive fleet of leased delivery trucks allowing for next-day delivery. We are on track with the consolidation of four distribution centres into two new ones before year-end, allowing for an optimal coverage of all regions and cities through 23 centres.

In Germany the construction of a new distribution centre in Waldlaubensheim has started. Our existing distribution centres will be consolidated in this leading-edge 45,000 square meter facility utilising proven technologies such as Pick-to-Cart and Pick-to-Voice. Substantial operating costs benefits are expected due to increased efficiency, providing a strong platform to drive German sales growth.

In Australia, in the second half of 2008 a new 40,000 square meter state-of-the-art distribution centre in New South Wales will become operational consolidating six separate existing facilities. Benefits include cost savings through consolidation, improved efficiency and a central cross-dock facility for our network.

FINANCIAL PERFORMANCE
Net sales increased to EUR 1,575 million, an increase of 7.3% at constant rates. Organic growth excluding ASAP Software was 2%. Total organic growth amounted to 5%. Gross contribution increased to EUR 461.3 million, up 6.2% at constant rates.
 

Global office products eCommerce sales on an annualised basis amounted to EUR 2.5 billion. In North America for example, approximately 80% of our office products sales is ordered electronically with the vast majority via E-Way, our proprietary on-line ordering systems.

Operating result decreased to EUR 43.3 million, reflecting lower underlying profitability in North America, higher costs at Corporate and higher reported special items versus prior year. Increased profitability in Europe, Australia and Printing Systems could not fully offset these factors. Special items of EUR 13.6 million mainly relate to the previously announced cost reduction at US headquarters and providing for the planned consolidation of our German distribution centres. Excluding special items, operating result amounted to EUR 56.9 million, a 15.5% decrease at constant rates.

Net financing costs were EUR 32.6 million compared to EUR 21.5 million in the third quarter 2006. Fair value changes had a negative year-on-year impact of EUR 7.1 million (Q3 2007: EUR 5.2 million negative versus positive EUR 1.9 million in Q3 2006). Cash interest rose to EUR 22.1 million, a year-on-year increase due to several acquisitions such as ATG, but in line with the second quarter. Other financial results include EUR 11.0 million book profit on the sale of Veenman Germany and the minority result of Corporate Express Australia of EUR 4.3 million negative.

Net result was EUR 16.2 million. Excluding fair value changes, amortisation intangibles and special items, EPS was EUR 0.13 (Q3 2006: EUR 0.19).

GLOBAL OFFICE PRODUCTS

In North America sales grew 0.8% at constant rates. By posting -1% organic growth, our North American operations performed more or less in line with the market. Despite modest price inflation in certain product categories such as paper, we estimate growth in the US office supplies market to be flat to slightly negative, driven by reduced spending on discretionary items and a decelerating growth of white-collar employment. Employment growth seems to be strongest in the small and mid-sized market with employment growth in large account segment stagnating in the last half year.

This reduced spending on discretionary items is evident in our furniture sales, which continued to be soft. Office supplies sales declined in the third quarter, whereas facility showed double-digit sales growth.

In the US, six months ago we initiated our plans to simplify our organisation, stabilise our service capabilities and re-energise the sales force. Solid progress has been made on all these. Having stabilized our service capabilities, there is still work to be done in the coming quarters and all efforts are focussed on this.

Canada continued to grow market share. The different customer segments performed well, driven by solid growth in office supplies as well as in facility and furniture. One of our key strategic initiatives is to strengthen our geographic footprint, as evidenced by acquiring Ontario-based Davenport. The company is performing as expected and has been consolidated per September.

North American gross contribution declined 2.6% at constant rates as a consequence of difficulties in fully passing on supplier price increases and reduced rebate income due to lower volumes in office products activities. These could not be fully offset by improvements in private brand sales - currently 31% of sales - and our preferred supplier initiative.

Operating result was EUR 14.1 million. Excluding special items, operating result declined 39.2% at constant rates to EUR 24.3 million. Special items of EUR 10.2 million were included mainly for the previously announced cost reduction at the US headquarters.

As previously stated, in the fourth quarter we expect organic growth to be in line with market growth.

In Europe, net sales increased 40.8% at constant rates to EUR 311.1 million. Organic growth for Europe was 7% in Q3 versus 5% in the previous quarter. All of our main countries performed well with above average performance in mid markets. Large clients performed well with continued strong sales growth in facility products. In Germany we saw a strong furniture performance. The mid market realised strong sales growth in the Nordics, Germany and the UK.

The centralisation of our merchandising function continues to bear fruit. New methods to manage product categories have been introduced with the aim of delivering the best products to our customers in the most cost-efficient way. All major product groups achieved growth compared to Q3 last year with clear double digit in facility products and strong furniture growth.

Gross contribution increased 53.1 % at constant rates to EUR 104.9 million. Gross contribution margin improved to 33.7% benefiting from the inclusion of ATG and our centralised merchandising.

Special items of EUR 3.4 million were recorded, providing for the closure of the Stuttgart distribution centre which is planned for mid 2008. Excluding special items operating result amounted to EUR 12.3 million. This represents an operating margin of 3.9%, a clear improvement compared to last year’s third quarter EBIT-margin (before special items) of 0.9%. Most of the improvement is due to strong performance in the Nordics and the UK and a continued improvement in operating profits in Germany.

For the fourth quarter, continued organic sales growth is expected in Europe, driven by our strategic initiatives and supported by solid macro-economic conditions. Those improvements in sales, the centralisation and ongoing merchandising developments efforts should result in significantly higher sales and operating result for 2007 and beyond.

In Australia, net sales increased 4.0% at constant rates to EUR 207.9 million with organic growth being 1%. Continued success is recorded in rolling out the advanced single source model and in further expansion into the medium and small sized market.

Gross contribution increased 8.7% at constant rates, resulting in further 140 basis points gross margin expansion to 31.7%. Operating expenses increased with the inclusion of recent acquisitions that have yet to be integrated. Operating result was up 3.8% at constant rates, in line with sales growth.

We are confident that the single source model will allow us to maintain and grow market share positions. Our focus on the back-end of the business will continue to drive incremental operational and supply chain improvements.

PRINTING SYSTEMS - includes Graphic Systems and Veenman

The sale of Veenman Germany was completed per late October. Economic ownership, as contractually agreed upon, moved to Konica Minolta per 31 May. Therefore, third quarter results also include the reversal of Veenman Germany’s June results (reported reduction as follows: sales EUR 3.2 million, gross contribution EUR 1.9 million, operating result EUR 0.2 million). A book profit of EUR 11.0 million has been realised.

Excluding Veenman Germany, net sales increased 4% to EUR 136.6 million. Sales growth in the graphical business was driven by a healthy increase in the sale of printing presses, with Belgium and Italy showing the highest growth. The new large format press continues to be well received in the market and gives an extra impulse to this year’s sales. Third quarter order intake was lower than the same quarter last year resulting in a modest sequential decline of the order portfolio at the end of the quarter.

Gross contribution declined 13.4% to EUR 38.5 million. Gross contribution margin decreased to 28.2% reflecting relatively strong growth of lower-margin machine sales and the deconsolidation of Veenman Germany. Operating result increased to EUR 8.5 million, a 6.2% operating margin.

We expect the fourth quarter performance to be about in line with last year’s.

ASAP SOFTWARE - expected closing per mid November 2007

As announced early August, an agreement has been signed with Dell on the sale of ASAP Software for USD 340 million. The expected closing is per mid November with EU approval as one of the last conditions to be met. Proceeds of around USD 300 million will be used to pay down debt. The book profit of about EUR 70 million will be included in our fourth quarter results under Other Financial Results.

CORPORATE

‘Corporate’ operating result amounted to EUR 6.0 million negative (Q3 2006: EUR 0.9 million negative). This includes operating costs of EUR 10.6 million (Q3 2006: EUR 5.5 million) for ‘Holdings’ as well as the net surplus of the funding side of our defined benefit pension plans relating to inactive members. The increase in ‘Holdings’ partly resulted from costs associated with the completed strategic review.

A net contribution of EUR 4.6 million, in line with last year’s third quarter, was recorded for the expected return on plan assets and interest on the pension obligations. The coverage ratio of the Dutch pension fund amounted to 155% per the end of September.

For the full year 2007 we expect to record a net contribution of approximately EUR 13 million for the expected return on plan assets and interest on the pension obligations and the accounting effect of the classification of a defined contribution plan as a defined benefit plan. Operating costs for ‘Holdings’ are expected to be about EUR 33 million.

SPECIAL ITEMS

In the third quarter special items totalling EUR 13.6 million have been included in the operational result. EUR 3.4 million relates to a provision for the planned consolidation of our German distribution centres. EUR 10.2 million relates to the previously announced cost reduction at US headquarters. In the upcoming quarters we expect to record additional special items of about EUR 5 million related to the consolidation of the German distribution centres (mostly a provision for to be terminated lease obligations) and, as previously announced, about EUR 5 million in North America.

Other financial results include EUR 11.0 million book profit on the sale of Veenman Germany.

DEPRECIATION PP&E, AMORTISATION OTHER INTANGIBLES AND CAPEX

In the third quarter depreciation of PP&E and software was EUR 22.4 million, amortisation of other intangibles was EUR 3.3 million and capex amounted to EUR 13.9 million.

For 2007 capital expenditure is expected to be around EUR 85 million (2006: EUR 78.5 million) and depreciation to be around EUR 90 million (2006: EUR 93.9 million). Amortisation of other intangibles is expected to be EUR 12 million (2006: EUR 5.2 million).

PROFIT TAXES

In the third quarter profit taxes amounted to EUR 1.2 million (Q3 2006: EUR 4.9 million). The tax effect on special items was EUR 4.1 million positive. Underlying taxes were EUR 5.0 million, excluding fair value effects, special items, amortisation of other intangibles and dividend on Preference Shares A, reflecting an effective tax rate of 14.1%. Cash tax payments were EUR 3.1 million in the third quarter.

For full year 2007 cash tax payments are estimated to be around EUR 35 million (2006: EUR 32.3 million). The effective tax rate, excluding any fair value effects, exceptional items, amortisation of other intangibles and dividend on Preference Shares A, is expected to be around 15% for 2007 and about 20-25% in the medium term.

CASH FLOW AND RETURN ON CAPITAL EMPLOYED (ROCE)

Cash flow available from operational activities amounted to EUR 154.6 million in the third quarter. For the last twelve months, cash flow available from operational activities amounted to EUR 380.0 million. Average working capital as a percentage of sales (on a four-quarter rolling average) was 9.9% (Q2 2007: 9.7%). Return on capital employed (before goodwill and special items) was 26.3% (Q3 2006: 30.1%). Including goodwill and special items, RoCE was 7.1% (Q3 2006: 10.7%).

NET DEBT, FINANCIAL COSTS AND FAIR VALUE CHANGES

Net interest-bearing debt decreased to EUR 1,361 million at the end of September 2007 versus EUR 1,456 million at 30 June 2007. The translation effect related to the depreciation of the US dollar versus the Euro decreased net interest-bearing debt by EUR 38 million in the third quarter. The leverage ratio (net interest-bearing debt excluding Preference Shares A and financing fees divided by EBITDA) was 3.6 times versus 3.7 times in the previous quarter.

For the third quarter, net financing costs were EUR 32.6 million (Q3 2006: EUR 21.5 million). EUR 2.8 million of these costs related to the dividend on Preference Shares A. Cash interest was EUR 22.1 million (Q3 2006: EUR 17.8 million) and non-cash interest amounted to EUR 2.5 million (Q3 2006: EUR 2.8 million).

For full year 2007, we project cash interest expenses (including dividends on Preference Shares A) of around EUR 95 million (2006: EUR 81.6 million). The total impact of fair value changes in the third quarter, net of tax, was EUR 5.4 million negative (Q3 2006: EUR 1.7 million positive).

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