CE Q1-2008 performance

This morning CE published the results for the first quarter of 2008, which can be found here on their website. At noon there was also a presentation of the results. The video, audio and presentation slides can be found here. I am disappointed with the net result of just €0.05 per share. I feel sorry for Mr. Ventress, who tried so hard in his presentation to show that his strategic plan is working and that results are forthcoming. In my opinion it was just not convincing enough, which makes an acquisition by Staples the more appealing choice.

But before I say more about that, let's have a look at the results. The most important part of the business is Office Products and we will take a look at Q1-2008, Q1-2007 and Q4-2008:



I understand that from an operational standpoint CE is not unhappy with the results for Office Products. There was organic growth in North America, and in Australia. Unfortunately the problem with these markets is that North America is confronted with a sharply declined exchange rate for the US-dollar, and Australia seems to operate in a deflationary environment. So a shareholder, calculating in Euro's, saw a decline in revenue both compared to Q1-2007 and Q4-2008. A shareholder would also notice a declining gross margin, which means that operating results in Euro's are down. CE makes a point of reporting operating results including and excluding special items. Since however special items seem to be recurring, although the subject item is always different, the existence of special items doesn't seem so special, and are part of normal operations. An operating result of 3.8% as a percentage of sales is lower than last year and only marginally higher than Q4-2008.



Sales for Printing Systems are down. CE is pleased with the performance, since the decline should be largely attributable to orders being postponed in anticipation of DRUPA, which is the largest printing equipment exhibition in the world, that is held once every four years, and will be held in Q2 this year. A shareholder unfortunately sees declining sales and a declining gross contribution margin.



Corporate costs are in line with guidance already given by CE. There was again a significant benefit from pension assets. Although this is part of operational results, and we have been given guidance by CE for this, I would not dare to discount an uncertain benefit such as this beyond this year.

Interest costs were substantially lower than Q1-2007, which is mainly related to the sale of ASAP, which allowed a significant reduction of debt. Unfortunately there was a large negative non-cash fair value change of €12.2 million. profit tax expenses were €3.9 million, and CE expects the effective tax rate to be 20% for this year

After looking at the separate elements of the results the total picture looks like this:



This net result of €8.5 million translates in a net result per share of €0.05. It is clear that CE is focusing on organic sales, special items and fair value changes to demonstrate that results are quite encouraging, but in the end this net result is the number that is relevant for shareholders.

When I was watching and listening to the presentation I could not help but think that the main point of the exercise was to demonstrate that shareholders should not accept the offer from Staples, at least not with the current value. Quite an effort was made by CE management to show that the strategic plan is well underpinned, and can lead to the desired targets of 6% organic sales growth for the period 2006-2010 and EBITDA above 7% by 2010. They also admitted however to the US market experiencing an unhealthy market decline, and the strategy needing growing economies to be successful. Without a strong increase of the US-dollar and price increases in Australia the task seems very difficult to me.

The presentation also showed that a lot of effort still has to be made, and many things have to go right, before the mission will be accomplished. I don't think that the market is prepared to value the company on the basis of a promise of improvement, but will value the company based on actual delivery, and unfortunately delivery in Q1-2008 does not justify yet a high value based on a stand alone strategy.

For the full year 2008, CE gave guidance for revenue between €5.7-5.8 billion and an EBITDA margin of 5.6%-6.0%. This means an EBITDA amount of between €319-348 million. Depreciation and Amortization are expected to be €100 million, and interest expenses €85 million. If we add the fair value changes to this, net result before taxes would be around €122-151 million. If we take a 20% tax rate, net result would be between €98-121 million or €0.54-0.66 per share. It also means that CE will have to earn an average net result of €30 million per quarter for the remainder of the year. If we compare this with the net result of €8.5 million for this quarter that seems quite a task.

I am afraid after all this my conclusion has not changed much. I still believe shareholders should prefer an acquisition by Staples for a price above the current offer. I believe there are many risks to the strategic plan of CE, and we need much more convincing by solid quarterly results that the strategy is working. Unfortunately this takes time, and leaves room for disappointment. If I would accept the lower limit of the net result of €0.54 per share as achievable, a risk free offer now of 16 times this profit sounds quite appealing.