Danka profits fall as Kodak merger integration takes toll

DANKA Business Systems, the troubled photocopier distributor, yesterday served up more bad news when it reported a 62 per cent fall in first-quarter profits.

Danka shares, which have dropped from a high of 787p last year after the company issued two profits warnings, dropped 16.5p to 132.5p as it reported that profits in the three months to 30 June had fallen to pounds 8.1m from pounds 20.8m in the same period of the previous year. Turnover in the quarter declined from pounds 510m to pounds 463m.

The company also revealed that it had renegotiated some of its banking covenants "to allow for more financial flexibility". Danka has more than pounds 450m of debt on its balance sheet. In the first quarter, operating profits covered its interest bill less than two times.

Mark Vaughan-Lee, the Danka chairman, blamed the profit fall on problems integrating Kodak Office Imaging, the photocopier distribution business bought in 1996.

He said the company had suffered problems motivating its sales force in the US after introducing a new bonus scheme. However, he added that the sales force was now beginning to accept the new scheme. "We are right in the middle of a very expensive integration plan," said Mr Vaughan-Lee.

Danka was also hit by the falling yen, which allowed Japanese copier makers to offer discounts for large contracts.

Mr Vaughan-Lee said that shifting Kodak's operations on to Danka's computer system should be completed by the end of the year, allowing more cost savings. He added that the company had already reduced its workforce by 700 out of the 1,000 redundancies planned at the time of the acquisition.

Danka has found a new chief financial officer and plans to name him later this month. The company has appointed two senior executives in the US.

Mr Vaughan-Lee stressed that, despite Danka's problems, the board remained supportive of the management team. "We are putting the company into the position of being one of the top document management companies in the world. But it's a question of time."