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Electronics Production | March 03, 2009

Neways order portfolio drops by 13.6%

The Netherlands based EMS provider Neways Electronics recorded a net profit excluding exceptional charges for reorganisation, of €3.1 million in 2008. The turnover and order portfolio dropped by 13.6% and 23.4% (at year-end 2008) respectively as a result of the deteriorating economic developments that have led to a substantial decrease in demand, especially in the semiconductor sector.
Including the exceptional charges, Neways’ net result came in at €0.5 million negative, which is in line with the forecast issued in October 2008.

Turnover and order portfolio
Gross turnover fell by 14% to €267.2 million (2007: €309.7 million). Internal turnover dropped by 15%, but its share in total turnover (9%) remained the same as it was in 2007.



The annual net turnover decreased by 13.6% to €242.8 million. The reduction in turnover was mainly caused by a sharp fall in demand in the semiconductor sector. Although automotive turnover rose in 2008, the effects of the present crisis are being keenly felt in this sector. Over the last few months of 2008, there was a clear downward trend. Neways is pleased with developments in the ‘high end’ telecom and defence sectors. For example, Neways won its first large defence order from RheinMetall Landsysteme at the end of 2008 for the production of cabling systems for the new BOXER (Large Armoured Wheeled Vehicle) that will be used by the Dutch and German armies. Neways considers the relative increase in turnover in the defence and medical sectors to be strategically important in the company’s drive to achieve a more balanced turnover distribution.

The order portfolio at year-end 2008 stood at €57.3 million, a decrease of 23.4% and 16.0% compared with year-end 2007 and end-June 2008 respectively. This was mainly due to the lower order intake from the semiconductor and automotive sectors. Towards the end of the year however, the placement of orders was also more restrained in other sectors.



Operating result and operating margin
The operating result excluding reorganisation costs, came to €5.9 million compared with €21.0 million in 2007. The operating margin consequently decreased from 7.5% in 2007 to 2.4% in 2008. Including the €4.5 million reorganisation charge, the operating result was €1.4 million.

Net result
The net result for 2008 including exceptional charges for reorganisation came in at €0.5 million negative, compared to a net profit of €14.5 million in 2007.

Net debt
Total interest-bearing, long-term liabilities and short-term liabilities were reduced by €3.2 million to €1.2 million and €8.6 million respectively, the lowest level in more than 10 years. After deducting cash and cash equivalents, this resulted in a further reduced and healthy net debt of €9.4 million (year-end 2007: €12.8 million). The debt/EBITDA ratio including exceptional charges, came to 1.7 (maximum of 3.0). Logically, as a consequence of the lower operating result (including exceptional charges), the interest cover ratio decreased to 0.8 (minimum of 1.5). The banks have granted a waiver. As in the markets in general, Neways also notices that banks are being more reserved, which has resulted in a reduction of the credit facility to €25 million. However, Neways’ financial position continues to be strong, which enables the company to further implement the strategy and adapt its organisation if the markets further deteriorate.

Following on from 2007, Neways made substantial investments once again, in particular in the first half of 2008. These investments were mainly based on replacement and upgrading of testing equipment and SMD technology. Investments were also made in new production facilities at Neways Leeuwarden and Neways Kassel. Total investments in tangible and intangible fixed assets amounted to €6.5 million (2007: €5.5 million). The return on invested capital (operating result as a percentage of invested capital) fell to 12.0% in 2008 (2007: 39.7%).

Important operational developments
To further strengthen Neways’ positioning as a one-stop-provider, the last operating company switched to the Neways name in the beginning of the year. On 1 January 2008, Evic Electronics became Neways Electronics Echt.

In the first half of 2008, Neways Leeuwarden and Neways Kassel’s new production plants started operations. This has made production and logistics processes more transparent and efficient. It has also enabled Neways to upgrade methods for guaranteeing increasingly stricter quality requirements and to improve its response to the growing amount of specific requirements and wishes of clients.

In July, Neways acquired i-Products. This company specialises in the development and engineering of high-tech electronic components and systems. The acquisition is part of Neways’ strategy of strengthening and expanding its development activities. i-Products has 15 developers and engineers and has now been integrated with the development company, Neways Technologies, in Son.

In order to remain able to operate competitively, a restructuring operation was implemented at Neways Electronic Assemblies in Son in the second half of the year. This subsidiary has been operating under the group’s average return for several years. Within the context of the operation, 70 jobs have become abundant. As a result of the reorganisation, the cost base has been structurally lowered. A large proportion of the forecast reduction in annual costs of approximately €3.5 million will be achieved in 2009.

In November 2008, a letter of intent was signed to acquire some of the activities of Bosch Security Systems, part of the Bosch group. The transaction involves approximately 40 FTEs specializing in development, engineering and the production of electronic systems for the communications sector. The takeover will result in a substantial expansion of Neways’ existing low cyclical activities in the area of communication and data security and the acquisition of a limited amount of tangible fixed assets and inventories. Once effective, the activities will immediately contribute positive to Neways’ net result.

Good progress was made in 2008 with further reducing the number of suppliers. Neways works increasingly with preferred suppliers. This enabled the company to obtain improved purchasing conditions last year. In 2008, the number of suppliers was further reduced by 15% to approximately 850 and the purchase of components in Asia was further expanded.

Neways’ average number of employees (measured in FTEs) was 2,168 in 2008 (2007: 2,247). On a year-end basis, the number of employees was reduced by 300 from 2,238 to 1,946 by the end of 2008. Due to an increase in the number of highly educated employees, such as developers and engineers on the one hand and a significant reduction in outsourcing and reorganisation at Neways Electronic Assemblies on the other hand, the total number of employees in Western Europe decreased on balance from 1,403 at year-end 2007 to 1,177 at year-end 2008. In Eastern Europe and China, the number of employees was reduced from 835 at year-end 2007 to 769 at year-end 2008. Approximately 40% of Neways’ total number of employees work in Eastern Europe and China.

Developments after the balance sheet date
As a result of the rapidly deteriorating market conditions in recent months, Neways will merge its subsidiaries Neways Electronic Assemblies and Neways Industrial Systems in Son. This operation will involve a one-off charge of approximately €1.0 million (gross) in the first half of 2009. In principle, there will be no forced redundancies in this respect. A request for advice has been sent to the Works Council. The merger of the two subsidiaries is a necessary step that will enable the annual cost base to be structurally reduced by approximately €1.5 million.

Outlook
Similarly to recent years, Neways succeeded in considerably strengthening its financial position in 2008. A large amount of attention was devoted to improving the reciprocal cooperation between the Neways operating companies and marketing support for the one-stop-provider concept. Neways has augmented its customer base and has attracted several new internationally operating clients, which has also clearly increased the diversity of the market segments in which the company is active. This has further strengthened the foundation of the company and reduced its dependence on the highly cyclical semiconductor sector.

At the present time, it is difficult to look ahead, but it is clear that the worldwide economic crisis will not leave Neways unaffected. The total order portfolio fell by 23.4% to €57.3 million as of year-end 2008. Neways maintained this order level in the first two months of this year. However, turnover in the first months of 2009 was at a substantially lower level than in the same period in 2008 and has fallen further compared with the last months of 2008, resulting in a negative result in the first two months of 2009.

The impact of the decline in demand is being buffered as much as possible by implementing additional cost reductions, further reduction of the flexible workforce buffer, internal reorganisation, continuing vigilant working capital management and a cautious investment policy. These measures, which have been implemented and will be continued into 2009, will significantly lower the break even level to a net turnover of approximately €210 million.

Neways has modern production facilities as well as the resources and financial strength to adapt its organisation, if necessary, to a further weakening of the EMS market. Because of the characteristic mutual dependence between suppliers, Neways and its clients, transparency in the supply chain is even more important in the present market situation to remain able to respond quickly and effectively.

Neways does not believe there is any reason to adjust its long-term strategy, since this is based in part on a number of sustainable trends in the EMS market. The implementation of the strategy will therefore be continued, while taking into account the uncertain prospects for 2009.

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