Elcoteq: net sales down 52% Y-o-Y

Operating income improved significantly compared to the first quarter, and was minus €11.5 million (0.6 in April - June 2008 and -38.3 in January - March 2009). Cash flow turned clearly positive as a result of the major cost reduction and working capital improvement actions carried out during the first half of 2009, and amounted to €72.2 million in the second quarter (-78.5 in April - June 2008 and -50.7 in January - March 2009). The equity project proceeded as expected and the company announced the signing of a conditional Letter of Intent for equity increase of 50 million euros with Shenzhen Kaifa Technology, a Chinese industrial company belonging to China Electronics Corporation (CEC) group. CEC has been Elcoteq's joint venture partner in China since 2002. April - June - Net sales 436.0 million euros (904.8 in April - June 2008) - Operating income -11.5 million euros (0.6) and -11.0 million euros excluding restructuring costs - Income before taxes -23.4 million euros (-5.5) - Earnings per share (EPS) -0.67 euros (-0.42) - Cash flow after investing activities 72.2 million euros (-78.5) - Rolling 12-month return on capital employed (ROCE) -14.4% (-6.2%) - Gearing 2.9 (1.2) - Total one-time costs 6.6 million euros, of which 6.2 million euros are financial expenses and 0.4 million euros restructuring costs above operating income January - June - Net sales 906.0 million euros (1,813.6 in January - June 2008) - Operating income -49.8 million euros (-8.9) and -35.7 million euros excluding restructuring costs - Income before taxes -73.3 million euros (-21.0) - Earnings per share (EPS) -2.07 euros (-0.78) - Cash flow after investing activities 21.5 million euros (-79.6) - Interest-bearing net debt 215.9 million euros (220.2) Business Areas As of the beginning of 2008, Elcoteq's segment reporting covers three Business Areas: Personal Communications, Home Communications and Communications Networks. In the second quarter of 2009, Personal Communications contributed 59% (70%), Home Communications 16% (10%) and Communications Networks 25% (20%) of the Group's net sales. Elcoteq's largest customers (in alphabetical order) are EADS, Ericsson, Funai, Huawei, Nokia Devices, Nokia Siemens Networks, Philips, Research in Motion (RIM), Sony Ericsson and Thomson. There is also a very promising sales pipeline for winning new customers. Net sales of the Personal Communications Business Area in the second quarter were 259.1 million euros (631.0). Net sales increased from the first quarter. Personal Communications' net sales have decreased from last year mainly due to the manufacturing re-allocation decisions made by Nokia Devices. The segment's operating income was 2.1 million euros (5.6). The cost level has been further reduced and together with higher sales contributed to clearly better profitability than in the first quarter. Net sales of the Home Communications Business Area were lower in the second quarter than a year earlier, standing at 69.0 million euros (90.5). The segment's operating income was -6.7 million euros (0.9). The decrease in net sales compared to last year was due to lower market demand. Net sales decreased also compared to the first quarter of 2009, which was due to the display panel supply shortages and the change in the business model in Juarez, where the display panels were consigned to Elcoteq instead of Elcoteq buying the panels. The display panel supply situation is expected to improve during the third quarter. The Second-quarter profitability was significantly affected by the lower volumes. Net sales of the Communications Networks business area were lower in the second quarter than a year earlier, standing at 107.9 million euros (183.3). The segment's operating income was 1.5 million euros (3.3). The segment has been able to keep its profitability at a fairly good level despite of the drop in net sales. Elcoteq's second-quarter net sales were derived from the geographical areas as follows: Europe 44% (46%), Asia-Pacific 15% (26%) and Americas 40% (28%). Personnel At the end of June 2009, the Group employed 12,996 (21,522) people. The geographical distribution of the workforce was as follows: Europe 5,928 (9,708), Asia-Pacific 3,187 (6,212) and Americas 3,881 (5,602). The average number of employees on Elcoteq's direct payroll between January and June was 13,088 (17,543). Progress in the Restructuring Plan Elcoteq has reduced its manufacturing capacity through the Restructuring Plan launched in January to adapt to the radical changes in the market situation. The restructuring actions have proceeded according to the Plan. A further step in this process was taken on June 17, when Elcoteq and Ericsson concluded an agreement whereby Elcoteq will sell the majority of the machinery, equipment and materials of its Tallinn manufacturing operations to Ericsson. The agreement also includes the transfer of the lease agreement concerning manufacturing premises and employment agreements related to these operations. The transaction value is approximately 30 million euros. The company expects a minor profit from the transaction, which is expected to close during the third quarter. The transaction will not have an impact on profitability at the annual level. The revenue generated by the transferred business is less than 200 million euros annually. Approximately 1,200 of Elcoteq's 1,600 employees in Tallinn will be transferred to Ericsson and continue their employment under the existing terms and conditions. Elcoteq will continue operations in Tallinn on a smaller scale in a specialized plant. Deliveries to Ericsson will continue from other Elcoteq plants. European high-volume manufacturing will be concentrated in Elcoteq's plant in Pécs, Hungary. The total restructuring costs were 27.6 million euros, of which 13.5 million euros were booked in December 2008, 13.6 million euros in the first quarter and 0.4 million euros in the second quarter of 2009. Prospects Under the current market conditions it is still extremely difficult to make exact forecasts. Third-quarter net sales are expected to decrease slightly compared with the second-quarter of 2009 due to the partial Tallinn business transfer to Ericsson. Operating income is expected to improve from the second quarter. Cash flow is expected to remain positive. Successful completion of the equity increase project is expected to speed up the closing of several new programs, which are under negotiations with both existing and new customers. The company's priority areas for 2009 are to strengthen the equity base, further balance the customer base, clear improvement in bottom-line profitability through the ongoing restructuring actions and strong cash generation through improved profitability, limited capital expenditure and further working capital reduction. Elcoteq plans its material purchases and capacity based on the forecasts received from customers and market analysis. Such forecasts may fluctuate during the forecast period, causing uncertainty in the company's own forecasts.