Elcoteq reduce net debt significantly

Elcoteq's President and CEO Jouni Hartikainen: "Financial development during the past two quarters has been very satisfactory. On the top line, the comparison to the previous year is unfavorable due to the loss of Sharp's KIN business and its impact on our net sales, but the implemented cost reduction actions and the shift in our strategic focus towards increasing the value content have clearly improved our profitability. Practically all of our customers have been satisfied with the solid development in strengthening our balance sheet. I am pleased to say that even during the tough times our quality and performance have never been an issue for our customers, but mainly our financial capacity and credibility as a long-term outsourcing partner. Now that our financial situation has improved significantly during the second and third quarter, we are gradually starting to see the results of this regained customer confidence. Both System Solutions' EMS business and the Consumer Electronics-related repair business have been developing well. In both areas we have been able to win new customers and strengthen our position with existing customers, which tells us that the new strategic direction has been well received by our existing and target customers. Business in Europe is currently developing very well but unfortunately our loading-related challenges - especially at our Chinese factories - are slowing our overall development. During the last quarter of 2010 our focus will be on implementing the revised strategy in practice and finalizing the very promising customer programs we currently have in the sales pipeline. We will also continue our efforts to further strengthen our balance sheet and long-term financing." July - September Elcoteq recorded net sales of EUR 250.7 million in July-September (EUR 331.7 million in July - September 2009). Operating loss continued to decrease from the previous quarter, and totaled EUR -2.5 million (-3.3). Operating income excluding restructuring costs was EUR 1.3 million (-1.6). Net sales continued to decrease from the previous year, especially due to the divestment of Ericsson-related operations in Tallinn, Estonia to Ericsson in July 2009. As expected, net sales declined also from the previous quarter mainly due to Sharp's sudden decision to put the KIN smartphone deliveries on hold. In 2010, operating result has improved solidly due to the consistent cost savings actions carried out during the review period. The Group's net financial expenses were EUR 14.3 million (4.1). The increase was due to unrealized foreign exchange losses resulting from the valuation of intercompany USD denominated loans. Loss before taxes was EUR -16.8 million (-7.5) and net loss totaled EUR -17.7 million (-6.3). Earnings per share (EPS) were EUR -0.57 (-0.19). The Group's gross capital expenditures on fixed assets between July and September were EUR 2.6 million (1.1), or 1.0% of net sales (0.3%). Depreciation amounted to EUR 7.2 million (13.5). During the review period, investments were earmarked mainly for the manufacturing equipment of new customer programs. Cash flow after investing activities remained positive and was EUR 47.9 million (42.7). Major contributor for the cash flow came from the reduction of working capital. The Group had EUR 84.0 million sold accounts receivable without recourse at the end of September 2010 (no sold accounts receivable at the end of September 2009 and EUR 3.3 million at the end of June 2010). At the end of September 2010, Elcoteq had cash totaling EUR 84.9 million (231.0). The company has reduced the EUR 100 million syndicated committed credit facility signed in April 2010 to EUR 73.5 million. The credit facility was fully utilized. At the end of September, the Group's interest-bearing net debt amounted to EUR 23.0 million (173.2). Net debt decreased by 69.9% from the second quarter of 2010. The solvency ratio was 18.6% (9.7%) and gearing was 0.2 (2.6). Rolling 12-month return on capital employed (ROCE) was 15.5% (-14.4%). January - September Net sales in January - September decreased significantly compared to the same period last year, standing at EUR 803.6 million (EUR 1,237.7 million in January - September 2009). The decline in net sales resulted from the divestment of Ericsson related operations in Estonia in July 2009 and the lower mobile device deliveries. Operating loss was EUR -22.3 million (-53.1) and excluding restructuring costs operating loss was EUR -12.4 million (-37.4). Improvement in profitability resulted from the restructuring actions implemented in 2009 and early 2010. Profit before taxes was EUR 44.5 million (-80.8). Earnings per share (EPS) were EUR 0.44 (-2.26). Cash flow after investing activities was EUR 29.9 million (64.2). Gross capital expenditures on fixed assets in January - September amounted to EUR 8.2 million (4.6) or 1.0% of net sales (0.4%). Depreciation totaled EUR 24.0 million (48.4). Personnel At the end of September 2010, the Group employed 9,344 (10,770) people. The geographical distribution of the workforce was as follows: Europe 4,240 (4,068), Asia-Pacific 2,013 (3,347) and Americas 3,091 (3,355). The average number of employees on Elcoteq's direct payroll between January and September was 8,318 (12,014). Restructuring Plan Elcoteq continues the restructuring actions launched in the global organization in order to identify and execute further cost-saving potential. The new organization is also expected to improve cost efficiency. Related to this, Elcoteq convened a meeting of the employee representatives of Elcoteq SE Finnish Branch, Elcoteq Finland Oy and Elcoteq Design Center Oy for statutory personnel negotiations on September 6, 2010. The company estimates that personnel reductions, if any, could concern maximum of 25 employees totally in all three companies. Outlook Fourth-quarter net sales are expected to be on the level of the third quarter. Operating income is expected to further improve from the third quarter. The changes in the business volumes have caused need for slightly higher restructuring costs than originally anticipated in both Q3 and Q4 in 2010. The company expects the operating profit excluding restructuring costs to turn positive for the second half of 2010. Due to the restructuring of subordinated debt, the net income for 2010 will be clearly positive. The company earlier estimated the operating profit to turn positive for the second half of 2010 based on the impact of implemented cost reduction actions, the stabilization of underlying business and the contribution of recently won new customer contracts. The activities in the equity increase and balance sheet strengthening will be on the highest priority in the coming months. Company continues putting strong efforts to maintain the good customer win rates achieved in the first nine months of 2010 to create a solid new customer basis for 2011. Furthermore, continuous effort is put on further reducing the operating costs. 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.