Incap: 'Structural changes complete'

Sami Mykkänen, President and CEO of Incap Group: "Incap has now completed the strategic structural change that started three years ago. We have organised our operations based on the chosen customer segments, cut the number of factories, shifted the focus of operation to lower-cost areas and made design services an integral part of our service portfolio." "In early 2010, demand was slack because of the international recession but picked up towards the end of the year. However, revenue was held back by a global shortage of semiconductor components. The shortage complicated the planning of production and led to prolonged delivery times." "The merger of the operations of our two electronics factories was completed as a part of our structural change process. Products were transferred from Vuokatti to Kuressaare on a very strict schedule. In order to ensure successful product transfers, we had to maintain partly overlapping resources. This made it impossible to fully adjust production costs to match the level of revenue. However, the cost savings we aimed for with the centralisation of electronics manufacturing began to affect our result in the third quarter. "In mechanics manufacturing, the structural change was not implemented as planned. The negotiations on selling the sheet-metal business of the Helsinki plant to Lankapaja Corporation ended unsuccessfully in February 2011. We continue developing the Helsinki plant into a unit that specialises in end-product assembly. "In terms of financing, the past year was very challenging. Incap's shareholders have shown trust in us in a difficult situation, and this was demonstrated by the success of the share issues. The share issues strengthened the company's capital and financing structures as intended. We were also pleased to welcome Finnish Industry Investment Ltd among our major shareholders. "The order book and outlook have clearly improved compared with the same time last year, and European demand seems to be returning back to normal. We have positive expectations: now that the company's structural change has been completed, we can fully concentrate on growth." Revenue and earnings in October-December 2010 Revenue for the final quarter of 2010 amounted to EUR 16.1 million, down 9% year-on-year. Revenue was held back, particularly by shortages of materials for well-being technology products which led to delays in deliveries. Revenue from energy efficiency products developed favourably. Profitability clearly improved, and operating result (EBIT) for the fourth quarter was slightly positive, amounting to about EUR 0.01 million (10-12/2009: EUR -3.7 million). The operating result includes a non-recurring provision of about EUR 0.3 million for the closure of the Vuokatti plant. Net profit for the fourth quarter was EUR -0.4 million (EUR -3.9 million). Earnings per share were EUR -0.03 (EUR -0.32). Revenue and earnings in 2010 Incap Group's revenue for 2010 amounted to EUR 59.2 million, down about 15% year-on-year (2009: EUR 69.8 million). Because of the global recession, demand for Incap's services remained low, particularly in the first part of the year. Delivery volumes both for energy efficiency and well-being technology products clearly increased towards the end of the year. However, revenue was held back by a global shortage of semiconductor components, which had a negative impact on the company's delivery capacity and led to delays in deliveries. The Indian unit's revenue increased strongly year-on-year, amounting to EUR 12.0 million (EUR 7.9 million). Profitability of operations clearly improved from the previous year, but operating result still remained negative. Incap Group's loss contracted clearly: full-year operating profit was EUR 3.2 million negative (5.0 million negative), representing -5.4% of revenue (-7.1%). The result for the comparison year includes a non-recurring provision of about EUR 2.5 million for the closing down of the Vuokatti plant. Of the provision made for the closure of the Vuokatti plant in 2009, a provision of about EUR 1.0 million is recognised in the operating result for 2010, and the corresponding costs have not been entered into accounts. It was impossible to fully adjust production costs to match revenue, because the merger of two electronics factories required the Group to maintain partly overlapping resources. In addition, a global shortage of components led to higher component prices, which had an impact on profitability. The cost-cutting programme to improve profitability continued. Personnel expenses and other operating expenses, for example, were about EUR 5.8 million lower than in 2009. Net financial expenses stood at EUR 1.7 million (EUR 1.8 million) and depreciation and amortisation expenses at EUR 2.8 million (EUR 2.9 million). Losses before tax amounted to EUR 4.9 million (EUR 6.8 million). Loss for the period was EUR 4.9 million (6.7 million). Return on investment was -11% (-16%) and return on equity -81% (-69%). Earnings per share were EUR -0.33 (EUR -0.55). Developing operations and implementing structural change In 2010, development of operations focused on improving the efficiency of materials functions, completing the change in production structure and honing processes. In order to ensure parallel material management goals at Group and factory levels, the procurement organisation was reformed and purchasing operations for factories were included in the responsibilities of the Director, Sourcing and materials. The value of inventories rose from EUR 11.4 million at the beginning of the year to EUR 13.1 million at year-end, reflecting the increase in demand seen early in 2011. In addition, the value of inventories was increased by the poor availability of components, which had a slowing effect on the entire material flow. A major structural change was implemented in Incap Group's production by centralising the company's European electronics manufacturing in one manufacturing plant. Starting in the spring, the manufacturing of products at the Vuokatti plant was gradually transferred to Estonia, and manufacturing in Vuokatti ended in August. Most of the production equipment was taken to the Estonian and Indian plants. The structural change was implemented to achieve cost savings, and the effects began to show in the result in the third quarter of 2010. Electronics production was centralised in order to improve operational efficiency and achieve annual cost savings of about EUR 3 million compared with 2009. After the transfer of production, revenue from deliveries by the Kuressaare plant doubled, while only slightly more than ten new employees were recruited. The 124 employment relationships at the Vuokatti plant were terminated as a result of co-operation negotiations. At the end of 2010, Incap still had 36 people at Vuokatti on notice but without an obligation to work. In order to further streamline the production structure, Incap wants to develop the Helsinki plant into a production unit that specialises in assembly. Toward this end, the company was engaged in negotiations with Lankapaja Corporation, a company specialising in mechanics manufacturing, to sell the Helsinki plant's sheet-metal business. However, the negotiations ended unsuccessfully after the end of the reporting period in February 2011. Development of services focused on the honing of production processes and on design services. The Group's product design is centralised in Bangalore, India, where Incap has built up a competence centre for the design of energy efficiency products. The products designed for customers included, among others, charging systems for electric cars and UPS equipment for uninterrupted and undisturbed electrical current input in households. Incap continued target-oriented acquisition of new customers in Europe and Asia. The co-operation with a local partner in China, launched in 2009, did not yet bring us any significant new customers, but we continued studying business opportunities in the region. In addition, Incap is investigating into launching its own operations in China. To boost customer acquisition in the company's strategic focus areas, Incap signed an agreement in June on participating in a venture capital fund managed by Cleantech Invest Oy. The fund invests in Cleantech growth companies, to which Incap can offer various manufacturing services in Europe and Asia. Personnel At the beginning of year, the Incap Group had a payroll of 783 employees, and at the end of the year it had 767 employees. In 2010, Incap employed 780 (751) people on average. The number of employees increased by nearly 50 in India and by 13 in Estonia. At the end of the year, about 49% of personnel worked in India, 27% in Estonia and 24% in Finland. At the end of the year, 250 of Incap's employees were women and 517 men; 611 were permanently employed staff and 156 were fixed-term employees. There were five part-time employment contracts at the end of the year. The average age of the personnel is 40 years. The closing down of the Vuokatti plant led to the termination of 124 employment contracts. In the European units, operations were adjusted to match demand mostly through temporary layoffs. However, some of the temporary layoffs were cancelled once demand picked up in late autumn. Goals in 2011 In 2011, Incap aims for an increase in revenue and considerably improved profitability. Demand from the company's key customer segments is anticipated to develop favourably, and Incap is aiming to extend the scope of deliveries to current customers and establish new customer accounts in the chosen industries. Revenue is expected to grow most vigorously in Asia, where the company intends to expand its business into China. The offering of design services will be increased and their role emphasised. The means to boost profitability include more efficient material management and harmonisation of operating processes. Outlook for 2011 Incap's estimates for future business development are based on its customers' forecasts and the company's own assessments. The general economic situation has improved, and the majority of Incap's customers are predicting that their revenue will increase in 2011, which has a positive effect on Incap's revenue. However, the shortage of components is predicted to continue, which can affect Incap's deliveries and revenue development. Incap estimates that its revenue in 2011 will increase from the EUR 59.2 million achieved in 2010. The Group's full-year operating result (EBIT) in 2011 is expected to be positive and, thus, clearly higher than in 2010 (EUR -3.2 million).