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Electronics Production | October 24, 2007

Elcoteq swings to loss in Jan-Sep 07

Finland based EMS Provider Elcoteq's net sales in January - September 2007 were 2,980.5 million euros (3,179.7 million euros in January - September 2006). Operating income was -71.5 million euros (37.0).
Operating income in the third quarter was -0.1 million euros (16.6); excluding restructuring costs, it was 1.7 million euros positive. The action plan and measures to raise operational efficiency proceeded as planned. These measures have improved the operating income of the Terminal Products business area in particular.

Third-quarter net sales amounted to 1,059.7 million euros (1,169.1 in July - September 2006). Operating income was -0.1 million euros (16.6). Operating income included restructuring costs amounting to 1.8 million euros, excluding which Elcoteq's third-quarter net sales rose by about 10% on the second quarter of the current year and totaled 1,059.7 million euros (1,169.1 million euros in July - September 2006). Operating income was 1.7 million euros. Income before taxes was -7.5 million euros (10.1).

Operating income included restructuring costs of 34.9 million euros, excluding which operating income was -36.5 million euros. Income before taxes was -91.6 million euros (20.0).

Elcoteq has two business areas: Terminal Products and Communications Networks. In the third quarter, Terminal Products contributed 80% (83%) and Communications Networks 20% (17%) of the Group's net sales.

Balancing the company's customer portfolio has proceeded. In the third quarter, the largest customers (in alphabetical order) were Ericsson, Nokia Mobile Phones, Nokia Siemens Networks, Philips, Research in Motion (RIM), Sony Ericsson and Thomson.

Net sales of the Terminal Products business area between July and September amounted to 842.9 million euros (967.9), down about 13% on the corresponding period of the previous year, but approximately 12% higher than in the second quarter of 2007. The segment's operating income was 6.0 million euros (18.6), representing 0.7% of its net sales. Operating income excluding restructuring costs was 8.1 million euros.

Net sales of the Communications Networks business area between July and September were 216.8 million euros (201.2), an increase of about 8% on the same period last year, but on par with the second quarter of 2007. The segment's operating income was 2.4 million euros (8.8), or 1.1% of its net sales. Operating income excluding restructuring costs was 2.1 million euros.

Elcoteq has three geographical areas: Europe, Asia-Pacific and the Americas. Elcoteq's third-quarter net sales were derived from these areas as follows: Europe 50% (57%), Asia-Pacific 30% (26%) and the Americas 20% (17%).

Europe's net sales declined by roughly 20% compared to the corresponding period of last year and totaled 530.2 million euros (659.4). Asia-Pacific's net sales showed slight growth, amounting to 313.7 million euros (307.2). Net sales in the Americas were also slightly up on the year-ago figure, having risen to 215.7 million euros (202.4).

Compared to the second quarter, Europe's net sales increased by about 10% and Asia-Pacific's by about 15%. Net sales in the Americas remained at the same level as in the second quarter. Net sales growth in Europe was primarily attributable to the increase in seasonal deliveries by Terminal Products. The increase in Asia-Pacific's net sales was due to growth in the production volumes of both Terminal Products and Communications Networks.

Progress with the Action Plan
Elcoteq launched an action plan early in the year to improve cost-effectiveness, profitability and competitiveness, and it proceeded as planned. The action plan focuses particularly on the company's operations in Europe and the Americas with a view to achieving annual savings of about 20 million euros. The estimated one-time restructuring costs related to the action plan total approximately 35 million euros, of which 34.9 million euros were recognized in the January - September accounts. Measures geared towards upgrading production efficiency have continued in the entire service network.

As part of the action plan, production at the Lohja plant, in Finland, ceased at the end of June, with production being transferred to other plants. In addition, production at the Juarez plant was wound up at the end of the third quarter, and production was transferred to the Monterrey plant in Mexico and to China.

Decision on New Actions
Elcoteq has today announced a new action plan that has three focuses: adoption of a customer-oriented organization model, turning around loss-making operations into profit or downsizing them and additional savings in operations.

The new action plan will lead to one-time costs that the company will seek to recognize in the last quarter of 2007. The company will release information on the specifics of the program during the final quarter.

IEMS Strategy
Negotiations on partnerships and M&A arrangements are further ongoing with other parties in order to implement the company's IEMS strategy (IEMS = Integrated Electronics Manufacturing Services). The company intends to implement the IEMS strategy measures by the end of 2008.

The main thrust of the IEMS strategy is to further upgrade the company's electronics manufacturing and product development services by introducing mechanics into the mix. As competition tightens and product lifecycles shorten, the rising trend is that customers need to partner up with companies capable of offering broader service portfolios globally. This is particularly true in Terminal Products. Partners are expected to take on a larger role in the management of complex product structures and in the entire product supply chain. There are a limited number of players offering such extensive service portfolios.

Short-term Risks and Uncertainties
The most important short-term challenges in Elcoteq's business operations concern the company's ability to further improve its cost structure and profitability. Meeting these challenges hinges on the company's provision of services that satisfy customer demand and needs as rapidly as possible.

Prospects
Elcoteq forecasts that its full-year net sales will fall slightly below the previous year and that its operating income excluding restructuring costs will be negative.

The new action plan will lead to one-time costs that the company will seek to recognize in the last quarter of 2007. The company will release information on the specifics of the program during the final quarter. The company believes that the cost-savings and higher operational efficiency achieved from the new action plan will enable it to reach operating income level of about two percent in 2008.

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