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Electronics Production | February 06, 2008

Elcoteq's net sales in 2007<br>declined about 6%

Elcoteq's net sales in 2007 declined about 6% on the previous year and amounted to 4,042.9 million euros (4,284.3 million euros in 2006).

Operating income was -96.3 million euros (43.9); excluding restructuring expenses, it was -46.1 million euros. Full-year cash flow after investing activities was -11.1 million euros (-20.8). Income before taxes was -122.8 million euros (19.2). Rolling 12-month return on capital employed was -19.6% (9.1%). Cash flow after investing activities was -11.1 million euros (-20.8). Interest-bearing net debt amounted to 144.5 million euros (128.0) Fourth Quarter of 2007: Net sales were 1,062.4 million euros (1,104.6 in the fourth quarter of 2006 and 1,059.7 in the third quarter of 2007). Operating income was -24.9 million euros (6.9). Operating income includes restructuring costs amounting to 15.3 million euros, excluding which operating income was -9.6 million euros. Income before taxes was -31.2 million euros (-0.8). Cash flow after investing activities was 21.9 million euros (41.2). Assembly value in the global electronics market amounted to roughly 1,000 billion US dollars in 2007. Communications technology represented some 230 billion US dollars of this total. Market research institutes report that the electronics manufacturing services (EMS) and original design manufacturing (ODM) market grew approximately 15% in 2007. Global sales of mobile phones amounted to about 1,140 million units, up around 15% on previous year. In home communications, sales growth was particularly strong in flat screen TVs. The value of the market for communications network equipment rose by about 8% compared with the previous year. In 2007, the consolidation trend made itself felt among EMS players as well. In terms of market share, Elcoteq was the world's third largest EMS provider to communications technology companies and the leading European player in the business. The company held a market share of around 7%. Elcoteq's 2007 net sales declined slightly on the previous year and amounted to 4,042.9 million euros (4,284.3). Operating income was -96.3 million euros (43.9), representing -2.4% of net sales. Income before taxes was -122.8 million euros (19.2) and net profit was -108.4 million euros (12.1) after the recognition of deferred tax assets. Earnings per share (EPS) amounted to -3.37 euros (0.38). Earnings include 50.2 million euros in restructuring expenses. The decline in the Group's net sales was due to an unanticipated change in the ordering procedures of the biggest customer, as a result of which incoming orders fell significantly short of the customer's forecasts during the review year. Sales to other customers grew by almost 30% on the previous year. Operating income for 2007 was a loss. The company's profitability was burdened especially by the aforementioned significantly lower-than-expected volumes, pricing based on expected volume growth as well as surplus capacity that had been reserved on the basis of customer's forecasts. Furthermore, production volumes at Elcoteq's German plant fell in the second half of 2007 due to mergers and acquisitions that took place in the communications networks market in 2006, driving the plant's operations into unprofitability. Capacity utilization at the St. Petersburg plant was low. In addition, earnings were weakened by production problems, particularly in Mexico. The company launched two action plans during the review year with a view to ensuring costeffectiveness and improving profitability and competitiveness globally. The Group's net financial expenses amounted to 26.1 million euros (23.7). The rise in the interest level was the major reason behind the growth in financial expenses. Fourth-quarter net sales in 2007 grew only slightly on the third quarter and amounted to 1,062.4 million euros (1,104.6 in the fourth quarter of 2006 and 1,059.7 in the third quarter of 2007). The primary reason underlying the modest quarter-on-quarter development of net sales was that demand in Communications Networks underperformed expectations. Elcoteq has three geographical areas: Europe, Asia-Pacific and the Americas. Elcoteq's net sales in 2007 were derived from these areas as follows: Europe 52% (57%), Asia-Pacific 27% (25%) and the Americas 21% (18%). Europe Europe's net sales amounted to 2,076.3 million euros (2,425.4). Of Elcoteq's plant floor space, 54% is located in Europe (about 114,700 square meters). The largest volume plants are located in Pecs, Hungary, and in Tallinn, Estonia. Personnel negotiations were held in the spring of 2007 in Finland. These negotiations resulted in 326 redun-dancies on financial and production grounds at the Lohja plant, the NPI organization in Finland, the Group's office in Espoo, Finland and the product development organization in Salo, Finland. As part of the global streamlining of operations, production at the Lohja plant ceased at the end of June. The Lohja manu-facturing facility was sold to Sponda Kiinteistörahasto in October. As part of the drive to streamline operations for higher cost-effectiveness, the company agreed on the sale of its subsidiary in Offenburg, Germany, in December 2007. The German competition authorities approved the deal in January 2008. In addition, the company has announced that it seeks to scale down or divest its St. Petersburg unit in Russia. Elcoteq reduced its holding in Imbera Electronics Oy to 15%. Imbera Electronics Oy is a joint venture established by Elcoteq and the Aspocomp Group in 2002 on a 50-50 basis. Asia-Pacific Asia-Pacific's net sales amounted to 1,110.9 million euros (1,094.1). Of Elcoteq's plant floor space, 34% is lo-cated in Asia (about 70,800 square meters). The largest volume plants are located in Beijing, Dongguan and Shenzhen in China as well as Bangalore, India. The Chinese plants generated higher sales for Communications Networks in 2007. Efficiency-boosting measures have been initiated at the Chinese plants as part of the global action plan. Americas Net sales in the Americas amounted to 855.7 million euros (764.8). Of Elcoteq's plant floor space, 12% is lo-cated in the Americas (about 25,800 square meters). The largest volume plant is located in Monterrey, Mexico. As part of the drive to boost capacity utilization, a decision was made to close down production at the Juarez plant in Mexico and move operations primarily to the company's plants in China and the Monterrey plant in Mexico. Production at the Juarez plant ceased at the end of the third quarter. Production problems continued at the Monterrey plant during the review period due to the rapid expansion of operations. Spe-cific measures have been implemented to rectify the problems. Research and Development Elcoteq's research and development costs in 2007 totaled approximately 4.6 million euros (6.8), or 0.1% of net sales. In addition, the company had some 8 million euros of other development costs. The company's R&D activities and expenditures cover, among other things, equipment and process development for pro-duction and production testing needs, research and development related to the platforms, software, elec-tronics, mechanics and testing and verification environments for mobile phones, and the development of radio modules and technologies for mobile phones. Trends of the Business Areas Elcoteq's reporting on 2007 covers two business areas: Terminal Products and Communications Networks. In 2007, Terminal Products contributed 79% (82%) and Communications Networks 21% (18%) of the Group's net sales. Elcoteq has continued to balance its customer portfolio in line with its key strategic focus. In 2007, Elcoteq's largest customers (in alphabetical order) were Ericsson, Nokia Mobile Phones, Nokia Siemens Networks, Philips, Research in Motion (RIM), Sony Ericsson and Thomson. No single customer accounted for over 40% of consolidated net sales. Terminal Products Net sales of the Terminal Products business area in 2007 were down about 8.5% on the previous year and amounted to 3,212.0 million euros (3,512.1). The segment's operating income was -41.0 million euros (68.4); excluding restructuring expenses, it was -5.1 million euros. Fourth-quarter net sales came in at 849.9 million euros (898.6) and the segment's operating income was 1.3 million euros (13.2). Most of the customers of the Terminal Products business area posted substantial net sales growth compared with the previous year. Elcoteq continued to balance its customer base in 2007. Business with RIM and Phil-ips in particular saw growth. Box build deliveries saw growth in 2007 and sales of after-market services also increased. In October 2007, the company announced its plan to launch a new, more customer-centric organization. The new organization was adopted on January 1, 2008. As from the beginning of 2008, Terminal Products will be reported on as two separate business areas: Personal Communications (including mobile phones and their components) and Home Communications (including set-top boxes and electronics for flatscreen TVs). Communications Networks Net sales of Communications Networks in 2007 rose by about 7.6% on the previous year and amounted to 831.0 million euros (772.3). The segment's operating income was -17.3 million euros (22.4); excluding re-structuring expenses, it was -3.3 million euros. Fourth-quarter net sales in 2007 amounted to 212.5 million euros (206.0) and the segment's operating income to -17.2 million euros (5.7). The business operations of Communications Networks have seen strong growth in Asia. Elcoteq has also expanded its service portfolio to box build, logistics and supply chain management services, as customers are expecting their manufacturing partners to provide broader service packages. During the review year, Elcoteq announced two new customer accounts in the manufacture of WiMAX products. In March, Elcoteq and Redline Communications Inc. signed a cooperation agreement focusing on the Americas, and in October, an agreement was made with Telsima Corporation for the box build manu-facture of products at the Bangalore plant in India. Following the organizational change that came into effect as from the beginning of 2008, the Communica-tions Networks business area will still be reported on separately.
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