Electronics Production | April 29, 2009

Elcoteq: net sales almost halved

Elcoteq's net sales between January and March decreased as expected and totalled €470.0 million (908.7 in January - March 2008). Operating income was € -38.3 million (-9.5) and -24.7 excluding restructuring expenses.
The first-quarter result was strongly influenced by the economic crisis and the rapid changes in our customers' markets. Elcoteq has vigorously adjusted its cost structure with the Restructuring Plan announced in January, but it will only start to come to full effect from the second quarter onwards.

Net Sales and Result
Elcoteq recorded net sales of 470.0 million euros (908.7) between January and March. Operating income totaled -38.3 million euros (-9.5) and was -24.7 million euros excluding restructuring costs. All segments posted negative results since they were all affected by the economic crisis and the rapid changes in our customers' markets. Sales are typically lower in the first quarter, and it was this time coupled with customers' particularly full sales channels and the fact that customers have been consuming their own buffer stocks. Profitability has been affected by the decline in sales and restructuring costs arising from adjustments in the cost base. Such reductions in the cost base will have more visible impact from the second quarter onwards.

The Group's net financial expenses were 11.5 million euros (6.0). Income before taxes was -49.9 million euros (-15.4) and net income totaled -45.6 million euros (-11.6). Earnings per share (EPS) were -1.40 euros (-0.35). Financial expenses were affected by the high debt level and currency fluctuations.

The Group's gross capital expenditures on fixed assets between January and March were 2.0 million euros (27.7), or 0.4% of net sales. Depreciation amounted to 18.9 million euros (17.1). Investments have been reduced to a minimum to increase existing asset capacity utilization ratios.

Financing and Cash Flow
Cash flow after investing activities was -50.7 million euros (-1.1). Cash flow received by the Group from sold accounts receivable was 52.3 million euros at the end of March (136.5). The negative cash flow was a result of high volatility in customer demand in the first quarter. Demand fluctuations caused challenges in maintaining the working capital, especially inventories, at an optimal level. Cash flow is expected to improve in the second quarter because the measures taken to reduce the component purchase orders implemented in the first-quarter will gradually release cash tied up in working capital.

At the end of March 2009, Elcoteq had cash and unused but immediately available credit lines totaling 118.9 million euros (368.3 million euros in the first quarter of 2008 and 165.9 million euros at the end of 2008). These credit limits included a 230 million euro syndicated, committed credit facility, of which 20 million euros were unused. The company has signed a term sheet with the bank syndicate to renew the syndicated, committed credit facility and the finalization of the loan master agreement is currently under progress.

At the end of March, the Group's interest-bearing net debt amounted to 286.4 million euros (143.6). The solvency ratio was 12.1% (19.2% at the end of March 2008) and gearing was 3.2 (0.8). Rolling 12-month return on capital employed (ROCE) was -11.3% (-10.7%).

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 first quarter of 2009, Personal Communications contributed 48% (76%), Home Communications 25% (9%) and Communications Networks 27% (15%) of the Group's net sales.

Net sales of the Personal Communications Business Area were 227.7 million euros (688.4). The segment's operating income was -10.2 million euros (5.4) and -9.4 million euros excluding restructuring expenses. Personal Communications net sales have decreased mainly due to the manufacturing re-allocation and in-sourcing decisions made by Nokia Devices.

Net sales of the Home Communications Business Area increased compared to the first quarter a year earlier, standing at 116.9 million euros (81.4). The segment's operating income was -9.9 million euros (-0.5) and -3.5 million euros excluding restructuring expenses. The increase in net sales came mainly from the acquisition of the flat TV manufacturing plant in Juarez, Mexico. The result was strongly affected by the one-time restructuring costs of 6.4 million euros.

Net sales of the Communications Networks business area decreased slightly compared to last year's first quarter, standing at 125.3 million euros (139.0). The segment's operating income was -10.3 million euros (-4.2) and -4.5 million euros excluding restructuring expenses.

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.

Elcoteq's first-quarter net sales were derived from the geographical areas as follows: Europe 40% (51%), Asia-Pacific 15% (24%) and Americas 46% (25%).

At the end of March 2009, the Group employed 14,569 (23,996) people. The geographical distribution of the workforce was as follows: Europe 6,597 (10,838), Asia-Pacific 3,231 (7,127) and Americas 4,741 (6,031). The average number of employees on Elcoteq's direct payroll between January and March was 14,446 (17,894).

Progress in the Restructuring Plan
The Restructuring Plan announced on January 15 is proceeding as planned in terms of plant closures and cost cutting. As a result of the rapid decrease in net sales, personnel reductions were carried out on a somewhat wider scale than initially planned. This has also affected the one-time restructuring costs, which were higher than anticipated. The total restructuring costs are expected to be around 30 million euros, of which 13.5 million euros were booked in December 2008 and the rest by the third quarter of 2009. Earlier, the Company estimated that the total restructuring costs would be 24 million euros, of which 13.5 million euros were booked in 2008. The cost structure has been adjusted to the current manufacturing volumes, but also allows for rapid growth. The Company can leverage the new, reduced cost base when the manufacturing volumes pick up again.

Equity Project
In January, the Company commenced a project to strengthen its balance sheet. The Equity Project is designed to provide the financial means for future growth with both existing and new customers. The Company has advanced to a phase where discussions are now carried out with a limited number of equity investors who have indicated an interest to enter into final negotiations and confirmatory due diligence. The selection of the equity partner and final negotiations are scheduled to be completed during the first half of 2009.

New Incentive Plan - Profitability Turnaround
On February 10, the Board of Directors approved a new profitability turnaround plan for the company's key personnel in the form of a share subscription plan.

The potential reward from the plan is based on reaching the targets set by the Board of Directors for the Group's consolidated income before taxes for the first and second half of year 2009. Based on the achieved targets the company would issue a maximum of 1,500,000 new series A shares of which 50% would be issued during June 2010 and the remaining 50% during January 2011. The new series A shares, if any, will be issued according to and under the authorization granted to the Board of Directors in the company's Articles of Association.

Under the current market conditions it is extremely difficult to make exact forecasts. The second-quarter net sales are expected to be on par with the first-quarter of 2009. Operating income is expected to improve as the restructuring actions start having an impact on the cost structure. Cash flow is expected to be positive due to the actions taken in the second quarter to reduce working capital, including the inventories.

Successful completion of the equity increase project is expected to speed up the closing of several new programs, which are under negotiations both with existing and new customers. Such equity increase is also expected to clearly stabilize the financing structure of the Company.

The Company's priority areas for 2009 are the strengthening of the equity base, further balancing of 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.


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