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Electronics Production | August 29, 2006

Neways increase net profit 81%

Holland based EMS-provider Neways has presented its results for the first half of 2006. The company realised an 81% increase in net profit to EUR 4.7 million in the 1st half of 2006.
The operating margin has improved to 6.4%, from 4.3%. The substantial increase was due to a combination of factors ensuing from the previously implemented strategy. The product mix has changed clearly, due to a growing number of orders for high added value activities such as development, prototyping and engineering. In addition, purchasing power was used more effectively and outsourcing to production companies in Eastern Europe and China was increased. Sound capacity utilisation also contributed to the improvement in results.

The order portfolio has increased by 45% as per 30 June. Neways expects turnover for the full year to exceed EUR 220 million and the net result to increase by at least 50% in comparison with 2005.

Turnover
After a cautious start to the year, the market for Electronic Manufacturing Services (EMS) has developed positively. In the 1st half of 2006, Neways realised net turnover of EUR 111.7 million, an increase of 2% compared with the 1st half of 2005 and 12% compared with the 2nd half of 2005. The increase in turnover was entirely organic.
Particularly in the past few months a clear increase in demand in all segments was noted, which resulted in a 45% increase in the order portfolio to EUR 64 million, compared with EUR 44 million at end-June 2005 and a 23% increase from EUR 52 million at year-end 2005.

Results
The increase in turnover was accompanied by a 7% rise in gross margin to EUR 46.8 million, or an increase to 41.9% from 40.0% as a percentage of turnover. This strong increase in added value can be attributed to a combination of factors which ensued from the previously implemented strategy. The more prominent profiling as a one-stop provider has led to a shift in the product mix towards more high-added value activities, such as development, prototyping and engineering and relatively more orders combining the various disciplines within Neways. Also, purchasing power was used more effectively.

The operating expenses rose more or less in line with net turnover. This led to a 51% increase in the operating result to EUR 7.1 million, which means an operating margin of 6.4% compared with 4.3% in the 1st half of 2005. All operating companies realised a positive operating result.

The pre-tax profit was EUR 6.6 million, from EUR 3.8 million in the 1st half of 2005. Interest charges were clearly down and the tax rate came in at 29.6%, compared with 33.2% in the 1st half of 2005, which puts it at a normal level.

Net profit increased to EUR 4.7 million, up 81% from EUR 2.6 million. Net profit as a percentage of turnover increased to 4.2%. Net earnings per ordinary share increased by 70% to EUR 0.51, from EUR 0.30 per ordinary share in the 1st half of 2005.

Key developments
Neways increasingly acts as a one-stop provider for its clients. In the 1st half of 2006 this led to a relative increase in the number of orders which combine the various disciplines within Neways. It also led to a shift in the product mix towards relatively more high added value activities, such as development, prototyping and engineering. Both the internal cooperation between the operating companies and the cooperation with suppliers has clearly improved in the past six months, which resulted in improved purchasing terms and conditions.

Outsourcing production to Eastern Europe and China increased
In the past year, Neways made good progress on the outsourcing of production activities to its operating companies in Eastern Europe and China. The capacity utilisation of production facilities has been strong in the past six months. Of the total of 1969 employees (in FTEs), the number of employees (in FTEs) in Eastern Europe and China now stands at 813, an increase of 21% compared with end-June 2005 and of 14% compared with year-end 2005.

Streamlining of Ripa organisation completed
The final ongoing reorganisation at our Ripa operating company in Son was successfully completed early this year. The reorganisation was necessitated by lagging turnover and result developments. The efficiency drive comprised a drastic improvement of the logistical process, adaptation of the organisation and reduction of the workforce by around 20.

Transit to lead-free production without problems
For environmental reasons, the production of lead-containing electronics has been banned - with a few exceptions - within the European Union as from 1 July 2006. The Neways operating companies have made the transition to lead-free production virtually without problems.

Financial position
In the 1st half of 2006, Neways strengthened both shareholders' equity and guaranteed equity. In early April, a convertible subordinated bond loan of EUR 3 million with a conversion price of EUR 5.25 per share was converted into equity. As per end-June, the number of outstanding ordinary shares has increased by a total of 664,660 to 9,191,116.

The strong increase in the number of orders has resulted in relatively high accounts receivable and order-related inventories positions and thus an increase in the working capital as per end-June. As a result, the solvency rate (guaranteed capital / balance sheet total) dropped to 36.5%, from 40% at year-end 2005. This meant a negative net cash flow of EUR 4.5 million, compared with a positive EUR 2 million in the 1st half of 2005.

Neways' financial position is sound and offers sufficient room for further growth in the coming years.

Outlook 2006
Neways has, in recent years, redesigned its organisation to be much more in tune with the current market conditions and the changing demands and wishes of its clients. The benefits of this operation were reaped in the 1st half of 2006.

For the coming years there are ample opportunities for improvement. Intensified cooperation between the operating companies, improved use of outsourcing, reductions in suppliers and expansion of component purchasing in Asia are high on the agenda. In order to expand capacity, extra investments will be made in new production facilities in Eastern Europe and China in the 2nd half of 2006.

Neways will use its profile of one-stop provider of electronics systems in the EMS market not only to further increase the added value for clients but also to further improve the quality, delivery reliability and innovative capacity.

Neways' order portfolio for the coming months is well-stocked and exceeding the level at the beginning of the year. Expectations are that price pressure will continue and that costs for raw materials and auxiliary materials will increase. As a result, Neways expects a further increase in turnover to above EUR 220 million and an increase in net profit of at least 50% for the full-year 2006.
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