Elcoteq SE
Stock Exchange Release
July 23, 2008, at 9.00 am (EET)
ELCOTEQ SE'S INTERIM REPORT JANUARY-JUNE 2008 (UNAUDITED)
Elcoteq's second quarter net sales totaled 904.8 million euros (968.3
million euros in April-June 2007). The second quarter operating
income turned positive as expected, and totaled 0.6 million euros
(-19.0). In spite of the net sales being lower than in the first
quarter of 2008, the operating income clearly improved (-9.5 million
euros in January-March 2008). Cash flow after investing activities in
the second quarter was -78.5 million euros (-21.0). It was affected
by the temporarily high finished goods and component inventory levels
caused especially by a Personal Communications customer's overly
optimistic forecast for the second quarter.
April-June
* Net sales in the second quarter amounted to 904.8 million
euros (968.3 million euros in April-June 2007).
* Operating income was 0.6 million euros (-19.0 and
excluding restructuring costs -15.9).
* Income before taxes was -5.5 million euros (-25.1).
* Earnings per share (EPS) were -0.42 euros (-0.64).
* Rolling 12-month return on capital employed (ROCE) was
-6.2% (-9.4%).
* Cash flow after investing activities was -78.5 million
euros (-21.0).
* Gearing was 1.2 (0.8).
January-June
* Net sales in January-June were 1,813.6 million euros
(1,920.8 million euros in January-June 2007).
* Operating income was -8.9 million euros (-71.3 and
excluding restructuring costs -38.2).
* Income before taxes was -21.0 million euros (-84.1).
* Earnings per share (EPS) were -0.78 euros (-2.12).
* Cash flow after investing activities was -79.6 million
euros (-61.9).
* Interest-bearing net debt was 220.2 million euros (192.1).
This interim report has been prepared using IFRS recognition and
measuring principles. Tables have been prepared in compliance with
the IAS 34 requirements approved by the European Union. The
comparative figures given in the body text of this report are figures
for the corresponding period in the previous year, unless stated
otherwise.
April-June
The Group's net sales in the second quarter were slightly below the
level of the first quarter, totaling 904.8 million euros (968.3 in
the second quarter of 2007 and 908.7 million euros in the first
quarter of 2008). The decline is partly explained by the EUR/USD
exchange rate; using the currency rates that prevailed in the second
quarter of 2007, the figure for net sales would have been
approximately 100 million euros higher. Net sales of both the Home
Communications and the Communications Networks Business Areas rose
clearly compared to the first quarter while Personal Communications
Business Area's sales declined.
Operating income turned positive and was 0.6 million euros (-19.0
million euros April-June 2007). Operating income improved according
to company's expectations compared to the first quarter of 2008, when
the operating income totaled -9.5 million euros. The main reasons
for this positive trend were the good progress in the action plan
initiated in February 2007 to improve profitability as well as
improved net sales by the Home Communications and Communications
Networks Business Areas. All Business Areas reported positive
operating income in the second quarter. The clearest improvement was
in Communications Networks' profitability, which was due to better
capacity utilization and cost savings. Improved profitability in Home
Communications Business Area is mostly resulting from sales
increase.
The Group's net financial expenses amounted to 6.1 million euros.
Income before taxes was -5.5 million euros (-25.1) and net income was
-13.7 million euros (-20.6). Earnings per share were -0.42 euros
(-0.64).
Gross capital expenditures on fixed assets in the second quarter
totaled 16.6 million euros (13.4) or 1.8% of net sales. Capital
expenditure was allocated to testing capacity expansion and
replacement of assembly equipment. Depreciation was 18.2 million
euros (19.9).
Cash flow after investing activities in the second quarter was -78.5
million euros (-21.0). Cash flow was affected by the unusually high
finished goods and component inventory levels as well as an increase
in accounts receivables. Company held excess inventories caused
especially by a Personal Communications customer's overly optimistic
forecast for the second quarter. These inventories, which the company
had to a great extent pay in the second quarter will be run down
during the third quarter of 2008. The cash flow received by the Group
from sold accounts receivable amounted to 113.8 million euros at the
end of June (136.5 million euros at the end of March 2008).
At the end of June Elcoteq had unused but immediately available
credit limits totaling 237.5 million euros (276.4 million euros at
the end of March 2008). These credit limits included a 230 million
euros syndicated, committed credit facility of which 170 million
euros was unused. The solvency ratio was 18.0% (20.9%) and gearing
was 1.2 (0.8).
January-June
Net sales in January-June decreased slightly compared to the same
period last year, standing at 1,813.6 million euros (1,920.8).
Operating income improved clearly and was -8.9 million euros (-71.3
and excluding restructuring costs -38.2). Income before taxes was
-21.0 million euros (-84.1). Earnings per share were -0.78 euros
(-2.12).
Gross capital expenditures on fixed assets in January-June amounted
to 44.3 million euros (24.6), 1.4% of net sales. Depreciation totaled
35.3 million euros (40.0).
Personnel
At the end of June 2008 Elcoteq employed 21,522 people (23,847): 249
(489) in Finland and 21,273 (23,358) in other locations. The
geographical distribution of the workforce was as follows: Europe
9,708 (10,889), Asia-Pacific 6,212 (8,125) and the Americas 5,602
(4,833). The average number of Elcoteq employees on the company's
direct payroll in January-June was 17,685 (19,334).
Business Areas
Since the beginning of 2008, Elcoteq has three Business Areas as its
primary segments: Personal Communications, Home Communications and
Communications Networks. Until the end of 2007 Personal
Communications and Home Communications formed one combined Business
Area, Terminal Products.
In the second quarter of 2008, Personal Communications contributed
70% (65%), Home Communications 10% (13%) and Communications Networks
20% (22%) of the Group's net sales. Elcoteq's largest customers (in
alphabetical order) were Ericsson, Nokia Devices, Nokia Siemens
Networks, Philips, Research in Motion (RIM), Sony Ericsson and
Thomson. Over the past year and a half the company has significantly
grown with several of its other major customers whereas the share of
Nokia has declined and Nokia is not the biggest customer anymore.
Net sales of the Personal Communications Business Area in the second
quarter were higher than in the second quarter last year, standing at
631.0 million euros (628.8). The segment's operating income improved
clearly to 5.6 million euros (-9.4), 0.9% of its net sales.
Profitability improvement resulted mainly from the operational cost
savings which were still not fully effective in the second quarter as
the improvements made especially in Mexico start to become visible
from the third quarter of 2008 onwards.
Net sales of the Home Communications Business Area were lower in the
second quarter than one year earlier, standing at 90.5 million euros
(123.2). However, the segment's operating income improved clearly
totaling 0.9 million euros (-2.0), 1.0% of its net sales. The
improvement of profitability resulted from production consolidation
and systematic actions to improve the product portfolio. Home
Communications operating income improved also from the first quarter
of 2008 (-0.5 million euros in January-March 2008), mainly due to the
better demand situation.
Net sales of the Communications Networks Business Area decreased
somewhat compared to last year's second quarter to 183.3 million
euros (216.4) due to the divestment of the loss making German
manufacturing operations in the beginning of 2008. However, the
segment's operating income improved to 3.3 million euros (2.2) or
1.8% of its net sales. Operating income improved also clearly from
this year's first quarter (-4.2 million euros in January-March 2008),
mainly due to higher net sales.
Geographical Areas
Elcoteq has three geographical areas: Europe, Asia-Pacific and
Americas. Elcoteq's second quarter net sales were derived from these
areas as follows: Europe 46% (50%), Asia-Pacific 26% (28%) and
Americas 28% (22%).
Europe's net sales showed a decrease of 14% compared to the same
period last year and totaled 414.3 million euros (481.0).
Asia-Pacific's net sales decreased by 14%, amounting to 233.4 million
euros (272.1) and net sales of Americas increased by 19% on the same
period last year to 257.1 million euros (215.2).
Compared to the first quarter of 2008, the net sales in Europe
declined by 11%, while in Asia-Pacific the net sales grew by 9% and
in the Americas the net sales grew by 12%.
Progress with the Action Plan and the IEMS Strategy
The earlier announced action plans to improve Elcoteq's profitability
and competitiveness continued in the second quarter of 2008. Except
for the delay in the St. Petersburg divestment, the action plan is on
track. On February 25, 2008, Elcoteq signed an agreement with
Flextronics International GmbH to divest the Elcoteq subsidiary ZAO
Elcoteq and its plant in St. Petersburg, Russia. Among the conditions
precedent for the closing of this transaction were that the purchaser
would obtain the approval of the transaction by the Russian
competition authorities, and that the purchaser would be able to
close the negotiations related to certain specific issues with the
Russian customs authorities. As these conditions were not met by the
deadline stated in the agreement, Flextronics decided to use its
right to terminate the transaction. Elcoteq is continuing with its
plan to divest the St. Petersburg plant and is discussing with new
parties to this effect.
As part of the action plan and because of delays in some customer
projects, Elcoteq decided in the second quarter to initiate
procedures with its Tallinn-based personnel regarding either
compulsory holiday with partial pay or personnel reductions. Some 300
persons were affected rather than the originally estimated 330.
Actions already taken to improve operational efficiency also meant
that reductions in personnel numbers were possible. Using the option
of compulsory holiday with partial pay maintains the capability of
upgrading volumes at short notice while at the same time reducing
costs. The service offering and capabilities of Elcoteq's operations
in Tallinn were not affected by these measures.
Expanding the service offering to an Integrated EMS (IEMS) company is
proceeding and expected to be implemented by the end of 2008 as
earlier announced. Through its IEMS strategy, Elcoteq is placing
special emphasis on the broadening of its service offering to
increasing its mechanics expertise and services, and to the
strengthening of product development services that combine both
electronics and mechanics. Elcoteq has previously announced that, in
addition to developing its own operations, this strategy could call
for specific M&A arrangements or various forms of collaboration with
other companies in the same sector.
Changes in Elcoteq's Management
Mr. Jouni Hartikainen, President and CEO of the Elcoteq SE, took over
management of the Group's Personal Communications Business Area on
July 1, 2008. Mr. Anssi Korhonen, former President of the Personal
Communications Business Area and member of the Elcoteq Management
Team, has taken up a new position outside the company. Mr.
Hartikainen continues as Elcoteq's President and CEO. The IEMS
strategy is of particular importance to the Group's Personal
Communications Business Area as it represents more than 70% of
Elcoteq's net sales. Mr. Hartikainen will be focusing on the
implementation of this strategy.
Since October 2007, Mr. Hartikainen's responsibilities at Elcoteq
have also included the Human Resources function. Leadership of the
Group's Global HR function was passed to Mr. Sándor Hajnal, who was
appointed as Vice President, Human Resources as of July 1, 2008.
Short-Term Risks and Uncertainty Factors
The most important short-term challenges with respect to Elcoteq's
business operations concern the company's ability to improve its cost
structure - and thus its profitability - at a rate quick enough to
cope with market conditions that are becoming increasingly tight,
coupled with its ability to offer service packages that correspond to
customer demands and needs. The ability to react rapidly to changing
market situation is especially important in times of increased
economic uncertainty.
Shares and Shareholders
On June 30, 2008 the company had 127,795,919 shares divided into
22,025,919 series A shares and 105,770,000 series K Founders' shares.
All the K Founders' shares are held by the company's three principal
owners.
Elcoteq had 9,302 shareholders on June 30, 2008. There were
altogether 8,022,145 nominee-registered and foreign-registered
shares, representing 24.6% of the share capital and 6.3% of the votes
outstanding.
Prospects
Elcoteq's key priorities during 2008 are to significantly improve the
company's profitability and to prepare the ground for future growth
by expanding the service offering in accordance with customers'
needs. The company has gone through several changes in the past year.
The growth with major customers, accomplished cost savings and
closures or divestments of three factories are proving to be
effective as the second quarter results show.
Elcoteq's current forecast is that the operating income will improve
substantially in 2008 compared to 2007. The company's full-year net
sales are expected to be at lower level than in 2007, based on the
weaker than expected development in the Personal Communications
Business Area and a temporary decrease in the sales during the third
quarter. Irrespective of the continuing forecasted change in the
customer structure the Group's operating income is expected to be at
the level of 1% towards the end of the year.
The third quarter net sales are expected to be lower than in the
second quarter of 2008 while operating income is expected to be at
about the same level.
Elcoteq's forecasts are based on the company's opinion of market
growth and on the project-specific forecasts of its customers, based
on which Elcoteq makes its forecasts of the realization of both
agreed and planned new projects.
Savonlinna, Finland
July 22, 2008
Board of Directors
Further information:
Jouni Hartikainen, President and CEO, +358 10 413 11
Mikko Puolakka, CFO, tel. +358 10 413 11, mobile +41 79 618 0302
Minna Aila, Director, Investor Relations and Corporate
Responsibility, tel. +358 10 413 1908,
mobile +358 40 513 1470
Press Conference and Webcast
Elcoteq will hold a combined press conference, conference call and
webcast in English at 2.30 pm (EET) on Wednesday July 23, in the
Bulsa-Freda room at Scandic Hotel Simonkenttä (address: Simonkatu 9,
Helsinki, Finland).
To participate by phone, please call in 5 - 10 minutes before the
start of the conference on +44 20 7162 0125 (Europe) or +1 334 323
6203 (the USA), code Elcoteq.
The press conference can also be followed as a live webcast or later
as a recording via Elcoteq's website www.elcoteq.com.
Presentation material used at the press conference (pdf file) will be
available on the company's website www.elcoteq.com from approximately
13.00 am (EET) on July 23, 2008.
Elcoteq publishes its third quarter interim report at 9.00 am (EET)
on Thursday, October 23, 2008.
Enclosures:
1 Income statement
2 Balance sheet
3 Cash flow statement
4 Calculation of changes in shareholders' equity
5 Formulas for the calculation of key figures
6 Key figures
7 Business areas
8 Assets and liabilities classified as held for sale
9 Assets pledged and contingent liabilities
10 Quarterly figures
