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Elcoteq's Sales Down 56% for 2009
March 31, 2010 |Estimated reading time: 24 minutes
Elcoteq SE's net sales in 2009 declined about 56.3% on the previous year and amounted to 1,503.2 million euros (3,443.2 million euros in 2008). Operating loss totaled -76.5 million euros (-20.4), mainly due to increased restructuring expenses of 37.0 million euros, excluding which the operating loss was -39.5 million euros (-6.9). The company has been able to offset to a great extent the effects of the sales decline with the strong cost savings actions carried out throughout the year. Cash flow after investing activities was clearly positive at 52.9 million euros (-99.7). Interest-bearing net debt decreased significantly and was 187.5 million euros (238.5). Net sales declined in the fourth quarter of 2009 by about 20% on the previous quarter and amounted to 265.5 million euros (331.7 million euros in the third quarter of 2009). Operating loss totaled -23.4 million euros (-11.8) and excluding restructuring expenses it amounted to -2.1 million euros (1.7 in the third quarter of 2009).
Financial Year 2009:
- Net sales were 1,503.2 million euros (3,443.2);
- Operating loss was -76.5 million euros (-20.4), excluding restructuring expenses -39.5 million euros (-6.9);
- Loss before taxes was -117.1 million euros (-52.9);
- Earnings per share (EPS) were -3.22 euros (-2.02);
- Cash flow after investing activities was 52.9 million euros (-99.7);
- Rolling 12-month return on capital employed (ROCE) was -18.9% (-3.1%);
- Interest-bearing net debt amounted to 187.5 million euros (238.5), and gearing was 5.8 (1.8); and
- The Board of Directors proposes that no dividend will be paid for 2009.
October to December 2009:
- Net sales were 265.5 million euros (889.1 million euros in the fourth quarter of 2008);
- Operating loss was -23.4 million euros (-11.8). Operating loss includes; restructuring costs amounting to 21.3 million euros (13.5), excluding which the operating loss was -2.1 million euros (1.7);
- Loss before taxes was -36.4 million euros (-25.2);
- Earnings per share (EPS) were -0.96 euros (-0.89); and
- Cash flow after investing activities was -11.3 million euros (46.6).
Major events after end of financial year:
- Hybrid bond of 29 million euros issued and proceeds from hybrid issue used to redeem debentures of 105 million euros in January 2010; and
- Term sheet signed for a 100 million euros committed revolving credit facility maturing in June 2011.
Elcoteq SE's consolidated financial statements for 2009 have been prepared using IFRS recognition and measurement principles. The comparative figures given in the body text of this report are the figures for the corresponding period of the previous year, unless stated otherwise.
Market Review
The estimated total assembly value of the global electronics market declined by roughly 15% at the annual level, amounting to US $840 billion in 2009. The combined value of EMS and ODM, including all the electronics segments, was roughly US $250 billion in 2009, according to data from Electronics Trend Publications (ETP), iSuppli and InForum. EMS alone was valued at roughly US $150 billion in 2009, with a market decline of approximately 15% from the previous year. The After Market Services (AMS) market declined roughly 13% in 2009 and was valued at US $170 billion in 2009.
Financial Year 2009
Elcoteq's 2009 net sales declined on the previous year and amounted to 1,503.2 million euros (3,443.2). Operating loss was -76.5 million euros (-20.4), representing -5.1% (-0.6%) of net sales. Loss before taxes was -117.1 million euros (-52.9) and net loss was -105.0 million euros (-65.9). Earnings per share (EPS) amounted to -3.22 euros (-2.02). Earnings include 37.0 million euros (13.5) in restructuring expenses.
Net sales declined in both Consumer Electronics and System Solutions compared to the previous year. The decline in net sales was due to the combined effect of the overall decline in electronics equipment demand and the company's weak balance sheet. From time to time, the EMS business may involve temporary working capital fluctuations, which the electronics manufacturing service provider is expected to finance. This lacking financing capacity prevented the company from absorbing all the business opportunities available in the market.
Operating loss increased in 2009 from the previous year. Results were affected by non-recurring costs of 37.0 million euros (13.5) arising from the restructuring actions implemented to mitigate the effects of lower net sales. The cost savings from restructuring actions mainly became visible in the second half of 2009 and thus could not fully offset the significant net sales decline throughout 2009. On an annualized basis, fixed costs were 165 million euros or 48% lower in the last quarter of 2009 compared to the last quarter of 2008.
The company has continued to adjust its operations to lower volumes, but it has, at the same time, maintained its excellent operational performance and global platform to serve customers close to their end markets. Among the efficiency-boosting actions carried out in 2009 were the streamlining of the factory network, increasing capacity utilization, aligning the organization to support the adjusted strategy and decreasing operational costs. The company closed production sites in St. Petersburg (Russia), in Arad (Romania), in Richardson (the United States) and in Shenzhen (China).
The Group's net financial expenses amounted to 40.5 million euros (32.4). The increase was mainly due to a loan receivable write-off of 13.4 million euros.
Fourth-Quarter Net Sales and Earnings
Fourth-quarter net sales in 2009 declined compared to the third quarter, as expected, and amounted to 265.5 million euros (889.1 million euros in the fourth quarter of 2008 and 331.7 million euros in the third quarter of 2009). Net sales were affected by the divestment of the majority of operations in Tallinn to Ericsson at the end of July 2009 and lower demand in Consumer Electronics, mainly in handsets. Deliveries in home communications products such as flat TVs and set-top boxes increased significantly from the third quarter of 2009.Operating loss in the fourth quarter was -23.4 million euros (-11.8 million euros in the fourth quarter of 2008 and -3.3 in the third quarter of 2009). Operating income exclusive of restructuring expenses in the fourth quarter was slightly negative at -2.1 million euros (1.7). Restructuring expenses in the fourth quarter of 2009 were related mainly to unused asset write-offs. Loss before taxes was -36.4 million euros (-25.2 million euros in 2008).
Financing and Cash Flow
At the end of December 2009, Elcoteq had cash totaling 87.9 million euros (201.0 million euros in the third quarter of 2009 and 95.1 million euros at the end of 2008). In November 2009, the company used 100 million euros cash to repay part of its revolving credit facility, of which a total of 200 million euros were outstanding at the end of the third quarter of 2009.
At the end of 2009, the company had a syndicated, committed credit facility of 100 million euros that was fully utilized. The facility matures on April 30, 2010 and the company signed a committed term sheet with the same bank syndicate in March 2010 for a new facility maturing at the end of June 2011.
At the end of December, the Group's interest-bearing net debt amounted to 187.5 million euros (238.5). The solvency ratio was 6.3% (14.2%) and gearing was 5.8 (1.8). Elcoteq had no sold accounts receivable at the end of December 2009 (101.1 million euros at the end of 2008). Rolling 12-month return on capital employed (ROCE) was -18.9% (-3.1%)
Cash flow after investing activities in 2009 was 52.9 million euros (-99.7) while it was -11.3 million euros negative in the fourth quarter due to an increase in working capital.
Capital Expenditures
The Group's gross capital expenditures on fixed assets in 2009 amounted to 6.4 million euros (71.4), or 0.5% of net sales. Depreciation was 60.1 million euros (78.9), representing 4.0% of net sales. Investments were primarily earmarked for production machinery and test equipment. In 2009, investment activity was reduced to a minimum in order to increase the capacity utilization of existing assets. In the fourth quarter, investments amounted to 1.8 million euros (9.9). No new operating lease contracts were made in 2009 (and in 2008).
Personnel
At the end of December, the Group employed 10,101 (18,830) people: 139 (217) in Finland and 9,963 (18,613) elsewhere. The geographical distribution of the workforce was as follows: Europe 3,940 (8,607), Asia-Pacific 2,664 (5,027) and the Americas 3,497 (5,196). The average number of Elcoteq employees on the company's direct payroll in 2009 was 11,271 (17,401).
Wages, salaries and other personnel expenses in 2009 amounted to 126.3 million euros (193.0).
Corporate Responsibility
Elcoteq's corporate responsibility includes economic, social and environmental aspects. The company's environmental management system corresponds with the requirements of the ISO 14001:2004 standard. All Elcoteq units operate within a multisite certificate for quality and environmental management. In 2009, Elcoteq continued systematic group-level internal audits of environmental, social accountability as well as occupational health and safety standards. Further details on Elcoteq's corporate responsibility activities will be presented in the Corporate Responsibility Report, which will be published as a part of the Annual Report 2009 during the week commencing on April 5, 2010.
Research and Development
Elcoteq's research and development costs in 2009 totaled approximately 0.9 million euros (1.8), or 0.06% of net sales. The company's R&D activities cover, among other things, equipment and process development for production and production testing needs as well as development related to the platforms, software, electronics, mechanics and testing of mobile phones.
Strategic Business Units
Since the beginning of 2008, Elcoteq has had three Business Areas: Personal Communications, Home Communications and Communications Networks. They have been reported as separate segments. The Personal Communications and Home Communications Business Areas were combined during the third quarter of 2009, and the company now has only two Strategic Business Units (SBUs): Consumer Electronics and System Solutions. Both SBUs are responsible for managing and developing their existing customer relationships and applicable service offerings, while Group Operations and Sourcing is responsible for the supply chain and production.
Consumer Electronics covers products such as mobile and wireless phones, their parts and accessories, set-top boxes, flat panel TVs and other consumer products. System Solutions covers wireless and wireline infrastructure systems and modules, enterprise network products and various other industrial segment products.
By combining the Home Communications and Personal Communications segments under the Consumer Electronics SBU, the company can better utilize the synergies between these businesses. The company also aims to reduce costs further by streamlining and simplifying the organization by removing organizational layers and overlapping roles.
More emphasis is also put on new sales activities, which are now under a separate global function, New Sales and Business Development. The function focuses on identifying new business opportunities, acquiring new customers and exploring new service segments for the company.
In 2009, Elcoteq's largest customers (in alphabetical order) were EADS, Ericsson, Funai, Huawei, Humax, Nokia Devices, Nokia Siemens Networks, Philips, Research in Motion (RIM) and Sony Ericsson.
Consumer Electronics
Net sales of the Consumer Electronics SBU in 2009 were 1,127.3 million euros (2,739.5), contributing 75% of the Group's net sales. The segment's operating loss was -38.2 million euros (15.0), and -13.9 million euros excluding restructuring costs (23.1). Fourth-quarter net sales in 2009 amounted to 211.1 million euros (684.0). The segment's operating loss amounted to -11.2 million euros (2.7). Excluding restructuring costs the operating profit was 4.4 million euros (10.8)
In the Consumer Electronics SBU, 2009 was characterized by drastically lower orders from its high-volume mobile phone customers. The flat TV manufacturing business acquired in Juarez, Mexico in 2008 was transformed in early 2009 from a turnkey (TV panel owned by Elcoteq) to a consigned material (TV panel owned by the customer) business model, which also impacted on net sales. In the EMS market, the decline in customer demand and excess capacity also led to greater competition among EMS companies.
Lower customer volumes impacted the profitability of the segment. Significant cost reduction activities were implemented in 2009 but those could not yet fully offset the significant sales decline. Restructuring costs arising from capacity adjustments also had a negative effect on profitability.
However, at the same time Elcoteq made strong progress in growing its service content in the Consumer Electronics business, especially in increasing its after sales services business. The company was also successful in acquiring new customers in the Consumer Electronics business. These new customers include Emporia, a special-purpose mobile phone manufacturer, Cinterion, a wireless module manufacturer, TCL, a leading Chinese consumer electronics company, and Philips Lighting, a leading provider of solutions and applications for both professional and consumer markets.
System Solutions
Net sales of the System Solutions SBU in 2009 were 375.9 million euros (703.7), contributing 25% of the Group's net sales. The segment's operating loss was -2.0 million euros (1.6), and excluding restructuring costs its operating income was 9.9 million euros (7.0). Fourth-quarter net sales in 2009 amounted to 54.5 million euros (205.2). The segment's operating loss amounted to -0.1 million euros (-5.1). Excluding restructuring costs the operating profit was 5.6 million euros (0.3).
The decline in net sales was mainly due to the sale of the majority of operations in Tallinn to Ericsson in July 2009. Despite the decline in net sales, System Solutions was able to improve its efficiency and further reduce costs to offset the volume decline. However, its operating income was negative.
During 2009, growth in the outsourcing of communications equipment underperformed forecast. The top key players in traditional communications network technology infrastructure were in-sourcing their business, thereby decreasing the share of business accounted for by outsourcing. The overall market for System Solutions nevertheless showed slight growth.
System Solutions was also successful in alluring new customers. In Tallinn, the remaining manufacturing capacity has been in utilization and the SBU has managed to gain new customers for its specialized business operations. Elcoteq's plant in India also attracted new customers and expanded its operations pipeline. Furthermore, one of the SBU's major customers successfully relocated its manufacturing of communications network equipment to central Europe and proceeded to ramp up its business to a significantly higher level in accordance with the plan agreed with Elcoteq.
Geographical Areas
Elcoteq has three geographical areas: Europe, Asia-Pacific and the Americas. Elcoteq's net sales in 2009 were derived from these areas as follows: Europe 47% (48%), Asia-Pacific 14% (22%) and the Americas 38% (30%).
Decisions of the Annual General Meeting
Elcoteq SE's Annual General Meeting took place on March 23, 2009, in Luxembourg. The Meeting confirmed the consolidated and parent company's income statements and balance sheets for the financial year 2008 and discharged the members of the Board of Directors and the statutory auditor from liability for the financial year. The Meeting approved the Board's proposal that no dividend will be distributed for the financial year January 1 - December 31, 2008.
The Meeting re-elected the following persons to the Board of Directors: President Martti Ahtisaari; Eero Kasanen, Executive Dean of Aalto University School of Economics; Heikki Horstia, B.Sc.; François Pauly, General Manager of Sal. Oppenheim Jr. & Cie S.C.A; Antti Piippo, principal shareholder of Elcoteq SE; Henry Sjöman, founder-shareholder of Elcoteq SE; Juha Toivola, M.Sc.; and Jorma Vanhanen, founder-shareholder of Elcoteq SE. President Ahtisaari, Horstia, Kasanen, Pauly and Toivola are independent Board members, and they represent more than half of the Board's members.
The Meeting approved the proposal of the Audit Committee of the Board of Directors to appoint the firm of authorized public accountants KPMG Audit S.à.r.l under the supervision of Philippe Meyer as the company's auditors for the financial year ending on December 31, 2009. The fees of the auditors will be paid as per the appropriate invoice.
Convening after the Annual General Meeting in Luxembourg, the Board of Directors elected Antti Piippo as its Chairman and Juha Toivola as the Deputy Chairman. Piippo was elected Chairman of the Nomination Committee and the Working Committee and Henry Sjöman, Juha Toivola and Jorma Vanhanen as members of these committees. Toivola was elected Chairman of the Compensation Committee and the Audit Committee and President Martti Ahtisaari, Heikki Horstia, Eero Kasanen and Pauly as members of these committees.
Balance Sheet Strengthening
In January, the company commenced a project to strengthen its balance sheet by means of an equity investment. In July, the company announced the signing of a conditional letter of intent for an equity increase with Shenzhen Kaifa Technology Limited, a Chinese industrial company, but after a mutual re-assessment the negotiations ended in September. In October, Elcoteq announced that it had signed a non-binding letter of intent with Videocon Industries Ltd., an Indian company. The negotiations with Videocon were terminated in March 2010.
Another integral part of this balance sheet strengthening is the restructuring of the company's interest-bearing debt. As a part of this project, Elcoteq announced in October its plan to collect irrevocable, voluntary selling commitments from the holders of its subordinated debenture bonds. In January 2010, the company proceeded to exercise these selling commitments by issuing hybrid securities valued at 29 million euros and using the proceeds directly to repay outstanding debenture bonds with a nominal amount of 105 million euros. After redeeming the debentures of 105 million euros at a price of 25% of the nominal value, reversing the relevant deferred tax assets and recognizing the 29 million euro hybrid securities as equity according to IFRS, the company's equity increases approximately by 85 million euros.
In November, Elcoteq signed a new agreement to replace the revolving credit facility of 230 million euros signed five years ago. The new credit facility was agreed with the same bank syndicate and it is for 100 million euros. The loan will mature at the end of April 2010 and the company has signed in March 2010 a committed term sheet with the same lender group to extend the 100 million euro facility until the end of June 2011.
Restructuring Plan
Elcoteq has reduced its manufacturing capacity through the Restructuring Plan launched in January 2009 to adapt to the radical changes in the market situation. The restructuring actions have proceeded according to the plan. The plan consists of a number of measures such as closing several plants and reducing personnel globally. During the year, Elcoteq closed down its plants in Arad (Romania), Richardson (USA) and St. Petersburg (Russia). The plant in Shenzhen (China) was consolidated into the plant in Beijing.
A further step in this process was taken on June 17, when Elcoteq and Ericsson concluded an agreement whereby Elcoteq sold the majority of the machinery, equipment and materials of its Tallinn manufacturing operations to Ericsson. Cost-saving measures have continued at other factories as well.
Shares and Shareholders
At the end of 2009, the company had altogether 128,132,185 shares divided into 22,362,185 Series A shares and 105,770,000 Series K founders' shares. All the series K Founders' shares are held by the company's three principal owners.
Elcoteq had 10,213 registered shareholders on December 31, 2009. There were a total of 5,307,833 foreign and nominee registered shares, representing some 4.14% of the votes.
Incentive Schemes
The company has had a share subscription plan from 2007 that allows the company to issue shares to key personnel on the basis of the set operational targets. Based on the target achievement in 2008 the actual number of shares issued on November 12, 2009 for this share subscription plan was 336,266.
The company also has a fairly similar share subscription plan from 2009, where the potential reward is based on reaching the targets regarding consolidated income before taxes for the first and second half of 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. Based on the actual results for 2009, the targets for the first and second half of 2009 have not been met and thus no shares will be issued.
In October 2009, the Board of Directors amended the 2009 Share Subscription Plan. The amendments concerned the issuance of shares in case of a public tender offer and, secondly, a situation where the company's registered share capital value would increase at least 50% during the second half of 2009. If such situations occur, a maximum of 750,000 shares will be issued. Neither of these cases occurred during the second half of 2009.
Changes in Elcoteq's Management
As of August 27, 2009, and as a result of the changes in the organization, the Elcoteq Management Team consists of the following persons:
- Jouni Hartikainen, President and CEO;
- Sándor Hajnal, Senior Vice President, Human Resources;
- Vesa Keränen, Senior Vice President, Consumer Electronics;
- Markus Kivimäki, Senior Vice President, Legal Affairs (until March 31, 2010);
- Tommi Pettersson, Senior Vice President, System Solutions;
- Mikko Puolakka, CFO;
- Tomi Saario, Senior Vice President, New Sales and Business Development; and
- Roger Taylor, Senior Vice President, Group Operations and Sourcing.
Events After the Financial Year
In December 2009, Elcoteq decided to convene an Extraordinary General Meeting (EGM) of shareholders to decide on actions supporting the execution of balance sheet restructuring and the equity investment project. The first EGM took place on January 22, 2010, in Luxembourg. Since the quorum requirement (at least half of the series A shares and half of the series K shares need to be present or represented in the meeting) was not met at this first meeting, the company convened a second EGM that was held on February 23, 2010.
The EGM held on February 23, 2010, rejected the Board's proposals to decrease the share capital of the company from its current amount of EUR 8,944,874 and to decrease the current par value of series A shares (EUR 0.40) and series K shares (EUR 0.04). The Board of Directors made its proposal to the EGM prior to the recent positive development in the company's equity. In light of the stronger balance sheet, the EGM deemed that the size of the proposed authorization to increase the share capital up to EUR 200,000,000 was too high and it is not necessary to decrease the par value of shares.
The EGM decided to increase the authorized share capital of the company from its current amount of twenty million euros (EUR 20,000,000) up to forty million euros (EUR 40,000,000). The EGM authorized the Board of Directors to issue new shares and convertible debt instruments within the authorized share capital of the company without reserving preferential subscription rights for the existing shareholders, up to an amount of twelve million euros (EUR 12,000,000) of the authorized share capital, corresponding to a maximum of 30,000,000 new series A shares. The EGM also authorized the Board of Directors to issue new shares and convertible debt instruments within the remainder of the authorized share capital of nineteen million fifty-five thousand one hundred and twenty-six euros (EUR 19,055,126), respecting the existing shareholders' preferential subscription rights. A maximum of approximately 47,000,000 new series A shares can be issued under this authorization.
The EGM deleted from the company's Articles of Association the right of a shareholder to request a redemption of shares in case a change or changes in the ownership of the company result in a shareholder holding more than thirty-three and one third (33 1/3) percent or, as the case may be, fifty (50) percent of the shares in the company. Finally, the EGM changed the date of the Annual General Meeting of the shareholders from March 23 to April 28 each year. The company's Articles of Association were reworded in order to reflect these changes voted upon at the EGM of the shareholders of the company.
On January 27, 2010, Elcoteq issued EUR 29 million in hybrid securities in a private placement as a part of its previously announced balance sheet restructuring. The proceeds from the hybrid securities issue were used directly to repay Elcoteq's outstanding debenture bonds with a nominal amount of 105 million euros. As a result of this transaction, the company estimates that it will recognize a one-time gain of approximately EUR 75 million in the first quarter of 2010. The announced restructuring will significantly improve the company's indebtedness and solidity. If this transaction had taken place on December 31, 2009, the company's solvency would have been 23.7%, gearing 0.7 and net debt 82.1 million euros.
On January 27, 2010, Elcoteq and Nokia Corporation signed an agreement that qualifies Elcoteq as a partner to provide Nokia's customers with After Market Services for their Nokia devices. It is expected that Elcoteq will start these operations gradually during the second quarter of 2010. The companies also intend to explore other opportunities for cooperation.
On March 1, 2010, Elcoteq commenced statutory personnel negotiations regarding possible temporary lay-offs or the termination of employee contracts in the operations of Elcoteq SE Finnish Branch, Elcoteq Finland Oy and Elcoteq Design Center Oy on production or financial grounds. As a result of these negotiations the companies decided to make altogether seven persons redundant and temporarily lay off seven persons on March 16, 2010.
On March 4, 2010, Markus Kivimäki, member of the Elcoteq Management Team and Senior Vice President of Group Legal Affairs, announced that he will pursue his career outside Elcoteq. Jari Hakkarainen, Legal Counsel at Elcoteq will be heading the legal function as of April 1, 2010.
On March 15, 2010, Elcoteq announced that Philips Lighting has chosen Elcoteq as a global growth partner for its Solid-State Lighting (SSL) business. Under the agreement, Elcoteq will provide Philips Lighting with global manufacturing services and related sourcing and supply chain management as well as product development services. Elcoteq has already started the production of SSL products at its factory in Dongguan, China. Production will expand to other Elcoteq locations including Mexico and Hungary during 2010.
On March 30, 2010, Elcoteq and the lenders of its EUR 100 million revolving credit facility agreed on extending the facility from April 30, 2010 until June 30, 2011. The parties have signed a committed term sheet for the extended facility and aim at finalizing the loan documentation during April 2010.
On March 30, 2010, Elcoteq and Videocon Industries Limited (Videocon) decided after mutual re-assessment to terminate the negotiations started in September 2009 regarding a major equity investment which would have made Videocon a major single shareholder in Elcoteq.
In addition, to enhance possibilities for further balance sheet strengthening, the three founder shareholders of the company, Antti Piippo, Henry Sjöman and Jorma Vanhanen, have informed the Board of Directors that they will exercise their right to convert all of their series K founders' shares to series A shares after which the company will have only one series of shares, A shares.
At the same time Antti Piippo and Henry Sjöman, the founder shareholders and board members of Elcoteq as well as Juha Toivola, an independent board member of Elcoteq have announced that they will not be available for re-election as Board Members. Jorma Vanhanen, the third founder shareholder, and all other independent board members (Martti Ahtisaari, Heikki Horstia, Eero Kasanen and François Pauly) have announced their availability for re-election to the Board. In addition, the Board will be strengthened by two independent board members to be proposed to the Annual General Meeting.
The company continues to explore further ways to strengthen its balance sheet through equity and long-term financing arrangements. Furthermore, the company will arrange a rights issue during 2010. The three founder shareholders have undertaken to support such balance sheet strengthening arrangements in shareholders' meetings.
Short-Term Risks and Uncertainty Factors
The company operates in a working capital intensive business environment where the access to and availability of sufficient financing represents a risk factor. The Board of Directors has assessed the company's financing requirements against the business plan. The company's ability to implement its business plan is highly dependent on the availability of financing and ability to stabilize the financing structure, including the strengthening of shareholders' equity and to increase financial flexibility.
The company's key short-term operative challenges are to increase sales, proactively manage fixed costs according to sales fluctuations, significantly improve profitability as well as avoid generating excess working capital to preserve cash reserves. The company has significant part of its purchases and sales in other currencies than euro and the inability to fully or partly hedge the foreign currency exposure can result to deviations from business plan. Ability to offer the right service offering to customers is a key element in keeping existing customers and winning new customers. Under the changing market conditions the failure to identify and respond to the customer requirements may prevent the company from achieving the strategic objectives and the above operative targets.
Prospects
The total assembly value of the global electronics market is expected to increase again in 2010 and reach the 1,000 billion US dollar milestone in 2011. According to industry research data providers, the EMS market is expected to grow approximately 6% and After Market Services (AMS) spending roughly 14% in 2010. The operator and OEM revenue streams are increasingly coming from various services where usage is highly dependent on well functioning devices. Therefore, the uninterrupted usage of the devices becomes more important, creating more demand for After Market Services.
Within the Consumer Electronics market, handset production amounted to approximately 1.1 billion units in 2009 and is expected to increase slightly in 2010. In spite of the global economy worries, the set-top box (STB) and flat TV markets (FTV) are expected to see further growth in the coming years, STB approximately 7% annually during the next five years and FTV even higher. System Solutions' electronics assembly market amounted to US $150 billion in 2009 and is expected to increase only slightly in 2010 according to the industry research data providers.
First-quarter net sales are expected to be somewhat lower than the fourth quarter of 2009. Company expects that the operating income in the first half of 2010 remains negative. Based on the impact of implemented cost reduction actions, the stabilization of underlying business and the contribution of recently won new customer contracts the Company expects the operating profit to turn positive for the second half of 2010. Due to the restructuring of subordinated debt in January 2010, the net income for 2010 will be clearly positive.
The company's key operational focus area for 2010 is to generate positive cash from operations by further significantly improving factory utilization ratio through reduced cost base and gaining new customer contracts. It is the focus of the Board and operative management to further strengthen the balance sheet through equity related transactions and long-term financing arrangements. The company seeks to further reduce tied-up capital through fixed asset divestments, working capital financing arrangements and operational improvements in inventory management.
Board's Dividend Proposal
The Board of Directors proposes to the Annual General Meeting to be held on April 28, 2010, that no dividend will be paid for the financial year 2009.
Annual General Meeting 2010
Elcoteq's Annual General Meeting will be held in Luxembourg on April 28, 2010. A separate Shareholder Information Meeting will be held before the Annual General Meeting in Helsinki, on April 20, 2010.
About Elcoteq
Elcoteq SE is the global Life Cycle Service Partner for high-tech product and service companies.
Engineering, Manufacturing, Fulfillment and After Market Services are the cornerstones of Elcoteq's extensive service offering. Elcoteq has a proven track record in EMS and a global factory network coupled with modern manufacturing equipment and consistent systems and processes.
Products include Consumer Electronics devices such as mobile phones and their accessories, set-top boxes, flat panel TVs, as well as System Solutions products, such as infrastructure systems, modules and other industrial segment products.
The Group's consolidated net sales for 2008 totaled 3.4 billion euros and it employs approximately 11,000 persons. Elcoteq SE is listed on the Nasdaq OMX Helsinki Ltd. For more information, visit www.elcoteq.com.