INCAP GROUP INTERIM REPORT JANUARY-SEPTEMBER 2008: REVENUE INCREASED, OPERATING PROFIT STILL NEGATIVE

Incap Corporation      Stock Exchange Release       5 November 2008 at 8:30 a.m.
 
  • Revenue in January-September increased by approximately 20% on the same period the previous year, amounting to EUR 68.1 million (Jan-Sep 2007: EUR 56.7 million)
  • Operating profit (EBIT) was EUR 2.4 million negative (EUR 1.7 million negative), or 3.5% negative of revenue (3.0% negative).
  • Net profit for the report period amounted to EUR 3.5 million negative (2.6 million negative).
  • Earnings per share (EPS) were EUR 0.29 negative (0.21 negative)
  • Profitability was burdened by increased production costs, non-recurring items for organisational development and personnel arrangements as well as by delayed revenue growth in India
This unaudited interim financial report has been prepared in compliance with the recognition and measurement principles of the IFRS standards. The tables in the report have been prepared in compliance with the requirements of the IAS 34 standard approved by the EU. The accounting principles and methods of the interim report are the same as in the last annual financial statements. Unless mentioned otherwise, the comparison figures used in the text portion of the report are the figures for the comparable period during the previous year. The figures for 2007 include the Indian operations as of 1 June 2007.
 
Revenue and earnings in July-September 2008
 
Revenue during the third quarter was EUR 21.4 million (7-9/2007: EUR 20.6 million) or approximately 4% higher than during the comparable period in 2007. Compared to the second quarter of the year, revenue decreased due to the softened demand for telecommunications products in July-August. Demand for the energy efficiency segment, on the other hand, developed favourably.
 
The operating profit was EUR 0.4 million negative (EUR 0.6 million negative) and as a percentage of revenue it was 2.1% negative (2.8% negative).  The operating profit improved compared to the previous quarters due to a relative increase in the sales margin and reduced fixed costs.
 
 
 
Revenue and earnings in January-September 2008
 
Revenue for January-September 2008 was EUR 68.1 million or 20.2% higher than during the comparable period in 2007 (Jan-Sep 2007: EUR 56.7 million). Many new products entered actual serial production from the prototype and pre-production stages during the report period. Discontinued telecommunication sector products were manufactured for the customer’s stock, which increased the revenue. 
 
Operating profit, EUR 2.4 million negative, was slightly weaker than during the comparable period in 2007 (EUR 1.7 million negative) and as a percentage of revenue it was 3.5% negative (3.0% negative). The increases in electronics components and metal material prices had mainly been transferred to customer prices by the end of the report period.
 
The operating profit for the report period includes approx. EUR 1.0 million of non-recurring costs connected with the organisation changes and the streamlining of the Group structure. During the comparable period the non-recurring costs amounted to EUR 0.6 million.
 
Net profit for the report period amounted to EUR 3.5 million negative (EUR 2.6 million negative). Net profit was particularly affected by an increase in financing expenses. Earnings per share amounted to EUR 0.29 negative (EUR 0.21 negative), while equity per share stood at EUR 1.24 (EUR 1.46).
 
 
 
 
Development of operations
 
 
The six new customers in India proceeded from prototype and pre-production runs to volume production. The Indian factory’s production mainly comprises integrated product entities for the energy technology and industrial electronics. The construction of new production facilities in Tumkur is proceeding and they are supposed to be completed during the first quarter of 2009.
 
The value of inventories increased at the end of the report period due to components required for final deliveries to customers operating in the telecommunications sector. When the production of these products ends, the value of the material inventory is estimated to decrease by approximately EUR 4 million by the end of the year.
 
During the report period, the focus of material sourcing was transferred to India and China, where cooperation with a partner operating in the area was started. Low-cost sources of supply were utilised in the procurement of several component groups. In addition, own resources in strategic sourcing were reinforced in India. Also the design capacity was enhanced strongly so that Incap today runs a design team of 12 professionals offering design services in mechanics, electronics and PCBs to customers globally.
 
Incap sold the entire share capital of its subsidiary Ultraprint Oy to the operative management of the subsidiary on 16 July 2008. The subsidiary’s revenue in 2007 amounted to about EUR 1.2 million and it had 12 employees. 
 
Redefining the strategy
 
In accordance with the strategy updated in August, Incap pursues profitable growth by focusing on strongly growing market segments and developing services particularly for the needs of leading equipment manufacturers in the fields of energy efficiency and well-being technology.  Incap is already strongly involved in the delivery chain of these applications.
 
The definition means that the importance of the telecommunications sector will decrease remarkably in Incap’s operations. The share of products for the telecommunications sector of revenue will be reduced significantly at the end of 2008, when volume production for two customers will end.
 
As part of the revision of the strategy, Incap has renewed its organisation, which is divided into three business units: Energy efficiency, Well-being and Emerging business. Incap’s present revenue is almost evenly distributed among these three units.
 
Reorganisation programme
 
In August 2008, Incap launched a reorganisation programme aimed at strengthening the financial base of the company. The programme emphasises the improvement of profitability and the working capital ratio and also the adaptation of the cost structure.
 
Profitability is to be improved by expanding the service selection, eliminating low-margin or unprofitable assignments, and further increasing the role of Indian and Estonian plants in service production. The capacity of production services will be adapted in response to demand, the roles of plants will be specialised and fixed costs will be reduced. The reorganisation programme will be implemented by the end of 2008.
 
The implementation of the programme has proceeded according to plans. Production capacity has been adjusted to match demand in, e.g., the Vuokatti factory, where the number of personnel has been cut in accordance with reduced demand. On the other hand, resources were added in Vaasa and Helsinki for the manufacturing of energy and well-being technology products. Transfers of products to the Estonian factory are being carried out in accordance with plans agreed with the customers. Service capacity is being improved, particularly in terms of the start-up of new products and customer production takeover projects and design services.
 
Low-margin or unprofitable assignments and customer relationships have been disposed of in a controlled way. Fixed costs are being reduced in both production units and corporate functions. A marketing project to gain new customers, particularly among leading energy efficiency and well-being sector manufacturers and other growing sectors in Europe, started in September.
 
Financing and cash flow
 
The Group’s equity ratio was 29.4% (31.2%). Interest-bearing net liabilities totalled EUR 20.1 million (EUR 22.0 million) and the gearing ratio was 132.6% (124.3%). Net financial expenses were EUR 1.1 million (EUR 0.9 million) and depreciation expenses were EUR 2.1 million (EUR 2.0 million).
 
The Group’s equity at the close of the period under review was EUR 15.2 million (EUR 17.7 million). Debt totalled EUR 36.4 million (EUR 39.1 million), of which interest-bearing debt amounted to EUR 20.7 million (EUR 23.5 million).
 
The Group’s quick ratio was 0.6 (0.7) and the current ratio 1.5 (1.6). Cash flow from operations was EUR 0.3 million positive (EUR 4.1 million negative) and the change in cash and cash equivalents was a decrease of EUR 0.3 million (an increase of EUR 1.0 million).
 
Capital expenditures
 
The Group’s capital expenditures were EUR 1.5 million (EUR 1.1 million) or 2.2% (1.9%) of revenue.
 
Personnel
 
At the end of the report period, Incap Group had 755 employees (778), of whom 166 were officials and 589 were employees. At the end of the report period, 47% of personnel worked in Finland, 25% in Estonia and 28% in India. In addition, a total of 64 leased employees worked in the company.
 
The co-determination negotiations at the Vuokatti unit were concluded after the close of the report period in October. As a result, 13 people will be made redundant and a total of 67 will be temporarily laid off in three phases.
 
Authorisations of the Board of Directors
 
The Annual General Meeting of 10 April 2008 authorised the Board of Directors to decide, within one year of the Annual General Meeting, on increasing the share capital through one or more rights issues and on granting stock options so that the total number of new shares to be subscribed for on the basis of the authorisation is a maximum of 4,000,000 shares, from which a maximum of 600,000 shares can be used in stock options. The Board of Directors has not exercised the authorisation.
                       
Shares and shareholders
 
Incap Corporation has one series of shares and the number of shares is 12,180,880. During the report period, the share price varied between EUR 0.85 and EUR 1.60, and the closing price of the period was EUR 0.86 (EUR 1.85). During the report period, the trading volume was 11% of outstanding shares (30%).
 
At the end of the report period, the company had 1,071 shareholders (1,114). Foreign or nominee-registered owners held 3.7% (16.3%) of all shares. The company’s market capitalisation on 30 September 2008 was EUR 11.9 million (EUR 22.5 million). The company does not own any of its own shares.
 
Short-term risks and factors of uncertainty concerning operations
 
The increased uncertainty of general economic trends may have an impact on Incap’s customers’ market situation in the future and thereby on the development of Incap’s revenue. However, the customers have not predicted any significant changes in their demand so far. The significant decrease in deliveries to customers operating in the telecommunications sector, which has already been known, will be realised by the end of 2008, and this is estimated to improve Incap’s financing situation due to a considerable decrease in capital tied up in inventories. In case the declining revenue from the telecom sector cannot be replaced by growth in another customers, the already decided lay-offs may cause non-recurring costs.
 
The most significant challenge in the near future is Incap’s ability to improve its cost structure and to enforce the turn to operational profitability. Other short-term uncertainties are connected with the financing arrangements of the Indian operations, the risks related with the general turbulence in financing market as well as with the management of the costs of materials.
 
The general risks and factors of uncertainty relating to Incap’s operations are described in more detail in the report by the Board of Directors dated 3 March 2008, and no significant changes have taken place with regard to these factors during the report period.
 
Outlook for the rest of 2008  
 
Incap’s estimates of its future business development are mainly based on its customers’ estimates. In spite of a significant deterioration in the global economic outlook, Incap’s customers have estimated their demand to remain at the previously predicted levels, even though the situation could change quickly should the financial crisis become critical. On the other hand, of the customers, equipment manufacturers in energy technology and electrotechnology have reported that their demand will develop favourably also in 2009 due to their outstanding orders.
 
Incap estimates that its revenue in 2008 will increase clearly from last year’s EUR 83.0 million. Profitability is expected to improve further during the last quarter of the year and operating profit from operations in 2008 is expected to be on the same level than the previous year, when it was EUR 2.8 million negative.
 
In the earlier statement on 6 August 2008, Incap estimated that the Group’s revenue would exceed last year’s EUR 83.0 million. Then, the company further estimated that profitability will improve during the second half of the year compared to the first half of the year, and the operating profit from operations in 2008 is expected to be on the same level as 2007.
 
Helsinki, 5 November 2008
 
INCAP CORPORATION
Board of Directors
Additional information:
Sami Mykkänen, President and CEO, tel. + 358 40 559 9047
Eeva Vaajoensuu, Chief Financial Officer, tel. +358 40 763 6570
Hannele Pöllä, Director, Communications and HR, tel. +358 40 504 8296
 
DISTRIBUTION
NASDAQ OMX Helsinki Oy
Principal media
The company’s Web site www.incap.fi  
 
PRESS CONFERENCE
Incap will arrange a conference for the press and financial analysts today at 10.00 a.m. today at the World Trade Center Helsinki, in Meeting Room 1 on the 2nd floor at Aleksanterinkatu 17, FI-00100 Helsinki.
 
ANNEXES
1 Consolidated Income Statement
2 Consolidated Balance Sheet
3 Consolidated Cash Flow Statement
4 Consolidated Statement of Changes in Equity
5 Group Key Figures and Contingent Liabilities
6 Quarterly Key Figures
 
 
 
INCAP IN BRIEF
Incap Corporation is an internationally operating contract manufacturer whose comprehensive services cover the entire lifecycle of electromechanical products from design and manufacture to maintenance services. Incap’s customers are leading equipment suppliers in energy-saving and well-being technology for which the company produces new competitiveness as a strategic partner. Incap has operations in Finland, Estonia and India. The Group’s revenue in 2007 amounted to EUR 83 million and the company currently employs approximately 730 persons. Incap’s share is listed on the NASDAQ OMX Helsinki Oy. For additional information, please visit www.incap.fi.
 
Annex 1
 
 
 
Annex 2
 
 
Annex 4
 
 
 
Annex 5
 
 
 
Annex 6