Efore Plc Half year financial report January 1, – June 30, 2018

EFORE PLC  Half year financial report   August 16, 2018   at 9.00 a.m.   


EFORE PLC  Half year financial report     January 1, – June 30, 2018

This release is a summary of Efore's Half year financial report January – June 2018. The full report is a PDF file attachment to this stock exchange release and is available on the company's website at the address www.efore.com.

January – June 2018 in brief: 
- Net sales totalled EUR 24.6 million (EUR 39.4 million*).
- Operating result was EUR -4.0 million (EUR 0.7 million).
- Earnings per share were EUR -0.08 (EUR 0.00).

* Telecommunication net sales included EUR 2 million sales of components to Wuxi Hodgen Technology with no margin.

Financial estimate for 2018

Due to the financial situation of the Group and especially uncertainty related to the market development of the telecommunications sector giving earnings guidance has been exceptionally challenging.

Due to this reason Efore has e.g. in the stock exchange release published on April 27, 2018 stated that “Due to the net sales development during the first half of 2018 and planned structural arrangement of telecom business as well as due to strengthening the capital structure and development of other businesses, Efore does not at the moment give earnings guidance for the full year 2018 “

During the first half of the year visibility to the rest of the year telecom business market situation has improved. Product launches completed during spring and summer time together with activities to adjust costs and increase efficiency have also improved visibility to the Group 2018 financial development. With these changes and actions the company expects to reach significantly better operating result during second half of the year than during the first half year. Company also expects to reach positive cash flow from operations during the last 6 months of the year. Nevertheless, the full year 2018 operating result and cash flow from operations will remain negative.

Jorma Wiitakorpi, Efore’s President and CEO:

“Group net sales was significantly below the corresponding period a year ago and the operating result was clearly weaker.

The main reason for the negative development in the operating result was the lower net sales. Product margins went slightly down but the margin decline was compensated by adjusting fixed costs and by improving operational efficiency. The operating result includes EUR 0.7 million impairment of capitalized R&D costs.

The most significant reasons for the lower net sales were difficult market situation in telecom business, phasing of planned product launches, material and component shortages towards the end of the period as well as unfavorable currency exchange rate changes.

Industrial business net sales totalled EUR 17.0 million, with a year-on-year decrease of 14.5 %. Lower than anticipated demand in certain key customers, phasing of planned product launches as well as currency exchange rate changes had a negative impact to the industrial business net sales development.

Telecommunication business net sales decreased significantly compared to the corresponding period of last year and amounted to EUR 7.6 million. The market situation in telecommunication business was challenging for Efore as the demand was focused on micro base stations. Most of the Efore telecommunication products are traditionally developed for macro base stations but demand for them has decreased faster than anticipated. Challenges in component availability during the latter part of the period postponed some deliveries to July-August. Additionally, some new product launches moved from the first half of the year to the second half of the year.

As announced in February 2018, Efore has initiated a review process to evaluate different structural alternatives to secure the long-term profitability of its telecom business. Negotiations related to structural arrangements in the telecom business and expanding the telecommunication business product portfolio continue.

Activities to lighten the Group balance sheet continued. As part of improving the operational efficiency, telecom business R&D activities in Sweden were discontinued and centralised to Finland and China. Actions to adjust the fixed costs and improve operating efficiency will further continue.

As informed on April 10, 2018, Efore is preparing a rights offering within the limits of the authorization granted by the Extraordinary General Meeting on May 3, 2018. With the rights offering Efore aims to improve the capital structure and strengthen the working capital of the company. “

January - June net sales and result

January - June net sales totalled EUR 24.6 million (EUR 39.4 million).

Industrial business net sales totalled EUR 17.0 million (EUR 19.9 million), with a year-on-year decrease of 14.5 %. Lower than anticipated demand in certain key customers, phasing of planned product launches as well as currency exchange rate changes had a negative impact to the industrial business net sales development.

Telecommunication business net sales totalled EUR 7.6 million (EUR 19.4 million), with a year-on-year decrease of 61.1 %. Challenging telecom business market situation, phasing of the planned product launches as well as challenges in material and component availability had a negative impact on the telecommunication business net sales development.

The operating result in January – June decreased significantly compared to the previous year and it was EUR -4.0 million (EUR 0.7 million).  Main reason for the negative result development was low level of net sales. The operating result includes EUR 0.7 million impairment of capitalized R&D costs.

Business development

Efore has expanded the industrial business product portfolio in the strategic market segments (test & measurement, digital displays, medical equipment). Several new customized products utilizing existing product platforms were delivered to key customers. Furthermore, Efore introduced new high power (200w) product family designed specifically for wall displays and home care equipment. Efore launched also high IP-class products for harsh environment (wet environment, operating theater and demanding automation applications).

Digital Light product portfolio has been further expanded by the first product of the high density Strato Evo family launched at “Light & Building” and “Strategy in Light” events in Frankfurt and Las Vegas.

Strato Evo is based on the successful Strato family and is designed specifically for indoor, architectural and outdoor lighting applications. Cost efficient and fully programmable Strato Evo products enable customers to reduce their inventory and react faster to market demand changes. At the end of the period, the first 1500W power supplies for sport arena and airport lighting were also delivered to the customers.

Thanks to the new product launches Efore has good opportunity to expand it’s Digital Light and Digital Power offering to new market segments.

Efore Digital Light and Digital Power geographical presence has been improved by five new distributor agreements in UK, Scandinavia, China and in US.

The telecommunication market is transforming, which sets new requirements for the operators in this business. Most of Efore telecommunication products are traditionally designed for macro base stations but demand for them has decreased and shifted towards smaller base stations. Due to this market change Efore has starting from 2017 focused R&D investments into new smaller cell products. During the reporting period product portfolio has been expanded to include products agnostic to network technologies. 5G technology based products are in a key role in future network expansions.

System level solutions for telecommunication and industrial markets will play an even more significant role in the Group future product portfolio. In this context, system level solutions refer to wider systems including current Efore products and e.g. electro mechanics and cablings. In these products Efore can utilize already existing expertise and skills from the DC-system business. Efore continues also the development of system level solutions for the telecommunication market and the first complete solutions are estimated to be delivered during 2018.

Due to the component market situation availability of certain components has been challenging. As a result of these component shortages Efore has not succeeded to deliver all products according to their demand. Furthermore, the company had to buy components in the spot market which has increased costs. Efore continues activities to secure better the component availability.

To improve operations at Tunisia plant investments in production equipment and quality assurance machinery continued.

The company further continued the operational development. As part of this process,  new product line based organization was established in the beginning of 2018. Based on the new organization there are two business areas in Efore; Industrial business and Telecommunication business. Industrial business consists of three product lines which are Digital Power, Digital Light and Systems. Telecommunication business consists of Telecom product line. With the new organization structure Efore can be more customer-oriented and further develop its operative efficiency and ability to utilize new business opportunities.

Activities to lighten the Group balance sheet continued. As part of improving the operational efficiency, telecom business R&D activities in Sweden were discontinued and centralised to Finland and China. Actions to adjust the fixed costs and improve operating efficiency will further continue.

Market outlook

Industrial business power supplies for LED lighting, measuring equipment, medical equipment and infrastructure offer still several growth opportunities. Efore focuses on customer segments where high reliability and long product life cycles are the key success factors.

Due to the volatility and variability in product offering in telecommunication market predicting the future is challenging. However, outlook for the latter part of the 2018 and for 2019 has become both clearer and improved compared to the situation at the beginning of this year. Efore telecommunication customers R&D investments are now focusing more into 5G technology. Efore new product releases are supporting both existing technology and future 5G network technology.

New products launches in spring and summer 2018 will create opportunities for the growth already during the latter part of 2018.

Short-term risks and factors of uncertainty

Overall economic development may have an effect on Efore’s business environment.

As part of the normal business Efore is involved in some claims and the final outcome of these claims cannot be predicted. Based on current information these claims are not expected to have material impact on the financial position of the Group.

The most significant business risks are related to the market success of key customer products. Progress of Efore product development projects depends partly on the customers’ own project schedules. Furthermore, demand fluctuations typical in the market cause rapid changes in Efore’s business.

Lead times for component deliveries have become longer and the availability of certain components has been occasionally challenging. This may have an impact on Efore delivery capability also in the future. Efore estimates that the component shortage will continue until 2020.

Expanding the product portfolio to system level solutions in industrial business may lead to increased product liability risk.

Due to weak financing situation there are some risks related to the current credit facilities and adequate financing. The company is aiming to manage these risks by active planning and implementation of different options.  

The Group actively monitors possible impacts of risks on both financing and liquidity.

As informed on April 10, 2018, Efore prepares a rights offering within the limits of the authorization granted by the Extraordinary General Meeting on May 3, 2018. 

The company has started loan extension negotiations with the main financier for loans expiring during 2018. The management of the company believes that the result of the negotiations will be positive.

More comprehensive report on risk management is presented on the Group web-site and in the Annual Report for 2017.

Investments and product development

Group investments during the first half of the year amounted to EUR 1.9 million (EUR 2.2  million) which includes EUR 1.5 million (EUR 1.8 million) capitalization of product development costs. At the end of the period under review, the capitalized product development investments amounted to EUR 8.6 million (EUR 8.3 million).

During the first half of the year the company impaired capitalized product development costs by EUR 0.7 million mainly as a result of changes in certain customers’ volume expectations in telecommunication business.

The development expenditure amounted to EUR 4.5 million (EUR 5.1 million), 18.2 % (12.8 %) of net sales. EUR 1.5 million (EUR 1.8 million) of these costs was capitalised. 

Previously capitalized product development costs were impaired by EUR 0.7 million. No further impairment or write down needs were identified in the Group balance sheet. However, based on evaluation made EUR 3.0 million impairment was recognised in the parent company Efore Plc reducing the equity.

Financial position

The interest-bearing liabilities exceeded the consolidated cash reserves by EUR 15.3 million (EUR 7.3 million) at the end of the period under review. The Group net financial expenses were EUR -0.5 million (EUR -0.5 million).

The cash flow from operations was EUR -5.3 million (EUR 2.4 million). Negative cash flow was due to the negative result and a change in the net working capital. The cash flow after investments was EUR -7.2 million (EUR 0.2 million). The Group's solvency ratio was 7.5 % (18.7 %) and the gearing was 562.6 % (97.5 %).

The liquid assets excluding undrawn credit facilities totalled EUR 2.8 million (EUR 3.2 million) at the end of the period under review. At the end of the period under review the Group had undrawn credit facilities excluding factoring limits EUR 1.7 million (EUR 4.7 million). The balance sheet total was EUR 36.3 million (EUR 40.8 million). 

As informed on April 10, 2018 Efore Plc agreed on a short-term financing arrangement of EUR 4.4 million with a number of company shareholders. Part of the credit package has been granted by Jussi Capital Oy and Rausanne Group, which belong to the related parties of the company. Other lenders belong to the 20 biggest shareholders of the company. The credit arrangement has been conducted on normal market equivalent terms.

In May 31, 2018 Efore has raised a long-term credit of EUR 2.0 million in Italy. This credit has covenants regarding net debt/ebitda and net debt/net equity. The first measurement point of these covenants will be on December 31, 2018.

The company has agreed with the main financier that the next measurement point of loan covenants will be on December 31, 2018. The company has started loan extension negotiations with the main financier for loans expiring during 2018. The management of the company believes that the result of the negotiations will be positive.

Efore prepares a rights offering for improving the capital structure and strengthening the working capital of the company during the year 2018. The targeted size of the rights offering is total EUR 10-13 million based on the authorizations granted by the Extraordinary General Meeting on May 3, 2018.



EFORE PLC
Board of Directors


Further information

For further information please contact  Mr. Jorma Wiitakorpi, President and CEO, on August 16, 2018 at 11-12 a.m., tel. +358 40 175 8510

DISTRIBUTION

Nasdaq Helsinki Oy
Principal media

Efore Group
Efore is an international Group which develops and produces demanding power products. Efore's head office is based in Finland and its R&D functions are located in Finland, Sweden, Italy and China. Sales and marketing operations are located in Europe, United States and China. In the financial year ending in December 2017, consolidated net sales totalled EUR 69.9 million and the Group's personnel averaged 432. The parent company's share is quoted on the Nasdaq  Helsinki Ltd. www.efore.com


ENCL   Half year financial report H1/2018 incl. tables

Attachment

• Efore_2018_H1_half-year report_final