RNS Number:8220P
European Telecom PLC
11 January 2002
11th January 2002
EUROPEAN TELECOM PLC
Interim Results for the Six Months Ended 30th September 2001
European Telecom plc ("European Telecom"), the leading supplier of value added
fulfilment services for the telecoms and converging industries, announces its
interim results for the six months ended 30th September 2001.
* Turnover for the six months #102m (2000: #147m)
* Operating Loss before goodwill write-off, restructuring charges and tax
#5.1m (2000 profit #369,000)
* EBITDA of #1.4m (2000: #0.5m)
* Net cash generated #7.9m (2000: absorbed #2.5m)
* Net Borrowings reduced by #8.2m from #21.1m to #12.9m
* Continued profitable growth in Operational arm of business
underpinned by acquisition of part of Philips GSM handset and cordless
DECT manufacturing, configuration and distribution facility.
Warren Hardy, Executive Chairman of European Telecom, said:
"The UK distribution market continues to prove very competitive. Although we
have significantly reduced our UK operating cost base, trading remains
extremely difficult and we do not see this position being reversed in the
short term. However the Group will benefit significantly in the final quarter
of its trading year from the acquisition of the Philips Le Mans facility in
France.
"It is clear that these financial results are disappointing for all
shareholders. The Board remains convinced that the Group's future lies in its
profitable operations business; accordingly the Board is reviewing the
strategic options for the distribution businesses to enable the Group to focus
on its more profitable activities."
Enquiries:
European Telecom plc
Warren Hardy, Executive Chairman
David McKinney, Chief Executive Officer
Tel: 01992 825825
Flagship Consulting
Andy Berry / Ben Steele
Tel: 020 7299 1500
Chairman's Statement
The first half of the current financial year has been a period of very
significant change for European Telecom. We disposed of our interests in
Global Telematics and ET Voice and 81 per cent of our handset distribution
business in France, reduced our UK employee headcount by over 150, stabilised
our IT system and re-engineered our business processes. Shortly after the
period we also raised approximately #2.2 million (after expenses) via a
placing and open offer, of which #1.5m was received in the period.
Significant progress has been made on repositioning the Group as a supplier of
value added fulfilment and configuration services for the telecoms and
converging industries.
The strategy to grow the operations arms of the business (Austria, Spain and
South Africa) has been significantly further underpinned by the acquisition,
as announced on 2nd January 2002, of part of the Philips GSM handset and
cordless DECT manufacturing, configuration, fulfilment and distribution
facility in Le Mans, France.
The capacity of the Le Mans facility will allow for an annual configuration,
fulfilment and distribution of 4-5 million GSM handsets, the return and repair
of approximately 250,000 GSM and DECT phones and the manufacturing of around
20% of Philips DECT requirements.
This Philips exclusive contract and the recent further extensions of our
existing contracts in Austria and Spain are clear evidence that there is
demand for the value added fulfilment and configuration services that are
increasingly core to European Telecom's business and we expect to see further
growth with new contracts in 2002.
The market for our UK and export GSM handset distribution business has
remained difficult throughout the period under review and continues to be
extremely competitive. Within the consolidating UK PCN distribution market,
European Telecom has performed to plan, growing to become the largest contract
connecting distributor in the UK, serving both the Orange and One2One
networks.
It is clear that these financial results are disappointing for all
shareholders. The Board remains convinced that the Group's future lies in its
profitable operations business; accordingly the Board is reviewing the
strategic options for the distribution businesses to enable the Group to focus
on its more profitable activities.
Financial Review
Group turnover for the period was #102m (2000: #146.8 m) reflecting
predominantly the fall in the number of handsets sold by the Group and the
associated reduced selling prices.
The Group made an operating loss of #5.1m in the period before taking
additional charges for goodwill of #8.6m and restructuring of #2.4m.
The Group reported a loss before taxation of #9.5m, after #1.4m losses from
the discontinued joint venture, Global Telematics, and profits of #8.9m from
disposals of certain operations and investments.
Balance Sheet
Net Group borrowings were reduced by #8.2m in the period from #21.1m to #12.9m.
The Group is pleased to report that it generated #3.4m cash from operating
activities in the period, through effective working capital management.
The Group has taken the opportunity to review the carrying value of goodwill
in respect of the Banner acquisition. Taking into account current market
conditions, particularly in the telecoms sector, referred to below, and in
light of the restructuring of the Group, the outcome of this review has been
to take a charge of #8.6m in the period representing the full carrying value
of the goodwill as at 30th September 2001.
Operating Review
UK Sales Distribution Division
Our UK sales division, which includes our GSM, export and PCN handset
distribution business, generated turnover of #55.5m for the period (2000:-
#117.6m) with a corresponding gross margin of 5.8%.
The UK GSM distribution business continued to experience severe pressure on
margins as the effects were felt of the shorter product life cycles, which
historically have tended to hold up initial margins in the period immediately
following launch. This effect has been exacerbated by an increase in the
number of products now available in an already competitive market, and is
compounded by the level of sales of grey market handsets. In addition there
has been a degradation of credit ratings in the dealer base resulting in a
reduction in number of deals that can be achieved without an increase in
credit risk assumed.
The Group's export business has been significantly affected by very similar
issues to those described above as affecting the GSM (SIM free) market.
Business is still being done at acceptable margins in Africa and Eastern
Europe. MSI (Africa), where we supply low end handsets to nine out of the
twelve available networks, has performed well during the period.
Our PCN business is performing to expectations and remains an attractive
market in which to operate. European Telecom will, once again, retain
strategic partner status with Orange. One2One connections are growing, and
this improved relationship with the network is likely to lead to higher
commission rates being seen for these businesses during the course of 2002.
TAG
The accessories market remains extremely competitive, and TAG (formerly The
Accessories Group) reported a turnover for the period of #2.2m (2000: #4.3m)
with a gross margin of 22.4%. As a result of the strategic review of its
business, TAG pulled out of a number of unprofitable contracts; this is
demonstrated to some extent by the reduced levels of turnover.
ServiceXpress
After a period of operational challenges relating predominantly to the
implementation of the ERP system last year, ServiceXpress, our accredited
handset service and repair business, has performed admirably and to plan in
the period with turnover increasing by 150% to #1.1m (2000: #0.43m) at a gross
margin of 26.5%. ServiceXpress is looking to increase its level of business
through additional repair contracts as the roll out of the Group's operations
strategy continues.
Austria
The business in Austria has performed extremely well in the period with
turnover increasing by 38% to #2.7m(2000: #1.98m) at a gross margin of 42.4%.
Since the completion of e.t.logistics GmbH relocating to its new fulfilment
centre, the Austrian subsidiary continues its steady development, having
attained the newly introduced ISO 9001 : 2000 Quality Management
accreditation. At the same time, our contract with our network operator
partner, Connect Austria, has been extended for a further four years. Further
progress in the After Sales and Repair Division has seen the introduction of a
fully integrated Track and Trace System developed in close consultation with
network operator Connect Austria. During the second quarter e.t.logistics is
scheduled to roll out this new system nationwide, therefore making this free
internet service available to all retail chains and network operators. We
have also successfully introduced an e-business platform for our customers web
shop sales.
Strategically placed in Central Europe, e.t.logistics GmbH is becoming our
natural gateway for business in Eastern Europe. e.t.logistics will provide
exciting new business opportunities in the coming year following the
successful conclusion of fulfilment agreements with a number of major
companies.
www.etlogistics.at
Spain
The Group's Spanish business continues to perform to plan with turnover of #
1.2m (2000: #1.6m) at a gross margin of 39.8%. This decline in turnover is
due to the majority of business in the prior period being pre-pay, which has
been on the decline. However the recent extension of the Vodafone Airtel
contract included the award of the post-pay business, which will start to
positively impact in the forthcoming period. The contract with Vodafone
Airtel has been extended for a further three years.
We are working hard to secure new contracts in the Iberian Peninsula, and are
currently at the tender stage for a potentially significant contract in the
region.
e-Vita
The Group\'s electronic solution for the pre-pay market has been consolidated
within our Austrian subsidiary. Operations have ceased in the UK. Since its
restructuring, e-Vita has secured a 5-year contract with Tobaccoland, a
convenience chain with 8,000 outlets and the largest supplier of pre-pay top
ups in Austria. Following its successful roll out with Connect Austria, it
has successfully concluded contracts with a number of additional networks and
service providers. e-Vita is expected to handle in excess of 250,000
transactions per month by the end of the fiscal year.
Benelux
The Group's handset distribution business in Benelux is performing broadly in
line with plan and reported a turnover for the period of #13.3m (2000: #
13.5m), marginally under that achieved in the prior period. Gross margin
achieved in the period was 5.9%. As the Group has recognised that its future
lies with its operational activities; Benelux will form part of the strategic
review of the Groups distribution businesses.
South Africa
Turnover in the period was #1.3m, down in respect of the prior year (2000: #2m)
as a result of increasingly difficult trading conditions for the distribution
business. Gross margin achieved was 7.6%.
However, as the first step in its strategy to move towards offering value
added services, our South African business has recently secured a new contract
with Cell C, the country's 3rd network operator for fulfilment and distribution
activities. Some 50% of the contract has been awarded at this time and the
remainder is due in the final quarter of the Group's financial year. The
effects of this contract will markedly improve the performance of our South
African subsidiary over the coming year.
ET France
The Group disposed of 81 per cent of ET Sarl on 28th September 2001. ET Sarl
and European Telecom Plc will continue to work closely together to leverage
opportunities within France that will be of benefit to both parties.
Strategy
The market for providing outsourced fulfilment, configuration and distribution
services to network operators and manufacturers, is determined by the number
and range of mobile communication devices being purchased by end users, which
still remains healthy at 400m GSM units globally (2001) and an estimated 450m
GSM globally (2002). As such, the trend towards replacement rather than new
connections in mature markets provides as much of an opportunity to ET as do
the growth of first time users in the emerging markets.
Key trends affecting the market are consolidation of production to lower cost
locations by manufacturers, e.g. China and Mexico, whilst network operators
focus on targeted revenue-driving services rather than the acquisition of new
users, at the same time that new products and customisation requirements are
increasing and volumes become much more difficult to forecast. These trends
create a tension in the supply chain as long supply lines between global
production centres and local network sales channels drives an increase in
inventory and forecast requirements.
European Telecom's proposition of outsourced configuration and fulfilment
services offers the opportunity for manufacturers to run a regional operation
that is able to receive standard components from a global facility, and build
to order specific customised products to meet short-term local customer
demands. This provides lower cost production to manufacturers, flexibility and
availability of supply to local networks and distributors and a wider choice
of customised products to end-users. Overall our service offers the
manufacturers and their customers the ability to significantly reduce the
working capital associated with the current issues of stock obsolescence
throughout the supply chain and the opportunity to increase profits by
significantly minimising inventory write downs.
The recent renewal of contracts with networks in Austria and Spain, and the
new contracts with Cell C in South Africa and now with the consumer
electronics division of Philips in France underpins the strategy of the
Company to grow the operations arm of the business, and we fully expect that
2002 will see further growth as new contracts are awarded.
Current Trading
The UK distribution market has continued to prove very competitive. Although
the Group has reduced its UK operating cost base, trading remains extremely
difficult, and the Group does not see this position being reversed in the
short term. The Group is now looking at focusing on its operational
businesses and is reviewing available options with regard to its distribution
businesses.
The operations in Austria, Spain and Benelux continue to be profitable and
South Africa and ServiceXpress are performing to plan. The Group will benefit
significantly in the final quarter of its trading year from the acquisition of
the Le Mans facility in France, however the remaining part of this financial
year will be challenging.
Consolidated Profit and Loss Account
for the period ended 30th September 2001
6 months to 6 months to 12 months to
30 September 30 September 31 March
2001 2000 2001
Notes #000 #000 #000
Turnover
Continuing operations 77,855 139,389 290,223
Discontinued operations 24,099 7,451 20,781
Discontinued 2,028 2,608 5,577
operations - share of
joint venture's
turnover
103,982 149,448 316,581
Less: share of (2,028) (2,608) (5,577)
discontinued joint
venture's turnover
Group turnover 2 101,954 146,840 311,004
Cost of sales (94,465) (129,265) (288,546)
Gross profit 7,489 17,575 22,458
Distribution costs (3,843) (3,559) (4,468)
Administrative expenses 4 (19,762) (13,647) (40,108)
Operating (Loss)/Profit
Continuing operations (16,566) 311 (22,343)
Discontinued operations 450 58 225
Group Operating (16,116) 369 (22,118)
(Loss)/Profit
Profit on the sale of 5 8,909 0 0
operations
Share of operating 10 (1,395) (1,252) (3,953)
loss in discontinued
joint venture
Interest receivable 7 20 49
and similar income
Interest payable and (885) (512) (1,306)
similar charges
(Loss) on ordinary (9,480) (1,375) (27,328)
activities
before taxation
Taxation 6 (361) 0 377
(Loss) on ordinary (9,841) (1,375) (26,951)
activities
after taxation
Minority interests - 0 6 26
equity
(Loss) for the
financial period
attributable to (9,841) (1,369) (26,925)
members of the
parent company
Dividends 7 0 0 0
(Loss) retained for (9,841) (1,369) (26,925)
the financial period
Earnings per share-basic 8 (25.0)p (3.65)p (70.0)p
- diluted 8 (25.0)p (3.65)p (70.0)p
Consolidated Balance Sheet
at 30th September 2001
6 months to 6 months to 12 months to
30 September 30 September 31 March
2001 2000 2001
Notes #000 #000 #000
Fixed assets
Intangible assets 853 12,016 9,769
Tangible assets 7,109 8,482 8,985
Investments 218 0 43
8,180 20,498 18,797
Current assets
Stocks 6,741 25,714 11,731
Debtors 21,716 60,645 42,529
Cash at bank and in 4,441 3,602 4,812
hand
32,898 89,961 59,072
Creditors: amounts (31,904) (61,119) (50,864)
falling due within one
year
Net current assets 994 28,842 8,208
Total assets less 9,174 49,340 27,005
current liabilities
Creditors:
amounts falling due (3,384) (3,836) (3,639)
after more than one
year
Provision for
liabilities and charges
Investment in joint
venture:
Share of gross assets 10 139 4,688 5,842
Share of gross 10 0 (9,266) (13,178)
liabilities
139 (4,578) (7,336)
5,929 40,926 16,030
Minority interests - 0 4 24
equity
5,929 40,930 16,054
Capital and reserves
Called up share capital 1,962 1,961 1,962
Share premium 33,521 34,895 33,521
Revaluation reserve 325 325
Profit and loss account (29,879) 4,074 (19,754)
Equity shareholders' 5,929 40,930 16,054
funds
Consolidated Statement of Cash Flows
for the period ended 30 September 2001
6 months to 6 months to 12 months to
30 September 30 September 31 March
2001 2000 2001
Notes #000 #000 #000
Net cash 12 3,379 (3,835) (835)
inflow/(outflow) from
operating activities
Returns on investments (796) (467) (1,140)
and servicing of finance
Taxation (296) (563) (1,109)
Capital expenditure and 4,576 (1,787) (9,345)
financial investment
Acquisitions and 1,304 (14,957) (14,963)
disposals
Equity dividends paid 0 (895) (895)
Financing (288) 19,992 22,334
Increase/(Decrease) in 13 7,879 (2,512) (5,953)
cash in the period
Notes to the Accounts
at 30th September 2001
1. Basis of preparation
The interim financial statements have been prepared on the basis of the
accounting policies set out in the Group's statutory accounts for the year
ended 31 March 2001. The interim financial statements do not constitute full
statutory accounts and are un-audited. They have however, been reviewed by
the auditors. Full year figures have been extracted from the annual report and
accounts for that year which received an unqualified audit opinion and have
been filed with the Registrar of Companies.
2. Turnover and profit on ordinary activities before taxation
Turnover represents the amounts derived from the provision of goods and
services which fall within the group's ordinary activities, stated net of
value added tax.
The group operates in two principal areas of activity as set out in the tables
below. It also operates worldwide, but it can be split into three geographical
areas, UK, Europe and Rest of the World.
Turnover and group profit on ordinary activities before taxation
are analysed as follows:
Geographical area
Group turnover
6 months to 6 months to 12 months to
30 September 30 September 31 March
2001 2000 2001
#000 #000 #000
Turnover by
destination:
United Kingdom 36,572 91,523 197,748
Europe 41,340 25,047 53,239
Rest of the World 24,042 30,270 60,017
101,954 146,840 311,004
Turnover by origin:
United Kingdom 59,353 120,175 249,512
Europe 41,340 24,612 57,794
Rest of the World 1,261 2,053 3,698
101,954 146,840 311,004
2. Turnover and profit on ordinary activities before taxation (continued)
Geographical area
(Loss)/Profit 6 months to 6 months to 12 months to
30 September 30 September 31 March
2001 2000 2001
#000 #000 #000
Group operating
(loss)/profit:
United Kingdom (16,668) (208) (22,723)
Europe 1,030 845 1,712
Rest of the World (478) (268) (1,107)
(16,116) 369 (22,118)
Profit on the sale of 8,909 0 0
operations
Share of operating (1,395) (1,252) (3,953)
loss of joint venture
Net interest (878) (492) (1,257)
(Loss) on ordinary (9,480) (1,375) (27,328)
activities before
taxation
Area of activity
Group turnover 6 months to 6 months to 12 months to
30 September 30 September 31 March
2001 2000 2001
#000 #000 #000
Continuing operations
Handset and related 69,881 126,919 265,274
sales
Accessories and 7,974 12,470 24,949
servicing
77,855 139,389 290,223
Discontinued operations 24,099 7,451 20,781
101,954 146,840 311,004
(Loss)/Profit 6 months to 6 months to 12 months to
30 September 30 September 31 March
2001 2000 2001
#000 #000 #000
Continuing operations
Handset and related (16,671) 1,230 (14,970)
sales
Accessories and 105 (919) (7,373)
servicing
(16,566) 311 (22,343)
Discontinued operations 450 58 225
Group operating (16,116) 369 (22,118)
(loss)/profit
Profit on the sale of 8,909 0 0
operations
Share of operating (1,395) (1,252) (3,953)
loss of joint venture
Net interest (878) (492) (1,257)
(Loss) on ordinary (9,480) (1,375) (27,328)
activities before
taxation
3. Analysis of continuing and discontinued operations
6 months to 30 Continuing Discontinued Total
September 2001
#000 #000 #000
Turnover 77,855 24,099 101,954
Cost of sales (71,445) (23,020) (94,465)
Gross profit 6,410 1,079 7,489
Distribution costs (3,609) (234) (3,843)
Administrative expenses (19,367) (395) (19,762)
Operating (Loss)/Profit (16,566) 450 (16,116)
6 months to 30 Continuing Discontinued Total
September 2000
#000 #000 #000
Turnover 139,389 7,451 146,840
Cost of sales (122,368) (6,897) (129,265)
Gross profit 17,021 554 17,575
Distribution costs (3,414) (145) (3,559)
Administrative expenses (13,296) (351) (13,647)
Operating Profit 311 58 369
12 months to 31 March 2001 Continuing Discontinued Total
#000 #000 #000
Turnover 290,223 20,781 311,004
Cost of sales (269,088) (19,458) (288,546)
Gross profit 21,135 1,323 22,458
Distribution costs (4,088) (380) (4,468)
Administrative expenses (39,390) (718) (40,108)
Operating (Loss)/Profit (22,343) 225 (22,118)
4. Administrative expenses
6 months to 6 months to 12 months to
30 September 30 September 31 March
2001 2000 2001
#000 #000 #000
Other administrative 8,759 13,647 38,224
expenses
Impairment of goodwill 8,603 0 1,884
Restructuring provision 2,400 0 0
19,762 13,647 40,108
5. Profit on the sale of operations
On 28 June 2001 the Group sold its interest in ET Voice Limited in exchange
for an interest in Domain Dynamics Limited and deferred cash consideration. On
28 September 2001 the Group sold its investment in Domain Dynamics.
On 31st August 2001 the Group completed the sale of it's 50% interest in
Global Telematics plc to the joint venture partner. The share of operating
loss of the company has been shown under discontinued joint venture.
On 28 September 2001 the Group sold 81% of its interest in its subsidiary ET
Sarl. The results of the company have been shown under discontinued
operations.
6. Taxation
6 months to 6 months to 12 months to
30 September 30 September 31 March
2001 2000 2001
#000 #000 #000
UK corporation tax - 0 0 750
current year
- overprovision in 0 0 58
respect of prior years
0 0 808
Deferred taxation 0 0 105
Overseas taxation - (361) 0 (536)
current year
(361) 0 377
No UK taxation has been provided due to the incidence of tax losses for the
period.
7. Dividends
6 months to 6 months to 12 months to
30 September 30 September 31 March
2001 2000 2001
#000 #000 #000
Interim 0.0p (2000:0.0p) - - -
No interim dividend is proposed to be paid in the light of the results for the
period.
8. Earnings per ordinary share
Earnings per ordinary share has been calculated on the loss on ordinary
activities after taxation and minority interests of #9,841,000 (6 months to 30
September 2000: loss #1,369,000) divided by weighted average number of shares
of 39,252,385 (2000: 37,668,537) in issue during the period.
Where there is a loss per share there are no dilutive effects of share
options.
9. Group statement of total recognised gains and losses
6 months to 6 months to 12 months to
30 September 30 September 31 March
2001 2000 2001
#000 #000 #000
(Loss) for the (9,841) (1,369) (26,925)
financial period
attributable
to members of the
parent company
Exchange (loss)/gain (284) (153) 146
on translation of
subsidiaries
Revaluation of fixed 0 0 325
assets
Total recognised (10,125) (1,522) (26,454)
(losses) in the period
10. Share of operating loss in joint venture
The joint venture represented the Group's 50% interest in Global Telematics
Plc, the remaining 50% being owned by Racal Survey Limited, a subsidiary of
Racal Elecetronics plc. The Group announced the sale of it's 50% interest to
the joint venture partner on 27 July 2001 and hence accounted for its share of
operating loss in the joint venture up to that date.
11. Reconciliation of movement in shareholders' funds
6 months to 6 months to 12 months to
30 September 30 September 31 March
2001 2000 2001
#000 #000 #000
Issue of ordinary 0 22,196 22,263
share capital
Share issue costs 0 (1,020) (1,031)
Retained (loss) for (9,841) (1,369) (26,925)
the period
Exchange differences (284) (153) 146
on retranslation of net
assets of subsidiary
undertakings
Revaluation of fixed 0 0 325
assets
Opening shareholders' 16,054 21,276 21,276
funds
Closing shareholders' 5,929 40,930 16,054
funds
12. Reconciliation of operating (loss)/profit to net cash inflow/(outflow)
from operating activities
6 months to 6 months to 12 months to
30 September 30 September 31 March
2001 2000 2001
#000 #000 #000
Operating (loss)/profit (16,116) 369 (22,118)
Depreciation and 1,122 1,192 4,244
impairment of tangible
assets
Amortisation and 8,915 189 2,424
impairment of goodwill
Impairment of 44 0 535
investments
Loss on disposal of 204 10 484
tangible assets
Decrease/(Increase) in 4,989 (7,735) 6,249
stock
Decrease/(Increase) in 15,322 (14,182) 5,630
debtors
(Decrease)/Increase in (11,101) 16,322 1,717
creditors
Net cash 3,379 (3,835) (835)
inflow/(outflow) from
operating activities
13. Reconciliation of net cash flow to movement in net debt
6 months to 6 months to 12 months to
30 September 30 September 31 March
2001 2000 2001
#000 #000 #000
Increase/(Decrease) in 7,879 (2,512) (5,953)
cash in the period
Cash (inflow) from (265) (3,862) (2,548)
(increase) in debt
Change in net debt 7,614 (6,374) (8,501)
resulting from cash
flow
Inception of new 553 (808) (2,744)
finance leases
Finance lease acquired 0 0 (108)
with subsidiary
Decrease/(Increase) in 8,167 (7,182) (11,353)
net debt in the period
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