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Financial Report 1st half of 2015

Sales of EUR 56.9 million vs. EUR 64.8 million in H1 2014.
EBITDA of KEUR -494 compared with KEUR 1.984 in H1 2014.
Operating loss before goodwill impairment of KEUR 1.837 vs. operating profit of KEUR 517 in H1 2014.
After conducting an impairment analysis, the Board of Directors decided to write off goodwill totalling 4,548 KEUR. This impairment has no effect on cash flow.
Net loss of KEUR 7,017 compared with KEUR 13 net profit in H1 2014.
The Board is investigating the possibility of a capital increase to bring further stability to the company and ensure its future.
Order book of EUR 87 million at end-H1 2015 (EUR 82.8 million at end-2014).

Connect Group NV (Euronext Brussels: CONN) announces 1st half-year 2015 sales of EUR 56.9 million.  Sales for the comparable period of 2014 were EUR 64.8 million.  The first-half figures represent a stabilisation of sales, as sales for the 2nd half of 2014 amounted to EUR 56.2 million

The gross margin was 6.4 percent, against 11.7 percent in 2014. General and administrative expenses (4.5 percent of sales) and selling expenses (4.0 percent of sales) decreased by 0.6 and 1.3 percentage points respectively. This decrease was the result of job cuts and the streamlining of staff structures.

Other operating income included a reversal of a provision for bad debts in 2014 and a capital gain on the sale of several machines in 2015.

The operating result before the goodwill impairment was a loss of KEUR 1,837 in the first 6 months of the year, against a first-half profit of KEUR 517 in 2014).

Taking into account the plans for the group’s future, the Board conducted an impairment test. Based on the results thereof, the Board took the decision to write off the goodwill initially stemming from the acquisition of the Connect Group as part of the IPTE Group. The goodwill was originally amortized over a period of 10 years, but, following a change in the IFRS rules, became part of the annual impairment test on the basis of which no further write-downs were necessary. In the context of the Connect Group’s changed plan for the future, the changed customer base and products, the Board deemed that this acquired goodwill was no longer relevant for the Group’s future. It therefore took the decision to write it off in toto. This write-off has no effect on the company’s cash flow.
Also in the context of the plan for the future, the Board is investigating the possibility of a capital increase to bring further stability to the company and ensure its future.

Net financial expenses amounted to KEUR 629 (KEUR 502 in 2014). This increase is the result of exchange losses (mainly on the dollar) and increased financing costs (a higher interest rate on account of the EBITDA / debt ratio. The increase in both financial income and financial expenses is due to the development of the dollar in the first half of the year.

The net loss for the first 6 months of 2015 is the result of three important factors:

  • H1 sales (EUR 56.9 million) were 10% lower than forecast;
  • Due to changes in the product mix (more assembly operations with lower added value), the material margin was 2.5 percentage points lower than forecast (budgeted material margin: 36 percent; actual material margin: 33.5 percent);
  • The restructuring decided at the end of 2014 was started in the first half of 2015. Due to a number of different factors, the decisions taken at the end of 2014 are being implemented later than originally planned. As a result, wage costs for the first 6 months of 2015 were significantly higher than forecast.

The order book developed positively, amounting to EUR 87 million at the end of the 1st half of 2015, against EUR 82.8 million at the end of 2014. The order book contains formal commitments from customers, but may be subject to adjustments in numbers and timeframes. For this reason it cannot be used as a financial indicator of future results.

Capital investment in the first half of the year amounted to EUR 1.4 million and involved the finishing of the new building in Ypres and the purchase of several new production machines to replace old ones.

The increase in trade receivables is due to the high level of invoicing in June 2015.  They contain no known increased collection risk. Provisions decreased by EUR 1.9 million due to a partial payment of the restructuring charge decided and announced in December 2014.

The increase in long-term debt is the result of debt restructuring, with EUR 6 million of short-term debts being converted into a long-term loan repayable over 3 years beginning in 2017. Short-term financial debt remained the same, with the EUR 6 million reduction through the conversion to a long-term loan offset by the increased use of the factoring line (EUR 3 million) and the short-term credit line (EUR 3 million).

The risk assessment can be found in the annual report and is available on the Internet
(www.connectgroup.com).

The most significant risks for the company are:

  • Production is completely dependent on the availability of all components at the moment that production starts up. If component availability slows down, sales too will be delayed.
  • Currency risk:
    The group buys a portion of its components in dollars/yen, the exchange rate risk on which is only partially covered in the selling price.
    Production takes place partly in Romania and the Czech Republic: large fluctuations of these currencies against the Euro can impact costs.
    Since foreign currency needs cannot be accurately timed, the group does not cover its foreign currency positions.
  • The group has a credit agreement with its bankers that includes a minimum solvency ratio covenant, equity and cash flow. Customer insolvency can have a major impact on the results.
  • Risk of order postponements, leading to a temporary under-coverage of costs incurred.

Significant events in 1st half 2015

At the beginning of April 2015, the Connect Group Board of Directors announced the departure of CEO Luc Switten.  Supported by the board of directors, the current management should ensure continuity, with COO Flor Peersman being appointed as CEO.

In April 2015, all activities of the Poperinge plant (a rented property) were transferred to the Ypres plant (owned by the Group). This move is expected to cut fixed costs by more than KEUR 300 a year. Its impact should become visible in the 2nd half of 2015.

A major part of the restructuring measures decided at the end of 2014 were carried out in the first half of 2015.  The remaining part should be completed by the end of the year. Further restructuring measures were decided and carried out in various plants with the aim of aligning costs with the current level of sales.

In the context of this plan for the future, the Board of Directors is investigating the possibility of a capital increase to bring further stability to the company and ensure its future.

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