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Connect Group reports 2nd half and annual results 2017

2ND HALF RESULTS:
Sales in the 2nd half of 2017 up to EUR 65.5 million, against EUR 54.8 million in the 2nd half of 2016.
2nd half operating profit of EUR 2,073 K, against a profit of EUR 1,480 K in the 2nd half of 2016.
Net profit of EUR 1,778 K in the 2nd half compared to a net profit of EUR 996 K in the 2nd half of 2016.

ANNUAL RESULTS:
Sales of EUR 125.0 million compared with EUR 116.8 million in 2016.
Improvement of operating result, up from a profit of EUR 2,059 K in 2016 to EUR 2,598 K in 2017.
Net profit of EUR 2,025 K in 2017 compared with a profit of EUR 1,161 K in 2016.
Orders at the end of financial year 2017 amounted to EUR 116.5 million (EUR 89.4 million at the end of 2016).

Management discussion and analysis of the results

Discussion of the 2nd half results

The 2nd half of 2017 closed with sales of EUR 65.5 million compared with EUR 59.4 million in the 1st half of 2017 and EUR 54.8 million in the 2nd half of 2016. The upward trend in sales is thus continuing. Compared with the 1st half of 2017, sales have risen 10%, while they have risen almost 20% compared with the 2nd half of 2016.
The cost of sales has risen from 88.1% to 89.0%, while R&D, administrative and selling expenses are in line, accounting for ca. 8.5% of turnover.

Discussion of the annual results

Our greatest achievement in 2017 was to increase turnover from EUR 116.8 million to EUR 125 million. Taking account of the gap caused by the loss of the ASML business in mid-2016 (EUR 9.7 million), this can be equated with a 16.7% increase in turnover through increased sales of our product range to existing and new customers.
In the 1st half of 2017, the volume of new orders reached a record high. However, beginning in the 2nd half, we found ourselves confronted with increasing shortages in the components market and difficulties finding suitable personnel in Romania, just when increased flexibility was required.
These factors have significantly inhibited further growth. Accelerated capacity adjustments, the streamlining of various processes and working as a Connect GROUP nevertheless drove a considerable increase in output in the 2nd half of 2017.

Jeroen Tuik (CEO):
“The figures for the 1st half of 2017 insufficiently reflected the result of the efforts made in the 2nd half of 2016. Consolidated turnover for the 2nd half of 2017 was almost 20% higher than that of the 2nd half
of 2016.

The increase was mainly achieved in our plants in the Czech Republic and Romania, meaning that these plants were under great pressure over the last few months to boost their production capacity. That is by no means easy at the moment, as we are seeing very high demand for employees in the regions where we are recruiting. We are also seeing a considerable rise in wages in Romania. For the second year in a row, the Romanian government has decided to increase the minimum wage by 15%. The increasing shortages in the components market are also pushing up component prices, putting further pressure on our operating activities. As we are not always able to pass on these cost increases to our customers, our margins are coming under pressure. On the positive side, orders are up to almost EUR 117 million, the highest level ever known at Connect Group. Although the height of orders does not fully reflect expected short-term turnover (certain orders can have a long lead time), we are cautiously hoping for positive sales growth.

Nevertheless, we are still not where we want to be, and more cost adjustments will be necessary in 2018 to further improve our profitability. We also need to invest in skill development in our plants in Romania and the Czech Republic to meet all customer demands. In mid-2018, we expect to gain further production space in our Romanian subsidiary, allowing us to continue growing and putting us in a position to guarantee future flexibility to our customers.”

Annual figures

Connect Group NV announces annual sales of EUR 125.0 million for 2017, against EUR 116.8 million in the previous year (+7%).

The gross margin on sales dropped from 11.9% to 11.0%, mainly caused by rising wage costs in Eastern Europe. R&D, administrative and selling expenses increased from EUR 10.5 million to EUR 11.1 million, though remaining stable at 9% of turnover.

Other operating income/expenses in 2017 amounted to EUR +146 K, mainly attributable to a reversal of a provision for a customer. Other operating income/expenses in 2016 totalled EUR -282 K, mainly due to reversals / write-offs of revenues from customers amounting to EUR 360 K and an EUR 285 K gain on the sale of a building, as well as lease costs totalling EUR 289 K and a provision for litigation of EUR 650 K.

The net financial result improved overall by EUR 323 K, mainly due to lower financing charges (decreasing interest costs and a positive cash flow from operations) and to lower exchange rate losses on foreign currencies. The company makes only limited use of foreign currency hedging contracts.

The net Group result thus improved from a profit of EUR 1,161 K in 2016 to a profit of EUR 2,025 K in 2017.

The order book at the end of the 2017 financial year stood at EUR 116.5 million (against EUR 89.7 million at the end of 2016).

Balance sheet

Trade receivables increased from EUR 19.1 million to EUR 26.3 million at the end of 2017. Q4 2017 sales were nearly 22% higher than Q4 2016 sales. They contain no known increased collection risk.

Inventories increased from EUR 28.4 million at the end of 2016 to EUR 36.0 million at the end of 2017. This increase is mainly the result of the adding of various new customers (increased orders). In addition, component availability and delivery times are deteriorating in the supply chain, leading to a situation where most of the material needed to produce an order is kept in stock. The unavailability of just a few components can however mean that production cannot be started.

New investments (capacity adjustments, replacements and new technologies) amounting to EUR 1.6 million were made in 2017. With annual depreciation and amortization totalling EUR 2.4 million, the value of tangible and intangible assets dropped from EUR 8.2 million at the end of 2016 to EUR 7.4 million at the end of 2017.

Total financial liabilities increased significantly from EUR 14.4 million at the end of 2016 to EUR 19.9 million at the end of 2017. This increase is the result of a higher working capital requirement in the last quarter of 2017 (increased inventories and trade receivables).
To finance the working capital requirement, the group has short-term bank credit lines of EUR 5 million (of which EUR 785K were taken up at year-end), revolving credit facilities of EUR 1.7 million, and a long-term subordinated shareholder loan of EUR 0.8 million. In addition, the group makes use of factoring for its receivables (EUR 16.2 million at the end of 2017, against EUR 10.7 million at the end of 2016). The group has bank investment loans and leasing debts amounting to EUR 0.8 million.
At year-end 2017, Connect Group complied with all bank covenants.

As a result of the increased inventories, trade payables rose from EUR 14.9 million at the end of 2016 to EUR 19.6 million at the end of 2017.

Shareholders’ equity increased from EUR 20.5 million to EUR 22.5 million as a result of the net profit for the period. The group’s solvency ratio dropped however from 34.3% to 31.1% as a result of the increased total balance sheet (inventories and receivables).

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