In the first quarter, business at Finnish foundries proceeded better than before in terms of its scope and profitability. On the other hand, the volumes and profitability of machining, painting and castings sold as agency products and profitability in Sweden declined. Componenta is implementing a strategy in Sweden whereby it aims to improve profitability and reduce capital employed in business operations. This will be carried out by reducing some of the weakest customer relationships. Manufacturing costs are decreasing more slowly than net sales. For this reason, profitability in Sweden is currently poor, and will continue to be so for the rest of the year.
The Group’s liquidity continued to develop very positively. The reduction in working capital in Sweden will continue to support this trend for the rest of the year.
Componenta’s restructuring programs have progressed as planned. We continued to take measures to improve the profitability during the financial year that ended: we reduced costs, improved the productivity of our factories and increased prices as planned.
We also assessed our customer relationships during the financial year and terminated one significant unprofitable customer contract. The main reasons which justified the termination of the contract were the insufficient profit margin, high level of invested capital and low refining level of products. The impact of the measures will be visible during the financial year 2019, especially as reductions of our operations in Sweden. The measures will also have an impact on Pori foundry operations, since these deliveries represent 40% of the Pori unit’s volume. As part of the adjustment measures, we are planning to close the other line of the Pori foundry, the so-called Disa line, by the end of 2019.
The synergy significance of Componenta Främmestad AB, which conducts machining and painting operations, for the Group decreased when we sold the foundry operations in Turkey in 2017. Most of Componenta Främmestad AB’s operations consists of the refining and supplying of castings from outside the Group. The reactions of our main customers towards the operational model change has not delivered expected results. While the synergy benefits have decreased, we are considering giving up the operations. Divesting ourselves from the low-profitability machine shop customer relationships in Sweden frees up capital for our core business.
Due to our stabilised financial situation, we have started to receive new significant orders for our Finnish foundries.
We have negotiated with our key foundry customers on possibilities to offer them machining of their castings in Finland. We perceive this to be the most significant synergic growth direction of Componenta in the future.
The demand for Componenta products continued as viable in the first nine months. Profitability increased due to cost-reducing activities. Liquidity increased due to positive operating cash flow and sold real estate companies.
As told in the half-year financial report 2018 we aim to change the operations in Componenta Främmestad AB in order to engage less working capital and additional financial requirements in the operations. The objective of these actions is to decrease invested capital and improve profitability. The possible changes are not expected to have effect on net sales or the result of the current year. Instead in 2019 these changes are expected to decrease net sales but to improve profitability.
By changing the operations in Componenta Främmestad AB and offering subcontracting services without Tier1-position for large volume series we can significantly reduce committed capital and reduce the need for additional financial requirements. The risk in changing the operation model is that these customers may move their large volume products to competitors. The realisation of this risk will not significantly reduce the profitability of the Group after the deduction of corresponding expenses. By releasing the committed capital in these functions Componenta is able to focus on those customers where Componenta has better opportunities to make adequate profit.
Componenta foundries have updated their customer prices to meet the expenses after the reporting period. The price increases for some products have been significant, that they may cause some customer losses. We do not expect these losses to have a negative impact on the Group’s result.
The restructuring program is proceeding according to plan for each of the Group companies and liquidity has remained on a good level. There are no restructuring debts left, which fall due in 2018.
The demand for Componenta products continued as viable in the first half of the year. Profitability increased due to cost reducing activities.
We aim to change operations in Componenta, particularly in Componenta Främmestad AB in order to engage less working capital and financial requirements in the operations. The changes in operation models are being negotiated with customers. The objective of these actions is to decrease invested capital and increase profitability. The possible changes are not anticipated to have effect on net sales or the result on the current year. The progress of this subject will be reported in the future business reviews and financial statement.
The restructuring program is proceeding according to plan and liquidity has remained on a good level. There are no restructuring debts left, which fall due in 2018.
The strong demand for Componenta products continued in the first quarter of the year. Due to cost reducing activities the profitability increased from previous year. In the beginning of the year, Componenta has already paid its restructuring debt that fall due in July 2018. There are no restructuring debts left, which fall due in 2018.
“The year 2017 was the Group’s first profitable financial year since 2009. We continued to systematically implement restructuring measures and focused on improving Componenta’s profitability. The restructuring programmes of the parent company and its operational subsidiaries were confirmed in Finland and Sweden. Following the confirmation of the restructuring programmes, the Group companies’ debt burden in foundry operations was reduced to a level that can, to the best of my understanding, be managed with cash flow from operations.
The Group is no longer engaged in the forge business after Componenta Wirsbo AB and Componenta Arvika AB, which had been under corporate restructuring, filed for bankruptcy in July. The forge companies were unable to pay their restructuring debts within the specified time. I have no regrets about the loss of the forge business, as its profitability was low and it would have required a very significant injection of working capital. As the forge business has had no synergies with the foundry business, its loss has no negative impact on the remaining business operations.
As planned, we divested the highly indebted Turkish foundry business by agreeing on the sale of our shares in Componenta Dökümcülük Ticaret ve Sanayi A.Ş. Componenta’s guarantee liabilities were reduced by EUR 80 million in connection with the transaction.
The restructuring measures taken by the Group have been essential for securing Componenta’s future. The measures have led to a downsizing of the Group’s business, but also a substantial reduction in the Group’s debt. At the balance sheet date, the Group’s equity ratio stood at 34.8% (-165.3%).
Componenta Främmestad AB paid off all of its short-term restructuring debt after the end of the financial year. As of the time of writing, the Group has approximately EUR 15.3 million in long-term external interest-free restructuring debt, of which EUR 2.5 million is in Sweden and the rest is in the Group companies in Finland, as well as EUR 0.8 million in interest-bearing long-term restructuring debt.
The Finnish Group companies must pay external restructuring debts amounting to approximately EUR 1.7 million per year from 2019 to 2022. The remaining amount, approximately EUR 7.2 million, must be paid in 2023. The Swedish Group company must pay an external restructuring debt of EUR 2.5 million within the next six years if the company’s result makes payment possible.
The improved profitability was primarily due to lower fixed costs. The Group also implemented operational efficiency improvement measures in 2017 to not only achieve cost savings, but also to ensure the quality of our products. Close cooperation with customers is at the heart of our day-to-day operations. Our goal has been to ensure that the renewal measures and changes in our operations correspond to customer needs. Having stabilised our operations, we will focus even more on the growth of our operations, particularly with respect to our existing customers. We adopted a flat line organization structure in 2016 and transferred the customer service function to our production facilities. This has substantially improved our service capacity and will enable improved profitability going forward.”