Micronas: return to growth and profitability with a new strategy in the Consumer division; Automotive a strong second pillar (PR0714)

Focusing in the Consumer division - streamlined research - further development of Automotive business - third quarter 2007 exceeds expectations - turnaround in 2008

Following a strategic review, the Micronas Group is to selectively streamline its product portfolio in the Consumer division, significantly reducing the complexity of the offering in the TV segment. A divestment opportunity is being sought for the US subsidiary in view of its critical market position. The Group's sales organization will be streamlined to improve marketing and sales efficiency. Research and development activities will be revamped to make them leaner and more focused, economizing CHF 80 million through 2009. On the basis of the restructuring measures and the resulting growth strategy, the Consumer division is expected to generate additional revenues in the region of CHF 110 million over the next two years. The turnaround at Micronas should be achieved in the coming year. In terms of EBIT, a positive result is expected for 2009. The projected costs of restructuring are expected to be in the range of CHF 50 to 70 million. Of these, CHF 30 to 40 million are cash costs and a further CHF 20 to 30 million are accounted for by loss provisions. As at September 28, 2007, Micronas had shareholders' equity of CHF 443.2 million after book entry of goodwill amortization of CHF 357.6 million and further loss provisions of CHF 87.4 million. In the third quarter of 2007, net sales reached CHF 186.5 million, 9 percent up on the previous quarter. The operating loss before impairment was CHF 19.7 million compared with CHF 23.4 million the previous quarter. The operating loss (EBIT) was CHF 409.7 million.

Dr. Thomas Lustenberger, Chairman of the Board of Directors, on the planned drive to improve efficiency: "Over the last few months, the Board of Directors and Management, supported by external experts, have conducted a rigorous review of all the strategic options available to secure a profitable future for the Micronas Group. The result is a radical restructuring of the Consumer division which will enable Micronas to bring its strengths to the market with a leaner organization and generate vital growth stimuli."
 

Consumer and Automotive as core businesses

A clear result of the comprehensive strategy review was that Micronas should continue to focus its market positioning on the two core businesses of Consumer and Automotive.The Automotive division currently generates a third of Group revenues. It has always been profitable, despite persistently difficult market conditions. The trend in the automotive industry towards more incar electronics will continue to have a positive effect on the performance of our Automotive division in the medium to long term. Micronas today is well placed to build on the successful development of this business.

In the extremely competitive semiconductor segment of the various Consumer markets, Micronas has lost market share. The analysis showed a need for specific action. Micronas was pursuing a very broad product strategy with highly complex projects in a rapidly evolving digital TV market. Research and development expenditure was correspondingly high. This proved too costly given the everincreasing intensity of competition.

That was the reason for the decision to reduce the complexity of the product portfolio. This will make it possible to reduce research and development expenditure in the long term. At the same time, development lead times can be reduced to make us more responsive to the rapid changes in the TV market.

The measures to sharpen the focus of our research and development activities will result in savings of approximately CHF 80 million, equating to 45 percent of the present research budget. This cannot be achieved without reducing the size of the research and development team.

In the period under discussion, in the Consumer division around 300 jobs will be cut across all sites, with socially responsible measures to help those affected. A methodical expansion of the research capacity in Shanghai is planned.

Future of US subsidiary in the balance

There is also a need for action at Micronas USA. The market serviced by this subsidiary has proved more fragmented and volatile than was at first assumed. Projected growth figures have not been borne out by events. There has been a corresponding rise in the risks involved in making these activities successful within the projected period.

In the course of the restructuring measures for the business as a whole, it was decided to sell the US company. That would make it possible to further develop the company's good IP basis and rich fund of know-how as well as retain jobs.

Efficiency gains in marketing and sales

The strengths/weaknesses analysis of Micronas revealed that the marketing and sales process across the entire Group is in need of improvement. The aim is to get closer to the market and provide major customers with more intensive support. Relocating these activities nearer to customers will achieve savings of around CHF 15 million in 2009.

New momentum to bring turnaround

The Board of Directors and Management are convinced that the planned measures will enable Micronas to achieve a turnaround in 2008. A concentration of the product portfolio in the Consumer business will increase Micronas' capacity and growth, and at the same time make it possible to streamline and concentrate research and development activities.

The one-off restructuring costs totaling CHF 50 to 70 million are offset by shareholders' equity of CHF 443.2 million as well as cash and cash equivalents of CHF 257.1 million as of September 28, 2007. Concerted implementation of the agreed measures will make it possible for the Consumer division to achieve a positive EBIT from 2009 onwards.

Results for third quarter of 2007

The operating result for the third quarter of 2007 exceeded expectations and thus outperformed the published guidance. Net sales reached CHF 186.5 million, 9 percent up on the previous quarter (CHF 171.2 million). The operating loss before impairment was CHF 19.7 million compared with CHF 23.4 million the previous quarter. The operating loss (EBIT) was CHF 409.7 million.

The Consumer division's contribution to sales was CHF 136.7 million on an operating loss before impairment of CHF 32.0 million and an operating loss (EBIT) of CHF 422.0 million. The Automotive segment continued to benefit from buoyant demand for Micronas products. The division contributed CHF 49.8 million to sales in the third quarter of 2007 and generated an operating profit (EBIT) of CHF 13.4 million.

Amortization of goodwill in the third quarter of 2007

With the Consumer division continuing to face a difficult run of business and the Micronas Group's market capitalization dipping below the book value in the third quarter, an immediate review of the goodwill position was undertaken in accordance with IAS 36. On the basis of the impairment tests, it was decided to write off the entire Consumer goodwill as well as certain intangible assets and deferred tax assets. This resulted in non-cash impairment charges of CHF 445.0 million for the Consumer division.

Subdued outlook for the fourth quarter of 2007

The comprehensive restructuring measures will already be effective this autumn and should be completed by the end of the third quarter of 2008.

Fiscal 2007 will go down as an extremely difficult year in the history of Micronas. Net sales for the fourth quarter of the year will be in the region of CHF 160 and 175 million, the operating loss before restructuring provisions in the region of CHF 25 to 30 million and operating loss (EBIT) including restructuring provisions of CHF 50 to 70 million, will be between CHF 75 and CHF 100 million. Sales for the 2007 business year as a whole will come in between CHF 700 and 715 million on an operating loss before restructuring provisions and impairment between CHF 90 and 95 million and an operating loss at EBIT level of between CHF 530 and 555 million. The loss for the 2007 business year will be between CHF 560 and 585 million. Given that the restructuring measures are not due to be completed until the end of the third quarter of 2008, the year as a whole can be expected to produce a further significant operating loss (EBIT) in the Consumer division.