Affecto Plc's Interim report 1-9/2013 Helsinki, 20

Helsinki, 2013-10-29 11:30 CET (GLOBE NEWSWIRE) -- AFFECTO PLC  --  INTERIM REPORT --  29 OCTOBER 2013 at 12.30

Affecto Plc's Interim report 1-9/2013

Group key figures

CEO Pekka Eloholma comments:

We grew during the third quarter in most of the countries, but decreases in Baltic and Denmark pushed our net sales down by 3% to 27.5 MEUR (28.4 MEUR). Net sales grew by 5% in Finland, by 4% in Norway and by 9% in Sweden, and decreased by 17% in Denmark and 27% in Baltic. In a challenging market situation we managed to slightly grow in our Nordic main market.

Operating profit grew significantly to 2.0 MEUR (1.2 MEUR) and profitability increased to 7% (4%). Despite the holiday season, the profitability in Finland and Denmark was excellent 15-16%. We made a positive 1% margin in Sweden in the typically weakest quarter of the year, which strengthens my belief that after a long period of difficulties we are finally reaching sustainable profitability also in Sweden. Profitability in Baltic was 0% reflecting the slow market especially in Lithuania.

After nine months, we are slightly ahead last year regarding both net sales and operating profit. The general economic sentiment seems to be picking up in Sweden and Denmark. In Finland the sentiment has remained subdued, which has naturally also caused postponements to our customers' investment plans. Order backlog decreased to 45.0 MEUR (46.5 MEUR), as customers slowed down their decision making and made investment decisions in smaller lots than earlier. Additionally, the weak predictability of license deals typical to the fourth quarter weakens the short-term visibility especially in the current market conditions.

Due to the uncertain market conditions we have decreased our growth expectations and currently expect net sales to be near last year's level instead of previously expected slight growth.

Year 2013 net sales and operating profit are estimated to be near last year's level. Previous guidance: Net sales are estimated to grow in 2013. Operating profit is estimated to be near last year's level.

Additional information: CEO Pekka Eloholma, +358 205 777 737 CFO Satu Kankare, +358 205 777 202 SVP, M&A, IR, Hannu Nyman, +358 205 777 761

This release is unaudited. The amounts in this report have been rounded from exact numbers.

NET SALES

Affecto's net sales in 1-9/2013 were 96.7 MEUR (1-9/2012: 95.1 MEUR). Net sales in Finland were 38.3 MEUR (37.9 MEUR), in Norway 22.2 MEUR (19.2 MEUR), in Sweden 17.0 MEUR (16.7 MEUR), in Denmark 11.2 MEUR (11.1 MEUR) and 11.5 MEUR (12.4 MEUR) in Baltic.

Net sales by reportable segments

Net sales decreased by 3% in the third quarter, as net sales in Baltic decreased 27% mainly due to the slowed market in Lithuania and in Denmark by 17% due to normal quarterly fluctuation. On the other hand, Sweden grew by 9%, Finland by 5% and Norway by 4%, so we managed to grow in the Nordic main market as a whole.

Net sales of Information Management Solutions business in 1-9/2013 were 90.1 MEUR (87.4 MEUR) and net sales of Karttakeskus GIS business were 8.8 MEUR (8.7 MEUR).

Customers' interest was toward shorter and smaller projects than earlier and the investment decisions take a long time. The general market sentiment is cautious and has weakened especially in Finland. On the other hand the Swedish and Danish markets have picked up somewhat. The order backlog decreased to 45.0 MEUR (46.5 MEUR).

PROFIT

Affecto's operating profit in 1-9/2013 was 6.0 MEUR (5.9 MEUR) and the operational segment result was 7.5 MEUR (7.5 MEUR). Operational segment result was in Finland 4.9 MEUR (5.2 MEUR), in Norway 2.2 MEUR (2.0 MEUR), in Sweden -0.3 MEUR (-1.3 MEUR), in Denmark 1.3 MEUR (0.9 MEUR) and in Baltic 0.4 MEUR (1.5 MEUR).

Operational segment result by reportable segments

Operating profit in the third quarter increased to 2.0 MEUR (1.2 MEUR) and profitability increased to 7% (4%). Profit improved especially in Sweden and Finland, but also in Denmark. The largest negative impact came from Baltic, but profit decreased also in Norway.

Profitability in Finland was at excellent 16% level in the third quarter, as also the Karttakeskus GIS business unit returned to excellent profitability after a weak second quarter. Profitability was also an excellent 15% in Denmark, despite a decrease in net sales. This was impacted both by sales mix and successful project implementations. In Baltic especially the Lithuanian market has slowed down and a four-day work week has been partially adopted there. Profitability in Sweden turned finally positive and was 1%, which is a good achievement in the typically weakest quarter of the year.

According to the IFRS3 requirements, 1-9/2013 operating profit includes 1.5 MEUR (1.5 MEUR) of amortization on intangible assets related to acquisitions. The IFRS3 amortization is estimated to be approx. 2.0 MEUR per year until 2014, as the other intangible assets impacting in the IFRS3 amortization totaled 2.2 MEUR at the end of the reporting period.

Taxes corresponding to the profit of the period have been entered as tax expense. Net profit for the period was 4.1 MEUR, while it was 4.3 MEUR last year.

FINANCE AND INVESTMENTS

At the end of the reporting period Affecto's balance sheet totaled 129.2 MEUR (12/2012: 147.9 MEUR). Equity ratio was 55.5% (12/2012: 50.6%) and net gearing was 19.8% (12/2012: 15.8%).

The financial loans were 28.5 MEUR (12/2012: 30.5 MEUR) at the end of reporting period. The company's cash and liquid assets were 15.2 MEUR (12/2012: 19.8 MEUR). The interest-bearing net debt was 13.2 MEUR (12/2012: 10.6 MEUR).

Cash flow from operating activities for the reported period was 2.1 MEUR (0.5 MEUR) and cash flow from investing activities was -1.4 MEUR (-0.8 MEUR). Investments in tangible and intangible assets were 1.4 MEUR (0.8 MEUR).

The Annual General Meeting held in April decided to distribute a dividend of 3.4 MEUR (2.4 MEUR).

EMPLOYEES

The number of employees was 1083 persons at the end of the reporting period (1102). 436 employees were based in Finland (417), 124 in Norway (130), 146 in Sweden (145), 71 in Denmark (74) and 306 in the Baltic countries (336). The average number of employees during the period was 1080 (1087).

Hellen Wohlin Lidgard started as the country manager in Sweden in April. Rene Lykkeskov returned to his role as Affecto's chief strategy officer.

REVIEW OF MARKET DEVELOPMENTS

Uncertainty about the general economic development continued to affect Affecto's business negatively. Customers' decision-making pace was slower than normally and they are ordering shorter projects than earlier, which has decreased the size of the order backlog in most countries. In our operating area the general customer activity has been growing in Sweden and Denmark, has decreased in Finland and has remained low in Baltic.

Customers' focus seems to be more on efficiency-improvement solution areas like Master Data Management (MDM) and Corporate Performance Management (CPM) than on growth-oriented sales solutions.

The demand for Business Intelligence (BI) and Enterprise Content Management (ECM) solutions is estimated to continue growing more rapidly than the general IT services. The analyst forecasts for the average annual growth of BI and analytics software license markets are approx. 6-8% in the next few years. The corresponding Nordic service markets are estimated to grow annually by 6-8% on average. However, market growth in 2013 will most likely be smaller.

BUSINESS REVIEW BY AREAS

The group's business is managed through five country units. Finland, Norway, Sweden, Denmark and Baltic are also the reportable segments.

In 7-9/2013 the net sales in Finland grew by 5% to 11.3 MEUR (10.7 MEUR). Operational segment result was 1.8 MEUR (1.3 MEUR). Profitability was 16%. The business development was rather stable, but customers were cautious with their orders. The increased challenges for the export industries will likely affect IT investments negatively also in near future. Largest deal in the period was made with the City of Helsinki regarding the maintenance of its data warehouse and reporting systems.

In 7-9/2013 the net sales of Karttakeskus GIS business, reported as part of Finland, increased by 16% to 3.0 MEUR (2.6 MEUR) and its profitability was excellent. Unit's order backlog developed positively, to which the multi-year deal with the Finnish Agency for Rural Affairs had a clear impact.

In 7-9/2013 the net sales in Norway were 6.2 MEUR (5.9 MEUR) and operational segment result was 0.5 MEUR (0.7 MEUR). Net sales grew by 4% and profitability was 9%. Business development was mainly stable, but customers prefer shorter and smaller projects than earlier, which has clearly decreased the order backlog.

In 7-9/2013 the net sales in Sweden were 4.7 MEUR (4.3 MEUR) and operational segment result 0.0 MEUR (-1.0 MEUR). The net sales grew by 9%. Profitability turned finally positive and was 1%, which is a good achievement in the typically weakest quarter of the year. Development actions continue and the goal is to achieve normal profitability, but structural and operational changes for the business will take some time. The continuing recruitments of junior consultants have improved cost structure.

In 7-9/2013 the net sales in Denmark were 3.1 MEUR (3.8 MEUR) and operational segment result was 0.5 MEUR (0.4 MEUR). Net sales decreased by 17% due to smaller license sales and decreased amount of low-margin items in the sales mix. Profitability increased to 15% thanks to successful project implementations. Order backlog exceeds last year's level, partially thanks to the three-year maintenance contract announced in September.

In 7-9/2013 the net sales in Baltic (Lithuania, Latvia, Estonia, Poland, South Africa) were 3.3 MEUR (4.6 MEUR). Operational segment result was 0.0 MEUR (0.6 MEUR). Net sales decreased by 27% and profitability decreased to 0%. The sales mix of consultant work was less profitable than last year. Especially in Lithuania the market has slowed down and public sector customers' launch new projects very slowly. In order to improve profitability the Lithuanian organization has partially adopted a 4-day work week. The situation is not expected to improve during 2013, but the possible new funding decisions by the European Union may improve situation next year. Also the possible entrance of Lithuania into Euro may increase IT investments.

ANNUAL GENERAL MEETING AND GOVERNANCE

The Annual General Meeting of Affecto Plc, held on 9 April 2013, adopted the financial statements for 1.1.-31.12.2012 and discharged the members of the Board of Directors and the CEO from liability. Approximately 35 percent of Affecto's shares and votes were represented at the Meeting. The Annual General Meeting decided on a dividend distribution of EUR 0.16 per share for the year 2012.

Aaro Cantell, Magdalena Persson, Jukka Ruuska, Olof Sand, Tuija Soanjärvi and Lars Wahlström were elected as members of the Board of Directors. The organization meeting of the Board of Directors re-elected Aaro Cantell as Chairman and Jukka Ruuska as Vice-Chairman. KPMG Oy Ab was elected as the auditor of the company.

The Meeting approved the Board's proposal for appointing a Nomination Committee to prepare proposals concerning members of the Board of Directors and their remunerations for the following Annual General Meeting. The Nomination Committee will consist of the representatives of the three largest shareholders and the Chairman of the Board of Directors, acting as an expert member, if he/she is not appointed representative of a shareholder. The members representing the shareholders will be appointed by the three shareholders whose share of ownership of the shares of the company is largest on 31 October preceding the Annual General Meeting.

The Meeting approved the Board's proposal for issuing stock options 2013. The maximum total number of stock options issued will be 400 000 and they will be issued gratuitously or for consideration determined by the Board of Directors.

According to the Articles of Association, the General Meeting of Shareholders annually elects the Board of Directors by a majority decision. The term of office of the board members expires at the end of the next Annual General Meeting of Shareholders following their election. The Board appoints the CEO. The Articles of Association do not contain any special rules for changing the Articles of Association or for issuing new shares.

THE AUTHORIZATIONS GIVEN TO THE BOARD OF DIRECTORS

The Board has not used in the review period the authorizations given by the Annual General Meeting in 2012, which authorizations expired on 9 April 2013.

The complete contents of the new authorizations given by the Annual General Meeting held on 9 April 2013 have been published in the stock exchange release regarding the Meetings' decisions. Key facts about the authorizations:

The Annual General Meeting decided to authorize the Board of Directors to decide to acquire the company's own shares with distributable funds. A maximum of 2 100 000 shares may be acquired. The authorization shall be in force until the next Annual General Meeting.

The Annual General Meeting decided to authorize the Board of Directors to decide to issue new shares and to convey the company's own shares held by the company in one or more tranches. The share issue may be carried out as a share issue against consideration or without consideration on terms to be determined by the Board of Directors and in relation to a share issue against consideration at a price to be determined by the Board of Directors. A maximum of 4 200 000 new shares may be issued. A maximum of 2 100 000 own shares held by the company may be conveyed. In addition, the authorization includes the right to decide on a share issue without consideration to the company itself so that the amount of own shares held by the company after the share issue is a maximum of one-tenth (1/10) of all shares in the company. The authorization shall be in force until the next Annual General Meeting.

SHARES AND TRADING

During the review period a total of 350 667 new shares have been subscribed with the 2008B and 2008C options.

The company has one share series and all shares have similar rights. At the end of the review period Affecto Plc's share capital consisted of 21 893 735 shares. The company owned 78 427 treasury shares and Affecto Management Oy owned 823 000 shares.

In 1-9/2013 the highest share price was 4.55 euro, the lowest price 2.98 euro, the average price 3.82 euro and the closing price 4.00 euro. The trading volume was 3.4 million shares, corresponding to 21% (annualized) of the number of shares at the end of the period. The market value of shares was 87.3 MEUR at the end of the period including the shares owned by Affecto Management Oy but excluding the treasury shares.

2008C options have been listed on Nasdaq OMX Helsinki since 2 April 2013. 2008B options expired in May. A total of 259 000 of 2013 stock options have been conveyed to key employees for the 0.20 eur/option issue price that was decided by the Board.

SHAREHOLDERS

The company had a total of 2800 owners on 30 September 2013 and the foreign ownership was 13%. The list of the largest owners can be found in the company's web site. Information about the ownership structure and option programs is included as a separate section in the financial statements. The ownership of the board members, CEO and their controlled corporations totaled approx. 14.3%.

According to the flagging announcement made on 26 September 2013, the ownership of Arendals Fossekompani ASA has decreased below 5%.

ASSESSMENT OF RISKS AND UNCERTAINTIES

Affecto's order backlog has traditionally been only for a few months, which decreases the reliability of longer-term forecasts. Affecto sells third party software licenses as part of its solutions. Typically the license sales have most impact on the last month of each quarter and especially in the fourth quarter. This increases the fluctuation in net sales between quarters and increases the difficulty of accurately forecasting the quarters. Affecto had license sales of approx. 10 MEUR in 2012.

The changes in the general economic conditions and the operating environment of customers have direct impact in Affecto's markets. The uncertain economy may affect Affecto's customers negatively, and their slower investment decision making, postponing or cancellation of IT investments may have negative impact on Affecto. Slower decision making by customers may decrease the predictability of the business and may decrease the utilisation rate of resources.

Affecto’s balance sheet includes a material amount of goodwill. Goodwill has been allocated to cash generating units. Cash generating units, to which goodwill has been allocated, are tested for impairment both annually and whenever there is an indication that the unit may be impaired. Potential impairment losses may have material effect on reported profit and value of assets. The greatest uncertainty is related to Sweden.

Approximately a half of Affecto's business is in Sweden, Norway and Denmark, thus the development of the currencies of these countries (SEK, NOK and DKK) may have impact on Affecto's profitability. The main part of the companies' income and costs are within the same currency, which decreases the risks.

Affecto's success depends also on good customer relationships. Affecto has a well-diversified customer base. Although none of the customers is critically large for the whole group, there are large customers in various countries who are significant for local business in the country.

Affecto's bank loan has covenants, the breach of which may lead to higher financing costs or even the termination of the loan. The covenants are based on total net debt to earnings before interest, taxes, depreciation and amortization and total net debt to total equity.

FUTURE OUTLOOK

Year 2013 net sales and operating profit are estimated to be near last year's level. Previous guidance: Net sales are estimated to grow in 2013. Operating profit is estimated to be near last year's level.

The company does not provide exact guidance for net sales or EBIT development, as single projects and timing of license sales may have large impact on quarterly sales and profit.

Affecto Plc Board of Directors

You can order Affecto's stock exchange releases to be delivered automatically by e-mail. Please visit the Investors section of the company website: www.affecto.com

A briefing for analysts and media will be arranged at 14.00 at Restaurant Savoy, Eteläesplanadi 14, Helsinki.

www.affecto.com

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Financial information:

1. Consolidated income statement, consolidated comprehensive income statement, balance sheet, cash flow statement and statement of changes in equity 2. Notes 3. Key figures

1. Consolidated income statement, consolidated comprehensive income statement, balance sheet, cash flow statement and statement of changes in equity

CONSOLIDATED INCOME STATEMENT

CONSOLIDATED BALANCE SHEET           

SUMMARY CONSOLIDATED CASH FLOW STATEMENT

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

2. Notes       

2.1. Basis of preparation

This condensed interim financial information has been prepared in accordance with IAS 34, Interim Financial reporting. The condensed interim financial report should be read in conjunction with the annual financial statements for the year ended 31 December 2012. The same accounting policies have been applied as in the annual consolidated financial statements with the exception of the amendments to the IFRS standards that have entered into force and have been applied on 1 January 2013, which amendments have been presented in the previous annual financial statements. These amendments had no material impact on this interim report.

The non-controlling interest has been presented separately after net profit for the period and in total equity.

2.2. Segment information

Affecto's reporting segments are based on geographical locations and are Finland, Norway, Sweden, Denmark and Baltic.

Segment net sales and result

Net sales by business lines

2.3. Changes in intangible and tangible assets          

2.4. Share capital, reserve of invested non-restricted equity and treasury shares

At the end of reporting period Affecto Plc owned 78 427 treasury shares. In addition to that Affecto Management Oy, included in consolidated accounts, owned 823 000 shares in Affecto Plc. In total these 901 427 shares correspond to 4.1% of the total amount of the shares. The amount of registered shares was 21 893 735 shares.

2.5. Interest-bearing liabilities

Affecto's loan facility agreement includes financial covenants, breach of which might lead to an increase in cost of debt or cancellation of the facility agreement. The covenants are based on total net debt to earnings before interest, taxes, depreciation and amortization and total net debt to total equity. The covenants will be measured quarterly, and these terms and conditions of covenants were met at the end of the reporting period.

2.6. Contingencies and commitments

The future aggregate minimum lease payments under non-cancelable operating leases:

Guarantees given:

The above-mentioned liabilities are secured by bearer bonds with a nominal value of 52.5 million euro. The bonds are held by Nordea Pankki Suomi Oyj and secured by a mortgage on company assets of the group companies. In addition, the shares in Affecto Finland Oy and Affecto Norway AS have been pledged to secure the financial liabilities above.

Other securities given on own behalf:

Other guarantees are mostly securities issued for customer projects. These guarantees include both bank guarantees secured by parent company of the group and guarantees issued by the parent company and subsidiaries.

2.7. Related party transactions

Key management compensation and remunerations to the board of directors:

Loans to related party:

Purchases from related party:

3. Key figures

Calculation of key figures

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         Additional information:          CEO Pekka Eloholma, +358 205 777 737          CFO Satu Kankare, +358 205 777 202          SVP, M&A, IR, Hannu Nyman, +358 205 777 761