Elcoteq CEO sees 2006 profit margin flat

By Tarmo Virki

PARIS (Reuters) - Finnish Elcoteq (ELQAV.HE: Quote, Profile, Research, Stock Buzz) expects its 2006 operating profit margin to remain on a par with last year's, but Europe's largest contract manufacturer of electronics said it hopes to raise margins in the next three years.

"It would be quite difficult to raise margins (in 2006). In principle it's possible ... but we are seeing them pretty much flat on last year," Chief Executive Jouni Hartikainen said on Wednesday at Reuters Global Technology, Media and Telecoms Summit.

Elcoteq, a key supplier to the world's top handset maker Nokia (NOK1V.HE: Quote, Profile, Research, Stock Buzz), said it was seeing constant pressure on its margins due to falling prices of cellphones.

Elcoteq's operating profit margin dropped to 1.8 percent in 2005 from 2.0 percent, while sales rose to 4.17 billion euros.

"The average selling prices in the whole industry are going constantly down ... when the average selling prices come down there is always huge margin pressure," Hartikainen said.

In the last two years, the average selling price of Nokia phones has dropped to 99 euros ($118) from 127 euros.

Hartikainen said the company hopes to reach its long-term target of 3-5 percent operating profit margin in the next three years.

"I believe we will make it ... when last year we were speaking that we would make it in around three years, we would say this also now," he said.

FIRST QUARTER GUIDANCE

Hartikainen said the company was sticking to its first quarter guidance and has seen no reason to change it, saying sharply higher financial expenses and depreciations would hurt January-March net earnings.

Elcoteq repeated in a bourse statement on Wednesday its forecast for sales to grow year-on-year in its seasonally weaker first quarter, but operating profit to weaken somewhat from 9.5 million euros a year earlier.

"There is always a risk we could make a net loss on a quarterly level. It's not impossible. We are aiming not to make a loss," he said.

Elcoteq shares dropped over 5 percent on the comments, but later rebounded to close at 18.06 euros, down 2.5 percent, compared with a 0.9 percent rise in the DJ Stoxx European Technology index .

Hartikainen said the company hopes to cut its dependency on one customer to below one third of its all sales over the next three to four years, while currently some two thirds of Elcoteq sales goes to Nokia, according to analysts.

Elcoteq's cash flow is closely followed by analysts as the firm continuously needs resources to finance fast growth. Cash flow turned to positive in 2005 after two years of outflows, but analysts still worry that it may resort to a share issue to fix the problem.  Continued...