During the 13 September 2006 Small Cap Seminar, you showed the increasing trend for Sampling Cup shipments since 2001 and suggested that this was a good means of monitoring SinterCast’s growth. The 3Q Report issued on 8 September shows a 48% growth in Sampling Cup shipments compared to 3Q05, which is positive. However, the deliveries thus far during 2006 have declined (10,800 in Q1 vs. 9,300 in Q2 and 7,100 in Q3). Can you comment on this declining trend?


Shareholder, name withheld

It is true that the Sampling Cup shipments are a good general indicator of growth. However, it is difficult to establish a direct correlation between Sampling Cup shipments and the CGI series production volume. The reason for this is that customers frequently include large quantities of Sampling Cups together with the initial order for a new System 2000 installation. The bulk order ensures that the foundry will have start-up stocks and will not need to concern themselves with logistics and shipping costs for smaller orders, particularly for foundries located far from Sweden.

Another important consideration is that some countries have favourable import tax conditions for new equipment, in order to promote and support the development of the domestic manufacturing sector. These taxation policies encourage foundries to order larger quantities of Sampling Cups together with the initial installation rather than making separate orders of consumables in the future - at a higher tax rate. In this way, the Sampling Cup shipments during early 2006 were positively impacted by the new System 2000 installation in China (Q1) and the Mini-System 2000 installation in Korea (Q2). In contrast, the Sampling Cup shipments during 3Q06 were entirely related to series production requirements.

While Sampling Cup shipments can indeed be a good indicator of growth, during the initial series production period, the total Sampling Cup shipments are still dependent on new installations. The primary difference between 2005 and 2006 is that five new installations were announced during 2005 while only two new installations have been realised thus far during 2006. The fact that the year-to-date revenues for 2006 are nevertheless effectively the same as for 2005 is entirely due to the increase in series production. This positive growth in the series production activities is evident by comparing the production rate stated in the 3Q05 Interim Report (250,000 Engine Equivalents) to the current rate of 400,000 Engine Equivalents stated in the 3Q06 Report. Beyond this 60% increase in the current series production, a comparison of the 3Q05 and 3Q06 reports also shows that the future production potential has increased from 3.5 million Engine Equivalents to 5 million Engine Equivalents. Each of these individual developments illustrate the positive development of SinterCast’s market activities.