AvestaPolarit Interim Report for January to March 2002

AvestaPolarit Interim Report for January to March 2002 Profitability markedly improved · The market conditions for stainless steel improved slightly from the last quarter of 2001. Stainless steel base prices and conversion margins improved compared to those reported for the corresponding period in 2001. · Net sales for the first quarter declined 7% from the corresponding period last year as a result of a fall in transaction prices and amounted to EUR 769 million. · The operating profit for January to March totalled EUR 75 million, more than twice that reported for the same period last year. The rise in profitability resulted from increased deliveries and improved conversion margins supported by efficiency gains and synergy benefits. · Although net interest-bearing debt increased, the Group's financial position remained strong. · Investment programmes, post-merger integration work and initiatives to enhance internal efficiency are proceeding well and to plan. · The outlook for the second quarter is positive, but the market development for the second half of the year still remains uncertain. Key figures Pro forma Actual Jan-Mar Jan-Mar Jan-Mar EUR million 2002 2001 2001 Net sales 769 830 704 Operating profit 75 34 32 Profit before extraordinary items 72 32 30 Profit for the financial period 59 23 23 Earnings per share, EUR 0.17 0.07 0.08 Return on capital employed, % 14.0 7.2 9.8 Net interest-bearing debt at period end 537 219 219 Debt-to-equity ratio (gearing), % 41.7 18.6 18.6 All comparables for 2001 in this text are pro forma figures including Avesta Sheffield for the full periods stated. In actual figures, Avesta Sheffield has been consolidated into AvestaPolarit as from 23 January 2001. For further information, please contact: Ian Cooper, Executive VP & Chief Financial Officer, +46 (0)8 613 3647 or +46 (0)70 656 56 86 Jouni Grönroos, Deputy CFO & Corporate Controller, +358 (0)9 5764 5510 or +358 (0)40 504 5125 Hannele Öbrink, Manager - Investor Relations, +46 (0)8 613 44 19 or +46 (0)70 652 10 32 AvestaPolarit Corporate Management Linnoitustie 4 A, PO Box 270, FIN-02601 Espoo, Finland. Tel: +358 (0)9 5764 5511, Fax: +358 (0)9 5764 5555 Vasagatan 8-10, PO Box 16377, SE-103 27 Stockholm, Sweden. Tel: +46 (0)8 613 3600, Fax: +46 (0)8 613 3669 Registered office for AvestaPolarit Oyj Abp: Espoo, Business ID: 0823312- 4 Interim Report for January to March 2002 Positive signs for stainless steel markets Global economic growth remained weak during the first quarter, even though some indications of recovery were visible, especially in the USA. Some positive signs were also witnessed towards the end of the period in Europe and Asia, but market developments during the first quarter were clearly not as strong in these economies as in the USA. The Japanese economy continued to suffer, whereas growth trends in China remained sound. Although industrial activity remained weak, the demand for stainless steel showed signs of recovery and this has continued into the second quarter. Part of this improvement may result from inventory re-building as distributors and consumers replenished their inventories in anticipation of further rises in prices. Inventory levels in Europe and in the USA are now returning to normal levels having fallen in 2001. In Asia the increase in demand has created some shortage of stock, particularly in China. Even in Japan, relatively high inventory levels have started to reduce. European prices and conversion margins for cold rolled products started to rise towards the end of the quarter. The average conversion margin increased by 2% compared to the previous quarter and by 9% compared to the first quarter of 2001. European prices for hot rolled products have followed the increase in cold rolled coil. Quarto plate demand is improving but prices have not yet increased. Some positive signs have also been witnessed for long products, but future development will be affected by the Section 201 actions in the USA. Market activity in precision strip improved during the quarter but prices remained broadly at previous quarter levels. The prices of tubular products increased towards the end of the period. Nickel production levels exceeded demand, but the decline in exports from Russia balanced the market. Average nickel prices were up 23% compared to the last quarter of 2001, but down 5% compared to the first quarter of 2001. It is believed that the recent increase in demand and prices is, at least in part, attributable to stainless steel producers replenishing their stocks and to speculative purchases made by funds and investors. Ferrochrome markets remained strongly undersupplied but relatively high inventory levels restrained price increases. Instead, ferrochrome prices continued to fall and were down 3% on the previous quarter and 26% compared to the first quarter of 2001. In March, the USA announced its restrictions to be imposed on stainless steel imports based on the Section 201 review carried out last year. The tariffs, ranging up to 15%, will be imposed over a three-year period on imports of stainless steel bar, wire rod and wire. Although these restrictions will have an effect on the Long Products business unit, they are not expected to have any significant impact on the Group's core operations or profitability. Clear improvement in profitability Net sales for the first quarter declined by 7% compared to the corresponding period last year as a result of a fall in transaction prices and totalled EUR 769 million (EUR 830 million). Production ran smoothly and deliveries reflected an improved performance compared both to the previous quarter and to the first quarter of 2001. The operating profit for January to March amounted to EUR 75 million (EUR 34 million), more than twice that recorded for the corresponding period last year and more than three times the figure for the fourth quarter of 2001. The improvement in profitability is primarily attributable to the increase in deliveries and improvement of stainless steel conversion margins, accompanied by synergy benefits and efficiency gains. The operating result for the period includes an amortisation of negative goodwill corresponding to EUR 11 million (EUR 9 million). Unusual items include provisions amounting to EUR 16 million and a corresponding additional amortisation of negative goodwill. The net income effect of these items is zero. The provisions include the restructuring of the Panteg works in the UK (EUR 4 million) and a recalculation of UK pension liabilities as at combination (EUR 12 million). The operating profit margin for the quarter was 9.8% (4.1%). Profits for the quarter totalled EUR 59 million (EUR 23 million). The return on capital employed was 14.0% (7.2%) and earnings per share amounted to EUR 0.17 (EUR 0.07). Financial position stable The cash flow from operating activities for January to March was lower than the corresponding period last year as a result of movements in working capital. Working capital increased slightly due to higher sales prices and deliveries while cash flow last year benefited from a significant decrease in working capital as a result of the sharp fall in sales prices during the quarter. Net interest-bearing debt increased from December 2001 by EUR 55 million to EUR 537 million, mainly because of the major capital investment in Tornio. Key ratios 31 Mar 2002 31 Dec 2001 31 Mar 2001 Debt-to-equity ratio 41.7 39.7 18.6 (gearing), % Equity-to-assets 42.1 41.6 42.1 ratio (solvency), % Net interest-bearing 537 482 219 debt, EUR million Although the debt-to-equity ratio rose in the quarter, the Group's financial position remains strong. The equity-to-assets ratio improved slightly from the year-end 2001. Tornio expansion approaching completion Capital expenditure for the first quarter amounted to EUR 106 million (EUR 52 million). Total capital expenditure for the full year is estimated to amount to EUR 450 million. The investment projects are proceeding to plan. The first part of the Tornio expansion project (total project cost EUR 790 million) due to be completed is the new melting shop, which will be commissioned from July. This will be followed by the completion of capacity enhancement at the hot and cold rolling mills. The cold rolling mill is due to be commissioned from December. Full production capacity will be reached during 2004. Other major ongoing investment projects include the move to underground mining at the Kemi chromium mine in Finland (EUR 73 million) and the installation of a new billet caster at the Sheffield melting shop in the UK (EUR 22 million). As part of its strategy to seek new growth outside its main markets in Europe, the Group announced in March its plans to enhance its capabilities in stainless steel long products through investments in new capacity and a long-term hire-rolling co-operation agreement with Allegheny Technologies Inc. in Richburg, South Carolina, USA. The total capital expenditure amounts to some EUR 25 million (USD 22 million). This comprises investments to enhance AvestaPolarit's own cold finishing capabilities for long products, as well as a contribution to expand production capabilities at Allegheny Technologies' rolling mill. The project includes a conversion agreement, which gives AvestaPolarit access to hire-rolling long products at Allegheny Technologies' Richburg mill at competitive pricing over a 20-year period. Initiatives to enhance internal efficiency proceeding to plan One of the results of the project launched in January 2002 to further develop the business organisation to support the Group's strategic aspirations for strong and profitable growth, has been the decision to combine the Melting Shop and Steckel Mill in Avesta with Avesta KBR and the SMACC melting shop in Sheffield with the Long Products business unit. As a result, a new Avesta Integrated Mill business unit will be formed, a new and strengthened Long Products business unit established and the Primary Products business unit discontinued. These changes will become effective during the second quarter. The work to implement and develop new leadership processes and corporate values continues. Other initiatives to enhance internal efficiency, including the restructuring of the Panteg works in the UK, development of the sales and marketing network and the increased focus on cost and capital control, have proceeded well. In addition, post-merger integration work has proceeded to plan. Business area reviews Coil Products Key figures Pro forma Jan-Mar 2002 Jan-Mar 2001 Jan-Mar 2001 Net sales, EUR million 613 620 536 Operating profit, EUR million 55 16 10 Operating profit margin, % 9.0 2.6 1.9 Average number of employees 4 347 4 199 3 753 First quarter net sales for Coil Products fell 1% as a net result of lower sales prices and increased deliveries. Operating profits improved significantly and reached EUR 55 million. This improvement reflects mainly higher delivery volumes, a rise in conversion margins and the achievements in enhancing cost and operational efficiency. Production at Coil Products ran smoothly during the first quarter and the volumes of cold rolled products increased slightly compared to the corresponding period last year. Production of white hot strip exceeded last year's figures by 17% and also slab production rose significantly. The investments to increase capacity at Avesta KBR and in Nyby have been finalised. The expansion programme in Tornio is progressing to plan and the first plant to come on stream will be the new melting shop, which is due to be commissioned from July. The other facilities covered by the investment are due to be commissioned by the year-end. Operations in Avesta are currently being reorganised into a new business unit, the Avesta Integrated Mill, and the SMACC melting shop is being combined with the Long Products business unit, part of the Special Products business area. At the same time the Primary Products business unit has been discontinued. Special Products Key figures Pro forma Jan-Mar 2002 Jan-Mar 2001 Jan-Mar 2001 Net sales, EUR million 225 247 203 Operating profit, EUR million 8 11 7 Operating profit margin, % 3.6 4.5 3.4 Average number of employees 3 210 3 150 3 019 Net sales for Special Products fell 9% compared to the first quarter of 2001 as a result of a decrease in sales prices. Operating profit decreased to EUR 8 million. The fall in profitability resulted principally from the ferrochrome business, which suffered from very low prices. The Group's tube plant and warehousing facilities at Helmond in the Netherlands, which were totally destroyed by a fire in January, were fully covered by insurance. Insurance compensation has been accounted for by the end of March only to the amount of the book values of the destroyed fixed assets and inventories, as full settlement has not yet been made. Avesta Sandvik Tube B.V. has announced that it does not intend to rebuild the tube mill. Different options for the warehousing activities are still being evaluated. Higher production volumes were recorded by most of the business units during the quarter, while the production of Ferrochrome and Long Products fell compared to the corresponding period last year. The reorganisation of Tubular Products to form separate business units for Tubes and Fittings was finalised during the first quarter and the Group's ownership in Avesta Sandvik Tube AB increased to 83%. The combination of SMACC and Long Products is currently taking place. The restructuring of melting activities in Degerfors and Sheffield is proceeding to plan. North America Key figures Pro forma Jan-Mar 2002 Jan-Mar 2001 Jan-Mar 2001 Net sales, EUR million 71 78 62 Operating profit, EUR million 1 -2 -1 Operating profit margin, % 1.4 Neg. Neg. Average number of employees 361 367 367 North America net sales fell 9% from the same period last year as a result of a fall in sales prices while deliveries remained at last year's levels. The operating result turned from a loss to a profit of EUR 1 million. This improvement reflects the business area's improved cost efficiency, particularly in the bar business where finishing operations were brought in-house during the latter part of 2001. Production in North America generally ran well and volumes were up on last year's levels. In March, the Group announced its plans to enhance its capabilities in stainless steel long products through investments in new capacity and a long-term hire-rolling co-operation agreement with Allegheny Technologies Incorporated in Richburg, SC, USA. Annual General Meeting held in April The Annual General Meeting held on 9 April decided that a dividend of EUR 0.08 per share would be distributed for 2001. Directors re-elected were Jyrki Juusela, Tony P. Pedder, David M. Lloyd, Bernt Magnusson, Timo Peltola, Juha Rantanen, and Risto Virrankoski. Evert Henkes, Chief Executive of Shell Chemicals Ltd., was elected as a new member. The number of Board members was reduced from 10 to 8, all of whom are non- executive members. At the Board's statutory meeting, held directly after the AGM, Jyrki Juusela was re-elected Chairman of the Board and Tony P. Pedder Vice-Chairman. The meeting also approved the proposals made by the Board of Directors to issue warrants to key personnel and to authorise the Board to increase the share capital by issuing new shares and by taking out convertible loans, in one or more instances. The warrants form a part of the incentive and commitment programme for key personnel within the Group. The number of warrants issued will be 6 400 000. The warrants entitle holders to subscribe for a maximum of 6 400 000 shares in AvestaPolarit Oyj Abp and can be exchanged for shares constituting a maximum of 1.8% of the company's shares and voting rights. Liquidity in AvestaPolarit shares increases Based on the decision of the Annual General Meeting of Outokumpu Oyj held in early April, approximately 70% of Outokumpu's dividend for 2001 will be distributed as shares in AvestaPolarit. This will reduce Outokumpu's shareholding in AvestaPolarit from 55.3% to approximately 52% and increase liquidity in the AvestaPolarit share. According to the shareholders' agreement between Outokumpu Oyj and Corus Group plc, Outokumpu will reduce its shareholding in AvestaPolarit to 40% or less by 31 March 2004, or under materially adverse capital market conditions by 31 December 2005. Short-term outlook positive Confidence in the world economy has increased, which could indicate a recovery in the second half of 2002. Signs of a rebound in the economic climate have been witnessed, especially in the USA but also in Europe. On the other hand, more positive evidence is still required to reduce the uncertainty and more strongly promote the growth of industrial production and investment activity. The outlook for the stainless steel market for the second quarter looks relatively good and prices are expected to continue to increase moderately in the next two or three months. The outlook for the second half of the year remains more uncertain. If the world economy starts to pick-up more strongly in the latter part of the year, the short-term positive performance of the stainless steel market is expected to continue and even strengthen. The prospects for nickel prices also remain uncertain. Due to market speculation price volatility may continue even if the market is currently almost in balance. The outlook for ferrochrome is cautiously optimistic as demand has recently improved and the market is strongly undersupplied. On the other hand, the current relatively high ferrochrome inventory levels may postpone the recovery. Taking into account the recent positive development in stainless steel markets, the promising short-term market outlook and the initiatives taken to enhance the Group's performance, AvestaPolarit's profitability should also remain on a satisfactory level during the second quarter. Financial reporting The interim report for the second quarter will be published on 25 July and the interim report for the third quarter on 24 October 2002. Espoo, 26 April 2002 AvestaPolarit Oyj Abp ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2002/04/26/20020426BIT00660/wkr0001.doc The Full Report http://www.waymaker.net/bitonline/2002/04/26/20020426BIT00660/wkr0002.pdf The Full Report