AvestaPolarit Interim Report - January to June 2001

AvestaPolarit Interim Report - January to June 2001 Profitability improved during second quarter · The market conditions for stainless steel improved slightly compared to the first quarter; however, the trading climate was clearly weaker than the previous year. · Production ran smoothly but, because of low prices, net sales fell compared to last year's figures to EUR 819 million (EUR 966 million) for the second quarter and to EUR 1,632 million (EUR 1,877 million) for the six-month period. The April to June net sales increased from the first quarter 2001. · The operating profit totalled EUR 80 million (EUR 152 million) for the second quarter and EUR 114 million (EUR 331 million) for the six months. Profitability was down compared to last year's record levels, but improved from the first quarter of 2001 as a result of higher prices and increased deliveries. · Both post-merger integration work and major investment projects are proceeding well and according to plan. · The short-term outlook remains uncertain, and production levels will be determined by market demand. Price levels are expected to improve after the summer holiday season. Key figures - pro forma Apr- Apr- Jan- Jan- EUR million June June June June 2001 2000 2001 2000 Net sales 819 966 1,632 1,877 Operating profit 80 152 114 331 Profit before extraordinary 76 148 108 322 items Profit for the financial 54 130 77 281 period Earnings per share, EUR 0.15 0.37 0.22 0.81 Return on capital employed, 16.0 29.1 11.7 33.1 % Net interest bearing debt at 373 368 373 368 period end These are pro forma figures for the full periods stated. All text comments in this review relate to the pro forma figures. For further information, please contact: Ian Cooper, Executive VP & Chief Financial Officer +46 8 613 3647 or +46 70 656 56 86 Katarina Lybeck, Senior VP - Corporate Communications, +358 9 5764 5505 or +358 40 503 0750 Jouni Grönroos, Deputy CFO & Corporate Controller +358 9 5764 5510 or +358 40 504 5125 AvestaPolarit Oyj Abp Corporate Management Linnoitustie 4 A, PO Box 270, FIN-02601 Espoo, Finland Phone: +358 9 5764 5511, fax: +358 9 5764 5555 Vasagatan 8-10, PO Box 16377, SE-103 27 Stockholm, Sweden Phone: +46 8 613 3600, fax: +46 8 613 3669 Registered office: Espoo, trade register number: 499.868 Interim Report - January to June 2001 Stainless market improved slightly from the first quarter World economic growth weakened further in the second quarter. This fall was led by the economic slowdown in the USA, which has now spread into Europe and Asia. In the USA, the industrial sector was especially hard hit by the effects of this slowdown. In Europe, it has led to a gradual erosion in business confidence. The Asian economies - and the Japanese economy in particular - have suffered increasingly from reduced export opportunities to the USA and Europe. Although demand for metals was adversely affected by the lower level of industrial activity, the market climate for stainless steel improved in the second quarter, especially in Europe, compared with the previous quarter. The high inventory levels built up during the first half of 2000 have now been reduced through the first few months of 2001. European order intake improved in the second quarter as the stock draw came to an end and purchases more closely reflected real demand. There are signs of a similar development in the USA. Stainless steel prices increased throughout Europe in the quarter. After a 23 per cent decline in base prices between the summer of 2000 and the first quarter of 2001, prices began to recover during March. Base selling prices for stainless steel cold rolled coil in Europe have since the end of March increased by some EUR 200 per tonne. A similar increase has occurred for white hot strip (continuous produced plate). Differentials between white hot strip and cold rolled base prices remain at between 10 and 12 per cent in most markets. European prices for white hot strip are expected to rise further this year as demand from projects improves. In Europe, the market for quarto plate has remained relatively stable recently. Both apparent consumption and shipments of cold rolled products in Western Europe declined by 3 per cent compared with the second quarter last year. Stainless steel output in the USA fell by 25 per cent in the first quarter of 2001 and 18 per cent in the second quarter compared with the corresponding periods in 2000. The decrease in output reflects cutbacks by major stainless steel producers in the USA and the unfavourable scenario for selling prices. Demand for long products remained subdued in the USA, but as the recent period of stock draw in the rod and bar sectors now seems to have come to an end, the outlook for the third quarter is slightly more positive. Precision strip order volumes were weak in the latter part of the second quarter, but prices remained unchanged. In central Europe, tube prices have improved, because of low stock levels and increasing delivery times. The availability of stainless steel scrap has been substantially reduced in the second quarter. A combination of export controls, imposed in Russia in early March, and seasonal factors led to a severe restriction in scrap flows and higher demand for primary raw materials. Nickel prices have been volatile, with cash prices fluctuating during the quarter between USD 2.74 and USD 3.17 per lb. Nickel stocks are at low levels due to an increase in demand whilst supply has fallen sharply. Despite this, the nickel price has remained low. As a result of oversupply and high inventory levels, ferrochrome prices suffered another significant fall in the second quarter, dropping a further 16 per cent compared to first quarter levels. European prices are now down to around USD 0.30 per lb., which is a historically low level. Profitability improved during second quarter Net sales for the second quarter fell by 15 per cent compared to the corresponding period last year as a result of a decrease in sales prices and deliveries. Net sales were similar to the first quarter and totalled EUR 819 million (EUR 966 million). Production ran smoothly and deliveries for the second quarter reflected an improved performance compared to the previous quarter but remained below the corresponding period last year. The operating profit for April to June amounted to EUR 80 million (EUR 152 million) which is 47 per cent less than the figure reported for the second quarter of 2000 but more than double the operating profit achieved for the first quarter of 2001. The reduction from the second quarter of 2000 is primarily attributable to a fall in prices and deliveries, whilst the increase from the first quarter stems mainly from an increase in delivery volumes, accompanied by a strengthening of stainless steel base selling prices and conversion margins. The result for April to June 2001 includes EUR 12 million of amortisation of negative goodwill (EUR 0 million). The operating profit margin was 9.8 per cent (15.7 per cent). Profit for the second quarter amounted to EUR 54 million (EUR 130 million). The return on capital employed was16.0 per cent (29.1 per cent) and earnings per share totalled EUR 0.15 (EUR 0.37). The cash flow from operating activities for April to June decreased compared to the first quarter and the corresponding period last year. Major investment projects, dividend payments and an increase in working capital meant that the net interest bearing debt increased from March by EUR 96 million to EUR 373 million. Financial ratios - pro forma 30 June 31 Mar 31 Dec 30 June 2001 2001 2000 2000 Debt-to equity ratio, (gearing) % 31.4 23.6 27.2 31.6 Equity-to-assets ratio, (solvency) % 41.2 42.1 41.3 39.0 Net interest bearing debt, EUR 373 277 322 368 million The debt-to-equity ratio increased in the quarter because of the increase in net interest bearing debt. The equity-to-assets ratio was slightly reduced from March 2001. Half-year net sales below last year's record level Net sales for January to June were 13 per cent down on the figure for the corresponding period last year and totalled EUR 1,632 million (EUR 1,877 million). The operating profit for the six months was EUR 114 million (EUR 331 million). The decline in profitability resulted primarily from a fall in conversion margins and reduction in stainless steel deliveries. In addition, the operating profit for January to June 2000 included a SPP pension refund of EUR 42 million. Net financial expenses amounted to EUR 6 million (EUR 10 million) and the profit for the half-year was EUR 77 million (EUR 281 million). Earnings per share amounted to EUR 0.22 (EUR 0.81) and the return on capital employed was 11.7 per cent (33.1 per cent). Investments proceeding according to plan The investment projects have been progressing well and the capital expenditure for January to June amounted to EUR 143 million (EUR 46 million). The most important investment projects are the construction of a new melting shop and the development of the hot and cold rolling mills in Tornio, Finland (total project cost: EUR 680 million), an increase of cold rolling capacity at Avesta KBR and Nyby in Sweden and Sheffield in the UK and the move to underground mining at the Kemi chromium mine in Finland. It is estimated that total capital expenditure for 2001 will amount to about EUR 430 million. Progress in post-merger integration The integration process following the combination of Outokumpu Steel Oyj and Avesta Sheffield AB on 22 January 2001 has proceeded well. The numerous integration teams comprising employees from all the main business units and functions are working to ensure the achievement of the declared synergy benefits from the merger. As required by agreements signed in connection with the formation of AvestaPolarit, as well as required by the Stockholm and Helsinki stock exchanges, a separation procedure has been carried out by and between the Outokumpu Group and AvestaPolarit. This was to ensure the ability of AvestaPolarit to operate on a stand-alone basis, and to ensure the arms- length nature of any and all relations of entities in the Outokumpu and AvestaPolarit groups. The separation procedure has been substantially completed, in compliance with contractual and other obligations. Annual General Meeting held in April The Annual General Meeting held on 23 April 2001 decided that a dividend of EUR 0.15 per share be distributed in respect of 2000. Directors elected at the AGM were Jyrki Juusela, Anthony Pedder, Bernt Magnusson, Jacob Palmstierna, Timo Peltola, Juha Rantanen, Risto Virrankoski, Ossi Virolainen and Stuart Pettifor, all re-elected, and David Lloyd, Executive Director, Finance, Corus Group plc., elected as a new member. At the Board's statutory meeting, held directly after the AGM, Jyrki Juusela was elected as Chairman of the Board and Anthony Pedder as Vice Chairman. Business area reviews Coil Products Key figures - pro forma Apr-June 2001 Apr-June 2000 Net sales, EUR million 615 702 Operating profit, EUR million 42 108 Operating profit margin, % 6.8 15.4 Average number of employees 4,404 4,365 Second quarter net sales for the Coil Products business area were down 12 per cent on the corresponding period last year, but up slightly compared to the first quarter of 2001. The operating profit for April to June was EUR 42 million, a reduction of 61 per cent compared to the second quarter of 2000 but a substantial increase compared to the first quarter of 2001. The decline from the second quarter of 2000 is primarily attributable to a reduction in conversion margins and delivery volumes, whilst the improvement from the first quarter is mainly a result of an increase in deliveries and a strengthening in conversion margins. The production within the Coil Products business area ran smoothly, with no major setbacks reported during the second quarter. Production volumes of cold rolled products were approximately the same as on the corresponding period last year and up by 11 per cent on the volumes reported for the first quarter of 2001. Production volumes of white hot strip were down 10 per cent on last year's figures and remained at first quarter levels. Slab production was down 7 per cent compared to the volumes achieved during the corresponding period last year but up 13 per cent compared to the first quarter of 2001. The new production capacity in Avesta and Nyby will be commissioned by the end of the year and the expansion in Tornio is proceeding to plan. Special Products Key figures - pro forma Apr-June 2001 Apr-June 2000 Net sales, EUR million 231 297 Operating profit, EUR million 15 33 Operating profit margin, % 6.5 11.1 Average number of employees 3,240 3,208 Net sales for the Special Products business area remained at the levels of the first quarter 2001 but fell by 22 per cent compared to the corresponding quarter last year as a result of a decrease in deliveries and prices. The operating profit amounted to EUR 15 million, a reduction of 55 per cent compared to last year, but a clear improvement on the figure reported for the previous quarter. The profitability of the Long Products, Precision Strip and Hot Rolled Plate business units improved compared to both the corresponding period of the previous year and the first quarter of 2001, whereas the Ferrochrome business unit was particularly badly affected by the difficult trading environment and low prices. The Tubular Products business unit witnessed a positive turnaround in profitability following firmer demand for stainless tubes and fittings compared to that noted in the first quarter. Production volumes for Long Products and Precision Strip were up compared to the corresponding period last year, but decreased for other business units. Compared with the first quarter of 2001, Tubular Products also recorded an improvement in volumes. Deliveries for Special Products were higher than those reported in the previous quarter but remained below the level of the corresponding quarter last year. The move to underground mining at the Kemi chromium mine is proceeding according to plan. North America Key figures - pro forma Apr-June 2001 Apr-June 2000 Net sales, EUR million 73 86 Operating profit, EUR million 0 3 Operating profit margin, % neg. 3.5 Average number of employees 371 366 Production operations ran smoothly within the North America business area, but the trading environment in the USA remained relatively difficult during the second quarter. Investment projects and spending on capital goods remained sluggish in processing industry as well as in automotive and semiconductor markets. Weak demand affected the business area's net sales, which declined 15 per cent compared to the corresponding quarter last year. Net sales amounted to EUR 73 million, a slight drop compared to the figure reported for the first quarter. The decline in net sales resulted mainly from the decrease in deliveries. The operating result for the second quarter improved from the first quarter and was breakeven, which was weaker than the corresponding period last year. The recent improvement in profitability is attributable to slightly improved conversion margins in some businesses and cost reductions within the business area. Short-term outlook uncertain Earlier global growth predictions have been revised downwards and the macro economic outlook is uncertain. The primary concern is whether the USA economy will recover in the short term and when a more positive outlook can be expected. To promote a positive turnaround, the USA has frequently cut short-term interest rates, and the current rate is the lowest in seven years. The slowdown in the USA is also influencing European economies and further interest rate cuts may also be introduced in Europe. The market conditions in Japan are unlikely to improve in the short term. The short-term market outlook for stainless steel is influenced by both positive and negative signs. Market conditions are now healthier than they were at the beginning of the year, and prices are expected to be stable during the summer period and begin to increase again towards the end of the year. On the other hand, the full impact of the slow summer season, with production maintenance and holiday breaks at customer industries, as well as the outlook for the early autumn are more difficult to predict. Additional uncertainty is caused by the USA Section 201 review for stainless steel producers, announced by the Bush administration in June. The effect of this is currently being assessed and it will take several months before the exact position is clarified. In this review, the primary concern for AvestaPolarit is the stainless steel semi and long products. If the International Trade Commission in the USA confirms injury to US producers, an introduction of quotas or tariffs may follow. The forward prospects for nickel prices also remain uncertain. However, recent forecasts of improving stainless scrap availability later this year, coupled with a primary nickel market that is likely to remain in modest surplus, should limit the scope for any significant upward movement in price. Significant cutbacks have been made by ferrochrome producers in an attempt to bring the market back into balance. However, the high inventory levels suggest that any recovery in ferrochrome prices will not be seen until later in the year. Although the market situation has improved slightly since the early part of the year and prices have increased, base price levels at the end of June 2001 were still 15 per cent below the figures noted for the corresponding period last year. Taking into account this factor and the expectation of relatively stable prices and lower volumes during the summer months, it is estimated that AvestaPolarit's operating result for 2001 as a whole will remain well below last year's record levels. However, taking into account the market situation, the result for the whole year is expected to be satisfactory. Financial reports AvestaPolarit will publish the interim report for January to September on 31 October 2001. Espoo, 2 August 2001 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/2001/08/02/20010802BIT00180/bit0001.doc The full report http://www.waymaker.net/bitonline/2001/08/02/20010802BIT00180/bit0001.pdf The full report