AvestaPolarit Interim Report - January to September 2001

AvestaPolarit Interim Report - January to September 2001 Profitability below expectations · The market conditions for stainless steel remained difficult during the third quarter and prices were substantially below last year's levels. · Net sales for July to September were significantly down compared to the corresponding period last year, a result of lower prices and reduced deliveries. Net sales for the third quarter amounted to EUR 631 million (EUR 809 million). Net sales for the nine months totalled EUR 2,298 million (EUR 2,717 million). · The operating profit was EUR 4 million (EUR 94 million) for the third quarter and EUR 118 million (EUR 425 million) for the nine months. Profitability for July to September was down compared to last year and to that reported for the second quarter of 2001 as a result of lower prices, a decline in deliveries and some production problems. · AvestaPolarit's plans to restructure its melting activities include the closure of the melting shop and billet rolling facilities in Degerfors by mid-2003 and an investment in long products casting at the Group's plant in Sheffield. · The short-term outlook remains uncertain. Key figures - pro forma July-Sep July-Sep Jan-Sep Jan-Sep EUR million 2001 2000 2001 2000 Net sales 631 809 2,298 2,717 Operating profit 4 94 118 425 Profit before extraordinary 2 86 110 408 items Profit for the financial period 6 32 83 312 Earnings per share, EUR 0.02 0.09 0.24 0.89 Return on capital employed, % 1.4 17.4 8.3 28.3 Net interest bearing debt at 393 297 393 297 period end Debt-to-equity ratio (gearing), 34.0 24.4 34.0 24.4 % 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 Jouni Grönroos, Deputy CFO & Corporate Controller +358 9 5764 5510 or +358 40 504 5125 Hannele Öbrink, Manager - Investor Relations + 46 8 613 4419 or +46 70 652 10 32 AvestaPolarit Oyj Abp Corporate Management Linnoitustie 4 A, PO Box 270, FIN-02601 Espoo, Finland Tel: +358 9 5764 5511, fax: +358 9 5764 5555 Vasagatan 8-10, PO Box 16377, SE-103 27 Stockholm, Sweden Tel: +46 8 613 3600, fax: +46 8 613 3669 Registered office: Espoo, trade register number: 499.868 Interim Report - January to September 2001 Market conditions for the stainless steel remained difficult World economic growth remained very weak in the third quarter. The sharp slowdown in the USA continued, and there were clear signs of a further deterioration of market conditions in Europe. Overall European industrial production is now falling year-on-year, with the manufacturing sectors in Germany and the UK being the hardest hit. In Asia, the Japanese economy is in recession, and the other major economies in that region were also adversely affected by a combination of poor domestic demand and lower exports to Europe and the USA. Improved market conditions for stainless steel in the second quarter allowed for some price increases, but the upturn has not been sustained. Although inventory levels at stockists and service centres were reduced gradually through the first half of 2001 and are currently estimated to be at their lowest level in two years, end-user demand has weakened, particularly for cold rolled coil. Despite weaker demand in the third quarter, stainless steel base prices for cold rolled coil remained unchanged from the second quarter, as major stainless steel producers in Europe and the USA cut back production in line with demand. Asian producers reduced production as well, in response to poor domestic demand and declining exports, particularly to the USA. Demand for hot rolled coil was stronger than demand for cold rolled coil in the third quarter, notably in Asia. Quarto plate shipments in Europe have been falling compared with the second quarter, but base prices have remained stable. During the third quarter, sales prices for long products have reduced in line with falling raw material costs. For precision strip, market demand for texture rolled products was satisfactory, although demand for austenitic material remained poor throughout the third quarter. Demand for tubular products in Europe fell in the latter part of the quarter as customers anticipated lower sales prices as a result of falling nickel prices. The availability of stainless scrap in Europe fell significantly during the quarter, partly a result of lower primary nickel prices. Although the flow of scrap from Russia has now stabilised, export restrictions are still in place and tonnages remain substantially lower than they were before these restrictions were imposed. Stainless steel production cuts meant that the demand for nickel remained weak and prices fell by 18 per cent during the quarter. The average nickel price for the third quarter was down 34 per cent compared to the average for the corresponding period in 2000. Following the sharp decline in the first half of the year, ferrochrome prices stabilised during the quarter. However, third quarter prices remained historically low at 26 per cent below the corresponding period last year. Poor result for the third quarter Net sales for the third quarter were down by 22 per cent compared to the corresponding period last year as a result of a decrease in both sales prices and deliveries. Due to seasonal factors such as scheduled maintenance stoppages and reduced customer orders during the summer break, net sales fell by 25 per cent compared to the second quarter and amounted to EUR 631 million (EUR 809 million). Stainless steel deliveries for the third quarter were down 12 per cent compared to the corresponding period last year. The operating profit for July to September dropped sharply compared to last year and amounted to EUR 4 million (EUR 94 million), primarily due to the effect of reductions in nickel prices creating a substantial negative market adjustment to inventories, reduced deliveries and production difficulties. The decline in operational performance compared with the second quarter was caused by reduced deliveries, coupled with some production problems, partly related to the commissioning of new facilities in Avesta. The operating profit reported for July to September 2001 includes amortisation of negative goodwill of EUR 12 million (zero). The operating profit margin was 0.6 per cent (11.5 per cent). Profit for the third quarter totalled EUR 6 million (EUR 32 million). The return on capital employed was 1.4 per cent (17.4 per cent) and earnings per share EUR 0.02 (EUR 0.09). The cash flow from operating activities for July to September decreased compared to the second quarter and the corresponding period last year. As a result of the capital expenditure programme and an increase in working capital, net interest bearing debt increased from June by EUR 20 million to EUR 393 million. Financial ratios - pro forma 30 Sep 30 June 31 Mar 31 Dec 2001 2001 2001 2000 Debt-to-equity ratio (gearing), % 34.0 31.4 23.6 27.2 Equity-to-assets ratio 41.2 41.2 42.1 41.3 (solvency), % Net interest bearing debt, EUR 393 373 277 322 million The debt-to-equity ratio increased in the quarter due to an increase in net interest bearing debt. The equity-to-assets ratio remained at the June 2001 level. Sharp fall in profits for the nine months Net sales for January to September fell 15 per cent from the corresponding period last year and amounted to EUR 2,298 million (EUR 2,717 million). The operating profit for the nine months reduced to EUR 118 million (EUR 425 million). The decline in profitability primarily resulted from a decline in conversion margins and stainless steel deliveries. The operating profit for January to September 2000 included the benefit of the SPP pension refund of EUR 42 million. The nine-month operating profit for 2001 includes amortisation of negative goodwill, EUR 33 million. Net financial expenses were EUR 8 million (EUR 17 million) and the profit for the nine-month financial period totalled EUR 83 million (EUR 312 million). The decline in net financial expenses results mainly from the fall in interest rates and an increase in dividends received. Earnings per share amounted to EUR 0.24 (EUR 0.89) and the return on capital employed was 8.3 per cent (28.3 per cent). Investments and integration work proceeding to plan The total capital expenditure for January to September amounted to EUR 257 million (EUR 86 million). The major investment projects at Kemi in Finland, Avesta KBR and Nyby in Sweden and Sheffield in the UK are proceeding to plan. The cost of the project to expand capacity at Tornio in Finland has increased from EUR 680 million to EUR 760 million. This increase relates to some technical changes and additional expenditure on buildings and equipment, partly related to changes in scope to improve the interface between new and existing facilities. The expansion programme in Tornio is proceeding according to schedule and will be completed by the end of 2002. The total Group capital expenditure for 2001 is estimated to amount to some EUR 430 million. The work of numerous integration teams to exploit synergies from the merger has proceeded to plan. The projected annual synergies of more than EUR 100 million are expected to be realised in full by 2005, with the greater part being realised by 2003. To underpin its integration targets in the current difficult and uncertain market situation, the Group has launched a project focusing on cost and capital expenditure control and revenue generation. The first effects of immediate measures are expected to materialise already during the fourth quarter of 2001. Restructuring of the Group's melting activities announced As part of the integration process following the combination of Outokumpu Steel Oyj and Avesta Sheffield AB, AvestaPolarit announced in August its plans to restructure the Group's melting activities. The plan entails a phased closure of the melting shop and billet rolling facilities in Degerfors, Sweden, by mid-2003 and the transfer of production to the melting shop in Sheffield, UK, where an investment of EUR 22 million will be made to install continuous casting facilities for blooms and billets. The decision means that operations at Degerfors Stainless will be discontinued. The Group's Hot Rolled Plate business in Degerfors will continue to operate from the site and focus on developing the business further to maintain its position as the world's leading producer of stainless steel quarto plate. The Degerfors Stainless closure is estimated to lead to 330 job losses at the site. The current total number of employees at the site amounts to about 700. As Degerfors Stainless and Hot Rolled Plate share the same site, all employees of these businesses will initially be affected by the closure plans and the need to re-organise to allow for the continued production of hot rolled plate. The statutory negotiations with local union representatives concerning the closure decision were concluded in mid-October. No provision for the restructuring has been made in these accounts as the negotiations with local union representatives were concluded after the end of the reporting period. They will be booked against the negative goodwill during the fourth quarter, but they will only affect income through a decrease of the amortisation of negative goodwill over the remaining period of approximately nine years. The current estimate for the provision is EUR 19 million. The future annual cost benefit after the completion of this restructuring of melting activities is expected to amount to some EUR 20 million. Business area reviews Coil Products Key figures - pro forma July-Sep 2001 July-Sep 2000 Net sales, EUR million 453 586 Operating profit, EUR million -2 67 Operating profit margin, % neg. 11.4 Average number of employees 4,151 4,042 Affected by a decline in prices and delivery volumes, third quarter net sales for the Coil Products business area were down 23 per cent on the corresponding period last year. The operating profit for July to September fell sharply and amounted to a loss of EUR 2 million. The decline in profitability from last year is primarily attributable to a reduction in conversion margins and delivery volumes together with some production problems. The fall in operating profit for Coil Products from the second quarter of 2001 was affected by seasonal factors such as scheduled maintenance stoppages and holiday breaks at customers. Production within the Coil Products business area experienced some difficulties related to the commissioning of new facilities in Avesta, Sweden, after the summer shutdown. Production problems were also experienced in Tornio, Finland. Production volumes of cold rolled products fell 6 per cent compared with the corresponding period last year. Production volumes of white hot strip were down 2 per cent on last year's figures. Slab production fell 13 per cent. Special Products Key figures - pro forma July-Sep 2001 July-Sep 2000 Net sales, EUR million 186 251 Operating profit, EUR million 9 20 Operating profit margin, % 4.8 7.8 Average number of employees 3,208 3,343 Third quarter net sales for the Special Products business area fell by 26 per cent compared to the corresponding period last year as a result of a decrease in deliveries and prices for most of its business units. The operating profit was down 55 per cent from last year and 40 per cent from the second quarter of 2001. Operating profit for July to September amounted to EUR 9 million. The difficult trading environment and low prices prevailed and the profitability of all business units fell from the corresponding period last year. Production at Precision Strip ran smoothly and volumes for both Precision Strip and Long Products were up compared to the corresponding period last year. Production volumes for all other business units decreased compared to the same period last year. Tubular Products was the only business unit to record an improvement in production volumes compared with the second quarter of 2001. North America Key figures - pro forma July-Sep 2001 July-Sep 2000 Net sales, EUR million 70 79 Operating profit, EUR million -1 2 Operating profit margin, % neg. 2.5 Average number of employees 370 368 The trading environment in the USA remained difficult during the third quarter although some price increases compared to the second quarter were witnessed. Uncertainty about the market recovery increased following the events on and after 11 September. Production within the North America business area ran smoothly, but deliveries were slightly below last year level. The business area's net sales declined 11 per cent compared to the corresponding quarter last year and amounted to EUR 70 million. The fall compared to second quarter net sales resulted mainly from the decrease in deliveries over the quiet summer season. The operating result for the third quarter declined from the corresponding period last year, and also slightly from the second quarter, and amounted to a loss of EUR 1 million. The fall compared to last year resulted mostly from weaker conversion margins while the recent decline in profitability is attributable primarily to tougher competition in the pipe business. On 22 October, the International Trade Commission in the USA gave its ruling of injury and concluded that all semi-finished stainless steel products are to be excluded from further investigative activities under the Section 201 investigation. The same ruling gave an affirmative injury decision for certain stainless steel long products and tubular fittings and flanges. Consequently, imports of slabs and billets will remain unaffected, while certain restrictive remedies can be anticipated with respect to the aforementioned finished products. AvestaPolarit views the ruling positively as coil imports were not affected and the Group's deliveries of semi-finished products to its North America business area will therefore be able to continue. Short-term outlook remains uncertain Global growth slowed further in the third quarter and prospects for the fourth quarter look poor. Business and consumer confidence in both the USA and Europe were already weak, and have been further depressed by the events in the USA on 11 September and its aftermath. The immediate impact is likely to be lower consumer spending and reduced investment spending, and forecasts of world growth for 2001 have been reduced accordingly. The authorities have responded to the situation with a series of aggressive monetary and fiscal measures aimed at stimulating growth and preventing a global recession. Given the poor global economic background, the short-term outlook for stainless steel is depressed and a quick recovery seems unlikely. Total world stainless steel consumption is forecast to drop by some 3-5 per cent this year, illustrating the severity of the situation. Weak demand will continue to put downward pressure on prices, but price development will be very much dependent on the level of supply. The first half of this year saw production problems or cutbacks at a number of European mills, which restored market balance. The overall market situation is thus healthier but quite sensitive to further development of the supply and demand balance and producers' responses to it. Although nickel prices have been on a weakening trend during 2001, prices staged a sharp recovery in mid-October. The main factor seems to have been the tight scrap availability, reflecting reduced Russian exports as well as lower scrap generation in the West, which in turn has resulted in increased consumption of primary nickel. Nevertheless, the nickel market is still characterised by excess supply, and thus the price recovery may be short-lived. In ferrochrome, despite major production cuts, demand is not expected to be strong enough to support any significant increases in price until next year. Taking into account the difficult market situation, increased uncertainty and the fact that stainless steel base price levels at the end of September 2001 were 20 per cent below last year figures, AvestaPolarit's operating result for 2001 as a whole will remain well below last year's record levels. Due to the considerable uncertainties, it is quite difficult to provide a reliable forecast even for short-term financial performance. However, assuming selling prices remain roughly at third quarter levels, AvestaPolarit expects to see an improvement in its profitability for the last quarter of 2001. AvestaPolarit's production levels will be determined by demand, which may mean restraining output during the fourth quarter. Stockholm, 31 October 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/2001/10/31/20011031BIT00560/bit0001.doc The full report http://www.waymaker.net/bitonline/2001/10/31/20011031BIT00560/bit0001.pdf The full report