OUTOKUMPU'S SECOND QUARTER RESULT WEAK
OUTOKUMPU OYJ STOCK EXCHANGE RELEASE July 24, 2003 at 1.00 pm
OUTOKUMPU'S SECOND QUARTER RESULT WEAK
Net sales for the second quarter amounted to EUR 1 439 million
(I/2003: EUR 1 483 million) and the operating profit was EUR 25
million (I/2003: EUR 28 million). Earnings per share were EUR
-0.07 (I/2003: EUR -0.03). Cash flow from operating activities
was EUR -62 million (I/2003: EUR -22 million). The Groups
earnings development is expected to improve towards the
year-end due to higher delivery volumes and an improved product
mix of stainless steel, in particular.
THE SECOND QUARTER IN BRIEF
- In deteriorating market conditions the operating profit for
the second quarter remained weak, around the same level as that
reported for the previous quarter. The negative impact came
mainly from lower deliveries of finished products and lower
base prices for cold rolled products in Stainless Steel, as
well as increased fixed costs in the Tornio ramp-up phase. The
markets for copper, zinc and technology sales remained
lackluster. Compared to the second quarter of 2002, the
operating profit fell considerably.
- The expansion of stainless steel operations in Tornio is
proceeding well, although the ramp-up of the new cold rolling
mill is slightly behind the original schedule. Deliveries of
white hot strip started in March and the production of cold
rolled material began in June.
- The weak cash flow - a consequence of the high level of
capital expenditure, a substantial increase in working capital
and poor profitability - increased the Groups gearing to 158%.
- Earnings development, after the seasonally slow third
quarter, is expected to improve towards the year-end
due to higher delivery volumes and an improved product mix from
the Tornio works. However, in the absence of any clear
improvement in market conditions, it is estimated that both the
Groups operating profit and the profit before extraordinary
items for the full year will remain below last year levels.
CEO Jyrki Juusela comments:
"We have experienced a prolonged period of slow economic growth
that has adversely affected the profitability of the metals
business. During this period, we have also invested heavily and
this has naturally had an impact on our balance sheet. Of our
three-component plan announced last summer the rights issue has
been completed and the divestment program has proceeded well,
but the third area of focus - cash flow - has not yet improved
at the desired rate, largely due to an unsatisfactory market
climate that has resulted in poor profitability. Should the
need arise, we will take additional measures to accomplish our
gearing target. The demand for stainless steel has started to
show signs of softening from the acceptable levels noted during
the early part of the year, whilst base metals prices have
slightly been picking up recently, albeit from very low levels.
In the short term, however, most of our anticipated
improvements in profitability will come from the increased
volumes and improved product mix from Tornio. And when the
market situation finally turns around, the new Outokumpu that
we have been building over the past three years will be well
poised to make the most of it - that means making good
profits".
MANAGEMENT ANALYSIS OF THE OPERATING RESULT FOR THE SECOND
QUARTER
The Groups comparable operating profit remained weak
The following table presents the Groups net sales and
comparable operating profit (i.e. operating profit excluding
inventory gains or losses as well as one-off items) by
business.
EUR million I/02 II/02 III/02 IV/02
Net sales
Stainless Steel 769 823 671 739
Copper 409 452 392 416
Zinc 99 120 101 98
Technology 71 114 90 124
Other operations 89 90 65 92
Intra-group sales (61) (68) (59) (78)
The Group 1 376 1 531 1 260 1 391
Comparable
operating profit
Stainless Steel 75 83 20 21
Copper 15 22 15 8
Zinc 3 1 1 (0)
Technology (8) 5 (1) 8
Other operations (4) 9 (15) (25)
Intra-group items (0) (1) 5 1
The Group 81 119 25 13
Items affecting
comparability, businesses 14 53 (20) 2
Items affecting
comparability, the Group - (21) 1 -
The Group, official
operating profit 95 151 6 15
EUR million 2002 I/03 II/03
Net sales
Stainless Steel 3 002 876 851
Copper 1 669 409 402
Zinc 418 93 95
Technology 399 88 81
Other operations 336 87 99
Intra-group sales (266) (70) (89)
The Group 5 558 1 483 1 439
Comparable
operating profit
Stainless Steel 184 49 36
Copper 60 2 8
Zinc 5 5 2
Technology 4 (9) (4)
Other operations (35) (23) (17)
Intra-group items 5 1 (1)
The Group 223 25 24
Items affecting
comparability, businesses 64 3 1
Items affecting
comparability, the Group (20) - -
The Group, official
operating profit 267 28 25
Demand growth of metals slowed during the quarter. The Groups
net sales fell slightly compared to the previous quarter,
mainly due to the lower sales volume of stainless steel. The
Groups comparable second quarter operating profit remained
weak, roughly at the previous quarters level, but fell
considerably compared to the second quarter of 2002. The
operating profit of Stainless Steel weakened, whereas the
operating profit of Copper improved compared to the first
quarter of 2003. The Zinc divisions operating profit remained
low and Technology reported another operating loss for the
quarter.
In April-June the euro strengthened against the US dollar by 6%
compared to the previous quarter and by as much as 24% compared
to the corresponding quarter in 2002. However, the adverse
effect that this had on the Groups financial results was
largely offset by the Groups currency hedging measures.
Stainless Steel ramping up new capacity
Stainless Steel key figures
EUR million I/02 II/02 III/02 IV/02
Net sales
Coil Products 599 628 517 584
Special Products 325 375 299 312
North America 71 72 60 64
Others (226) (252) (205) (221)
Stainless Steel total 769 823 671 739
Comparable
operating profit
Coil Products 54 60 16 32
Special Products 9 11 1 (8)
North America 1 3 1 (2)
Others 11 9 8 6
AvestaPolarit total 75 83 26 28
Amortization of
positive goodwill - - (6) (7)
Stainless Steel total 75 83 20 21
Market valuation
provision in inventories - - - 0
Amortization of positive
goodwill arising from the
acquisition of the (15)
AvestaPolarit minority
interest 1)
Insurance compensation - 20 - -
Stainless Steel,
official operating profit 75 103 20 6
Operating capital at
the end of period 1 992 2 154 2 819 3 038
Production of main
products (1 000 tonnes)
Coil Products
Steel slabs 411 411 337 435
- of which
Long Products share 130 147 109 115
Cold rolling
mill production
- cold rolled 205 222 179 201
- white hot strip 102 104 75 104
Special Products
Ferrochrome 63 63 59 63
Tubes 18 19 14 17
Quarto plate 25 26 19 25
Long products 2) 40 54 33 53
Precision strip 5 5 6 5
North America
Quarto plate,
bar and tubes 19 21 17 17
Development of
market prices 3)
Stainless steel
Transaction price EUR/kg 1.54 1.75 1.82 1.76
Base price EUR/kg 1.31 1.41 1.45 1.44
Conversion margin EUR/kg 0.88 0.98 1.03 1.00
Nickel USD/lb 2.81 3.15 3.10 3.22
EUR/kg 7.08 7.56 6.95 7.11
Ferrochrome (Cr-content) USD/lb 0.29 0.30 0.32 0.35
EUR/kg 0.72 0.72 0.72 0.77
1) In the fourth quarter of 2002, a EUR 15 million amortization
of positive goodwill not belonging to the period was made so
that the total amount corresponds to the annual amortization
level.
2) Other than slabs.
3) Sources: Stainless steel: CRU - German conversion margin (2
mm cold rolled 304 sheet), price estimate for deliveries during
the period. Nickel: London Metal Exchange (LME) cash quotations
converted into USD/lb and EUR/kg. Ferrochrome: CRU US
imported high carbon 50-55% Cr.
EUR million 2002 I/03 II/03
Net sales
Coil Products 2 328 682 667
Special Products 1 311 349 327
North America 267 64 59
Others (904) (219) (202)
Stainless Steel total 3 002 876 851
Comparable
operating profit
Coil Products 162 45 35
Special Products 13 0 2
North America 3 (1) 0
Others 34 12 6
AvestaPolarit total 212 56 43
Amortization of
positive goodwill (28) (7) (7)
Stainless Steel total 184 49 36
Market valuation
provision in inventories 0 1 0
Amortization of positive
goodwill arising from the
acquisition of the - - -
AvestaPolarit minority
interest 1)
Insurance compensation 20 - -
Stainless Steel,
official operating profit 204 50 36
Operating capital at
the end of period 3 038 3 204 3 355
Production of main
products (1 000 tonnes)
Coil Products
Steel slabs 1 594 494 500
- of which
Long Products share 501 110 93
Cold rolling
mill production
- cold rolled 807 204 207
- white hot strip 385 112 125
Special Products
Ferrochrome 248 63 62
Tubes 68 20 18
Quarto plate 95 27 32
Long products 2) 180 54 52
Precision strip 21 5 7
North America
Quarto plate,
bar and tubes 74 20 20
Development of
market prices 3)
Stainless steel
Transaction price EUR/kg 1.72 1.77 1.78
Base price EUR/kg 1.41 1.43 1.39
Conversion margin EUR/kg 0.97 0.98 0.93
Nickel USD/lb 3.07 3.78 3.80
EUR/kg 7.16 7.77 7.36
Ferrochrome (Cr-content) USD/lb 0.31 0.36 0.41
EUR/kg 0.73 0.74 0.80
1) In the fourth quarter of 2002, a EUR 15 million amortization
of positive goodwill not belonging to the period was made so
that the total amount corresponds to the annual amortization
level.
2) Other than slabs.
3) Sources: Stainless steel: CRU - German conversion margin (2
mm cold rolled 304 sheet), price estimate for deliveries during
the period. Nickel: London Metal Exchange (LME) cash quotations
converted into USD/lb and EUR/kg. Ferrochrome: CRU US
imported high carbon 50-55% Cr.
The market conditions for stainless steel weakened markedly
during the second quarter. Demand for cold rolled and hot
rolled stainless steel slowed in all markets. Higher stainless
steel production levels contributed to an oversupply. Base
prices were under pressure and declined during May and June in
all major regions. According to CRU, average base prices fell
by 3% and conversion margins fell by 5% compared to the first
quarter of 2003. Demand for quarto plate stayed below normal
levels and the poor market conditions for long products
deteriorated further during the period. However, demand for
precision strip was reasonable and prices remained stable,
albeit at a relatively low level. Prices for tubes and fittings
were also relatively stable. The market in North America
remained weak.
The Stainless Steel business areas net sales for the second
quarter amounted to EUR 851 million. Compared to both the first
quarter of 2003 and the corresponding period last year, the
average transaction price was lower, largely due to the high
proportion of slabs and white hot strip. The comparable
operating profit declined compared to the first quarter of 2003
as a result of lower deliveries of finished products and lower
base prices for cold rolled products. Higher fixed costs,
attributable mainly to the ramp-up phase of the Tornio
expansion, had an adverse impact on the operating profit. The
impending closure of the Degerfors melt shop in Sweden and the
ramp-up of the Sheffield melt shop in Britain further reduced
the profitability. Billet and bar rolling will continue at
Degerfors, saving some 50 jobs compared to original plans. The
Degerfors melt shop will now close at the end of September 2003
and billet and bloom melting will be continued at the Sheffield
melt shop as planned. The Special Products and North America
divisions continued to suffer from weak markets and low prices.
Discussions to establish a new pension fund for those
AvestaPolarit employees in Britain that have remained as
beneficiaries to the British Steel Pension fund following the
AvestaPolarit merger in 2001 have led to an agreement with the
relevant trade unions. Negotiations with the Corus Group
regarding its contribution to the new pension scheme are
ongoing.
Demand growth for stainless steel is expected to remain modest
in 2003, also after the seasonally slow third quarter. European
cold rolled stainless steel base prices for third quarter
deliveries are under pressure. The impact of the production
cuts announced by some of the major producers for the third
quarter is still uncertain. High volatility in the nickel price
has continued, increasing uncertainty in the market.
Ferrochrome price negotiations for the third quarter are
ongoing, but a further reasonable increase seems likely.
The key factor for AvestaPolarits profitability, apart from
market conditions, continues to be the successful ramp-up of
the Tornio expansion. The full benefit of these investments
will be achieved once full capacity has been reached by the end
of 2004. Profitability during the ramp-up phase has hitherto
been negatively affected by low capacity utilization and by the
relatively high proportion of semi-finished products.
Copper business hit by low conversion margins
Copper key figures
EUR million I/02 II/02 III/02 IV/02
Net sales
Americas 90 93 81 76
Europe 142 144 120 120
Automotive
Heat Exchangers 61 74 63 58
Appliance Heat
Exchangers & Asia 73 92 85 101
Harjavalta Metals 96 103 87 105
Others (53) (54) (44) (44)
Copper total 409 452 392 416
Comparable
operating profit
Americas 4 5 5 5
Europe 2 7 0 0
Automotive
Heat Exchangers 4 8 6 5
Appliance Heat
Exchangers & Asia 2 4 0 (7)
Harjavalta Metals 8 (1) 2 5
Others (5) (1) 2 0
Copper total 15 22 15 8
Market price
adjustments
to inventories 7 (1) (9) 2
Pension
provision (the US) - - - (6)
Copper, official
operating profit 22 21 6 4
Operating capital at
the end of period 1008 933 991 935
Deliveries of fabricated
products (1 000 tonnes)
Americas 24 25 25 24
Europe 36 40 34 35
Automotive
Heat Exchangers 21 24 22 21
Appliance Heat
Exchangers & Asia 22 28 21 19
Internal deliveries (1) (2) (2) (1)
Total deliveries 102 115 100 98
Order backlog at
the end of
period (1 000 tonnes) 67 61 60 60
Production of Harjavalta
Metals (1 000 tonnes)
Blister copper 43 34 41 43
Cathode copper 29 28 27 31
Price development
Conversion margin of
copper products,
change on the
previous period, % 1) 3 (3) (7) (3)
Copper TC/RC,
change on the
previous period, % 2) (8) (2) (8) 7
Price of copper 3) USD/lb 0.71 0.73 0.69 0.70
EUR/kg 1.78 1.85 1.54 1.55
1) The average conversion margin of Outokumpus copper
products. Includes changes in the product mix.
2) Combined treatment and refining charges received by
Outokumpu.
3) London Metal Exchange (LME) cash quotation.
EUR million 2002 I/03 II/03
Net sales
Americas 340 74 66
Europe 526 112 109
Automotive
Heat Exchangers 256 59 62
Appliance Heat
Exchangers & Asia 351 121 128
Harjavalta Metals 391 93 88
Others (195) (50) (51)
Copper total 1 669 409 402
Comparable
operating profit
Americas 19 2 1
Europe 9 (6) (0)
Automotive
Heat Exchangers 23 3 4
Appliance Heat
Exchangers & Asia (1) 1 6
Harjavalta Metals 14 3 (2)
Others (4) (1) (1)
Copper total 60 2 8
Market price
adjustments to
inventories (1) 2 1
Pension
provision (the US) (6) - -
Copper, official
operating profit 53 4 9
Operating capital at
the end of period 935 947 945
Deliveries of fabricated
products (1 000 tonnes)
Americas 98 24 23
Europe 145 35 35
Automotive
Heat Exchangers 88 22 23
Appliance Heat
Exchangers & Asia 90 26 30
Internal deliveries (6) (1) (1)
Total deliveries 415 106 110
Order backlog at
the end of
period (1 000 tonnes) 60 67 64
Production of Harjavalta
Metals (1 000 tonnes)
Blister copper 161 43 34
Cathode copper 115 31 32
Price development
Conversion margin of
copper products,
change on the
previous period, % 1) (4) (4) (5)
Copper TC/RC,
change on the
previous period, % 2) (8) (9) (15)
Price of copper 3) USD/lb 0.71 0.75 0.74
EUR/kg 1.65 1.55 1.44
1) The average conversion margin of Outokumpus copper
products. Includes changes in the product mix.
2) Combined treatment and refining charges received by
Outokumpu.
3) London Metal Exchange (LME) cash quotation.
Demand for fabricated copper products remained weak during the
quarter. European demand slowed, the US economy stagnated and
in Asia the outbreak of SARS affected demand. In Europe, the
construction sector continued to underperform and the outlook
for the automotive industry weakened. Furthermore, the strength
of the euro against the US dollar, coupled with the existing
overcapacity and the tight copper cathode and scrap market
aggravated the difficulties of the European producers. In the
absence of the sustained market recovery US demand remained
disappointing with the commercial construction sector remaining
depressed and the residential construction sector showing signs
of weakness. In Asia, hitherto strong demand growth tapered off
during the quarter due to the SARS epidemic. However, it seems
that any effects of the SARS outbreak were restricted mainly to
the second quarter.
Demand for copper metal was disappointing during the second
quarter. Tightness of the concentrate markets continued to
prevail despite the growth in mine output. The spot treatment
and refining charges remained at record lows in the second
quarter and the contract terms reported by CRU dropped by 1%
compared with the previous quarter. The copper market is
forecast to be in undersupply for the rest of 2003 with the
growth of metals supply being constrained by the lack of
concentrates. The price of copper is estimated to rise
moderately in the second half of 2003.
The Copper business areas net sales in April-June fell by 2%
compared to the previous quarter, following the further
strengthening of the euro against the US dollar. The comparable
operating profit for the second quarter remained low, at EUR 8
million, due to the general downward pressure on prices. The
improvement in the comparable operating profit compared to the
previous quarter resulted mainly from the high season for the
Appliance Heat Exchangers & Asia division, as well as the
Europe divisions restructuring provision of some EUR 5 million
entered in the first quarter accounts.
Orders for fabricated copper products received during the
second quarter fell by some 5% compared to the previous
quarter. The demand for fabricated copper products is not
estimated to change markedly in the near future. Since neither
prices nor product mix are expected to improve during the rest
of the year, it is estimated that the operating profit for the
full year will be down on the previous year.
Zincs financial performance remained low in a weak market
Zinc key figures
EUR million I/02 II/02 III/02 IV/02
Net sales 99 120 101 98
Comparable
operating profit 3 1 1 (0)
Market price
adjustments to
inventories 1 (0) (1) 2
Write down of
reactors at Kokkola - - (4) -
Zinc, official
operating profit 4 1 (4) 2
Operating capital at
the end of period 416 383 378 361
Production of
zinc (1 000 tonnes) 103 81 94 102
Price development
Zinc TC,
change on the
previous period, % 1) (4) (6) (9) (2)
Price of zinc 2) USD/lb 0.36 0.35 0.35 0.35
EUR/kg 0.91 0.85 0.78 0.77
1) Zinc TC received by Outokumpu. Includes so-called free zinc.
2) London Metal Exchange (LME) cash quotation.
EUR million 2002 I/03 II/03
Net sales 418 93 95
Comparable
operating profit 5 5 2
Market price
adjustments to
inventories 2 (0) 0
Write down of
reactors at Kokkola (4) 0 -
Zinc, official
operating profit 3 5 2
Operating capital at
the end of period 361 353 347
Production of
zinc (1 000 tonnes) 380 97 103
Price development
Zinc TC,
change on the
previous period, % 1) (20) (9) (7)
Price of zinc 2) USD/lb 0.35 0.36 0.35
EUR/kg 0.82 0.73 0.68
1) Zinc TC received by Outokumpu. Includes so-called free zinc.
2) London Metal Exchange (LME) cash quotation.
The zinc market remained weak in the second quarter. The global
year-on-year growth in demand slowed to just 0.5% compared to
4% in the first quarter. Demand fell both in Europe and in the
US due to weakness of the commercial construction sector and
stagnation in the automotive sector. Consumption grew only in
Asia. The zinc metal market remained oversupplied with prices
at historically low levels. Zinc concentrate markets were
undersupplied during the period and the treatment charges
continued to decline.
Outokumpus zinc production facilities operated without any
major problems during the quarter, both at Kokkola and Odda.
The Zinc divisions net sales and operating profit for the
second quarter remained low in the continuing weak market. The
comparable operating profit for Zinc was a modest EUR 2
million, due to the extremely low treatment charges. The
adverse effect of the weak US dollar against the euro and the
Norwegian krone was largely mitigated by the currency hedging
measures.
The outlook for zinc remains challenging. The strength of the
euro against the US dollar has contributed to a significant cut
in the revenues of European producers and the rationalization
of supply is likely to continue. The recovery of demand and
further production cuts are prerequisites for a better zinc
market. The low zinc treatment charges for the short-term do
not suggest any marked improvement in the operating profit for
the Zinc division towards the end of the year.
Technology aims for improvement during the rest of the year
Technology key figures
EUR million I/02 II/02 III/02 IV/02
Net sales 71 114 90 124
Official
operating profit (8) 5 (1) 8
Operating capital
at the end of period 33 36 26 35
Order backlog at
the end of period 392 401 370 370
Technology key figures
EUR million 2002 I/03 II/03
Net sales 399 88 81
Official
operating profit 4 (9) (4)
Operating capital
at the end of period 35 28 32
Order backlog at
the end of period 370 359 294
The market situation for technology sales continued to be
extremely difficult during the period and major project
decisions were again postponed, reflecting the general economic
uncertainty. Technologys second quarter operating loss
amounted to EUR 4 million, primarily as a result of low sales
volumes. Given the typical seasonality of technology sales, the
bulk of the operating profit is again estimated to accrue in
the last quarter.
The divisions order backlog contracted during the second
quarter to EUR 294 million (Dec. 31, 2002: EUR 370 million),
resulting from the removal of the significant smelter project
of Southern Peru Copper Corporation from the order backlog
pending more confidence for this committed order to go ahead.
However, the market situation for technology sales is not
expected to deteriorate further and there has already been some
signs of an improved order intake for the second half.
Slight decrease in losses for Other operations
Other operations key figures
EUR million I/02 II/02 III/02 IV/02
Net sales 89 90 65 92
Comparable
operating profit (4) 9 (15) (25)
Gain on the sale of
the real estate in Espoo - - - 13
Refund of
actuarial surplus - - - 4
Refund of pension surplus
from Henki-Sampo - - - 2
Final settlement
on the sale
of the Harjavalta
nickel refinery - - (6) -
Capital gain on
AvestaPolarit Oyj Abp
shares - 34 - -
Gain on the sale of
the Pyhäsalmi mine 6 - - -
Other operations,
official operating profit 2 43 (21) (6)
Operating capital at
the end of period 147 223 100 209
Mine production
(1 000 tonnes)
Zinc in concentrates,
the Tara mine - - 7 42
EUR million 2002 I/03 II/03
Net sales 336 87 99
Comparable
operating profit (35) (23) (17)
Gain on the sale of
the real estate in Espoo 13 - -
Refund of
actuarial surplus 4 - -
Refund of pension surplus
from Henki-Sampo 2 - -
Final settlement
on the sale
of the Harjavalta
nickel refinery (6) - -
Capital gain on
AvestaPolarit Oyj Abp
shares 34 - -
Gain on the sale of
the Pyhäsalmi mine 6 - -
Other operations,
official operating profit 18 (23) (17)
Operating capital at
the end of period 209 228 248
Mine production
(1 000 tonnes)
Zinc in concentrates,
the Tara mine 49 43 41
The Groups remaining mining business, comprising mainly the
Tara mine, accounted for over half of the operating loss
reported under Other operations. The Tara zinc mine has to a
large extent reached its operational efficiency targets, but
due to the very low zinc prices that have prevailed the mine
was operating close to cash break-even level during the second
quarter. However, Tara is moving into the exploitation of
better grade ore for the rest of the year. The cost base of
Other operations also covers Corporate Management and certain
business development expenses, which are not allocated to the
business areas or divisions.
The attachments present the interim review by the Board of
Directors and accounts.
For further information, please contact:
Kari Lassila, SVP - Investor Relations and Corporate
Development, tel. +358 9 421 2555, kari.lassila@outokumpu.com
Eero Mustala, SVP - Corporate Communications, tel. +358 9 421
2435, eero.mustala@outokumpu.com
Vesa-Pekka Takala, SVP - Corporate Controller, tel. +358 9 421
4134, vesa-pekka.takala@outokumpu.com
News conference today at 3.00 pm
A combined news conference, conference call and live web cast
concerning the second quarter results will be held today, July
24, 2003 at 3.00 pm Finnish time (8.00 am US EST, 1.00 pm UK
time, 2.00 pm CET) at Hotel Kämp, conference room Akseli Gallen-
Kallela, Pohjoisesplanadi 29, 00100 Helsinki, Finland.
To participate via a conference call, please dial 5-10 minutes
before the beginning of the event +44 20 7162 0185 (UK) or +1
334 420 4950 (US & Canada). The password is Outokumpu. The news
conference can be viewed live via Internet at
www.outokumpu.com.
The stock exchange release and presentation material will be
available before the news conference at www.outokumpu.com ->
Investor information -> Downloads.
An on-demand web cast of the news conference will be available
at www.outokumpu.com as of July 24, 2003 at 4.30 pm Finnish
time. An instant reply service of the conference call will be
available until Saturday, July 26, 2003 in the following
numbers: +44 20 8288 4459 (UK) or +1 334 323 6222(US & Canada).
The access code is 929 262.
OUTOKUMPU OYJ
Corporate Management
Johanna Sintonen
Manager - Investor and Media Relations
tel. +358 9 421 2438, mobile +358 40 530 0778,
fax +358 9 421 2429
e-mail: johanna.sintonen@outokumpu.com
www.outokumpu.com
INTERIM REVIEW BY THE BOARD OF DIRECTORS
Official result contracted markedly on the previous year
Outokumpus business environment was extremely difficult in the
first half of 2003. The markets for copper, zinc and technology
sales remained lackluster. The demand for stainless steel also
softened towards the end of the period and the base prices and
conversion margins in the Groups principal market, Europe,
deteriorated. However, the Groups net sales in January-June
rose slightly compared to the corresponding period last year
and stood at EUR 2 922 million (I-II/2002: EUR 2 907 million).
The increase was primarily attributable to higher transaction
prices and higher delivery volumes of stainless steel.
In addition to the poor market situation, Outokumpus first
half result was adversely affected by costs relating to the
commissioning of major investment programs and restructuring
measures as well as lower-than-expected margins from the
product mix during the ramp-up of the capacity enhancement
program in Tornio. As a consequence the operating profit for
January-June fell sharply to EUR 53 million (I-II/2002: EUR 246
million). The operating profit for the first six months
includes a EUR 14 million amortization of goodwill on
consolidation relating to the acquisition of the AvestaPolarit
minority interest (I-II/2002: EUR 0 million). The comparison
period last year also included unusual gains of EUR 39 million,
for which a breakdown can be found in the notes to the
financial statements.
In January-June the euro strengthened against the US dollar by
23% compared to the corresponding period a year ago. However,
the adverse effect that this had on the Groups financial
results was largely offset by the Groups hedging measures. The
Groups net financial expenses increased in the first half of
the year to EUR 57 million (I-II/2002: EUR 1 million) primarily
due to the increase in interest expenses resulting from higher
net interest-bearing debt and exchange gains recorded by the
parent company as a result of hedging measures in the
comparison period. The Groups hedging position against the
weakening of the US dollar relative to the euro currently
extends close to twelve months, although the average exchange
rate for forward contracts is gradually becoming less
favorable.
The Groups loss before extraordinary items for January-June
was EUR 10 million and the loss for the period EUR 17 million
(I-II/2002: profit of EUR 243 million and profit of EUR 129
million). Earnings per share fell to EUR -0.10 (I-II/2002: EUR
0.94). Return on capital employed was also down noticeably
compared to the corresponding period last year, and stood at
2.3% (I-II/2002: 14.7%).
Capital structure to be restored
Following the difficult market conditions and increase in
working capital, the cash flow from operating activities fell
in the first half and stood at EUR -84 million (I-II/2002: EUR
147 million). The Groups net interest-bearing debt rose to EUR
2 873 million (December 31, 2002: EUR 2 385 million) as a
result of the weak cash flow and the ongoing major capital
expenditure programs.
The Groups capital structure has, as expected, weakened below
the target level due to the acquisition of the AvestaPolarit
minority interest last year. At the end of the second quarter
the equity-to-assets ratio was 28.3% and the debt-to-equity
ratio 158.3% (Dec. 31, 2002: 31.1% and 122.6%). The weak market
situation and consequently lower-than-planned profits make it
challenging to bring the debt-to-equity ratio back to the
target level - below 75% - in the planned time frame, by the
end of 2004. However, the ongoing EUR 200 million divestment
program is supporting the target with another milestone, the
sale of Outokumpus stake in the Arctic Platinum Partnership
for a total consideration of USD 31 million, a deal that was
reached in July 2003. The extent of the Groups divestments
will, if necessary, be increased over the next 18 months in
order to restore the capital structure within the planned time
frame.
Outokumpu signs EUR 875 million revolving credit facility
Outokumpu Oyj signed a EUR 875 million revolving credit
facility in May 2003. This five-year facility is for general
corporate purposes. It replaces the existing similar facilities
and serves as the core credit facility for Outokumpu. The
mandated lead arrangers for the transaction were ABN Amro Bank
N.V., The Bank of Tokyo-Mitsubishi Ltd, Citigroup, J.P. Morgan
plc and Nordea.
Tornio expansion program is keeping the Groups capital
expenditure high
Capital expenditure in January to June amounted to EUR 302
million (I-II/2002: EUR 340 million). It is estimated that the
capital expenditure for the full year will be some EUR 700
million, with the Tornio expansion program accounting for the
bulk of the overall expenditure. Capital expenditure in 2004 is
estimated to decrease compared to 2003, but will nevertheless
exceed the level of depreciation.
The EUR 1 billion expansion program at Tornio is proceeding
well, although the ramp-up of the new cold rolling mill has
progressed somewhat slower than planned. The deliveries of
white strip began in March and the production of cold rolled
material started in June. The expansion of the hot rolling mill
at Tornio, which will increase the annual production capacity
of the facility to 1.7 million tonnes, is running smoothly. The
integration of the quarto plate business of ThyssenKrupp
Nirosta, acquired in February, is proceeding well.
AvestaPolarits other major investment projects, the move to
underground mining at the Kemi chromium mine and the increase
of long products capacity in the US, are proceeding as planned.
The EUR 88 million modernization program being carried out at
the Odda zinc plant in Norway is progressing at planned cost
estimate and schedule. The project will be completed in the
autumn of 2004. The construction phase will not cause any
significant production losses.
Outokumpu to sell its stake in Arctic Platinum Partnership to
South Atlantic Ventures
In July 2003, Outokumpu entered into an agreement with South
Atlantic Ventures Ltd. of Canada, whereby Outokumpu will sell
its 49% share in Arctic Platinum Partnership (APP) to South
Atlantic. APP is a partnership between Outokumpu (49%) and Gold
Fields of South Africa (51%), which is studying a palladium-
platinum resource in Northern Finland. Under the terms of the
agreement, South Atlantic has agreed to pay Outokumpu USD 23
million in cash and USD 8 million in South Atlantic shares. A
capital gain of some EUR 25 million will be entered as an
unusual item in the second half financial results. The closing
of the transaction is subject to a number of standard terms and
conditions, among others, obtaining requisite regulatory and
third party approvals and consents, waiver of pre-emptive
rights and the satisfaction of other customary closing
conditions.
European Commissions Statement of Objections regarding copper
tube manufacturers
On July 7, 2003, Outokumpu Oyj received a Statement of
Objections from the European Commission concerning alleged
participation by Outokumpus copper tube business in a cartel
with respect to air-conditioning and refrigeration (ACR) tubes
in the European Union. Outokumpu has cooperated with the
Commission in connection with the investigation, which was
initiated by the Commission in March 2001. Outokumpu is
currently analyzing and examining the Statement of Objections
and shall submit its written reply in due course. Net sales of
copper ACR tubes manufactured by Outokumpu in Europe account
for less than one percent of the Groups total net sales.
Arbitration award on the redemption of minority shares in
AvestaPolarit confirmed
On June 9, 2003, the Arbitration Tribunal appointed by the
Central Chamber of Commerce confirmed in its arbitration award
that the redemption price of the minority shares in
AvestaPolarit is EUR 6.55 per share. This confirmed redemption
price is equal to Outokumpus original offer. The redemption
price will be paid to the minority shareholders of
AvestaPolarit as soon as possible after the arbitration award
has gained legal effect.
Revised principles on corporate governance adopted
In June 2003, the Board of Directors approved a new corporate
governance policy. This follows the acquisition of the
AvestaPolarit minority interest and subsequent integration. In
addition, a policy regarding the business organization and the
legal structure of the Group was issued. These policies aim to
clarify the roles and responsibilities of managers on various
levels of the organization.
Market outlook remains uncertain
The economic environment continued very difficult during the
second quarter. The world economic growth remained slow at less
than 2% and the anticipated recovery failed to materialize. In
the US and Germany the growth of industrial production fell to
zero, and China was the only major region to report significant
economic growth. Interest rates and taxes were cut further to
boost economic activity in both Europe and the US. The impact
of the strong euro on the European industrial sector has been
more serious than originally estimated. The US confidence
indexes indicate some cautious recovery during the next few
months, but a fast upswing in the US economy looks still
unlikely. Despite the temporary adverse consequences of the
SARS epidemic, it is expected that China and other Asian
countries will remain the leading growth region in the near
future. Overall, any recovery in the global economy is likely
to be sluggish given the ongoing geopolitical tensions and
underlying deficits in public finances.
Metal markets suffered from the slow growth in industrial
activity and demand growth of metals slowed during the second
quarter, with only China showing strong market growth. For
stainless steel markets, the period began satisfactorily, but
the market conditions deteriorated during the quarter. The
short-term outlook for stainless steel remains uncertain with
global stainless steel capacity increasing sharply in 2003.
However, some European and US stainless steel producers have
announced production cuts in response to the weaker market
situation.
Outokumpus management believes that, after the seasonally slow
third quarter, the Groups earnings development will improve
towards year-end due to higher delivery volumes and
better product mix of the Tornio works, in particular. However,
it remains to be seen how the markets will develop. In the
absence of any clear improvement in the current market
conditions, it is estimated that both the Groups full year
operating profit and the profit before extraordinary items will
remain below last year levels.
Espoo, July 24, 2003
The Board of Directors
CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
INCOME STATEMENT Jan-Jun Jan-Jun Jan-Dec
EUR million 2003 2002 2002
Net sales 2 922 2 907 5 558
Costs and expenses (2 876) (2 715) (5 332)
Unusual items 0 39 49
Other operating
income and expenses 9 1 (6)
Amortization of positive
and negative goodwill (2) 14 (2)
Operating profit 53 246 267
Equity earnings in
associated companies (6) (2) (7)
Financial income
and expenses
Net interest expenses (52) (25) (75)
Exchange gains and losses (7) 16 15
Other financial
income and expenses 2 8 13
Profit (loss) before
extraordinary items (10) 243 213
Extraordinary items - - -
Income taxes (6) (60) (53)
Minority interest
in earnings (1) (54) (1)
Profit (loss) for the
financial period (17) 129 159
BALANCE SHEET Jun 30 Jun 30 Dec 31
EUR million 2003 2002 2002
Fixed assets and other
long-term investments
Intangible assets 451 70 373
Property, plant
and equipment 3 091 2 756 3 088
Long-term
financial assets
Interest-bearing 149 165 157
Non interest-bearing 91 80 105
3 782 3 071 3 723
Current assets
Inventories 1 357 1 115 1 235
Receivables
Interest-bearing 40 102 76
Non interest-bearing 1 145 1 218 1 067
Marketable securities 11 20 31
Cash and bank 146 217 195
2 699 2 672 2 604
Total assets 6 481 5 743 6 327
Shareholders equity 1 774 1 603 1 906
Minority interest 40 611 40
Negative goodwill
on consolidation - 270 -
Long-term liabilities
Interest-bearing 1 629 933 1 493
Non interest-bearing 447 448 463
2 076 1 381 1 956
Current liabilities
Interest-bearing 1 589 800 1 352
Non interest-bearing 1 002 1 078 1 073
2 591 1 878 2 425
Total shareholders
equity and liabilities 6 481 5 743 6 327
STATEMENT OF CASH FLOWS Jan-Jun Jan-Jun Jan-Dec
EUR million 2003 2002 2002
Income financing 137 289 450
Increase in
working capital (212) (125) (100)
Other adjustments (9) (17) (16)
Cash provided by
operating activities (84) 147 334
Capital expenditure (302) (340) (2 042)
Other investing
activities (30) 22 73
Cash flow before
financing activities (416) (171) (1 635)
Cash provided by
financing activities 376 116 1 569
Adjustments (29) 7 7
Decrease in cash
and marketable
securities (69) (48) (59)
Jan-Jun Jan-Jun Jan-Dec
GROUP KEY FIGURES 2003 2002 2002
Operating profit
margin, % 1.8 8.5 4.8
Return on capital
employed, % 2.3 14.7 7.0
Return on
shareholders' equity, % neg. 17.0 8.0
Capital employed
at end of period,
EUR million 4 687 3 443 4 331
Net interest-bearing
debt at end of
period, EUR million 2 873 1 229 2 385
Equity-to-assets ratio
at end of period, % 1) 28.3 41.2 31.1
Debt-to-equity ratio
at end of period, % 158.3 55.5 122.6
Earnings per share
(excluding extraordinary
items), EUR (0.10) 0.94 1.15
Earnings per share, EUR (0.10) 0.94 1.15
Average number of
shares outstanding,
in thousands 2) 171 381 136 731 137 658
Fully diluted
earnings per share
(excl. extraordinary
items), EUR (0.10) 0.94 1.14
Fully diluted average
number of shares,
in thousands 2) 172 187 137 741 139 293
Shareholders' equity
per share at end
of period, EUR 10.34 11.70 11.14
Number of shares
outstanding at
end of period,
in thousands 2) 171 540 137 082 171 111
Capital expenditure,
EUR million 3) 302 340 2 042
Depreciation,
EUR million 4) 150 131 264
Average personnel
for the period 21 667 19 648 20 196
1) The negative goodwill is netted against assets.
2) The number of own shares repurchased is excluded.
3) The acquisition of AvestaPolarit shares is included.
4) The amortization of negative and positive goodwill is
excluded.
NOTES TO THE INCOME STATEMENT AND BALANCE SHEET
Shares and share capital
The total number of Outokumpu Oyj shares was 172 663 222 and
the share capital amounted to EUR 293.5 million on June 30,
2003.
Bonds relating to the subordinated bond loan have been
converted into 1 046 654 shares by June 30, 2003. No 1998
management option warrants have been converted into shares. The
number of Outokumpu Oyj shares may be increased to a maximum of
176 294 565 following the share subscriptions under the
convertible bonds to personnel and the 1998 management option
program.
In February 2003, Outokumpu Oyj transferred 282 660 treasury
shares to the persons participating in the 2000 share
remuneration scheme for management. After minor adjustments to
the number of transferred shares, Outokumpu Oyj held a total of
1 123 440 treasury shares on June 30, 2003 with total account
equivalent value of EUR 1.9 million. This equals to 0.6% of the
share capital and the total voting rights of the Company.
The Annual General Meeting of April 3, 2003 approved a stock
option program for management. Under the terms and conditions
of the stock option program, altogether 5 100 000 stock options
will be issued entitling their holders to subscribe for 5 100
000 new shares in the Company during the years 2006 and 2011.
As a result of the share subscriptions with the 2003 stock
options, the share capital of Outokumpu Oyj may be increased by
a maximum of EUR 8 670 000 and the number of shares by a
maximum of 5 100 000 shares. The shares that can be subscribed
with the 2003 stock options equal to 2.9% of the Company's
shares and voting rights following the potential share capital
increase.
In June 2003, the Board of Directors decided the earnings
criteria on the basis of which stock options 2003A will be
distributed to 118 key persons of the Outokumpu Group in spring
2004. The earnings criteria comprise the Group's earnings per
share (EPS), share price development, and additionally gearing
for the Group Executive Committee members. A total maximum of 1
700 000 Outokumpu Oyj shares can be subscribed for with the
2003A stock options between September 1, 2006 and March 1,
2009. The subscription price for a stock option will be the
trading volume weighted average of the Outokumpu share on the
Helsinki Exchanges between December 1, 2003 and February 29,
2004.
Authorizations of the Board of Directors
The Board of Directors has a valid authorization by the Annual
General Meeting of April 3, 2003 to repurchase and transfer the
Company's own shares. Shares may be repurchased through
purchases in public trading on the Helsinki Exchanges at the
market price prevailing at the time of the purchase. The
maximum number of shares to be repurchased or transferred is 8
632 955, which equals 5% of the total number of shares of the
Company registered on April 3, 2003. Own shares can be
repurchased for improving the Company's equity structure or to
be used as consideration when acquiring assets for the
Company's business or as consideration in possible corporate
acquisitions, in the manner and to the extent decided by the
Board of Directors. Repurchased shares may also be used as a
part of incentive and bonus schemes directed to the personnel
of the Company. Authorizations to repurchase and transfer the
Company's own shares are valid until AGM in 2004, however no
longer than April 2, 2004. By July 24, 2003 the Board of
Directors had not used these authorizations.
The Board of Directors has a valid authorization by the Annual
General Meeting of April 3, 2003 to increase the share capital
through an issue of new shares, stock options, option warrants
and/or convertible bonds. The share capital may be increased by
no more than EUR 29 352 050 and the aggregate maximum number of
new shares shall not exceed 17 265 911 shares. This equals 10%
of the share capital and voting rights of the Company
registered on April 3, 2003. By July 24, 2003 the Board of
Directors had not used this authorization.
Jan-Jun Jan-Jun Jan-Dec
EUR million 2003 2002 2002
Unusual items
Gain on the sale
of the real
estate in Espoo - - 13
Refund of
actuarial surplus
Outokumpu Oyj - - 3
Other companies - - 1
Refund of pension
surplus from Henki-Sampo,
Outokumpu Oyj - - 2
Final settlement
on the sale of the
Harjavalta nickel refinery - - (6)
Write down of
reactors at Kokkola 0 - (4)
Capital gain on
AvestaPolarit Oyj Abp
shares - 13 14
AvestaPolarit's
insurance compensation - 20 20
Restructuring provision
of AvestaPolarit - (16) (32)
Additional amortization
of negative goodwill
of AvestaPolarit - 16 32
Gain on the sale of
the Pyhäsalmi mine - 6 6
0 39 49
Income taxes
Current taxes (8) (45) (53)
Deferred taxes 2 (15) 0
(6) (60) (53)
Commitments Jun 30 Jun 30 Dec 31
EUR million 2003 2002 2002
Mortgages and pledges
To secure borrowings
of Group companies 145 105 119
Guarantees
On behalf of
associated companies 16 8 7
On behalf of
other parties 39 19 41
55 27 48
Minimum future lease
payments on
operating leases 128 134 133
Open derivative instruments
Carrying Fair Contract amounts
value value
Jun 30 Jun 30 Jun 30 Dec 31
EUR million 2003 2003 2003 2002
Financial derivatives
Forward foreign
exchange contracts 22 22 1 740 1 100
Currency options
Purchased 3 3 120 60
Written 0 0 25 60
Currency swaps (3) (4) 40 60
Interest rate swaps (2) (2) 220 70
Metal derivatives 1)
Forward and futures
copper contracts 1 1 122 900 121 200
Forward and futures
nickel contracts 2 3 5 400 2 200
Forward and futures
zinc contracts 1 1 115 400 197 300
Zinc options
Purchased 0 0 1 500 3 000
Written 0 0 1 500 3 000
Forward and futures
aluminium contracts 0 0 2 500 1 300
Forward and futures
gold contracts 0 0 57 200 63 400
Forward and futures
silver contracts 0 0 336 700 529 300
Electricity
derivatives 2)
Traded electricity
forwards and futures - 0.7 0.2 0.2
Other financial
contracts - 7.2 4.0 4.5
1) Contract amounts of base metal derivatives in tonnes and
precious metal derivatives in troy ounce.
2) Contract amounts of electricity derivatives in TWh.
The derivate transactions have been made for hedging purposes.
The market value of derivatives indicates the result of those
transactions if the deals were closed at the balance sheet
date. The realized gains and losses of derivative instruments
are booked in the income statement according to hedge
accounting principle i.e. against the underlying transaction.
The carrying amount of forward foreign exchange contracts,
currency options and currency swaps include unrealized gains
and losses relating to hedges of firm and anticipated
commitments, which have been deferred.
KEY FINANCIAL INDICATORS BY QUARTER
EUR million I/02 II/02 III/02 IV/02 I/03 II/03
Net sales
Stainless Steel
Coil Products 599 628 517 584 682 667
Special Products 325 375 299 312 349 327
North America 71 72 60 64 64 59
Others (226) (252) (205) (221) (219) (202)
Stainless
Steel total 769 823 671 739 876 851
Copper
Americas 90 93 81 76 74 66
Europe 142 144 120 120 112 109
Automotive Heat
Exchangers 61 74 63 58 59 62
Appliance Heat
Exchangers & Asia 73 92 85 101 121 128
Harjavalta Metals 96 103 87 105 93 88
Others (53) (54) (44) (44) (50) (51)
Copper total 409 452 392 416 409 402
Zinc 99 120 101 98 93 95
Technology 71 114 90 124 88 81
Other operations 89 90 65 92 87 99
Intra-group sales (61) (68) (59) (78) (70) (89)
The Group 1 376 1 531 1 260 1 391 1 483 1 439
Operating profit
Stainless Steel
Coil Products 54 60 16 32 45 35
Special Products 9 26 1 (8) 0 2
North America 1 3 1 (2) (1) 0
Others 11 14 8 6 13 6
AvestaPolarit
total 75 103 26 28 57 43
Amortization of
positive goodwill (6) (22) (7) (7)
Stainless Steel
total 75 103 20 6 50 36
Copper
Americas 7 6 1 (0) 3 1
Europe 2 6 (2) 0 (7) (0)
Automotive Heat
Exchangers 4 7 5 5 4 4
Appliance Heat
Exchangers & Asia 5 4 (2) (6) 2 7
Harjavalta Metals 8 (1) 2 5 3 (2)
Others (4) (1) 2 0 (1) (1)
Copper total 22 21 6 4 4 9
Zinc 4 1 (4) 2 5 2
Technology (8) 5 (1) 8 (9) (4)
Other operations 2 43 (21) (6) (23) (17)
Intra-group items 0 (22) 6 1 1 (1)
The Group 95 151 6 15 28 25
Equity earnings in
associated companies (0) (2) (3) (2) (3) (3)
Financial income
and expenses (11) 10 (21) (25) (29) (28)
Profit (loss) before
extraordinary items 84 159 (18) (12) (4) (6)
Income taxes (12) (48) (12) 19 (1) (5)
Minority interest
in earnings (26) (28) 50 3 0 (1)
rofit (loss) for
the period 46 83 20 10 (5) (12)
GROUP KEY FIGURES BY
QUARTER
I/02 II/02 III/02
Operating profit
margin, % 6.9 9.9 0.5
Return on capital
employed, % 11.4 17.7 0.7
Return on shareholders'
equity, % 13.6 20.1 neg.
Capital employed
at end of period,
EUR million 3 393 3 443 4 083
Net interest-bearing
debt at end of
period, EUR million 1 207 1 229 2 414
Equity-to-assets
ratio at end of
period, % 1) 42.2 41.2 27.7
Debt-to-equity ratio
at end of period, % 55.3 55.5 144.7
Earnings per share
(excluding extraordinary
items), EUR 0.34 0.60 0.15
Earnings per
share, EUR 0.34 0.60 0.15
Average number of
shares outstanding,
in thousands 2) 136 278 136 774 137 138
Shareholders' equity
per share at end
of period, EUR 11.87 11.70 11.78
Number of shares
outstanding at
end of period,
in thousands 2) 136 278 137 082 137 168
Capital expenditure,
EUR million 3) 146 194 1 403
Depreciation,
EUR million 4) 67 64 62
Average personnel
for the period 19 312 19 727 20 886
1) The negative goodwill is netted against assets.
2) The number of own shares repurchased is excluded.
3) The acquisition of AvestaPolarit shares is included.
4) The amortization of negative and positive goodwill is
excluded.
IV/02 I/03 II/03
Operating profit
margin, % 1.0 1.9 1.8
Return on capital
employed, % 1.3 2.5 2.2
Return on shareholders'
equity, % 1.6 neg. neg.
Capital employed
at end of period,
EUR million 4 331 4 528 4 687
Net interest-bearing
debt at end of
period, EUR million 2 385 2 624 2 873
Equity-to-assets
ratio at end of
period, % 1) 31.1 29.9 28.3
Debt-to-equity ratio
at end of period, % 122.6 137.8 158.3
Earnings per share
(excluding extraordinary
items), EUR 0.06 (0.03) (0.07)
Earnings per
share, EUR 0.06 (0.03) (0.07)
Average number of
shares outstanding,
in thousands 2) 140 498 171 375 171 534
Shareholders' equity
per share at end
of period, EUR 11.14 10.86 10.34
Number of shares
outstanding at
end of period,
in thousands 2) 171 111 171 534 171 540
Capital expenditure,
EUR million 3) 299 178 124
Depreciation,
EUR million 4) 71 75 75
Average personnel
for the period 21 173 21 242 22 064
1) The negative goodwill is netted against assets.
2) The number of own shares repurchased is excluded.
3) The acquisition of AvestaPolarit shares is included.
4) The amortization of negative and positive goodwill is
excluded.
