OUTOKUMPU TO COUNTER WEAK MARKET CONDITIONS WITH DECISIVE ACTIONS TO IMPROVE PROFITABILITY AND CASH
OUTOKUMPU OYJ STOCK EXCHANGE RELEASE SEPTEMBER 26, 2005 AT 11.00 AM
OUTOKUMPU TO COUNTER WEAK MARKET CONDITIONS WITH DECISIVE ACTIONS TO IMPROVE PROFITABILITY AND CASH FLOW Current difficult market conditions push Outokumpus third quarter profitability down. To counter the current market situation Outokumpu fills in Tornio capacity by transferring new orders from Coil Products Sheffield, and commences group-wide cost reduction initiatives. Also, financial targets for the longer-term operational excellence programs are confirmed. Larger than planned production cutbacks turn third quarter negative Although the long-term market fundaments for stainless steel are estimated to remain healthy demand is expected to grow faster than with other metals the short to medium-term market situation is weakened by de-stocking, as well as roll-out of new capacity especially in China. The oversupply in the market has driven and kept the stainless steel base prices at a very low level, which mainly effects Outokumpus standard grade volume production. During the third quarter Outokumpu has cut back its production by some 150 000 tonnes which is 50 000 tonnes more than announced in the second quarter interim report. In the short-term the current market situation and the larger production cutbacks mean that Outokumpus third quarter profitability will be clearly weaker than in the third quarter 2004 as earlier announced, and that operating profit is now expected to be negative. The order intake has improved in September and the base price erosion seems to have stopped. Nevertheless, due to the negative third quarter and current market uncertainty, the full year 2005 operating profit is estimated to be clearly lower than in 2004. Immediate transfer of new orders from Coil Products Sheffield to fill Tornio capacity Outokumpu has now the full new expanded capacity available in Tornio, which makes Tornio, the largest single-site stainless operation, a clear cost leader. However, to get full benefits from Tornios cost efficiency, the plant needs to be run as close to capacity as possible. Therefore, as a temporary measure, with immediate effect, all new orders (excluding bright annealed grades) usually produced at Coil Products Sheffield (CPS) will be transferred to Tornio. This arrangement will be re-evaluated at the end of this year. The transfer of new orders to Tornio combined with an already low order load at the Sheffield melt shop (SMACC) and CPS will necessitate an immediate review of shift levels at CPS and SMACC which supplies slabs to CPS as part of its production. Consultation with the local trade unions will commence without delay in this respect. All customer contacts will remain unchanged and Outokumpu will continue to focus on delivering to customers the best possible service. Financial targets confirmed for operational excellence programs Outokumpu's vision to be the undisputed number one in stainless with success based on operational excellence was announced in January this year. Operational excellence comprises the commercial and production excellence programs that were launched in April this year when the new business organization of the Group came into effect. The commercial excellence program covers all the business units and sales companies of Outokumpu. The program will help shift the Group increasingly towards customer orientation and a one-company operating model. Through key account management practices, sales force training, as well as by improving internal effectiveness in areas such as pricing management, the program seeks to significantly improve the value Outokumpu is able to provide to its customers, as well as to its own business performance. The commercial excellence program will have close links to the production excellence program to fully leverage all improvement opportunities. Production excellence is a very practical program to improve Outokumpu´s production activities. Objectives for the program are to improve health, safety and environmental performance, raw material and equipment efficiency, as well as benchmark and use best practices. The program has started from the Groups three melting shops and the first improvement teams have already been established. The program will next be expanded to cold rolling operations. After three years the program is launched throughout the Group. The total combined benefits from the commercial and production excellence programs are estimated to amount to EUR 40 million in 2007, EUR 80 million in 2008 and EUR 160 million annually in perpetuity. Decisive program to improve profitability and cash flow to complement operational excellence To complement the longer-term operational excellence program and to counter the current market situation Outokumpu has decided to commence a decisive program to improve profitability and cash flow. The improvement program will have three components: fixed cost reduction, reduced capital expenditure and tight working capital management. The fixed cost reduction will be implemented in all of the Groups stainless business units as well as Corporate Management and Group functions. The targeted 10% reduction of fixed costs in each unit will result to some EUR 100 million Group-level operating profit improvement annually. The units have until the end of October 2005 to prepare for their plans and thereafter implementation will start immediately after the employee negotiations have been completed. The program is addressing all cost elements, including personnel costs. The exact implications on personnel will be defined during the local employee and union negotiations. The plan is to have the reduced fixed cost running rate in place during the second half of 2006, and with full effect in 2007. The Groups capital expenditure for 2006 will be cut to absolute minimum to include only some maintenance investments and already committed other investments, to an estimated total of EUR 175 million. Capital expenditure for 2007 will be kept at the same level, i.e. some EUR 50 million lower than the depreciation level of EUR 220 million. The tight working capital management will continue to reduce the inventory levels. It is also to be noted that, today, some EUR 200 to 300 million extra is tied up due to high raw material prices. CEO Juha Rantanen says: "These immediate and short-term actions that we have initiated to complement the longer-term excellence programs are aimed at ensuring that Outokumpu is financially robust even in current difficult market conditions. The goal is to maintain our financial flexibility to be able to capture growth and development opportunities in the years to come." For further information, please contact: Karri Kaitue, Deputy CEO, tel. +358 9 421 5506, karri.kaitue@outokumpu.com Kari Lassila, Senior Vice President IR and Communications, tel. +358 9 421 2555, kari.lassila@outokumpu.com Eero Mustala, Senior Vice President Corporate Communications, tel. +358 9 421 2435, eero.mustala@outokumpu.com OUTOKUMPU OYJ Corporate Management Eero Mustala Senior Vice President - Corporate Communications tel. +358 9 421 2435, mobile +358 40 504 5146, fax +358 9 421 2125 e-mail: eero.mustala@outokumpu.com