Outokumpu Annual Accounts Bulletin 2009 - excep...

FINANCIAL STATEMENT BULLETIN February 3, 2010 9.00 am EET Year 2009 highlights - Operating profit was EUR -438 million (2008: EUR -63 million), underlying operational result some EUR -340 million (2008: EUR 305 million) - Strong cash flow of EUR 198 million due to working capital reduction - Balance sheet remained relatively strong, gearing at 48.2% (2008: 38.4%), well below target of less than 75% - The Board of Directors is proposing a dividend of EUR 0.35 per share (2008: EUR 0.50) - Cost cutting programme delivering EUR 185 million of savings, ahead of plan Fourth quarter 2009 highlights - Operating profit of EUR -29 million (III/2009: EUR -65 million) - EBITDA EUR 26 million, operative cash flow EUR -108 million - No major raw material-related inventory gains, underlying operational result EUR -29 million (III/2009: EUR -82 million) - Stainless steel deliveries at 277 000 tons as a result of weak demand Group key figures     IV/09 III/09 IV/08 2009 2008 --------------------------------------------------------------------------- Sales EUR million 728 587 966 2 611 5 474 Operating profit EUR million -29 -65 -271 -438 -63 EBITDA EUR million 26 2 -217 -212 149 Non-recurring items in operating profit EUR million - -15 -17 -20 -83 Profit before taxes EUR million -36 -81 -298 -474 -134 Non-recurring items in financial income and expenses EUR million - - -9 - -21 Net profit for the period from continuing operations EUR million -4 -55 -228 -332 -110 Net profit for the period EUR million -6 -56 -233 -336 -189 Earnings per share from continuing operations EUR -0.03 -0.30 -1.27 -1.83 -0.61 Earnings per share EUR -0.04 -0.31 -1.30 -1.86 -1.05 Return on capital employed % -3.3 -7.6 -26.8 -11.7 -1.6 Net cash generated from operating activities 1) EUR million -108 -10 205 198 664 Capital expenditure, continuing operations EUR million 82 55 129 245 544 Net interest-bearing debt at end of period EUR million 1 183 1 014 1 072 1 183 1 072 Debt-to-equity ratio at end of period % 48.2 41.4 38.4 48.2 38.4 Stainless steel deliveries 1 000 tons 277 238 261 1 030 1 423 Stainless steel base price 2) EUR/ton 1 297 1 307 1 045 1 161 1 185 Personnel at the end of period, continuing operations   7 606 7 699 8 471 7 606 8 471 --------------------------------------------------------------------------- 1) Cash flows presented for continuing operations 2) Stainless steel: CRU - German base price (2 mm cold rolled 304 sheet). SHORT-TERM OUTLOOK No major improvement in the underlying demand for stainless steel is yet visible. Distributors' cautious buying behaviour continued over the year-end. During the past few weeks, order intake has however been more encouraging. Lead times on standard grades for mill-deliveries are normal at 6-8 weeks. Inventory levels at distributors in Europe are estimated to be at normal levels. Outokumpu's delivery volumes of stainless steel in the first quarter are expected to be at the same level or slightly higher than in the fourth quarter of 2009 (277 000 tons). Base prices began to decline during the fourth quarter 2009 but stabilized around the year-end. Thus, Outokumpu's average base prices for all flat products in the first quarter of 2010 are expected to be 50-100 EUR/ton lower than the average in the fourth quarter. Currently Outokumpu sees potential for some base price increases. Outokumpu's underlying operational result in the first quarter is expected to be at the same level or somewhat weaker than in the fourth quarter of 2009. If metal prices remain at current levels, no major raw material-related inventory gains or losses are anticipated. Cash flow is expected to remain negative in the first quarter without any major impact on gearing, which will remain well below the Group's set maximum level of 75%. CEO Juha Rantanen: "Year 2009 was a very difficult one for the stainless steel industry. Dramatic drop of end demand, representing an estimated 26% decline in Europe, had a major negative impact on Outokumpu. We were successful in reducing our costs, however, this effort was not sufficient to compensate for the volume decline. In spite of external uncertainties, we stay firm with our plans. Priorities for 2010 are clear; restoring profitability, continued safety improvement, strategy implementation and delivering of the Excellence Programmes. These longer term initiatives build the foundation for our future results." The attachments present the Management analysis of the fourth quarter 2009 operating result and a summary of the Review by the Board of Directors for January-December 2009 as well as extracts from the financial statements.All full year figures are audited. For further information, please contact: Päivi Lindqvist, SVP - Communications and IR tel. +358 9 421 2432, mobile +358 40 708 5351 paivi.lindqvist@outokumpu.com <mailto:paivi.lindqvist@outokumpu.com> Ingela Ulfves, VP - Investor Relations and Financial Communications tel. +358 9 421 2438, mobile +358 40 515 1531 ingela.ulfves@outokumpu.com <mailto:ingela.ulfves@outokumpu.com> Esa Lager, CFO tel +358 9 421 2516 esa.lager@outokumpu.com <mailto:esa.lager@outokumpu.com> News conference and live webcast today at 1.00 pm A combined news conference, conference call and live webcast concerning the annual accounts 2009 will be held on February 3, 2010 at 1.00 pm EET (6.00 am US EST, 11.00 am UK time, 12.00 pm CET) at Hotel Kämp, conference room Akseli Gallen-Kallela, Pohjoisesplanadi 29, 00100 Helsinki, Finland. To participate via a conference call, please dial in 5-10 minutes before the beginning of the event: UK: +44 20 3043 2436 US & Canada: +1 866 458 4087 Sweden: +46 8 505 598 53 Password: Outokumpu The news conference can be viewed live via Internet at www.outokumpu.com. Stock exchange release and presentation material will be available before the news conference at www.outokumpu.com/Investors < http://www.outokumpu.com/Investors> An on-demand webcast of the news conference will be available at www.outokumpu.com as of February 3, 2010 at around 3.00 pm EET. OUTOKUMPU OYJ Corporate Management Ingela Ulfves VP - Investor Relations and Financial Communications tel. + 358 9 421 2438, mobile +358 40 515 1531 ingela.ulfves@outokumpu.com www.outokumpu.com < http://www.outokumpu.com/> MANAGEMENT ANALYSIS - FOURTH QUARTER 2009 OPERATING RESULT Group key figures EUR million   I/08 II/08 III/08 IV/08 2008 -------------------------------------------------------------------- Sales General Stainless   1 304 1 222 933 687 4 147 Specialty Stainless   786 778 630 512 2 705 Other operations   64 63 69 62 258 Intra-group sales   -465 -514 -362 -295 -1 636 -------------------------------------------------------------------- The Group   1 689 1 549 1 270 966 5 474 Operating profit General Stainless   81 125 -35 -177 -6 Specialty Stainless   42 44 -63 -123 -101 Other operations   -20 4 29 25 38 Intra-group items   -3 1 3 4 6 -------------------------------------------------------------------- The Group   100 174 -66 -271 -63 EUR million   I/09 II/09 III/09 IV/09 2009 -------------------------------------------------------------------- Sales General Stainless   476 501 496 592 2065 Specialty Stainless   371 278 258 332 1239 Other operations   66 58 56 62 243 Intra-group sales   -233 -220 -224 -259 -935 -------------------------------------------------------------------- The Group   679 617 587 728 2611 Operating profit General Stainless   -157 -52 -38 -12 -259 Specialty Stainless   -82 -37 -21 -10 -149 Other operations   -12 -5 -4 -9 -31 Intra-group items   2 0 -3 2 1 -------------------------------------------------------------------- The Group   -249 -94 -65 -29 -438 Stainless steel deliveries 1 000 tons   I/08 II/08 III/08 IV/08 2008 -------------------------------------------------------------------- Cold rolled   228 192 177 141 739 White hot strip   120 94 64 51 330 Quarto plate   33 35 27 25 120 Tubular products   19 19 16 16 70 Long products   15 15 15 11 55 Semi-finished products   34 35 25 16 109 -------------------------------------------------------------------- Total deliveries   449 391 323 261 1 423 1 000 tons   I/09 II/09 III/09 IV/09 2009 -------------------------------------------------------------------- Cold rolled   133 145 124 143 545 White hot strip   59 69 66 69 263 Quarto plate   19 18 14 16 67 Tubular products   16 13 12 12 53 Long products   10 9 11 10 40 Semi-finished products   10 14 12 27 63 -------------------------------------------------------------------- Total deliveries   247 268 238 277 1030 Market prices and exchange rates     I/08 II/08 III/08 IV/08 2008 -------------------------------------------------------------------- Market prices 1) Stainless steel   Base price EUR/t 1 243 1 307 1 143 1 045 1 185   Alloy surcharge EUR/t 1 702 1 888 1 582 1 293 1 616   Transaction price EUR/t 2 945 3 195 2 725 2 338 2 801 Nickel USD/t 28 957 25 682 18 961 10 843 21 111   EUR/t 19 335 16 440 12 599 8 227 14 353 Ferrochrome (Cr-content) USD/lb 1.21 1.92 2.05 1.85 1.76   EUR/kg 1.78 2.71 3.00 3.09 2.63 Molybdenum USD/lb 33.81 33.40 33.75 17.29 29.56   EUR/kg 49.77 47.14 49.45 28.92 44.31 Recycled steel USD/t 393 565 465 181 401   EUR/t 262 361 309 138 273 Exchange rates EUR/USD   1.498 1.562 1.505 1.318 1.471 EUR/SEK   9.400 9.352 9.474 10.234 9.615 EUR/GBP   0.757 0.793 0.795 0.839 0.796 --------------------------------------------------------------------     I/09 II/09 III/09 IV/09 2009 -------------------------------------------------------------------- Market prices 1) Stainless steel   Base price EUR/t 925 1 117 1 307 1 297 1 161   Alloy surcharge EUR/t 893 634 923 1 049 875   Transaction price EUR/t 1 818 1 751 2 229 2 346 2 036 Nickel USD/t 10 471 12 920 17 700 17 528 14 655   EUR/t 8 036 9 478 12 375 11 860 10 507 Ferrochrome (Cr-content) USD/lb 0.79 0.69 0.89 1.03 0.85   EUR/kg 1.34 1.12 1.37 1.54 1.34 Molybdenum USD/lb 9.15 9.41 15.36 11.76 11.42   EUR/kg 15.49 15.22 23.67 17.54 18.05 Recycled steel USD/t 207 199 236 250 223   EUR/t 159 146 165 169 160 Exchange rates EUR/USD   1.303 1.363 1.430 1.478 1.395 EUR/SEK   10.941 10.781 10.424 10.351 10.619 EUR/GBP   0.909 0.879 0.872 0.905 0.891 -------------------------------------------------------------------- 1) Sources of market prices: Stainless steel: CRU - German base price, alloy surcharge and transaction price (2 mm cold rolled 304 sheet), estimates for deliveries during the period. Nickel: London Metal Exchange (LME) cash quotation Ferrochrome: Metal Bulletin - Quarterly contract price, Ferrochrome lumpy chrome charge, basis 52% chrome Molybdenum: Metal Bulletin - Molybdenum oxide - Europe Recycled steel: Metal Bulletin - Steel scrap HMS 1&2 fob Rotterdam Slight recovery of volumes for stainless steel continued in Europe After a moderate improvement in the global market conditions for stainless steel in the third quarter of 2009, apparent consumption of flat products in the fourth quarter of 2009 is estimated to have increased a further 6% in Europe but decreased by 11% globally. In China the decline was 25%. Compared to the fourth quarter of 2008, apparent consumption of flat products is estimated to have increased by 24% globally with an increase of 8% in Europe and very strong growth of 46% in China. Compared to the third quarter of 2009, fourth-quarter production of stainless steel is estimated to have declined by 7% in Europe and 10% globally, with production in China down by 15%. Compared to the fourth quarter of 2008, production of stainless is estimated to have been flat in Europe but to have grown by 30% globally, with significant growth of 63% in China. According to CRU, the average base price for 2mm cold rolled 304 stainless steel sheet in Germany was 1 297 EUR/ton in the fourth quarter (III/2009: 1 307 EUR/ton). The alloy surcharge increased somewhat in the fourth quarter and was on average 1 049 EUR/ton (III/2009: 923 EUR/ton). The average transaction price during the quarter was 2 346 EUR/ton (III/2009: 2 229 EUR/ton). The price difference between Europe and Asia diminished slightly during the review period. (CRU) Among the alloying elements, global demand for nickel in the fourth quarter was 7% lower than in the previous quarter. Supplies of nickel market in the last quarter of 2009 continued to be constrained by production cuts and strikes, and production was 3% lower than in the third quarter. Nickel inventories at the LME, however, were at historically high levels. The nickel price traded in 15 800 - 19 500 range USD/ton during the quarter and ended the year at 18 480 USD/ton. The average nickel price in the quarter was 17 528 USD/ton (III/2009: 17 700 USD/ton). In January 2010, the price of nickel was in the range 17 700 - 19 000 USD/ton. Compared to the third quarter, global demand for ferrochrome in the fourth quarter was down by 9% while production was up by 13%. The quarterly contract price for ferrochrome in the fourth quarter was 1.03 USD/lb (III/2009: 0.89 USD/lb) and has preliminarily been settled at 1.01 USD/lb for the first quarter of 2010. The price of molybdenum also fell and averaged 11.76 USD/lb (III/2009: 15.36 USD/lb) in the fourth quarter. The price of recycled steel was 250 USD/ton in the fourth quarter (III/2009: 236 USD/ton). Operating profit in the fourth quarter of 2009 Group sales in the fourth quarter totalled EUR 728 million (III/2009: EUR 587 million). Deliveries of stainless steel increased by 16% and totalled 277 000 tons (III/2009: 238 000 tons). Capacity utilization in the fourth quarter was slightly above 60%. Operating loss in the fourth quarter totalled EUR 29 million (III/2009: EUR -65 million). No major raw material-related inventory gains or losses (III/2009: EUR 32 million) are included in the operating loss.  Operating loss in the third quarter included some EUR 32 million of raw material-related inventory gains and EUR 15 million of non-recurring write-downs. Underlying operational loss in the fourth quarter improved to EUR 29 million (III/2009: EUR -82 million) mainly as a result of both higher delivery volumes and better prices. Outokumpu's average base prices for flat products realized in the fourth quarter increased by 80 EUR/ton but were lower than the base prices reported by CRU for German 304 sheet. The Group's cost-saving programmes, initiated in December 2008, delivered more than earlier estimated EUR 150 million. The fixed-cost savings achieved in 2009 totalled EUR 185 million, half of which are expected to be sustainable.  Some EUR 20 million of total cost savings are related to the closure of Sheffield Special Strip in the UK. Return on capital employed in the fourth quarter was -3.3% (III/2009: -7.6%). Earnings per share totalled EUR -0.04 (III/2009: EUR -0.31). Net cash from operating activities in continuing operations was negative at EUR -108 million (III/2009: EUR -10 million) mainly because of somewhat higher inventory levels. Capital expenditure in the fourth quarter totalled EUR 82 million (III/2009: EUR 55 million). Sales by General Stainless in the fourth quarter totalled EUR 592 million (III/2009: EUR 496 million), and deliveries totalled 250 000 tons (III/2009: 221 000 tons). Operating loss was EUR 12 million (III/2009: EUR -38 million) and includes a total of EUR 12 million of net-positive accounting items recorded at the year-end. Tornio Works posted a profit of EUR 22 million (III/2009: EUR -44 million). The Tornio Works operating profit includes EUR 35 million of positive accounting items related to the valuation of raw materials, fuels and supplies. Sales by Specialty Stainless in the fourth quarter totalled EUR 332 million (III/2009: EUR 258 million), and deliveries totalled 87 000 tons (III/2009: 75 000 tons). Operating loss was EUR 10 million (III/2009: EUR -21 million). Other operations posted an operating loss of EUR 9 million (III/2009: EUR -4 million) in the fourth quarter. Additional restructuring actions at OSTP In November 2009, Outokumpu decided on further restructuring action within Outokumpu Stainless Tubular Products (OSTP). The main effect will be the closure of Group operations in Veteli, Finland. Some production lines will be moved to Jakobstad in Finland and some to Örnskiöldsvik in Sweden. Fifty people are currently employed at Veteli, completion of changes is planned for the end of the first quarter of 2010. Events after the review period According to a seismic research report produced by the Geological Survey of Finland in late 2009, the mineral resources at the Kemi Mine could turn out to be significantly greater than earlier estimates. The intrusion containing chromium ore extends to a depth of 2-3 kilometres, possibly to four kilometres and the chromitite layer possibly extends to a depth of at least 2-2.5 kilometres or more. Proven ore reserves at the Kemi Mine total some 37 million tons and the quantity of mineral resources totals some 87 million tons (estimated to a depth of 1 kilometre). The new information indicates the existence of resources sufficient to allow centuries of mining activity even with doubled annual production volumes (the previous estimate was 70-80 years). Outokumpu's mineral resources will not be updated based on these findings. SUMMARY OF THE REVIEW BY THE BOARD OF DIRECTORS FOR 2009 Determined action taken as stainless steel markets hit by the global recession 2009 was an exceptional year for the stainless steel industry in many ways. The global recession had a significant impact on the industry, especially in Europe. During the first part of 2009, demand was extremely weak and stainless steel markets were characterized by heavy destocking. Some recovery occurred in the summer but markets softened again towards the end of the year. In 2009, China was the only market in which demand grew and production significantly increased. The very difficult market conditions in 2009 forced Outokumpu to take drastic short-term measures to cut costs and secure its balance sheet and liquidity. Cost-cutting actions included production cuts and personnel adjustments. The ongoing recession limited progress towards strategic targets and the Group postponed the majority of its planned investment programme. Outokumpu's strategy is aimed at achieving a more stable and profitable business model by increasing the share of sales to end-user and project customers as well as building more stable relationships with key distributor customers. Other objectives include increasing the proportion of value-added special grades and products as well as non-nickel containing grades of stainless steel. Group sales for 2009 totalled EUR 2 611 million (down by 52% from the previous year) and stainless steel deliveries were 1 030 000 tons, down by 28% from the level in 2008. Operating loss totalled EUR 438 million (2008: EUR -63 million) and underlying operational result was EUR -340 million (2008: EUR 305 million positive). Net cash from operating activities was good at EUR 198 million (2008: EUR 664 million). Return on capital employed was -11.7% (2008: EUR -1.6%) and gearing was 48.2% (2008: 38.4%). Although Outokumpu's financial target of a return on capital employed higher than 13% was not reached, gearing remained below the Group's target of less than 75%. Earnings per share totalled EUR -1.86 (2008: EUR -1.05). The Board of Directors is proposing to the Annual General Meeting 2010 that a dividend of EUR 0.35 per share be paid for 2009 (2008: EUR 0.50). Very weak stainless steel markets with historically low deliveries in Europe The global recession resulted in demand for stainless steel being very weak at the beginning of the year. Heavy destocking along the whole value chain resulted in significant production cuts by producers especially in Europe with capacity utilization at the historically extremely-low levels of 50-55%. Demand for stainless steel mainly from distributors, recovered somewhat in the summer and stabilised towards the end of the year. Metal prices were at very low levels at the beginning of the year but began to rise after the spring, mainly as a result of improving demand in China. Base prices, which had fallen to very low levels in historical terms, began to recover after the first quarter. Compared to 2008, apparent consumption of stainless steel in 2009 is estimated to have decreased by 29% in Europe and by 8% globally. In China, however, apparent consumption is estimated to have increased by 31%. The average German base price for 2mm 304 cold rolled sheet in 2009 was 1 161 EUR/ton, 2% lower than in 2008. The transaction price for stainless steel averaged 2 036 EUR/ton in 2009, 27% lower than in the previous year. The main reason for this was the much lower metal prices in 2009. (CRU) Sales and deliveries Sales EUR million 2009 2008 2007 ------------------------------------------------ General Stainless 2 065 4 147 5 321 Specialty Stainless 1 239 2 705 3 456 Other operations 243 258 237 Intra-group sales -935 -1 636 -2 101 ------------------------------------------------ The Group 2 611 5 474 6 913 Stainless steel deliveries 1 000 tons 2009 2008 2007 ------------------------------------------------ Cold rolled 545 739 703 White hot strip 263 330 314 Quarto plate 67 120 146 Tubular products 53 70 65 Long products 40 55 54 Semi-finished products 63 109 137 ------------------------------------------------ Total deliveries 1 030 1 423 1 419 Group sales for 2009 declined to EUR 2 611 million (2008: EUR 5 474 million) due to the very low delivery volumes and lower transaction prices for stainless steel. Delivery volumes declined to 1 030 000 tons (2008: 1 423 000 tons). Sales by General Stainless were down by 50% and sales by Specialty Stainless were down by 54%. The European share of Group sales was 74% in 2009 (2008: 78%). Asia and the Americas accounted for 14% (2008: 8%) and 10% (2008: 11%), respectively. Operating profit EUR million 2009 2008 2007 --------------------------------------------------------------------- Operating profit General Stainless -259 -6 220 Specialty Stainless -149 -101 337 Other operations -31 38 21 Intra-group items 1 6 11 --------------------------------------------------------------------- Operating profit -438 -63 589 Share of results in associated companies -12 -2 4 Financial income and expenses -25 -69 206 --------------------------------------------------------------------- Profit before taxes -474 -134 798 Income taxes 142 24 -138 --------------------------------------------------------------------- Net profit, continuing operations -332 -110 660 Net profit, discontinued operations -4 -79 -18 --------------------------------------------------------------------- Net profit for the financial year -336 -189 641 --------------------------------------------------------------------- Operating profit margin, % -16.8 -1.2 8.5 Return on capital employed, % -11.7 -1.6 13.9 Earnings per share from continuing operations, EUR -1.83 -0.61 3.63 Earnings per share, EUR -1.86 -1.05 3.52 Operating loss in 2009 totalled EUR 438 million (2008: EUR -63 million). In 2009, net non-recurring items of EUR -20 million were included in the operating loss (EUR 5 million of restructuring provisions mainly relating to Sweden and EUR 15 million of write-downs from the cancelled melt-shop capacity expansion in Avesta, Sweden). In 2008, non-recurring costs of some EUR 83 million were included in the operating loss. Raw material-related inventory losses of some EUR 78 million are included in the operating profit (2008: some EUR 285 million). Underlying operational result for 2009 was some EUR -340 million (2008: EUR 305 million). While extremely-low delivery volumes were the primary reason for the weak result, a somewhat negative price and product mix and a reduced contribution from ferrochrome production also had negative impacts. The cost savings achieved had a mitigating effect. Loss before tax totalled EUR 474 million (2008: EUR -134 million). The Group's cost-saving programmes, initiated in December 2008, delivered more than earlier estimated EUR 150 million. The fixed-cost savings achieved in 2009 totalled EUR 185 million, half of which are expected to be sustainable.  Some EUR 20 million of total cost savings are related to the closure of Sheffield Special Strip in the UK. Capital structure Key financial indicators on financial position EUR million 2009 2008 2007 ------------------------------------------------------------------- Net interest-bearing debt      Long-term debt 1 038 1 219 1 046      Current debt 705 581 464 Total interest-bearing debt 1 742 1 800 1 510 Interest-bearing assets -548 -711 -589 Net assets held for sale -11 -16 -132 ------------------------------------------------------------------- Net interest-bearing debt 1 183 1 072 788 Shareholders' equity 2 451 2 794 3 337 Return on equity, % -12.8 -6.2 20.0 Debt-to-equity ratio, % 48.2 38.4 23.6 Equity-to-assets ratio, % 50.6 52.4 56.5 Net cash generated from operating activities 1) -108 664 658 Net interest expenses 22 54 58 1) Cash flows presented for continuing operations During 2009 Outokumpu's net interest-bearing debt increased only marginally by EUR 110 million and totalled EUR 1 183 million at the end of 2009 (Dec 31, 2008: EUR 1 072 million). Outokumpu's balance sheet was relatively strong at the end of the year with gearing at 48.2% (Dec 31, 2008: 38.4%), well below the Group's target of below 75%. At the end of 2009, the Group's equity-to-assets ratio stood at 50.6%. In June 2009, Outokumpu signed a three-year EUR 900 million revolving credit facility. This committed credit facility for general corporate purposes replaced the five-year EUR 1 billion facility signed in June 2005. At the end of 2009 this facility was undrawn. In addition, two bilateral long-term revolving credit facilities amounting to more than EUR 200 million were signed in 2009. Consequently, Outokumpu has committed undrawn credit facilities totalling EUR 1.1 billion. Net cash generated from operating activities in continuing operations in 2009 was good and totalled EUR 198 million (2008: EUR 664 million). Cash released from working capital as a result of lower metal prices and reductions in inventory levels totalled EUR 548 million. Cash and cash equivalents totalled EUR 112 million (2008: EUR 224 million) at the end of the year. Capital expenditure and the postponed investment programme Capital expenditure EUR million 2009 2008 2007 ------------------------------------ General Stainless 129 332 57 Specialty Stainless 93 170 69 Other operations 23 42 64 ------------------------------------ The Group 245 544 190 Depreciation 211 206 204 Capital expenditure by the Group in 2009 totalled EUR 245 million. The largest investments in 2009 were the modernization of the No. 2 annealing and pickling line in Tornio, expansion of the service centre in Willich in Germany, establishment of a service centre in China, the doubling of production capacity in special grades at Nyby in Sweden and the expansion of quarto plate production capacity in New Castle in the US. The service centre in China is planned to start operation in the spring 2010 and the investment at New Castle is planned to be finalized at about the same time. In December 2008 as the global recession had started, Outokumpu decided to postpone almost its entire investment programme worth some EUR 1.5 billion for a period of at least 12 months. The programme included an expansion of ferrochrome production capacity in Finland, investments in bright-annealed production capacity at Tornio Works in Finland, expansion of quarto plate production capacity in Degerfors in Sweden, the expansion of melting capacity in Avesta in Sweden and the construction of service centres in Europe. In October, a decision was made to cancel the investment in expanded melting capacity at Avesta as no need for additional melting capacity is seen in the medium-term. Continuation of any project in the Group's investment programme is subject to a separate decision based on an updated feasibility study. Further decisions on the postponed investments will be made by the end of 2010. Excluding decisions on any new investment projects, capital expenditure by the Group in 2010 is expected to be below EUR 200 million. This figure includes annual capital expenditure on maintenance and the finalizing of some ongoing investment projects. Personnel adjustments As a response to the very weak demand for stainless steel because of the ongoing recession, Outokumpu took a number of actions to adjust to the poor market conditions. Production was cut back heavily and consequent adjustments of personnel numbers through both temporary and permanent layoffs were implemented. In Finland, the low order load resulted in temporary layoffs for most employees at the Tornio Works. Some 250 employees at the Kemi Mine and the Ferrochrome Works were temporarily laid off from March until the end of September. Approximately 1 600 employees working on other steel production lines, maintenance and support functions were temporarily laid off in sequences starting from March. In September, some 700 employees were taken back and the remaining 900 who had been laid off temporarily returned to work in October. Some 50 permanent job reductions have been made in Finland. In Sweden, a total of some 400 job reductions were made in 2009. The number of working shifts was reduced and related temporary lay-offs were implemented. In the UK, the closure of Sheffield Special Strip, reduced production in the Sheffield melt-shop and actions taken in the service centre and the sales company resulted in approximately 350 job reductions and temporary adjustments due to reduced working shifts. Approximately 150 job reductions were implemented in other countries. Operational Excellence programs Outokumpu's Operational Excellence programme was launched in 2005 and originally comprised Production and Commercial Excellence. In 2007, the programme was expanded to include Supply Chain Excellence. Targets included improving Group performance by EUR 40 million in 2007 and by EUR 80 million in 2008 (compared to 2005). The targeted benefits were achieved in both years and benefits totalling EUR 86 million were delivered in 2008. In 2009, the Operational Excellence programme delivered benefits totalling EUR 150 million compared to 2005. The original target of EUR 200 million by 2009 was not achieved mainly as a consequence of the very low delivery volumes of stainless steel and the lower metal prices. The original target of EUR 300 million of benefits in 2010 will not be reached considering the current run-rate of delivery volumes. However, Outokumpu's Operational Excellence programmes continue to be a high-focus area and the intention is to achieve higher benefits than in 2009 (EUR 150 million). Class actions regarding the sold fabricated copper products business In 2003, the European Commission issued its judgment on Outokumpu's participation in a European price-fixing and market-sharing cartel involving copper air-conditioning tubes during 1988-2001. A fine of EUR 18 million was imposed on the Group. In 2004, Outokumpu lodged an appeal with the Court of First Instance for Europe regarding the basis for the calculation and the level of the fine. According to a decision issued by the court in May 2009, the amount of the fine remains unchanged. In a cartel investigation concerning sanitary copper tubes, the European Commission issued its judgement in September 2004 and imposed a fine of EUR 36 million on the Group for participation in cartel activities. Outokumpu lodged an appeal with the Court of First Instance for Europe in 2004 regarding the level of the fine. In August 2009, Outokumpu paid the fine of EUR 36 million in advance. The final decision from the Court of First Instance concerning the sanitary tubes case is expected during 2010. In 2003, Outokumpu booked provisions for fines in both of these cases. Fines totalling EUR 54 million and interest totalling EUR 9 million was paid in 2009. Outokumpu exited the copper fabrication business by divesting a major part of the company's business in 2005 and the remainder in April 2008. Customs investigation of exports to Russia by Tornio Works In March 2007, Finnish Customs authorities initiated a criminal investigation into the Group's Tornio Works' export practices to Russia. It was suspected that a forwarding agency based in south-eastern Finland had prepared defective and/or forged invoices regarding the export of stainless steel to Russia. The preliminary investigation focused on possible complicity by Outokumpu Tornio Works in the preparation of defective and/or forged invoices by the forwarding agent. In June 2009, the Finnish Customs completed its preliminary investigation and forwarded the matter for consideration of possible charges to the prosecuting authorities. The process of considering possible charges is expected to be completed in the spring of 2010. Immediately after the Finnish Customs authorities began their investigations in 2007, Outokumpu initiated its own investigation into the trade practices connected with stainless steel exports from Tornio to Russia. In June 2007, based on its own investigation, a leading Finnish law firm Roschier Attorneys Ltd. concluded that it had not found evidence that any employees of Tornio Works or the Group had committed any of the crimes alleged by the Finnish Customs. Roschier has subsequently, at Outokumpu's request, examined the preliminary investigation material produced by the Finnish Customs' and concluded that it contains no evidence that any Outokumpu employees committed forgery or the alleged accounting offences by the Finnish Customs. Outokumpu's Auditor, KPMG Oy Ab, has also stated that suspicions related to the making of false financial statements are groundless. Outokumpu has stated that neither the Group nor its personnel have committed any of the crimes alleged by the Finnish Customs. Risk management Outokumpu operates in accordance with the risk management policy approved by the Board of Directors. The risk management policy defines the objectives, approaches and areas of responsibility in risk management activities. Risk management supports the Group's strategy and also helps to define a balanced risk profile from the perspective of shareholders as well as other stakeholders such as customers, suppliers, personnel and lenders. Outokumpu has defined risk to be anything that might have an adverse impact on activities that the company has undertaken to achieve its objectives. Risks can thus be threats, uncertainties or lost opportunities that relate to present or future operations. In 2009 risk workshops were implemented with management teams from most of the Group's business units and several corporate functions such as Energy and Legal Affairs and IPR. Workshops included the identification of different business, operational and financial risks, the evaluation and mitigation of these risks in connection with strategic planning and performance management processes. During the year, Outokumpu also initiated a systematic crises management programme. Corporate-level crises management teams were trained in the handling of situations presenting different challenges. No major damage to Group property or business interruptions occurred in 2009. The most significant risks realised during the year were connected with structural issues in stainless steel markets and the global recession, with the latter having an impact on steel markets and also on the Group's willingness and ability to implement planned investment projects. Strategic and business risks The most important identified strategic and business risks include structural overcapacity and weak market conditions affecting stainless steel production, fierce competition in stainless steel markets and Euro-centricity of Group operations. Demand for stainless steel remained depressed in Outokumpu's main served markets. Increased stainless steel production capacity, especially in China, is creating a situation of gradually developing global overcapacity. Outokumpu has taken actions to address these strategic and business risks by maintaining cost efficiency and delivery reliability in the Group's operations, developing its distribution channels and aiming to increase sales to end-users and building stable relationships with key distributors. During 2009 Outokumpu also expanded its operations in China by investing in a new service centre in Kunshan in Shanghai. Activities at this new facility will focus on special products and grades and operations will begin in the spring of 2010. Outokumpu continues to study ways of strengthening its position outside Europe in future years. Operational risks Operational risks arise as a consequence of inadequate or failed internal processes, employee actions, systematic or other events such as natural catastrophes and misconduct or crime. Key operational risks include major fires or accidents, variations in production performances, unsuccessful project implementation and a lack of progress towards achieving a strong corporate culture and a one-company approach. To minimise damage to property and business interruptions that could result from fire at Outokumpu's sites, the Group has systematic fire and security audit programmes in place. Part of this type of risk is covered by insurances. In 2009, some 40 security and fire-safety audits were carried out using the Group's own resources, often jointly with technical experts from insurers and insurance brokers. Outokumpu also continued developing its corporate security during 2009 with a focus on crisis management. Outokumpu has been systematically developing the performance of its operations through excellence initiatives. Even so, risks associated with not being able to adapt production capacity to meet wide fluctuations in demand can have an impact on the company's business. The Group is mitigating these types of risks in two ways: by expanding its Operational Excellence programmes; and by building on strong Group-level functions such as Supply Chain Management and Group Sales and Marketing to enhance strategy implementation. Outokumpu's aim is to achieve a strong and unified corporate culture throughout its organization. For all Group personnel, the approach is to create "One Outokumpu", but this type of cultural change can take time. While it provides a great opportunity to increase operational effectiveness by increasing cross-cultural cooperation, corporate cultures that are one-country based or too independent can have an adverse effect on progress from an operational perspective, endangering the achievement of strategic goals. The implementation of strong Group-level functions such as Supply Chain Management and Group Sales and Marketing is a vital component in driving forward the one-company -approach. Due to the global financial crisis and the weakness in stainless steel market almost the entire already-announced investment programme was postponed at the end of 2008. Some investments, such as the service centre expansion in Willich in Germany and the establishment of a new service centre in China are however continuing and will be finalized early in 2010. In preparation for the future, Outokumpu is aiming to further develop its project management methods to support the implementation of investment projects and to manage risks related to the Group's entire project portfolio. At the end of the third quarter, Outokumpu decided to permanently cancel the investment project which would have provided additional melting capacity in Avesta in Sweden. Financial risks Financial risks include market, liquidity, refinancing, country and credit risk. One consequence of the global economic crisis is that sales-related credit losses have increased to some extent; but much of these losses are covered by credit insurance. At the end of 2009, Outokumpu updated its principles concerning the management of country and credit risk. Implementation of these principles will take place gradually during 2010. A weak Swedish krona has been mainly beneficial for the Group because of a significant amount of krona-denominated fixed and variable cost. Changes in the price of nickel and the value of the US dollar have an impact on Group earnings, cash flows and the balance sheet. Outokumpu also has exposure to changes in interest rates, credit risk related to certain loan receivables and risks connected with equity prices. During 2009 Outokumpu hedged part of the forecast risk associated with cash flow in Swedish krona and sterling, hedged against rises in interest rates associated with fixed part of financing costs and continued nickel risk hedging to reduce the impacts of any price changes on earnings. Liquidity and refinancing risks are taken into account in capital management decisions and, when necessary, in making investment and other business decisions. In 2009, Outokumpu signed a three-year revolving credit facility of EUR 900 million. This facility was fully undrawn at the end of the year. Environment, Health and Safety Emissions to air and discharges to water remained within permitted limits and the breaches that occurred were temporary, were identified and caused only minimal environmental impact. Outokumpu is not a party in any significant juridical or administrative proceeding concerning environmental issues, nor is it aware of any realised environmental risks that could have a material adverse effect on the Group's financial position. At approximately 540 000 tons (2008: 820 000 tons), carbon dioxide emissions under the EU Emissions Trading Scheme were at a very-low level in 2009 due to reduced levels of production. During the year, the Group sold 454 000 tons (2008: 1 022 000 tons) of carbon dioxide allowances for EUR 6 million (2008: EUR 22 million). Outokumpu's carbon dioxide allowances in the UK, Sweden and Finland were proved sufficient for the Group's production. Occupational safety continues to be a major focus area within the Group and Outokumpu has a separate safety function responsible for safety management and development. In 2009, the lost-time injury rate (i.e. lost-time accidents per million working hours) was 5.9 (2008: 9.0), slightly higher than the Group's 2009 target of less than five. No severe accidents were reported in 2009. The target for 2010 is less than four. Corporate Responsibility In March 2009, Outokumpu was selected as a member of the Kempen/SNS Smaller Europe SRI Universe, a concept launched by Kempen Capital Management. Membership is only offered to companies with the very highest standards and codes of practice in three areas: business ethics, human resources and the environment. In September, the results of the annual review carried out for the Dow Jones World and Dow Jones STOXX Sustainability indexes by the Sustainable Asset Management Group (SAM) were published. Outokumpu retained its membership in both indices and received the highest possible score in two sustainability criteria: environmental reporting and occupational health and safety. Once again, Outokumpu received an award in 2009 for being Finland's best corporate responsibility reporter. Research and Development Group expenditure on research and development in 2009 totalled EUR 19 million or 0.7% of sales (2008: EUR 20 million and 0.4%). Outokumpu has research centres in Tornio in Finland and in Avesta in Sweden. Some process and technology development work is also carried out in production units. R&D operates in close cooperation with the Group's commercial organization and customers, and direct feedback regarding customer needs serves as input for further product development. The R&D function employed almost 200 professionals in 2009. Outokumpu also conducts research in collaboration with research institutes and universities. In 2009, the main focus was on further developing new low-nickel and nickel-free stainless steels to reducing the effects of volatile nickel prices. Much effort has been put into developing duplex grades which offer a good combination of strength and corrosion resistance. Ideal applications for duplex grades include large, heavy-wall tanks, where weight savings of as much as 20% can be achieved. Customers have shown growing interest in LDX 2101®. New applications are continually being developed and the production technology has been improved. Non-nickel ferritic grades represent another opportunity to reduce the influence of the nickel price on raw material costs. Optimum process parameters and product properties for standard ferritic grades have been studied intensively at production scale. The primary focus has been on surface quality, formability and corrosion resistance. Four different grades, mostly intended for use in indoor applications, kitchen utensils, domestic appliances and the transportation sector, are now part of the Group's product portfolio. Cr-Mn-Ni grades (200 series), a third opportunity to reduce the use of nickel, also represent an interesting alternative in many applications. The most common grade is 201, the chemistry of which has been modified by Outokumpu. The corrosion-resistant properties of this grade are almost equal to those of standard austenitic 304 (Cr-Ni), and it also features higher strength and good formability. In application development, the traditional focus has been on the process industries where stainless steel plays a dominant role in the manufacturing of industrial equipment used in the Pulp and Paper, Oil and Gas, Desalination and Chemical segments. Outokumpu's R&D experts provide both customers and the Group's commercial personnel with advice on product properties and material selection. The 10th edition of the Outokumpu Corrosion Handbook was published in the autumn. For more than 60 years, the handbook has been a reliable source of essential information for metallurgists, design engineers and fabricators around the world. In addition to new products and new applications for stainless steel, the Group's R&D operations focus on innovative manufacturing processes that reduce costs, result in lower emissions, shorten lead times and improve quality levels. The main subject of environmental research in 2009 was slag utilization. Studies of the properties of different slag products and the development of new applications continue. Personnel Personnel Dec. 31 2009 2008 2007 --------------------------------------- General Stainless 3 753 3 938 3 571 Specialty Stainless 3 361 4 006 4 099 Other operations 492 527 439 --------------------------------------- The Group 7 606 8 471 8 108 In 2009, the Group's continuing operations employed an average of 7 941 people (2008: 8 551) in some 30 countries. At the end of 2009, the number of people employed by the Group was 7 606 (2008: 8 471). The net decrease in the number of people employed was 865 (2008: increase of 363) caused by actions to adjust to the very weak stainless steel markets in 2009. Personnel expenses in 2009 totalled EUR 446 million (2008: EUR 520 million). Outokumpu's development programmes, including management development programmes and the Production Excellence training programme, continued during 2009. The first eight Stainless Pro Graduates completed their two-year programme and transferred to new positions within the Group. Seven Stainless Pro Graduates are expected to complete their training in August 2010. Almost all Group employees participated in Performance and Development Dialogues in 2009, but the goal of 100% participation was not achieved. The Outokumpu Personnel Forum (OPF) 2009 held its 18th annual meeting in Espoo, Finland. The Group Working Committee appointed by the OPF - a forum for continuing dialogue between personnel and management - met six times during 2009. The fifth O'People personnel survey was conducted in 2009. The response rate was 72% (2008: 75%) and the overall O'People index was almost unchanged at 617 (2008: 621). Ideas for fast actions, a web-based survey for Outokumpu employees, was organised in the spring. Participants wer

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