Trading Update
January 27 2004 - 2:00AM
UK Regulatory
RNS Number:6572U
Marconi Corporation PLC
27 January 2004
Press enquiries:
Joe Kelly, tel: 0207 306 1771; email: joe.kelly@marconi.com
David Beck, tel: 0207 306 1490; email: david.beck@marconi.com
Investor enquiries:
Heather Green, tel: 0207 306 1735; email: heather.green@marconi.com
Marconi Corporation plc
Trading Update
for the three months ended 31 December 2003
*Group sales up 5 per cent to #408 million (Q2 FY04: #389 million)
*Europe/Rest of World sales driven by growth in Fixed Wireless
Access and Value-Added Services
*Strong growth in Outside Plant & Power and North American Access
offset by reduction in sales to US Federal Government as expected
*Group sales reported after negative foreign exchange impact of
approximately #11 million due to weakening of the US dollar; Group
sales of #419 million, up 8 per cent on Q2 on constant currency
basis
*Continued improvement in operating performance; good progress on
adjusted gross margin (before exceptional items) to within our targeted
range; further reduction in adjusted operating cost exit run-rate
(before goodwill amortisation and exceptional items)
*Fifth consecutive quarter of positive operating cash flow (before
exceptional items); Net cash position further reinforced to #108 million
at 31 December 2003 (from #99 million at 30 September 2003)
*Disposal of North American Access (NAA) agreed; completion expected
in first calendar quarter 2004; $240 million gross proceeds to fund
final pay-down of Junior Notes and first partial redemption of Senior
Notes
*Q3 sales excluding NAA up 4 per cent to #374 million (Q2 FY04:
#359 million)
*Year-end operational targets adjusted to exclude NAA; no impact
on adjusted gross margin exit run-rate target (before exceptional
items) maintained in the range of 27 to 29% by 31 March 2004;
adjusted operating cost exit run-rate revised down to below #410
million by 31 March 2004
*Recently announced business wins include extension to BT service
support contract and new optical frame contract with TeliaSonera
*Maintaining cautious view on market outlook; Q4 FY04 sales (excluding
NAA and on constant currency basis) expected to be flat to slightly up
on Q3 FY04; Year on year stability expected in Q1 FY05 in line with the
typical seasonal pattern of customer demand
*Full Q3 results to be announced on 12 February 2004
London - 27 January 2004 - Marconi Corporation plc (LSE: MONI; NASDAQ: MRCIY)
today provided a trading update for the third quarter ended 31 December 2003.
Mike Parton, Chief Executive, said: "We recorded a strong sales performance in
our third quarter despite negative currency movements. This and good progress
towards our year-end operational targets have led to a further improvement in
our operational performance. While we remain cautious on market outlook in the
near-term, we are encouraged by the level of interest in our next generation
product platforms and we continue to win important new business."
Resignation of Non-Executive Director
Ian Clubb, a Non-Executive Director of the Company has resigned from the Board
with immediate effect. Ian joined the Board at the time of the completion of the
Company's financial restructuring in May 2003 and is leaving for personal
reasons. John Devaney, Chairman of Marconi Corporation plc, thanked Ian Clubb
for his contribution to the recovery of Marconi and wished him well for the
future.
Q3 Results - 12 February 2004
We will announce results for the three months and nine months ended 31 December
2003 on 12 February 2004 and will host a conference call for analysts and
investors at 4pm on that date. Full details will be issued shortly.
Consequently, we will not host a conference call in connection with this trading
update. Analyst and investor enquiries should be directed to Heather Green, EVP
Investor Relations.
Basis of Preparation
The financial information in this trading update is un-audited and has been
prepared in accordance with UK accounting policies set out in Marconi
Corporation plc's 2003 Annual Report and Accounts.
Following our previously announced agreement for the disposal of our North
American Access business (see press release dated 5 January 2004), this unit
will be accounted for as a discontinued operation at 31 March 2004 as we expect
to have completed the transaction by this date. We will provide additional
detail of North American Access performance in the first three quarters of the
financial year when we report our interim results on 12 February.
The following table sets out the US Dollar/Sterling and Euro/Sterling exchange
rates used in preparing our financial information:
FY04 Q1 Q2 Q3
US Dollar:
Year to Date Average 1.6288 1.6227 1.6594
Period End 1.6502 1.6614 1.7902
Euro:
Year to Date Average 1.4206 1.4262 1.4301
Period End 1.4370 1.4267 1.4193
Trading Update
Sales
Group sales amounted to #408 million, a 5 per cent increase on sales of #389
million recorded in the second quarter. Sales growth in local currencies was
partially offset by adverse foreign exchange movements on translation to
sterling, mainly as a result of the weakening of the US dollar. At constant
currency rates, third quarter sales amounted to #419 million representing an 8
per cent increase on the previous quarter. Excluding NAA, sales amounted to #374
million, a 4 per cent increase compared to #359 million recorded in the second
quarter. At constant currency rates, third quarter sales excluding NAA amounted
to #383 million representing a 7 per cent increase on the previous quarter.
Sales by Product Area
in #m 3 months ended
30.06.03 30.09.03 31.12.03 31.12.02
Optical Networks 85 80 81 96
Access Networks 44 48 62 69
Other Network 12 16 17 11
Equipment
------ ------ ------ ------
Europe/RoW 141 144 160 176
Network Equipment
IC&M 43 47 48 53
VAS 64 61 68 103
------ ------ ------ ------
Europe/RoW Network 107 108 116 156
Services
------ ------ ------ ------
Europe/RoW - Total 248 252 276 332
====== ====== ====== ======
BBRS Equipment 28 38 30 32
OPP Equipment 35 39 43 30
------ ------ ------ ------
US Network Equipment 63 77 73 62
BBRS Services 15 15 13 19
OPP Services 16 15 12 20
------ ------ ------ ------
US Network Services 31 30 25 39
------ ------ ------ ------
US businesses - Total 94 107 98 101
====== ====== ====== ======
Network Equipment and 342 359 374 433
Network Services - Total
Other - - - 10
Operations excl. NAA - 342 359 374 443
Total
NAA 25 30 34 23
------ ------ ------ ------
Group 367 389 408 466
====== ====== ====== ======
3 months ended 30 June and 30 September 2003 and 31 December 2002 restated to
reflect the disposal of NAA
Sales by Geographic Destination
in #m 3 months ended
30.06.03 30.09.03 31.12.03 31.12.02
EMEA 220 223 241 295
North America 86 101 88 104
CALA 9 12 13 13
APAC 27 23 32 31
------- ------- ------- -------
Operations excl. NAA - 342 359 374 443
Total
NAA 25 30 34 23
------- ------- ------- -------
Group 367 389 408 466
======= ======= ======= =======
The main geographic and product area trends impacting sales excluding NAA during
the third quarter compared to the second quarter were as follows:
*Continued strength in demand in the German market, with a further
increase in sales of fixed wireless access equipment to mobile operators
ahead of the 31 December deadline set by the national regulator to achieve
25 per cent 3G mobile coverage. We also experienced a slight seasonal
increase in sales of narrowband access products at the end of the financial
year of a number of our German customers.
*Continued stability in sales of Optical Networks equipment as customer
spending in this area is focused on infill of existing network
infrastructure rather than new build projects. Increased shipments of SDH
equipment to Telecom Italia offset a reduction in the level of sales of
optical equipment to BT mainly due to timing of shipments.
*A slight reduction in the level of Access Hub sales recorded during the
quarter (from #10 million in Q2 to #9 million in Q3). While the volume of
shipments to Telecom Italia increased significantly during this period, a
high proportion of these were scheduled towards the end of the quarter and
in accordance with the contract terms will be recognised as sales during the
current quarter.
*An increase in sales of Network Services in Europe/Rest of World driven
by growth in Value-Added Services. This resulted mainly from the higher
level of sales under one specific long-term cable service contract in the UK
as well as an increase in wireless service sales under one specific contract
in the Middle East. We also recorded modest growth in sales of Integrated
Systems mainly driven by completion of key milestones in transport sector
projects in Germany.
*A reduction in sales of Broadband Routing and Switching (BBRS) to the US
Federal Government, as expected, after the seasonally higher level of spend
in the previous quarter. This trend is in line with the US Federal
Government's typical seasonal purchasing pattern.
*Strong growth in sales of Outside Plant & Power equipment. Continued
softness in central office spending by US wireline operators led to a
further reduction in sales of OPP services but this was more than offset by
an approximate 10 per cent increase in OPP equipment sales resulting from
the continued strong level of shipments to wireless operators in the US and
CALA during the period.
Excluding NAA, our ten largest customers during the three months ended 31
December 2003 were (in alphabetical order) AT&T, BT, E- Plus (Germany), Metro
City Carriers (Germany), O2, Telecom Italia, the US Federal Government, Verizon,
Vodafone Group and Wind (Italy). In aggregate, these customers accounted for 47
per cent of sales excluding NAA (Q2 FY04: ten largest customers 50 per cent).
BT accounted for 18 per cent of sales from Operations excluding NAA (Q2 FY04: 21
per cent). The reduction in sales to BT resulted from the reduced level of
optical sales described above, partially offset by increased sales of narrowband
voice systems and cable services.
Book-to-Bill
Excluding NAA, we recorded a total book-to-bill ratio of 1.00 during the third
quarter (Q2: 1.23).
In Network Equipment, book to bill reduced from 1.15 in the second quarter to
0.90 mainly as a result of lower levels of orders received in OPP and BBRS. In
OPP, following the strong order intake in the first half of the financial year,
we are now beginning to see some slowdown in orders, as our main wireless
operator customers are nearing completion of the planned network builds which
have positively impacted OPP sales in recent quarters and wireline operators are
continuing to squeeze capital expenditure in central office applications. The
lower order intake in BBRS was mainly due to the reduction in spend by the US
Federal Government described above.
The 1.18 book to bill ratio in Network Services was driven by extensions to two
existing long-term service contracts in the UK (BT) and Germany (TollCollect)
booked during the period. These were not however as large in value as the two
major contracts signed in the Middle East and Germany during the previous
quarter, which resulted in a book to bill ratio of 1.37.
Sales Outlook
The following outlook is based on our view of the expected like-for-like sales
profile of our operations excluding NAA and does not take into consideration any
impact of future foreign exchange movements.
We believe that our markets are beginning to stabilise although we remain
cautious and will continue to see volatility in sales from quarter to quarter as
a result of various regional demand drivers that we describe below.
Overall, on a like for like basis, we expect fourth quarter sales to be flat to
slightly up on the #374 million recorded in the third quarter (excluding NAA).
We expect to benefit from good growth in the UK partly as a result of the
scheduled phasing of sales to BT. This, however, will be partially offset by
expected reductions in sales in Germany following completion of the fixed
wireless access build-outs by many of the German wireless operators, the Middle
East and in the US where we expect growth in BBRS sales to the US Federal
Government to be offset by a decrease in sales of Outside Plant & Power
equipment driven mainly by the slowdown in demand from our major wireless
operator customers described in Book to Bill above.
While it remains difficult to predict sales beyond the next quarter to a high
degree of accuracy, our current view of the first quarter of the next financial
year shows relative stability year on year compared to the #342 million
excluding NAA recorded in the first quarter of this financial year, in line with
the seasonal pattern of customer demand experienced in the current year.
Operational Performance
We continued to make progress towards our operational targets during the
quarter, recording a further improvement in adjusted gross margin (before
exceptional items) to within our targeted range despite the reduced level of
higher-margin BBRS sales. This was achieved mainly due to improvements in our
European supply chain resulting from the sequential increase in volumes and
further cost reductions. In addition, we recorded a similar rate of reduction in
our adjusted operating cost run-rate (before goodwill amortisation and
exceptional items) as that reported in the second quarter.
Group headcount was reduced to approximately 13,025 at 31 December 2003 from
approximately 14,100 at 30 September 2003, including approximately 250 employees
within our North American Access business. Approximately 260 employees were
transferred to Elcoteq during the quarter following the outsourcing of our
manufacturing facility in Offenburg (Germany), which was completed in November
2003.
The disposal of our North American Access business does not impact our targeted
gross margin exit run-rate (before exceptional items) as gross margins in this
business are in line with Group average. We remain on track to achieve our
targeted range of 27 to 29 per cent gross margin run-rate (before exceptional
items) in our Operations excluding NAA by 31 March 2004. If we exclude the
operating costs associated with NAA which will be transferred to the buyer, AFC
upon completion of disposal, this reduces our adjusted operating cost exit
run-rate target (before goodwill amortisation and exceptional items) to below
#410 million (previously #425 million including North American Access).
We will disclose full details of gross margin, operating costs, exceptional
items (relating mainly to our ongoing operational restructuring process) and
overall operating result in our third quarter interim results announcement on 12
February.
Cash Flow
We recorded our fifth consecutive quarter of positive operating cash flow
(before exceptional items) as a result of our improved operating performance and
further modest improvements in working capital. This was almost sufficient to
cover our non-operating cash outflows, which mainly comprised exceptional
operating cash costs relating to our ongoing operational restructuring and
interest payments. Overall for the three months ended 31 December 2003, we
recorded a slight cash outflow prior to partial redemptions and repurchases of
our Junior Notes undertaken during the period.
In accordance with the terms of our Junior and Senior Secured Notes, proceeds
from disposals (mainly the disposal of our 50 per cent stake in Confirmant and
the outsourcing of our manufacturing facility in Germany) and certain releases
of cash collateral relating to performance bonds were applied to the mandatory
partial redemption of Junior Notes at 110 per cent face value. In total during
the quarter, approximately US$62 million (approximately #37 million) was used to
fund the US$56 million (approximately #34 million) reduction in principal amount
of the Junior Notes and the US$6 million (approximately #3 million) redemption
premium.
In addition, we repurchased $24 million (approximately #13 million) principal
amount of the Junior Notes in open market transactions for a total cash outlay
(excluding accrued interest and fees) of $26 million (approximately #15
million).
Full cash flow details will be disclosed in our third quarter results
announcement.
Cash and Debt
The following table sets out the composition of the Group's net cash balances at
30 September and 31 December 2003:
in #m 31.12.03 30.09.03
US$-denominated Senior Notes1 (400) (432)
US$-denominated Junior Notes2 (133) (191)
Other bilateral and bank debt (46) (50)
------- -------
Gross financial indebtedness (579) (673)
Cash and liquid resources 687 772
------- -------
Net Cash 108 99
======= =======
1. US$717 million
2. US$487 million upon issue in May 2003 reduced to approximately US$261
million at 31 December 2003, of which approximately US$23 million owned by
Marconi Corporation plc
The #94 million reduction in gross financial indebtedness during the period
primarily resulted from the partial redemptions and repurchases of our Junior
Notes described above (#47 million) and favourable foreign exchange translation
gains on our US-dollar denominated debt (#43 million). The balance of #4 million
related to a reduction in the level of our bilateral debt mainly resulting from
foreign exchange movements.
After the end of the quarter, on 12 January 2004, we completed the fifth partial
redemption of our Junior Notes. All Junior Notes outstanding including those
owned by Marconi Corporation plc were subject to this partial redemption. As a
result, this further reduced the total principal amount outstanding to
approximately $209 million (approximately #117 million) of which approximately
$18 million (approximately #10 million) was owned by Marconi Corporation plc.
The cash we received as a result of our holding at the time of the partial
redemption has been transferred to the Mandatory Redemption Escrow Account.
Furthermore, upon completion, the $240 million (approximately #135 million)
proceeds from the agreed sale of NAA will be used partly to fund the final
redemption of our Junior Notes and then to initiate pay down of our Senior Notes
at 110 per cent of par value.
At 31 December 2003, the Group's cash and liquid resources totalled #687 million
(30 September 2003: #772 million). Of this amount, #209 million represented
amounts which would be classified as restricted cash, and #478 million
represented free cash available to the Marconi Corporation plc Group.
The following table sets out the breakdown of these restricted and free cash
balances at 30 September and 31 December 2003:
in #m 31.12.03 30.09.03
Performance bonds and guarantees
Cash collateral on new performance 35 27
bonding facility
Cash collateral on performance bonds 72 108
and guarantees
Performance bonding escrow account 38 41
------- --------
Total - performance bonds 145 176
Captive insurance company 19 19
Collateral on secured loans in Italy 13 13
Mandatory Redemption Escrow Account (MREA) 32 2
------- --------
Total Restricted Cash 209 210
Cash held at subsidiary level and cash in 66 65
transit
Available Treasury deposits 412 497
------- --------
Total Cash and Liquid Resources 687 772
====== ========
The #36 million reduction in cash collateral on performance bonds outside the
new #50 million super-priority bonding facility resulted, as previously
disclosed, from a reduction in the amount of cash collateral held against
certain facilities issued by one of our major performance bonding providers and
the expiry of certain other performance bonds and letters of credit.
The #8 million increase in cash collateral in our new performance bonding
facility related to new performance bonds issued during the period, in respect
of which 50 per cent collateral has to be placed at the time of issue of the
bond, while the #3 million reduction in the performance bonding escrow account
resulted from adverse movements in foreign exchange.
The #32 million balance in our Mandatory Redemption Escrow Account was used on
12 January 2004 to fund the fifth partial redemption of our Junior Notes
described above.
The #85 million reduction in our available Treasury deposits was a result of our
third quarter cash outflow after Junior Notes redemptions and repurchases
described above (#59 million) and adverse foreign exchange movements (#26
million) caused mainly by the weakening of the US dollar.
ENDS/...
About Marconi Corporation plc
Marconi Corporation plc is a global telecommunications equipment, services and
solutions company. The company's core business is the provision of innovative
and reliable optical networks, broadband routing and switching and broadband
access technologies and services. The company's customer base includes many of
the world's largest telecommunications operators.
The company is listed on the London Stock Exchange under the symbol MONI and on
Nasdaq under the symbol MRCIY.
Additional information about Marconi Corporation can be found at www.marconi.com.
Copyright (c) 2004 Marconi Corporation plc. All rights reserved. All brands or
product names are trademarks of their respective holders.
This document contains certain statements that are not historical facts,
including statements about Marconi's expectations and beliefs and statements
with respect to its business plan and other objectives. Such statements are
forward-looking statements. These statements typically contain words such as
"intends", "expects", "anticipates", "estimates" and words of similar import.
Undue reliance should not be placed on such statements, which are based on
Marconi's current plans, estimates, projections and assumptions. By their
nature, forward-looking statements involve risk and uncertainty because they
relate to events and depend on circumstances which may occur in the future.
There are a number of factors that could cause actual results and developments
to differ materially from those expressed or implied by such forward-looking
statements. These factors include, but are not limited to future revenues being
lower than expected; increasing competitive pressures within the industry;
general economic conditions or conditions affecting the relevant industries,
both domestically and internationally, being less favourable than expected.
Marconi has identified some important factors that may cause such differences in
the Company's Form 20-F annual report for year ended 31 March 2003 and Form 8-K
report for the quarter ended 30 September 2003 filed with the US Securities and
Exchange Commission. Marconi disclaims any obligation to publicly update or
revise these forward-looking statements, whether to reflect new information or
future events or circumstances or otherwise.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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