Marconi Issues Profits Warning

Forecasts 15% drop in sales, 50% drop in profit. Will cut 4,000 more jobs

July 4, 2001

4 Min Read

LONDON -- Marconi (London and NASDAQ: MONI), a global provider of innovative communications solutions, today provided a trading update and summarised actions taken to address current business conditions.

Market Outlook for the year ending 31 March 2002

Market conditions during the first three months to June have been much tougher than expected. Whilst customers continue to show operational interest in solutions and continue to request information, in recent weeks it has become clear that financial constraints in the service providers, particularly in Europe, are now causing that interest to not convert into firm orders at the usual rate. Based on the current order book and a clear slowdown in the approval of capital expenditure by customers, management believes that these factors will impact this financial year more strongly than indicated by our previous guidance and current market expectations.

Marconi has completed market research and its internal re-forecast for the first half and the full year and the Board is now in a position to disclose headline expectations. Marconi expects sales for the year ending 31 March 2002 to be around 15 per cent lower than the previous year and operating profit before exceptional items to be down by approximately 50 per cent. These figures exclude from both years the results of Medical Systems, which is now being held pending completion of the disposal announced earlier today.

Profitability is being impacted primarily by the reduced sales volume compared to the speed at which the business can be re-scaled, made more flexible and overheads can be removed. As a result, Marconi expects to report an approximately break-even position at the operating profit level in the first half and to record a stronger second half, when the benefit of major cost reductions will have a significantly greater impact.

Cost Reduction

The Company is now taking further steps to accelerate and expand its previously announced cost-cutting actions in order to re-align its cost base with the revised sales forecasts. The effects of these new cost reductions are included in the above guidance.

On 10 April Marconi announced a reduction in its global workforce by around 3,000 positions. This target has been exceeded and over 4,000 people have left or agreed to leave the Group.

As a result of the further review of its cost base, Marconi now plans to withdraw from a number of existing facilities and increasingly concentrate its activities on major sites. These measures are expected to reduce Marconi’s workforce around the world by a further 3,000 jobs. In addition, Marconi will be taking steps to streamline its management structure, reducing the overall number of management positions by around 1,000.

Full details of these reductions and other actions necessary to re-shape the cost base to meet current business requirements will be communicated to our employees over the next few days.

This new restructuring programme will result in a further exceptional charge of £150m and is expected to save a further £150m on an annualised basis and £75m in this financial year. This will bring the total restructuring charges for the current year to £550m, saving £350m on an annualised basis, and £200m in this financial year. These will be recorded as operating exceptional items in the period in which they are incurred.

In total, including the transfer of employees to Jabil Circuit within the framework of the Company’s outsourcing programme, this will lead to a total headcount reduction of over 10,000.

Balance Sheet and Cash Flow

>p>The cost reduction programme is expected to be funded through operational cash flow. As a result, the sale of Marconi Medical Systems will strengthen the Company’s balance sheet through a reduction in the level of net debt. Management is targeting a year end net debt figure of £2.5 billion, indicating financial headroom of a further £4 billion under Marconi’s committed bank facilities.

The Company is still on track to make progress by March 2002 to unwind the higher than normal level of inventory reported at the end of the last financial year.

Dividend

The Board of Marconi will set the interim and final dividends for the year to 31 March 2002 at the appropriate time and in the light of the actual results achieved. If the outlook for next year continues to show a recovery in profits, we anticipate maintaining the dividend for the current financial year at last year’s level.

Medium-term Outlook

Marconi remains confident in the medium-term outlook and expects to see some signs of recovery in the first half of 2002. With its reduced cost base, the added flexibility of its outsourced manufacturing facilities and its strong incumbent customer base, Marconi will be well positioned to benefit from the market upturn when it occurs.

Request for Resumption of Trading in Shares

Marconi has requested that the London Stock Exchange resumes trading in its shares from the start of business on Thursday 5 July, 2001.

Marconi Communications PLC (Nasdaq/London: MONI)

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