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Marconi To Lay Off Another 4,000

Announces further cost cutting measures after making a core operating 3Q loss of £130 million

January 15, 2002

9 Min Read
  • Core sales seasonally lower than Q2 at £706 million

  • Core operating loss of £130 million; Core operating cashoutflow of £45 million

  • Net debt reduced to £3.5 billion (pro forma £2.9 billionassuming completion of all disposals announced to date)

  • Further cost reduction actions to underpin return toprofitability

  • Outlook remains difficult; Q3 to Q4 seasonal sales upliftexpected but may be less pronounced than last year Marconi (London and NASDAQ: MONI) todayprovided a trading update relating to the three months ended 31December 2001.Mike Parton, Chief Executive, said "The third quarter outcomeshows good progress towards our debt and cost reduction targetsagainst the background of a difficult market. It is with regretthat we have announced the need for further cost and jobreductions, but we are all the more determined not to be dependenton improvement in the market to return the Group toprofitability."Trading UpdateGroup sales during the third quarter amounted to £1,041 millioncompared to £1,689 million during the same period last year. Ofthis total, Core contributed £706 million (FY2001: £1,122million), Capital £282 million (FY2001: £312 million), and MedicalSystems £49 million (FY2001: £263 million) prior to completion ofthe sale of this business to Philips on 19 October 2001. Otheritems amounted to £4 million (FY2001: £(8) million).In the Core, the third quarter was characterised by a continuationof the difficult market conditions reported for the previousquarters of the year. Telecom operators have maintained tightcontrols on capex spending, maximising utilisation in theirexisting networks and further delaying the roll-out of new networkbuild.This trend was reflected in the 43 per cent year-on-year decreasein Core orders received and 37 per cent decrease in Core sales,leading to a book-to-bill ratio of below 1. As expected, due tothe seasonality of the business, third quarter Core sales werebelow the second quarter but remained above the £688 millionrecorded during the first quarter.Network Equipment sales decreased more than the overall declinewith sales down across all major product areas and geographies.The percentage decline in Optical Networks was less than inBroadband Switching and Access. Network Services decreased lessthan the overall decline whilst sales in Mobile remainedrelatively stable.Optical Networks was particularly impacted in the United Kingdomby continued low levels of spending amongst second operators whoare focusing their reduced capital expenditure budgets on customerconnections rather than core infrastructure. Sales to BT werealso lower and accounted for approximately 11 per cent of Coresales in the quarter compared to approximately 21 per cent in thethird quarter last year. Sales of photonics equipment (DWDM) wereup on the previous quarter due to increased deliveries in Italy.In addition, during the last three months Marconi made its firstmaterial shipments of photonics equipment to BT under thepreviously announced 5-year frame contract. Given the nature ofthis contract, revenue relating to ultra-broadband (STM64 andphotonics) products will be recognised when the circuits providedby this equipment are utilised. Consequently no revenue orprofits associated with these shipments were recognised during theperiod.Broadband Switching had a difficult quarter as it continued to beimpacted by the transition from its previous focus on enterpriseand CLEC customers to established large service providers and theUS Federal Government. The market downturn in Access has led to achange in demand towards broadband copper products such as ADSL,where Marconi has only recently entered the market. In addition,as previously reported in the first half, sales of our DigitalLoop Carrier products into the North American market have fallensharply as a result of capital spending reductions amongstIncumbent Local Exchange Carriers, particularly Bell South andSprint. Sales of legacy narrowband products have continued todecline and are now substantially lower than last year. Broadbandpoint-to-point radio systems sales were down but to a much lesserextent due to continuing deployments by mobile operators inGermany. The Group also continued to deliver its high densityDSLAM product to Telecom Italia as well as making first-timeshipments to two European second operators leading to an increasein sales compared to the previous quarter.Network Services sales were down mainly due to a decrease inwireless network planning and software sales after higher volumesin the first half of the year and delayed rollout of new 3Gnetworks as well as lower levels of installation and commissioningactivities following the downturn in network equipment supply.Cost ReductionMarconi recorded a Group operating loss of £103 million during thethird quarter comprising an operating loss of £130 million in theCore partially off-set by an operating profit of £27 million inCapital and Medical combined.Gross profit in the Core amounted to £143 million giving a grossmargin of approximately 20 per cent. This decline compared tolast year and to the previous quarter was mainly due to thereduction in sales volume, continuing under-recovery in the supplychain pending further structural rationalisation and the effect ofchanges in mix.The Group continues to make progress with its cost reductionprogrammes. Core operating costs in the third quarter, excludingshare option and other costs, were £289 million compared to £335million in the first quarter and £300 million in the secondquarter. The main cost savings during the quarter came fromreduced general and administrative costs, which amounted to £45million (Q2: £57 million). Research and development spend reducedmarginally to £129 million (Q2: £132 million). The increase insales and marketing costs to £115 million (Q2: £111 million) wasmainly due to costs incurred to terminate previously committedmarketing activities and programmes.At 31 December 2001, Marconi employed approximately 41,000 peopleworld-wide compared to approximately 49,000 at 30 September 2001.The significant decrease in the number of employees is mainly dueto the Group's on-going restructuring programme and the sale ofMedical Systems. By 31 December 2001, within the Core business,the number of employees had been reduced by approximately 23 percent to around 30,000 since the beginning of the financial year.There will be a further reduction of approximately 9,200 employeesfrom Capital upon completion of the recently announced disposalsof Marconi Optical Components, Commerce Systems, Data Systems andGeneral Domestic Appliances.Further Cost Reduction ActionsMarconi remains on track to achieve the targeted exit run-rateequivalent to an annualised operating cost base of £1 billion inthe Core by the end of the current quarter. However, in order tofurther reduce the Group's dependence on an improvement in marketconditions to restore operating profitability and to underpin thetiming of this return, it is necessary to reduce the cost basefurther. The Group is targeting additional labour and overheadsavings of £200 million of which £70 million are expected to comefrom reduced cost of sales and £130 million from reduced operatingexpenses. This will reduce the targeted annual Core operatingcost base from £1 billion to £870 million and the quarterly Corebreakeven sales level from £800 million to £675 million by the endof March 2003.As a consequence, management are undertaking a further review ofall cost drivers including sites and headcount. At this stage,the Group anticipates that this review could lead to an additionalreduction of around 4,000 employees from the Core. Based onpreliminary estimates, the incremental cash cost of this furtherrestructuring will be approximately £100 million, most of whichwill be incurred during the next financial year. The Groupexpects that this new restructuring programme will be essentiallycomplete by March 2003.The Group reconfirms its longer-term target business model toachieve a gross margin of 35 per cent and operating margin of 10per cent. Taking into account the further cost reduction measuresannounced today, achievement of this target gross margin requiresan annual sales volume in the region of £3.5 billion and timingis, therefore, dependent on market conditions.Net DebtNet debt at 31 December 2001 was £3.5 billion reduced from £4.3billion at 30 September 2001. On a pro forma basis, net debt at31 December assuming completion of all disposals announced to datewould be £2.9 billion, of which £2.0 billion is funded throughbonds with maturities extending from 2005 to 2030.The Group recorded an operating cash outflow of £25 million duringthe third quarter. Operating cash outflow in the Core amounted to£45 million. This outflow was driven by the £130 million operatingloss partially off-set by improvements in working capital with themain contribution derived from reduced level of debtors. There wasalso a modest reduction in the level of inventory whilst creditorswere maintained at a similar level to the previous quarter.During the third quarter, the Group completed the disposal of itsMedical Systems business to Philips for cash proceeds of £765million subject to completion accounting adjustments. During theperiod transaction-related costs were incurred and certainpayments were made against indemnities given to the buyer whichtogether amounted to £30 million.The Group also received cash proceeds of £190 million from othernon-core asset realisations including the sale of its entireshareholding in Lagardere, part of its shareholding inLottomattica, the sale of surplus properties and other non-coreassets. In addition, Marconi has announced agreements to sell, inseparate transactions, its 50 per cent shareholding in GeneralDomestic Appliances for approximately euro 195 million (£121million) in cash and its wholly owned Commerce Systems and DataSystems businesses for cash proceeds of approximatelyUS$325 million (£225 million) and US$400 million (£277 million)respectively. Furthermore, Marconi announced the sale of itsoptical components business in exchange for 9.999 per cent of thecurrent issued share capital of Bookham Technology plc(approximately 9.1 per cent of the enlarged post-transaction sharecapital) subject to approval by Bookham's shareholders. Thesetransactions, subject to regulatory and other approvals areexpected to close before the end of March 2002. Following thesedisposals, assets remaining within Capital include Marconi AppliedTechnologies, On-Line, Infochain and Interactive as well as theGroup's shareholding in Easynet Group Plc, other joint venturecompanies and financial investments.In December a wholly-owned subsidiary of Marconi plc purchased oragreed to purchase in privately negotiated transactions 8.6 percent and 19.7 per cent of its 2005 and 2010 eurobonds respectivelyas well as 5.0 per cent of its 2010 US dollar bonds. The totalcash cost of these purchases, including transaction fees andaccrued interest will amount to approximately £101 million toacquire bonds with a face value of £178 million. Of the cash cost,approximately £71 million was paid out prior to 31 December 2001and a further £30 million will be incurred during January 2002.The total corresponding transaction fees and accrued interestamounted to approximately £9 million. Following the purchases,approximately £2.0 billion euro and US dollar bonds remain inissue and not held by the Group, with maturities extending from2005 to 2030.Other cash flows during the third quarter related primarily torestructuring and the implementation of new information technologysystems (£111 million) and interest (£51 million).Marconi remains confident in its ability to achieve its statedtarget to reduce net debt to within a range of £2.7 billion to£3.2 billion by 31 March 2002.In addition, the Group reconfirms that it is currently negotiatingwith its banks with respect to the possible refinancing of itscredit facilities in order to make available longer term bankfinance to the Group.Vendor FinanceThe Group maintains a policy to keep vendor finance within amaximum limit of US$500 million. As at 31 December 2001, theGroup had vendor finance commitments of approximately £98 million(US$143 million), of which £54 million (US$78 million) had beendrawn. The decrease in both committed and drawn amounts since 30September 2001 relates to the sale of Medical Systems. At thetime of its disposal, Marconi Medical Systems had vendor financeexposure of £92 million (US$135 million). Marconi has provided acounter-indemnity to Philips of US$90 million against whichapproximately US$35 million was paid out during the third quarter.OutlookMarket conditions remain difficult with continued uncertaintyregarding levels and timing of service provider spending.The Group has historically reported strongest sales performance inthe second and fourth quarters. The Group expects this trend tobe sustained during the current financial year but believes thatthe sequential seasonal uplift between the third and fourthquarters may be less pronounced than in the previous year.Marconi PLC (Nasdaq/London: MONI)

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