SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the Month of October 22, 2002
Commission file number: 0-30924
MARCONI PLC
(Exact name of Registrant as specified in its Charter)
One Bruton Street
London W1J 6AQ
England
(Address of principal executive offices)
(Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F.)
Form 20-F X Form 40-F
(Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange
Act of 1934.)
Yes No X
Marconi plc
TRADING UPDATE FOR THE THREE MONTHS
ENDED 30 SEPTEMBER 2002
* During a period of further market deterioration, Marconi continued to
trade in line with its sensitised financial projections
* Core sales GBP482 million; 6% sequential decline
* Book to bill in Network Equipment steady at 0.9; Overall Core book to bill
reduced to 0.8 mainly due to phasing of long-term service projects
* Recent major new contract wins include BXR 48000 (US), Access Hub (South
Africa), Fixed Wireless Access and SDH equipment (Germany)
* Around 20 per cent reduction in Core operating loss before goodwill
amortisation and exceptional items compared to first quarter
* Cost reduction actions take underlying Core gross margin back above
20% of sales before impact of additional stock provisions
* Significant progress towards operating cost saving targets; Q2 exit
run-rate of GBP635 million vs GBP760 million end Q1
* Headcount reduction of over 2,000 achieved during the second quarter;
major driver of c. GBP100 million exceptional restructuring costs
during the quarter
* Net Debt reduced by approximately GBP170 million to GBP2.8 billion at 30
September 2002
* Group cash flow since 1 July in line with projected cash profile to
expected completion of Restructuring; on track to deliver GBP260 million
cash distribution to creditors, subject to the matters discussed in Note 1,
and of which GBP92 million of interest and accrued interest already paid to
15 October 2002
* Sequential reduction in Core operating cash outflow largely due to cash
generated from inventory utilisation
* Restructuring on track for expected completion end January 2003
London - 22 October 2002 - Marconi (MONI) today provided a trading update
relating to the three months ended 30 September 2002. The figures in this
trading update are preliminary and subject to audit.
Mike Parton, Chief Executive, said: "We held our quarterly sales decline in the
Core to 6% in what continues to be an extremely challenging trading environment
and aggressively managed our cost base to reflect these tough conditions. We
made significant progress in the quarter in reducing our pre-exceptional
operating losses and cash outflows and remain on track to deliver our
commitments to creditors in the context of our proposed financial
restructuring."
Trading Update
The Core business comprises the Group's Network Equipment and Network Services
activities. Network Equipment comprises Optical Networks, Broadband Routing and
Switching (BBRS), European Access, Outside Plant and Power (OPP), North American
Access and Other Network Equipment businesses. As previously disclosed, upon
completion of the Group's financial restructuring, it is intended that OPP and
North American Access will be transferred to and reported as part of Marconi
Capital. Marconi's Mobile assets were transferred to Capital on 1 April 2002.
Group Sales
GBPm %var to %var to
Q2 03 Q1 03 Q2 02
Core 482 (6) (40)
Capital - Mobile 34 (44) (67)
Capital - Other 1 (96) n/m
Capital - Medical - n/a n/m
Other* (3) n/m n/m
Group 514 (13) (64)
*Other relates to intra-Group sales
Core Sales
by Geography GBPm %var to %var to
Q2 03 Q1 03 Q2 02
EMEA 285 - (36)
US 142 (7) (41)
CALA 10 (60) (83)
APAC 45 (4) (18)
Core 482 (6) (40)
by Product Area GBPm %var to %var to
Q2 03 Q1 03 Q2 02
Optical Networks 108 (19) (48)
Broadband Switching* 35 (8) (43)
European Access 69 17 (38)
Outside Plant & Power*(a) 34 (26) (48)
North American Access* 23 (8) (26)
Other Network Equipment 15 7 (61)
Network Equipment 284 (10) (45)
IC&M 89 (8) (39)
VAS 109 12 (20)
Network Services 198 2 (30)
Core 482 (6) (40)
* The primary businesses comprising the Group's US Assets as defined in
the Restructuring Heads of Terms announced on 29 August 2002
(a) OP&P equipment sales only; GBP24 million of power installation service
sales reported in IC&M in Q2 and GBP27 million in Q1.
Core Overview
During a period marked by a further deterioration in market conditions in the
telecommunications industry, the Group traded in line with its sensitised
financial projections.
The Group's sensitised financial projections are based on the Group's Business
Plan forecasts prepared in April 2002, to which a set of sensitivities were
applied to reflect the scenario of more difficult market conditions, and in
particular, a delay in market recovery beyond the end of 2003 as assumed in the
Business Plan. Details of the Business Plan were set out in Marconi's
announcement on 29 August 2002.
Core Orders and Sales
Order intake in the Core was GBP379 million. Sales remained relatively resilient
at GBP482 million, a decrease of 6% compared to the previous quarter (Q1: GBP510
million).
Book to bill in Network Equipment remained stable at 0.9 whilst in Network
Services, it fell to 0.6, giving an overall Core book to bill of 0.8 during the
period.
The low order intake and book to bill ratio were mainly the result of the
phasing of long-term service contracts. This trend was particularly marked in
EMEA where the Group's ongoing contracts include long-term maintenance contracts
with a number of UK service providers and long-term service projects in industry
sectors such as transportation, government and utilities. These contracts vary
in length but revenues can be recognised over a period of up to 5 years. No such
major new contracts were booked in the second quarter while approximately GBP125
million of service-related sales were traded in EMEA, of which approximately 50
per cent would typically come from the existing order back log. This absence of
major new orders to replenish this consumption of the order backlog is a timing
issue. A number of the Group's existing service contracts are due for renewal
later in the financial year.
Core Sales by Geography and Product Area
In Europe, market dynamics in the UK continue to show signs of stabilisation. BT
continues its broadband access campaign which over time should lead to increased
traffic flows onto the core transmission network and, in turn, to renewed
spending in optical equipment. In addition, a number of restructured second
operators are beginning to re-emerge. The Italian market has remained relatively
stable, mainly as a result of the absence of 3G debt issues amongst Italian
telecom operators. Elsewhere in Europe however, major operators are continuing
to cut capital expenditure budgets as they focus on debt reduction. Overall,
EMEA sales remained flat during the second quarter at GBP285 million. Lower
sales of Optical Networks equipment were offset by an increase in sales of
Access and Interactive Systems equipment during the period. In European Access,
growth was driven by increased sales of high density DSLAM sales in Italy and
voice systems in the UK. Market conditions remain tough in the German fixed
wireless access sector.
The market in the Americas has been worst affected by the further decline, as
was the case in the previous quarter. In the US, incumbent RBOC and ILEC
operators continue to maintain tight controls over capital expenditure whilst
political and macro-economic issues in CALA have had a significant negative
impact on the telecoms market, particularly in Brazil and Mexico.
Core sales in CALA dropped 60 per cent to GBP10 million (Q1: GBP25 million)
mainly as a result of lower sales in both Optical Networks and Outside Plant and
Power. In the US, Core sales amounted to GBP142 million, a reduction of 7 per
cent compared to the previous quarter (Q1: GBP153 million). A higher percentage
decline in sales of Outside Plant & Power and Access equipment was partially
offset by growth in BBRS sales to US customers, mainly as a result of a strong
quarter in deliveries to the US Federal Government at the end of its financial
year. Overall on a global basis, BBRS sales declined by 8 per cent as the strong
US sales were more than offset by declines in EMEA and APAC.
Sales in APAC fell 4 per cent to GBP45 million during the period (Q1: GBP47
million) Growth in Optical Networks was more than offset by declines in BBRS and
Access product sales.
Network Services as a percentage of total Core sales increased to 41 per cent
during the second quarter. Historically this segment has represented between 30
and 35 per cent of the Core business. Overall, Network Services recorded modest
growth to GBP198 million (Q1: GBP194 million). Installation, commissioning and
maintenance (IC&M) activities, which represented around 45 per cent of Network
Services sales in the period, fell by approximately 8 per cent. Whilst long-term
maintenance contracts continue to trade through to sales, this was not
sufficient to offset continuing declines in the level of demand for installation
and commissioning activities associated with Network Equipment sales. The lower
sales in IC&M were more than offset by a 12 per cent increase in Value Added
Services, particularly in the transportation and government sectors.
During the period, Marconi was awarded a number of major contract wins including
the first sale of the Group's new multi-service switch-router platform, the BXR
48000 to the US Federal Government; a new two-year frame contract with Telkom
South Africa for the supply and installation of the Group's Access Hub high
density DSLAM and Access network management platform; a contract extension from
Alstom to deliver a voice radio system as part of the UK West Coast Main Line
signalling and communications upgrade; and a contract with Telefonica Moviles
Mexico to supply SDH and power systems for their network expansion. In addition,
in October 2002, Marconi was awarded a major new frame contract from O2 Germany
for the supply of fixed wireless access and SDH equipment.
BT remained Marconi's largest customer, accounting for almost 19 per cent of
Core sales during the period. The top ten Core customers - BT, Bell South, China
Railcom, Metro City Carriers (Germany), Qwest, Telecom Italia, UK Government, US
Government, Verizon and Vodafone Group - represented 48 per cent of Core sales.
Operating Performance
Cost reduction actions in the supply chain and a more favourable business mix
led to an improved gross margin in the Core during the second quarter of over 20
per cent of sales before the impact of additional stock provisions. Improved
utilisation of resources in installation and commissioning was also a
contributing factor in the quarter.
In line with the Group's accounting policy and in the light of the continued
decline in market conditions, additional provisions for excess inventory were
raised during the second quarter mainly in relation to optical networking and
access equipment. These provisions amounted to approximately GBP25 million and
were charged to cost of sales, thereby reducing the gross margin achieved in the
quarter.
Further supply chain rationalisation and outsourcing initiatives, along with
further planned product cost reductions are expected to be the main drivers of
future gross margin improvement in line with the Group's business plan.
At the end of the second quarter, the annualised operating cost run-rate in the
Core had reduced to around GBP635 million from GBP760 million at the end of the
first quarter and GBP890 million at the end of the last financial year. This is
in line with the Group's target to achieve an annualised operating cost
run-rate of no more than GBP520 million early in the next financial year.
Headcount reductions are the major driver of these savings. Since 1 July 2002,
over 2,000 employees from the Core business have left the Group, reducing the
Core headcount to just over 19,000 by 30 September 2002. Plans have already been
announced and actions are now in place to further reduce the Core headcount to
around 15,000 early in the next financial year. Additional savings were achieved
in the quarter through the scaling back of marketing initiatives and reductions
in engineering materials spend and capital expenditure in the area of research
and development.
As a result of these actions on direct and indirect costs, significant progress
was made in reducing the Core operating loss before goodwill amortisation and
exceptional items by around 20 per cent over the previous quarter, despite the
impact of the additional stock provisions. Group operating loss before goodwill
amortisation and exceptional items reduced by around 18 per cent during the
second quarter.
Core R&D spend in the quarter amounted to just over GBP70 million. Over 80 per
cent of this spend was focused on Optical Networks, BBRS and European Access. In
Optical Networks, on-going R&D projects include developments in DWDM (Marconi's
PMM metro WDM range), SDH (next generation SMA 16/64 and MSH256 and next
generation digital cross connect) as well as the continued development of
Marconi's network management software. In September, the Group announced the
availability of its next generation Series 4 SMA 1 - 4 products which have been
designed to be more cost effective and offer service providers greater
functionality than previous generations of the product. In BBRS, the BXR 48000
remains the key area of development spend whilst in Access, investment is
focused on Fixed Wireless, Softswitch and Access Hub platforms.
Exceptional Items
The Group's audit of the financial statements for the six months to 30 September
2002 is progressing and management is still considering the need for further
write-downs primarily related to both tangible and intangible fixed assets
(including goodwill).
Exceptional restructuring costs of approximately GBP100 million were incurred
during the period predominantly in relation to the Group's restructuring and
reorganisation and the balance mainly to costs associated with the ongoing
financial restructuring process.
Cash Flow
Cash Movement since 30/06/02 in GBPm Projected to Actual to 30/09/02
expected completion
of Restructuring
Strategic Communications disposal, net of bilateral indebtedness 290 295
Repayment of other bilateral indebtedness (54) (2)
Interest payments 1 August to 15 October 2002 (95) (78)
Projected operating expenditures, exceptional restructuring costs, working
capital movements and other disposals (408) (197)
Other net interest paid (12)
Total cash movement (267) 6
During the second quarter, the Group generated a total cash inflow of
GBP6 million as set forth in the table above.
In August 2002, Marconi completed the sale of its Strategic Communications
business for cash proceeds of over GBP290 million, net of Italian bilateral
indebtedness. An additional GBP2 million of other bilateral indebtedness was
also repaid during the period.
A net cash outflow of GBP197 million was incurred during the second quarter in
relation to operating expenditures, exceptional restructuring costs, working
capital movements and disposals other than the sale of Strategic Communications,
in line with the Group's projected cash outflow of GBP408 million in this
respect from 1 July 2002 to the expected completion of Restructuring.
The operating cash outflow was lower than the previous quarter, largely as a
result of cash generated from the reduction of inventory. Net inventory turns in
the Core increased from 4.3 in June to 5.1 in September mainly as a result of
continued improvements to the Group's sales and operations planning process
designed to better align inventory in-feed with forecast sales demand. Core
debtor days increased from 97 in June to 104 in September. This was due to
geographic mix with a higher proportion of Southern European sales where payment
terms are typically longer than average combined with a decline in US sales
where payment terms are shorter. Core creditor days increased from 48 in June to
53 in September as the reduced inventory in-feed resulted in a higher proportion
of suppliers with longer settlement profiles.
Depreciation in the Core is currently running at GBP30 to 40 million per quarter
and capital expenditure at less than half that rate.
Exceptional restructuring cash costs amounted to approximately GBP100 million
during the period. This comprised mainly the cash costs relating to the Group's
operational restructuring and reorganisation including cash costs associated
with the Group's manufacturing outsourcing programme, payments made under
onerous contracts and as a result of supplier liability claims, and most of the
balance to payments to advisors in relation to the Group's financial
restructuring.
Cash inflows from other disposals including proceeds from the sale of Applied
Technologies were partially offset by the payment of transaction-related costs
and fees, a payment to Court relating to litigation regarding the Group's
joint-venture, Ultramast as well as prior year US Federal tax charges paid in
the quarter.
Net interest paid in the period amounted to approximately GBP90 million. Of the
interest paid, approximately GBP78 million of this was paid by Marconi
Corporation plc in August and September including the payment of Marconi
Corporation's US dollar bond coupon and, as planned as part of the Restructuring
process, the payment of accrued interest on Marconi Corporation's Eurobonds as
at 15 September 2002, together with interest due to the Group's syndicate banks.
After the end of the quarter, on 15 October 2002, as planned as part of the
Restructuring process, Marconi paid all interest on Marconi Corporation's
financial indebtedness (including bond and syndicate bank debt) accrued as at
that date. This amounted to GBP14 million. The GBP78 million paid in August and
September and the GBP14 million paid in October constitute GBP92 million of the
projected GBP95 million interest payments which form part of the planned GBP260
million cash distribution to creditors within the framework of the
Restructuring.
The Group confirms that its cash flows during the period 1 July to 30 September
2002 were in line with the previously disclosed projected cash movement for the
period 1 July 2002 to expected completion of Restructuring. The Group also
confirms that it remains on track to deliver the planned cash distribution of
GBP260 million to creditors upon completion of Restructuring, subject to the
matters discussed in Note 1.
Net Debt
Net debt stood at GBP2,846 million at 30 September 2002 compared to GBP3,017
million at 30 June 2002. The decrease of GBP171 million in net debt relates
primarily to debt reduction arising from the disposal of Strategic
Communications and foreign exchange translation movements.
Net debt comprised GBP1,071 million of cash and gross financial debt of GBP3,917
million made up of GBP1,695 million of Euro and US dollar bond debt, GBP2,117
million of syndicate bank debt and GBP105 million of bilateral and other bank
debt. The reduction in the sterling equivalent amounts of syndicate bank debt
and bonds outstanding compared to the value at 31 March 2002 relates to foreign
exchange translation. In addition, interest rate swap arrangements totalling
GBP53 million were converted to new loan agreements in the period.
As previously announced, in September 2002, Marconi granted interim security to
the Group's syndicate banks, bondholders (including the bond trustees) and
certain ESOP derivative providers over the balance of the cash held in the
lockbox accounts established in April 2002. At 30 September 2002, the balance of
the secured cash amounted to GBP738 million.
Financial Restructuring
Marconi continues to work with the Co-ordination Committee of Syndicate Banks
and an informal ad hoc committee of bondholders to finalise the specific details
with respect to the Restructuring consideration (as outlined in Marconi's
announcement on 29 August 2002) as part of the process of implementing the
Restructuring. The agreed terms and conditions of the Restructuring will be set
out in the formal Scheme documentation. Marconi believes the restructuring
process is on track for expected completion at the end of January 2003.
Interim Results
Marconi expects to publish its audited interim results for the first six months
ended 30 September 2002 on 26 November 2002.
Q2 Trading Update - Conference Call for Analysts and Investors
A conference call and audio webcast will be held for analysts and investors
today (22 October) at 4 pm, UK time.
Dial-in details (from Europe) +44 (0) 20 8896 3900 or (from US) +1 617 801 9702
and quote "Marconi Trading Update".
An instant replay will be available for seven days by dialling +44 (0)1296 618
700, access code 470 427 or +1 617 801 6888, access code 63745
Materials to accompany the presentation will be available on Marconi's website
www.marconi.com.
Notes
1. The estimated distribution of GBP260 million set out in the Group's
announcement on 29 August 2002 assumed that Marconi will have cash resources
available for distribution on completion of the Restructuring of
approximately GBP165 million; GBP92 million of the balance of approximately
GBP95 million comprising due and payable and accrued interest has been paid
to 15 October 2002. The actual amount of cash ultimately available for
distribution as part of the Restructuring will be dependent, amongst other
things, on the Group's on-going trading performance, proceeds from further
non-core asset disposals, the post-Restructuring working capital
requirements of the business (including obtaining a new working capital
facility), performance bonding facilities, foreign exchange rate movements
and upon the terms of the final agreement with creditors.
ENDS/...
Notes to Editors
About Marconi plc
Marconi plc is a global telecommunications equipment and solutions company
headquartered in London. 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.
Additional information about Marconi can be found at www.marconi.com.
Copyright (c) 2002 Marconi plc. All rights reserved. All brands or product names
are trademarks of their respective holders.
Contacts
Name: David Beck / Joe Kelly
Title: Public Relations
Phone: +44 (0) 207 306 1771
joe.kelly@marconi.com
Name: Heather Green
Title: Investor Relations
Phone: +44 (0) 207 306 1735
heather.green@marconi.com
Cautionary statement regarding forward-looking statements
In order to utilize the "Safe Harbor" provision of the U.S. Private Securities
Litigation Reform Act of 1995, Marconi plc ("the Company") is providing the
following cautionary statement. Except for reported financial results or other
historical information, certain statements in this press release are
forward-looking statements, including, but not limited to, statements that are
predictions of or indicate future events, trends, plans or objectives. Reliance
should not be placed on such statements because, by their nature, they are
subject to known and unknown risks and uncertainties and can be affected by
other factors which are beyond the control of the Company and its subsidiaries,
and may cause actual results, performance and achievements to differ materially
from anticipated future results, performance and achievements expressed or
implied in the forward-looking statements (and from the past results,
performance or achievement). Although not exhaustive, the following factors
could cause such differences: any major disruption in production at our key
facilities; changes in the environmental, tax and other laws and regulations,
which, among other things, could cause us to incur substantial additional
capital expenditures and operation and maintenance costs; and adverse changes in
the markets for our products, including as a result of increased competition in
the highly competitive international markets for such products. These factors
and other factors that could effect these forward-looking statements are
described in the Company's Form 20-F report and Form 6-K reports filed with the
U.S. Securities and Exchange Commission. The Company disclaims any obligation to
publicly update or revise these forward-looking statements, whether to reflect
new information or future events or circumstances or otherwise.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARCONI PLC
By: ____M Skelly____
Name: M Skelly
Title: Secretary
Date: 22nd October 2002