Heavy cost-cutting measures raise net earnings of listed corporations

Streamlining and dismissals leading to improved profits

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By Marjut Tervola
     
      The developments in the earnings of Finnish listed corporations have continued on a positive note all year. In a Helsingin Sanomat analysis, the combined net earnings of the twenty corporations with the highest market value grew by 20.6 percent over the first three quarters of 2005.
      Traditional industrial sectors, such as the machinery and metal industries, have enjoyed a particularly good year. The retail sector also fared well during the year’s first nine months, which is reflected in the earnings improvements of Kesko and Stockmann.
     
The best spurt in performance was put in by engineering group Metso, whose net income after financial items quadrupled from the previous year. Machinery group Wärtsilä also improved its net earnings.
      Metso’s excellent result is explained in part by the company’s earlier cost-cutting measures as well as good demand for its products. The products of Metso Minerals, which specialises in crushing machinery, have met with a particularly high demand. Metso also benefited from the rising prices of metals, as the price hikes have induced Metso’s mining customers to invest in new machinery.
      However, first the company had to save: Metso announced a drastic streamlining programme in 2003 which led to selling and closing plants, the outsourcing of production, and job cuts.
     
Steel company Rautaruukki, which also significantly improved its earnings, carried out a reorganisation in 2002–2004. According to chief analyst Pekka Spolander from the Opstock investment bank, many corporations streamlined their operations heavily a few years ago when the economic outlook was uncertain. "These measures have now started to produce improvements in net earnings", Spolander explains.
      On the other hand, a high level of demand in traditional industrial sectors has also helped markets grow. "The plants of many companies have been running at full capacity, which helps the companies to take full advantage of cost efficiency", Spolander continues.
      However, steel refiner Outokumpu took a nose-dive. The company has suffered from overcapacity in steel production and the rise of raw material prices. At present, Outokumpu is searching for cost cuts by shutting down its cold rolling mill in Sheffield, among others.
      The net incomes of forest industry companies such as Stora Enso sank, but that was to be expected. The prices of paper grades have been falling for several years.
     
According to Spolander, there have been few disappointments in earnings announcements, despite the high expectations.
      "One factor that has contributed to this is the pull of China. Strong demand in China has been reflected in equipment purchases and investments", Spolander observes.
      Global phenomena have affected the revenues of Finnish corporations: interest rates have been low, and consumers have dared to consume.
      In the United States, economic growth has marched on despite the fears surrounding inflation and the price of oil. Europe has posted the weakest growth figures.
      Spolander believes that such large improvements in corporate earnings may no longer continue.
      "There are no great pressures downwards, but I would be cautious concerning earnings growth. There have been many one-off jumps in earnings", Spolander reasons.
     
The Mandatum investment bank predicts in its recent dividend report that strong balance sheets and good income statements will be reflected in the dividends paid to shareholders next spring.
      According to Mandatum chief analyst Antti Suttelin, Finnish corporations have returned to a "normal level" in dividend payouts this year. In 2005 and 2006, tax issues will no longer decide dividend payout, but actual earnings.
      The distribution of additional dividends last year was a consequence of changes in dividend taxation which took effect at the beginning of this year.
     
"Looking at the good earnings figures, you could think that dividends will not fall that much from last year", muses Jorma Kokko, the head of the Finnish Shareholders’ Association.
      The figures of the Finnish Central Securities Depository reveal that listed Finnish corporations had paid their shareholders 8.3 billion euros in dividends by the end of October. Last year’s total was 6.4 billion.
     
Helsingin Sanomat / First published in print 10.11.2005

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MARJUT TERVOLA / Helsingin Sanomat