Impexmetal tries to reverse profit fall through restructuring

Impexmetal said it would concentrate on its aluminum and copper businesses, incorporate its steel operation into its Huta Zawiercie subsidiary and spin off its ball-bearing division. In addition, the company plans to reduce its payroll by half through a mix of layoffs and transfers to subsidiaries.
The moves came after a disastrous first half in which the company posted a zl. 2.1 million ($583,000) loss, despite management forecasts in March that 1998 profit would climb 121% compared to the previous year to zl. 43.7 million ($12.2 million).
The company is now projecting 1998 profit of just zl. 4.2 million ($1.2 million). This reflects the need to make reserves of zl. 8 million ($2.2 million) for restructuring costs, and for a zl. 13.6 million ($3.8 million) decline in sales.
Analysts were generally positive on the restructuring moves, although they said the company may need to refocus operations further if it is to truly move into the black.
"The restructuring of a holding (company) like this is necessary to monitor the profitability of individual subsidiaries," said Artur Szeski, an analyst at CBM Pekao brokerage house. "But just cutting costs might not be enough."
He added that it is still unclear in some ways what exactly the company will do and how it will react to changes in its markets brought about by changing global economic conditions.
"The aluminum market can be very lucrative, but we have to bear in mind that all non-ferrous metal markets are very sensitive to the economic situation in Asia, which is not great right now," Szeski said. "Turning to the domestic market could be a good chance for the company, which is trading in half-products, as the raw material prices are quite low now."
The company said that getting a grip on its businesses was a crucial first part to bringing Impexmetal back to financial health. After a boardroom coup this spring, which was engineered by major shareholder Nomura International with a more than 15% stake, new management focused on revising the company's information systems.
"We could not even estimate which branches were profitable and which were not," said CEO Jacek Krawiec. "The first thing was to redraw the restructuring plans according to long-term perspectives for the market."
At the same time, global forces, such as weakened demand for steel because of the Asian crisis, helped the company focus on its core businesses. The sale of steel products had accounted for about 35% of Impexmetal's total exports, which in 1997 accounted for 65% of sales of zl. 1.56 billion ($437.1 million). The company will not invest further into this business, however, and will incorporate steel operations into its Huta Zawiercie steel works subsidiary.
Instead of steel, the company will focus on aluminum, which is a more profitable business. To do so, Impexmetal will incorporate the Konin aluminum works into the parent company structure.
Selling off the ball-bearing division will allow the company to focus more on aluminum and copper. Krawiec said that a spin-off was favored by the division.
"They believe they can do much better on their own," he added. "A change in the ownership structure should motivate the staff of the ball-bearing plant much more. The alternative was closing the plant down, as it has regularly been bringing losses."
Krawiec said the company may also sell off other divisions that are not seen as fitting in with Impexmetal's core businesses. "But only if there is a buyer that makes us an interesting offer," he added.
On the cost side, the company will reduce its staff to 180 by next June from a current level of 359 employees. Only 60 workers will be laid off, however. The rest will be shifted to Huta Zawiercie. Management said the employee shifts will save Impexmetal about zl. 1 million ($275,000) a month, although severance payments will amount to about zl. 4 million ($1.1 million).
Management will also tighten its belt. Krawiec said management costs have already been reduced by 50%. In addition, Impexmetal will look to reduce debt to zl. 100-zl. 120 million ($27.7 million-$33.3 million) from the current zl. 180 million ($50 million). No details of how the company will pay down the debt have been revealed.
The market reacted cautiously to the restructuring plans. Impexmetal's shares held steady at zl. 8.7 during the week's first three trading sessions, but then lost 10% to close the week at zl. 7.8.
The company's shares have performed dismally since it went public on the Warsaw Stock Exchange (WSE) in June 1997. Impexmetal fell 35.7% to July 31 and then plummeted during the Russian crisis for a year-on-year loss of 77.7%. At the same time, the WSE fell 35.7% on a year-on-year basis.
The shares' poor performance has confounded brokerage houses. Union Bank of Switzerland, Nomura, and DM Magnus had all given the shares a "buy" recommendation over the past year.