YEAR-END REPORT 2006
(For table, please see the attahced file)
· Sustained robust volume growth. Volumes have grown by 9%.
· Operating income adjusted for non-recurring items and earnings from currency forward contracts was MSEK 513, a 13% increase year on year.
· The US powder market contracted in 2006 due to the trend towards smaller, more fuel-efficient cars.
Full year 2006
Net sales grew by 12%, to MSEK 5 123. The higher turnover is primarily due to increased volumes and implemented price increases. The new pricing model in Europe, which was introduced in the third quarter, had a lesser effect. Currency effects resulting from a stronger krona exerted a 1% negative effect on turnover.
Volumes expanded by 9% year on year. Höganäs’ volume growth has been good on all markets apart from China and Taiwan.
North American car sales and car production decreased somewhat year on year. The North American powder market sustained weak progress in the fourth quarter. The trend towards smaller, more fuel-efficient cars, simultaneous with the two largest American car producers losing market share, mean that the US powder market contracted in the year. The US represents about half of the global powder market. The market in Europe continued to rally.
Fourth quarter 2006
In the fourth quarter, turnover increased by 2% year on year. All markets apart from the US and China enjoyed improved year on year volume growth. US volumes were on a par with the previous year which was extra strong due to the storm Katrina. China’s volumes decreased. Southeast Asia sustained positive progress year on year. For the group, fourth-quarter volumes were comparable with the first quarter, and thus as expected, lower than in the second and third. Currency effects resulting from a stronger Swedish krona, particularly against the USD, JPY and EUR, exerted a 9% negative turnover effect year on year.
Full year 2006
Operating income was MSEK 602 (461). Excluding the non-recurring items stated below and the net from currency forward contracts, income was MSEK 513 (455), a 13% increase. Increased volumes and previously implemented price increases had a positive impact on earnings.
Rising energy prices adversely affected earnings. Scrap, nickel and copper prices increased in the year, exerting a negative earnings impact. In the second half-year 2006, nickel prices increased from some USD 20 000 per ton to USD 34 000 per ton at year-end. This affected Components’ earnings negatively, because the impact of metal price increases is delayed when setting customer pricing. However, Consumables’ earnings benefited because price compensation here is faster. Moreover, operating income - disregarding currency forward contracts - reduced by some MSEK 40, mainly because of lower JPY and USD exchange rates.
Other operating income and operating expenses were MSEK 75 (180) including earnings from currency forward contracts of MSEK 73 (129) and non-recurring items. An amnesty was granted in the quarter on some costs Höganäs provisioned earlier in the year in its Brazilian operations, the majority relating to value-added tax. The cost was thus reduced by MSEK 21, and has an estimated total of some MSEK 41, of which MSEK 20 affects operating income, and the remainder, net financial income and expenses. More CO2 emission rights were divested in the final quarter. Earlier in the year, a smaller product segment in Brazil was divested, generating a capital gain of MSEK 10. Accordingly, non-recurring items amounted to MSEK 16 primarily comprised of the tax issue in Brazil of MSEK 20, a capital gain on a product segment in Brazil of MSEK 10 and MSEK 26 of earnings from sales of CO2 emission rights.
Income before tax was MSEK 525 (408). The provisioning in Brazil reduced net financial income and expenses by MSEK 21. Non-recurring items had a negative impact of MSEK -5 (-124) on income before tax.
Income after tax was MSEK 402 (290), or SEK 11.54 per share before and after dilution (8.39). The effective tax rate was 23.4% (28.9).
Fourth quarter 2006
Operating income was MSEK 146 (131). Underlying earnings, excluding non-recurring items and earnings from currency forward contracts were MSEK 93 (109). Rising metal prices - particularly nickel - exerted an adverse impact on profitability. Increased energy costs and a stronger SEK also had negative earnings impact. Non-recurring items, including earnings from currency forward contracts, increased earnings by MSEK +53 (22). The reduced provisioning for costs in Brazil exerted a MSEK +21 earnings impact. Sales of CO2 emission rights generated earnings of MSEK +8. Earnings from currency forward contracts in the quarter were MSEK 24.
Income before tax was MSEK 138 (115).
As a step towards an increased market orientation, Höganäs has chosen to monitor and report its operations from a market perspective from 2006 onwards. That portion of the metal powder market where Höganäs is active can be divided into two main fields of application: Components and Consumables. Components encompass all powder where value is added to create components. Consumables covers those powders used in processes such as preparing metals, as supplements to chemical processes, surface coatings or food additives. Components represent some 70% of consolidated turnover, and Consumables, some 30%.
The net sales of the Components business area were MSEK 3 673 (3 196), a 15% increase year on year. The increase is due firstly to expanded volumes, and secondly to price changes implemented. Exchange rate fluctuations exerted a lesser, negative impact on turnover.
Volumes have increased by 10% in the year. All markets sustained positive volume growth, apart from China and Taiwan.
Operating income was MSEK 332 (223). As stated previously, earnings were adversely affected by rising metal prices, increased energy costs and currency effects. The aforementioned non-recurring items exerted a marginal positive impact on operating income. Excluding non-recurring items, operating margins were 8.9% (9.5) in 2006.
For Consumables, net sales were MSEK 1 450 (1 398), a year on year increase of 4%. The increase is due to higher volumes, metal price fluctuations and price changes effected in previous quarters.
Volumes increased by 7% year on year. Volume growth remained positive, mainly in Taiwan, South Korea, South America and India.
Operating income was MSEK 197 (109). Non-recurring items had a positive impact on earnings. Operating margins, excluding non-recurring items, were 12.8% (10.8). Earnings were increased by earnings on metals.
Return on capital employed was 15.5% (12.0) and return on equity was 15.5% (12.2). Returns are calculated on the most recent 12-month period and include one-off items.
FINANCIAL POSITION AND CASH FLOW
The equity/assets ratio continued to strengthen in the fourth quarter to 51.5% (48.5) at the end of the period. Shareholders’ equity per share was SEK 75.40 (73.30).
Consolidated financial net debt was MSEK 1 009 at the end of the period, down MSEK 378 since the previous year-end. This was a consequence of earnings and the capital rationalisation package underway since autumn 2005. Net financial income and expenses were MSEK -77 (-53), with provisioning for tax in Brazil exerting a negative impact of MSEK 21 on net financial income and expenses.
Cash flow from operating activities was MSEK 626 (423). Increased metal prices and more inventories at year-end resulted in a negative cash flow in the quarter. Investments in fixed assets were MSEK 219 (260). Emission rights were sold in the year, affecting cash flow by MSEK 30. Financing activities reduced cash flow for the period by MSEK -442 (-152) comprising dividends paid of MSEK -200 and net change of loans of MSEK -242.
Höganäs had 1 557 employees at the end of the period, against 1 551 as of 1 January.
Parent company net sales were MSEK 2 911 (2 490) of which MSEK 1 277 (1 087) to group companies. Income after financial items was MSEK 350 (300). Investments in tangible fixed assets were MSEK 116 (115). The parent company’s liquid funds were MSEK 42 at the end of the period, against MSEK 30 as of 1 January.
ELECTION COMMITTEE AND ANNUAL GENERAL MEETING
In accordance with the decision taken at the AGM in April a new election committee has been appointed. It comprises Per Molin, Chairman of Höganäs AB, Ulf G Lindén, Lindéngruppen AB, Carl-Olof By, Industrivärden, Ramsay Brufer, Alecta and Henrik Didner, Didner & Gerge Fonder AB.
The Annual General Meeting will be held at 3 p.m. on 25 April 2007 at HB-hallen, Höganäs, Sweden.
The Board of Directors is proposing dividends of SEK 6.25 (5.75) per share to the AGM (Annual General Meeting). The scheduled record day is 30 April 2007.
The board intends to propose that the annual general meeting 2007 resolves to adopt a performance based incentive programme with the objective to offer key employees within the group the possibility to future shareholding in the company and thereby an increased interest for and engagement in the business of the company. The board considers the proposal to be a first part of a three year programme and therefore intends to submit proposals regarding incentive programmes on corresponding terms also for the annual general meetings 2008 and 2009.
In order to carry out the proposed incentive programme the board will also propose that the annual general meeting authorizes the board to resolve to purchase and sell the company’s own shares of class B.
The incentive programme will be directed to the managing director and the other persons in the management group of the company as well as to approximately 35 additional key employees within the group, in total approximately 50 persons, who with a maximum allotment will be able to acquire in total 250,000 shares of class B.
Allotment of options will commence during March 2008, at the earliest, and allotment will be dependent on the increased value of the group during 2007 in relation to targets set by the board. The term of the options will be between two and four years as from the time of allotment. The redemption price will be determined to an amount equal to 120 per cent of the average volume weighted price paid at the Nordic Stock Exchange for a share of class B during a period of ten trading days immediately following the annual general meeting 2007. The incentive programme will only entail a marginal dilution of shares and effect on the key figures of the group.
With reference to the commitments made towards Alrik Danielson at the time of his employment, the board further intends to propose that the annual general meeting resolves to approve an additional share related incentive programme for Alrik Danielson. The programme is intended to run for a period of three years.
Alrik Danielson shall free of charge receive class B shares in the company for each of the calendar years 2006, 2007 and 2008 during which the company meets the budgeted EBIT. As a further condition he shall himself acquire and retain a certain number of shares in the company. The programme will mean that Alrik Danielson, subject to full allotment, when the programme has been finally completed may become the owner of in aggregate 36,000 shares of class B during 2009, out of which 9,000 will have been acquired by him and 27,000 will have been received from the company.
The board intends as part of the programme to propose that the annual general meeting authorizes the board to transfer, free of charge, 3,000 class B shares of the company’s own shares to Alrik Danielson since the EBIT-budget have been met during 2006, provided, however, that he, himself, at that time owns 3,000 class B shares in the company.
The complete proposals of the board will be presented well before the annual general meeting.
OUTLOOK FOR 2007
Positive progress on the metal powder markets in Asia and South America is expected to continue. Weaker progress in North America is expected to persist, whilst Europe is expected to remain stable. The trend towards smaller and more fuel-efficient vehicles in North America will continue to hamper the growth of metal powders. Metal prices are expected to remain volatile during 2007. With these market assumptions Höganäs expects to achieve a continued positive volume development.
The Board of Directors
Höganäs, Sweden, 9 February 2007
(For the complete report, please see the attached file)