Year-End Report 1998

PRESS RELEASE YEAR-END REPORT 1998 @The AGA Group is currently undergoing restructuring and modernization to focus on the areas of competence in which AGA has a particularly strong position. This is intended to increase efficiency and improve competitiveness. The efficiency improvement programs, which were intensified and extended at the end of 1998, entail substantial costs, and a special provision of SKr 720m has been made in the 1998 closing accounts for one-time restructuring costs. In addition, unprofitable facilities, mainly in Russia and Ukraine, have been written down by SKr 180m and operating assets in South America by SKr 75m. @ Income after financial items for 1998 amounted to SKr 1,531m (1,746) prior to the above-mentioned provisions and write-downs for restructuring totaling SKr 975m (105). After these provisions, earnings amounted to SKr 556m (1.641). @ Sales rose 5 percent to SKr 15,088m (14,408). Operating income amounted to SKr 1,758m (1,847) before restructuring costs, etc., and the operating margin was 11.7 percent (12.8). @ Earnings per share after full tax amounted to SKr 4.46 (4.80) before and SKr 1.52 (4.51) after restructuring costs, etc. @ Cash flow from operations increased by 14 percent to SKr 2,918m (2,555). Investments in new plant and equipment amounted to SKr 2,002m (2,859), corresponding to 13.3 percent (19.8) of sales. @ During the year, the number of employees was reduced by 693 persons to 10,203. @ The Board of Directors proposes an unchanged dividend of SKr 3.00 per share and a redemption of shares totaling approximately SKr 3,000m. @ Sales In 1998, the Group's sales increased by 5 percent to SKr 15,088m (14,408). Exchange rate fluctuations accounted for three percentage points of this increase, while the net effect of new and sold operations was insignificant. In the fourth quarter, the economic situation deteriorated still further in the majority of AGA's markets in the wake of the economic crises in Russia and Asia. The sales trend for the full year 1998 was therefore weak in terms of both volumes and prices. Sales increases were still over 20 percent in Eastern Europe, excluding Russia and Ukraine where sales fell sharply due to the economic crisis. Considerable sales increases were also achieved in the U.K., Spain, Argentina and Uruguay. 2 Earnings The Group's operating income was charged with considerable costs for the efficiency programs which were started at the beginning of 1998. These costs increased substantially in the fourth quarter. Improved efficiency of product supply and distribution made a positive contribution in 1998. In December, the Board decided to expedite restructuring and extend the efficiency programs so that AGA's competitiveness could be improved more quickly. Thus, the number of employees will be reduced by a further 1,700 persons over the next two years. The costs of these and other measures decided earlier are expected to amount to approximately SKr 720m. On the same occasion, the Board decided to write down unprofitable facilities, mainly in Russia and Ukraine, by a total amount of SKr 180m. In addition, operating assets in South America were written down by SKr 75m. Provisions totaling SKr 975m have been made for these items in the 1998 closing accounts, where they are reported on a separate line in operating income. Operating income for the year amounted to SKr 1,758m (1,847) before the above- mentioned restructuring provisions and write-downs. Exchange rate fluctuations provided an increase of 2 percent. The largest increases in operating income were reported for the companies in Colombia, Uruguay, Mexico, Spain, Switzerland and Hungary, while earnings were below the 1997 in a number of countries including Finland, France, Germany, the Netherlands, Ukraine, Venezuela, Chile and Ecuador. The operating margin for the year amounted to 11.7 percent (12.8). The margin fell to 8.9 percent in the fourth quarter, mainly due to the costs of the efficiency programs and certain other nonrecurring costs, which apply in particular to North America. The number of employees was reduced by 693 persons in 1998. Adjusted for acquisitions and sale of operations, the reduction was 752 persons or 7 percent. The largest cutbacks were made in Russia and Ukraine, as well as in South America. The Group's net financial items comprised an expense of SKr 227m (101). The SKr 126m increase was mainly due to lower interest income due to lower average liquidity and the fact that AGA has reduced its equity hedging. Income after financial items decreased to SKr 1,531m (1,746) before the restructuring costs of SKr 975m (105). After these costs, income after financial items amounted to SKr 556m (1,641). The net profit for the year was SKr 370m (1,099) after deduction for tax of SKr 184m (537). Deferred tax was reduced by SKr 260m constituting the tax effect of the year's restructuring costs, etc. Earnings per share after full tax amounted to SKr 4.46 (4.80) before and SKr 1.52 (4.51) after restructuring costs. 3 Financing and Investments As can be seen in the funds statement, the cash flow from operations increased by 14 percent to SKr 2,918m (2,555). The lower level of capital expenditure contributed to a SKr 1,060m improvement in the net cash flow, after dividends, to SKr -14m (-1,074). The Group's financial net debt increased during the year by SKr 352m to SKr 3,775m. Liquid assets and investments decreased by SKr 389m to SKr 2,434m and loans decreased by SKr 37m to SKr 6,209m. The equity ratio amounted to 47.2 percent (49.1) and the net debt/equity ratio was 30.9 percent (27.9). During the year, AGA invested SKr 2,002m (2,859) in new plant and equipment, which corresponds to 13.3 percent (19.8) of the Group's sales, A further SKr 297m (346) was invested in plant and goodwill related to acquisitions. In 1998, new air separation plants went into operation in Sweden, Finland, Brazil and Argentina, and in Finland AGA took over an existing plant from Outokumpu. An air separation plant in Peru was completed at the beginning of 1999, an extension in the U.S. will be ready in the spring, and an air separation plant in Italy will go on stream in the summer. This will mark the end of the extensive capital expenditure program started in 1995. Production plants for carbon dioxide have been built in Argentina and Chile and a number of OSS installations have been built for production of oxygen and nitrogen on customer premises. In January 1999, AGA sold its subsidiary in Bolivia to Praxair, which in return transferred its operations in Ecuador to AGA. Another gas distribution company was acquired in the U.S. The restructuring program has led to a review of the company's involvement in the U.K. The market share is small and profitability has failed to reach a satisfactory level. AGA is therefore reviewing the possibilities for a sale of its U.K. subsidiary. Business areas Manufacturing Industry, which sells cylinder gases and liquid gases primarily to the metalworking industry for cutting and welding, reports a sales increase of 4 percent to SKr 7,611m (7,317), which accounted for 50 percent of the Group's total sales. The largest increases were achieved in the U.S. and Mexico, and in Eastern Europe excluding Russia and Ukraine. The business area had a good operating margin, although it decreased during the year. AGA has a leading position in the majority of markets and the large number of customers within several industries provide stability and a good spread of risk. 4 Volumes of liquid gases and shielding gases for cutting and welding increased by 5 percent, while a weaker trend was noted for acetylene and oxygen in cylinders. Although a large portion of volume increases came from markets in Eastern Europe, where prices are lower, average prices were only slightly below the level in the previous year for cylinder gases and largely unchanged for liquid gases. The business area's market position was strengthened through the introduction of package solutions for specific customer segments. Individual labeling of gas cylinders was also introduced in Sweden and Norway, where AGA is now the only company able to offer complete cylinder management systems. Process Industry, which accounted for 36 percent of the Group's sales, reports a sales increase of 5 percent to SKr 5,439m (5,176). Sales of air gases via pipelines rose by 19 percent after new plants went into operation in Sweden, Austria and Brazil. Sales from OSS installations rose by 52 percent. On the other hand, sales of liquid gases did not increase, partly because some customers have converted to OSS and, in some cases, to pipeline deliveries. The business area is very capital intensive and the major investments of recent years have reduced operating margin. In order to improve earnings, operations are now focused on raising price levels, and on lower costs and investments. Marketing efforts are being concentrated to selected geographic areas. All the business area's three customer segments, metallurgy, chemistry and food, increased their sales. The metallurgy segment increased by 7 percent in spite of negative development in the steel industry. AGA is the world leader in combustion technology, which is used in the steel and glass industries as well as for waste incineration. The chemistry segment, which reports a 6 percent sales increase, had considerable success with its products for water treatment, paper pulp production and recovery of solvents, etc. AGA has also signed contracts for large deliveries of specialty gases to petrochemical companies and, most recently, to a manufacturer of fiber optic cables. The food segment's sales rose by 3 percent. Installations of gas freezers rose substantially, both for traditional freezers and for two recently launched freezers for ready-cooked meals. Healthcare, with 14 percent of the Group's sales, increased its sales by 6 percent to SKr 2,038m (1,915). Home care is the most expansive area with a sales increase of more than 15 percent. In the hospital sector, price pressure intensified due to hospital rationalization programs which, on the other hand, also led to greater interest in AGA's range of services. 5 The business area had a good operating margin. Healthcare is the world leader in development towards pharmaceutical standards for medical gases and a better adaptation of products and services to meet the special requirements of the health care sector. The competitive scenario differs favorably from that of the industrial gas market, particularly in the fast-growing home care sector. In July, AGA acquired the license rights for inhaled nitric oxide (NO) in the U.S. and Canada as well as the nitric oxide operations in the U.S. previously conducted by BOC's subsidiary Ohmeda. This acquisition included a development and sales organization in New Jersey and a production plant in Louisiana, with a total of 63 employees. The acquisition had no appreciable impact on earnings in 1998 since development costs for the year were borne by the sellers. Clinical studies to evaluate the therapeutic potential of inhaled NO for treatment of persistent pulmonary hypertension of the newborn have now been completed and the data from these studies is being processed. An application for pharmaceutical registration in the U.S. is planned for mid-1999. In the U.S. the use of this method is already established and after registration sales are expected to be substantial. A registration application is also being prepared in Europe. In 1999, approximately SKr 140m will be charged to operating income for the NO project which, however, is expected to give a surplus from the year 2000. Anticipated market development in 1999 AGA's strategy also includes a concentration to the markets and product areas where the Group's position is strongest. AGA does not expect any immediate improvement in the relatively weak general economic situation. Growth for industrial gases is normally higher than growth in industrial production, while sales of medical gases and gases to the food industry are relatively unaffected by business cycles. The devaluation of the Brazilian currency in January is expected to have significant negative effects on growth in Brazil and its neighboring countries, and there is considerable risk of devaluation in other countries in South America. The devaluation itself represents a cost for AGA as the company's working capital is reduced in value, but this impact on earnings will be limited since working capital in South America was written down in the 1998 closing accounts. AGA reports the effects of devaluations in South America and some other countries in earnings and not directly in equity. Since these countries are generally high-inflation countries, AGA consequently uses the monetary method when translating subsidiaries' accounts into Swedish kronor. 6 Proposed dividend, etc. The Board of Directors proposes an unchanged dividend of SKr 3.00 per share, a total of SKr 730 m. The Board intends to propose to the Annual General Meeting a redemption of shares totaling approximately SKr 3,000m. AGA intends to use this redemption program to bring the capital structure in line with the rest of the industry. An extensive capital expenditure program was completed in 1998, which in that year could be financed with internally generated funds. It is expected that the changed capital structure will provide ample scope for the Group's ongoing expansion. Proposed terms for the redemption will be announced in the notice to the Annual General Meeting and the application period is intended to start at the beginning of May. The Annual General Meeting will be held on April 22, 1999. April 27 is proposed as the record date with VPC and dividends are expected to be paid from VPC on May 4. AGA's Annual Report will be published at the end of March. AGA's results for the first quarter of 1999 will be published on April 22. Lidingö, February 24, 1999 AGA AB (publ) Lennart Selander 7 QUARTERLY DATA Q 1 Q 2 Q 3 Q 4 Q 1 Q 2 Q 3 Q 4 SKr million 1997 1997 1997 1997 1998 1998 1998 1998 Sales 3,395 3,674 3,589 3,750 3,752 3,719 3,733 3,884 Operating income 432 509 440 466 501 461 452 344 (before restructuring costs, etc.) Operating 12.7 13.9 12.3 12.4 13.4 12.4 12.1 8.9 margin, percent Net financial -18 3 -20 -66 -40 -11 -75 -101 items Income after 414 512 420 400 461 450 377 243 financial items Restructuring -105 - - - - - - -975 costs, etc. Earnings per 0:81 1:38 1:04 1:28 1:31 1:26 1:11 -2:16 share, SKr (after full tax, after restructuring) No. of 11,095 11,086 10,985 10,896 10,720 10,494 10,291 10,203 employees, end of period * SALES BY BUSINESS AREA SKr million 1998 1997 Manufacturing Industry 7,611 7,317 Process Industry 5,439 5,176 Healthcare 2,038 1,915 Total 15,088 14,408 SALES BY REGION Western Europe 8,460 8,170 Eastern Europe 751 671 North America 3,277 3,102 South America 2,600 2,465 Total 15,088 14,408 ** OPERATING INCOME BY REGION Western Europe 1,348 1,489 Eastern Europe -26 -46 North America 244 245 South America 192 159 Total 1,758 1,847 ** OPERATING MARGIN BY REGION Percent Western Europe 15.9 18.2 Eastern Europe -3.5 -6.9 North America 7.4 7.9 South America 7.4 6.5 Total 11.7 12.8 * 1997 sales by business area have been revised in accordance with the 1998 organization. ** Excluding restructuring costs, etc. 8 CONSOLIDATED INCOME STATEMENT SKr million 1998 1997 Sales 15,088 14,408 Cost of sales -9,176 -8,658 Gross income 5,912 5,750 Selling expenses -2,589 -2,333 Administrative expenses -1,489 -1,470 Research and development costs -274 -288 Restructuring costs, etc. -975 -105 Other operating earnings, net 169 158 Share of income in associate companies 29 30 * Operating income 783 1,742 Net financial items -227 -101 Income after financial items 556 1,641 ** Tax -184 -537 Minority interests -2 -5 Net income 370 1,099 * Depreciation charged to operating 1,822 1,644 income ** Paid tax 330 439 Earnings per share, SKr After full tax, before restructuring 4.46 4.80 costs, etc. After full tax, after restructuring 1.52 4.51 costs, etc. Return, percent On capital employed, after restructuring 5.5 10.9 costs, etc. On shareholders' equity, after 3.0 9.2 restructuring costs, etc. 9 CONSOLIDATED BALANCE SHEET SKr million 1998 1997 ASSETS Goodwill 1,046 1,075 Plant and equipment 17,804 16,803 Shares 544 481 Long-term receivables 157 195 Total fixed assets 19,551 18,554 Inventories 939 907 Other current receivables 3,135 2,878 Liquid assets and investments 2,434 2,823 Total current assets 6,508 6,608 TOTAL ASSETS 26,059 25,162 SHAREHOLDERS' EQUITY AND LIABILITIES Share capital 1,217 1,217 Restricted reserves 6,226 5,439 Retained earnings 4,403 4,520 Net income 370 1,099 Total shareholders' equity 12,216 12,275 Minority interests 87 79 Provisions for pensions 1,141 1,080 Provisions for deferred tax 2,269 2,339 Provisions for restructuring 720 - Total provisions 4,130 3,419 Long-term loans 2,628 2,731 Short-term loans 3,581 3,515 Total loans 6,209 6,246 Other long-term liabilities 476 473 Other current liabilities 2,941 2,670 Total other liabilities 3,417 3,143 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 26,059 25,162 Net debt 3,775 3,423 Net debt/equity ratio, percent 30.9 27.9 Equity ratio, percent 47.2 49.1 10 CONSOLIDATED FUNDS STATEMENT SKr million 1998 1997 OPERATIONS Operating income 783 1,742 Reversal of depreciation 1,822 1,644 Reversal of restructuring reserve, 975 - etc. Net financial items -227 -101 Paid tax -330 -439 Adjustment for associate companies -7 -9 Cash flow-related operating 3,016 2,837 surplus Change in working capital Inventories 3 -40 Accounts receivable, trade -119 -62 Other current receivables -64 142 Current operating liabilities 71 -312 Long-term operating items 11 -10 Total change in working capital -98 -282 CASH FLOW FROM OPERATIONS 2,918 2,555 INVESTMENTS New plant and equipment -2002 -2,859 Plant and equipment from -265 -102 acquisitions Goodwill from acquisitions -32 -244 Sales, disposals, etc. 305 222 Shares, net -34 5 CASH FLOW FROM INVESTMENTS -2,028 -2,978 Effect on liquid assets of equity -174 6 hedging Dividends to shareholders -730 -657 NET CASH FLOW -14 -1,074 NET DEBT Net debt at the beginning of the 3,423 1,879 period Net cash flow 14 1,074 Currency effect 338 470 Net debt at the end of the period 3,775 3,423 ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/02/24/19990224BIT00530/bit0001.doc http://www.bit.se/bitonline/1999/02/24/19990224BIT00530/bit0002.pdf