Interim report, January - June 1998
Streamlining completed The Group completed the streamlining into medical technology and changed name to Gambro on July 1. Sales amounted to SEK 10,600 M (10,309). For business area Medical Technology sales increased by 41% incl. acquisitions. Earnings after financial items amounted to SEK 1,327 M (11,735), including nonrecurring items of SEK 875 M (11,101). Increased sales and expanded operations in medical technology but a weaker trend of earnings, primarily due to production disturbances. Continued focusing of operations -It is proposed that the holding of ABB shares be sold to Gambro's shareholders. -The holding of Electrolux shares was sold. -Agreement was reached covering sale of the MacGREGOR subsidiary. For further information: Bengt Modéer, Senior Vice President, Corporate Communications, +46-8-613 65 00, +46-70-513 65 33 Gambro is an international medical-technology group with revenues of approximately SEK 18 billion and about 17,000 employees in some 40 countries. INTERIM REPORT* - SIX MONTHS ENDED JUNE 30, 1998 Sales amounted to SEK 10,600 M (10,309). Sales of the Group as presently structured, including acquisitions, increased 33% compared with sales in the corresponding period in 1997. Operating earnings amounted to SEK 1,462 M (11,750). Operating earnings of the Group as presently structured amounted to SEK 901 M (814). Earnings after financial items amounted to SEK 1,327 M (11,375). This included nonrecurring earnings totaling SEK 875 M (11,101) from the sale of shareholdings and companies. Comparable earnings a year earlier also included participations totaling SEK 355 M in the earnings of associated companies. Earnings per share was SEK 2.32 (28.70). The overall effects of movements in foreign exchange rates during the period were minor. Operations in the field of medical technology continued to expand through acquisitions of clinics, among other activities. Sales of dialysis products were higher, but the earnings were unsatisfactory, primarily due to production disturbances of dialyzers and continued weak development for cardiopulmonary care products. The marine cargo-handling business was strong, with favorable trends of sales and earnings. The strategic focusing of the Group on medical technology continued. It is proposed that the shareholding in ABB AB be sold to Gambro's shareholders. The holding of Electrolux shares was sold. An agreement to sell the majority of shares in the MacGREGOR subsidiary has been reached. The remaining shareholding in Munters has been sold. *)Pertains to the then Incentive, whose name was changed to Gambro on July 1, 1998. Group key ratios January - June July 97 Jan-Dec SEK M 1998 1997 - June 98 1997 Revenues 10,600 10,309 19,781 19,490 Operating margin, % 13.8 114.0 19.4 72.5 Earnings after financial 1,327 11,735 3,482 13,890 items Return on shareholders' 6.2 102.5 9.8 57.6 1) equity, % Return on total assets, % 8.0 56.6 9.8 35.3 1) Earnings per share, SEK 2.32 28.70 7.32 33.70 Shareholders' equity per 74.58 69.37 74.58 74.25 share, SEK Solidity (equity/assets 58 48 58 52 ratio), % 1) After full tax MEDICAL TECHNOLOGY Sales in the first half of 1998 for business area Medical Technology amounted to SEK 9,007 M (6,341) - an increase of 41%, adjusted for foreign exchange movements, compared with sales in the year-earlier period. Operating earnings before depreciation (EBITDA) amounted to SEK 1,681 M (1,226), 37% higher than in the first half of 1997. The operating margin before depreciation was 18.7% (19.3). Operating earnings after depreciation (EBIT) amounted to SEK 818 M (775) and the corresponding margin was 9.1% (12.2). Dialysis Products Sales increased to SEK 3,824 M (3,587), an increase of 7%, adjusted for foreign exchange effects. The growth in volume of business in Europe and the United States continued to be in line with growth of these markets. Sales and deliveries of monitors continued to develop well and are following growth in the markets in Europe and the United States, among other regions. Sales of products used in the treatment of acute kidney failure - including the Prisma monitor - have been very strong. In May a company involved in the development and production of central water treatment systems for dialysis clinics was acquired. For disposable products, the growth in volume of sales of the BiCart bicarbonate cartridge continues to be favorable, but with continuing pressure on prices in certain markets. Sales of blood-lines were firm but were affected by production problems and a consequent product recall in May of this year. This has caused some additional costs. Three lots of blood tubing sets were believed to be the cause of a few incidents of hemolysis, a destruction of the red blood cells. The company is working closely with the authorities to investigate these incidents. The dialyzer filter operations have not developed satisfactorily. Sales increased but were lower than planned. The earnings were unfavorable, primarily due to production problems in one factory and underutilization of production capacity. The implementation of Gambro's own dialyzers in the US clinics has therefore proceeded more slowly than planned. Against this background and the foreseen continued pressure on margins, the Group is planning a review of the structure and efficiency of the operations within the business area Dialysis Products. The objective is to accelerate the ongoing rationalization and restructuring program that is being conducted within the area. In the new organisation established on July 1, 1998 a new position as Vice President Operations with global responsibility for the production of dialysis products is included. The actions planned to cope with the problems indicated above will not improve operating (EBITDA) margin for business area Medical Technology before year- end. Dialysis Care Sales amounted to SEK 4,338 M (1,802), an increase of 120%, adjusted for foreign exchange effects. As of June 30, 1998 there were a total of approxi- mately 450 Gambro clinics - responsible for the care of approximately 35,000 patients - in Europe, North and South America, and Asia. Gambro Healthcare Patient Services, which operates the Group's clinics in the United States, continued to develop positively. In the laboratory service business an increased pressure on margins has been noted. The integration of clinic operations in the former Vivra company has proceeded according to plan. In April 17 clinics were acquired in California, Connecticut, Illinois, Massachusetts and Washington DC with a total of 1,100 patients. In June an agreement was reached covering the acquisition of dialysis operations in Alabama with 450 patients. The business in Argentina has developed very favo- rably. It was expanded during the period through the acquisition of clinics serving approximately 200 patients and now includes 1,500 patients in total. Blood Component Technology This business area continued to develop favorably, with strong growth in sales and earnings. Sales rose to SEK 559 M (503), an increase of 9%, adjusted for foreign exchange effects. The trend was especially favorable in the markets in Europe and the United States. Sales in Japan and China were weaker than the corresponding period 1997. There is continuing good growth in sales of the Spectra blood component separation technology system and related disposable products. The TRIMA Automated Blood Collection System that was introduced during the second half of 1997 was launched successfully in a number of markets in Europe. It will be introduced in the American market following approval by the U.S. Food & Drug Administration (USFDA). In April the CITEM-10 immunoadsorption system, which was developed and is being marketed by Gambro's Excorim subsidiary, was approved by the USFDA for marketing in the U.S. for the treatment of hemophilia with antibodies focused on coagulation factor VIII or IX. Slightly more than 3,000 patients are estimated to be suffering from this condition in the U.S. The product will be sold by COBE BCT. Cardiopulmonary Care Sales of the business area amounted to SEK 580 M (580), which - adjusted for foreign exchange effects - represented a decrease of 4%. Following weak sales in the beginning of the year, a recovery was noted toward the end of the period. The trend in the American market was favorable, with a weaker trend in the European market. In the latter there was also a slight increase in the pressure on prices. The ongoing rationalization of production of cardiopulmonary products is continuing according to plan. MATERIALS HANDLING This business area comprises the MacGREGOR company, which focuses on products and service in the field of marine cargo-handling, in which it is a world leader. MacGREGOR has between 35% and 45% of the world market in its three most important product areas: cranes, hatch covers and ro/ro equipment. MacGREGOR has a strong base in Asia, where it has a partly owned subsidiary in Japan and licenses the manufacture of cranes and hatch covers in China, among other operations. Order bookings during the period, SEK 1,597 M (1,497), were 7% higher than a year earlier. Sales were on a level with those in the preceding year: SEK 1,593 M (1,613). For the period operating earnings before depreciation (EBITDA) amounted to SEK 99 M (61) and the corresponding margin was 6.2% (3.8). Operating earnings after depreciation (EBIT) improved to SEK 83 M (38), with an increase to 5.2% (2.4) in the corresponding margin. The overall trend of business in MacGREGOR was favorable, with good growth in sales and earnings. The efficiency-improvement and rationalization program that was begun in 1997 is continuing to contribute to good growth in earnings. Trends in the markets for the company's various product groups differ, with somewhat weaker growth for products used in container ships and very strong growth for products used in ro/ro and passenger ships. The service business developed very favorably. THE STRATEGIC FOCUSING IS COMPLETED Important steps were taken during the period to finalize the strategic focusing of operations on medical technology and Gambro. The Group's entire holding of five million AB Electrolux Series A shares was sold in June for SEK 825 M. The pre-tax capital gain amounted to SEK 535 M (capital gain after tax SEK 350 M). The remaining holding of 1.1 million Munters shares was sold in April for SEK 90 M, resulting in a capital gain of SEK 66 M. The Board of Directors decided on June 25, 1998 to propose that Gambro's shareholders be offered an opportunity to acquire approximately 114 million ABB AB shares, equal to 12.2% of the capital and 16.4% of the voting rights in ABB. The price per ABB share is SEK 55, representing a discount of approximately 50% relative to the last price paid for ABB shares on August 4, 1998. At a market price of SEK 111.50, the shares being offered are worth approximately SEK 12.7 billion. After giving effect to such a sale, Gambro's remaining holding in ABB will amount to approximately 3.8 million shares. The sale of ABB shares represents an important step toward the objective of streamlining the Group. The opportunities for profitable growth in medical technology are being improved at the same time that it is becoming easier to value the company's stock. In June an agreement was reached covering the sale of the MacGREGOR subsidiary at a price of SEK 900 M. MacGREGOR, which occupies a leading global position in the field of marine cargo-handling, has annual sales of approximately SEK 3.6 billion, with about 1,000 employees. SPLIT A 5-for-1 split of the Company's shares was effected on June 2. INVESTMENTS Group investments during the period amounted to SEK 881 M (556). FINANCIAL POSITION As of June 30, Gambro's net debt (loan and pension liabilities less cash and short-term investments including other financial investments) amounted to approximately SEK 10.4 billion. Effective with this interim report, net debt also includes pension liability (about SEK 550 M). Payment for the sale of the Electrolux shares was received after the close of the period. The equity/assets ratio was 58%. The liquid assets of the Group amounted to SEK 501 M (2,041) as of June 30, 1998. PERSONNEL The number of employees increased by 45 during the period. The total number of employees at the close of the period (June 30) was 18,221. PARENT COMPANY Parent Company earnings after financial items amounted to SEK -696 M (17,122). Liquid assets as of June 30, 1998 amounted to SEK 5,879 M (45). SIGNIFICANT EVENTS FOLLOWING CLOSE OF THE PERIOD On July 1, 1998 Gambro and Incentive merged into one group with the name of Gambro. A new group organisation was established including a more well-defined structure with four business areas and groupwide management functions. Business operations consist of two business areas in the renal care sector - Renal Care Products and Renal Care Services - in addition to the Cardiopulmonary Care and Blood Component Technology business areas. As of July 1, 1998, goodwill in the amount of SEK 9,750 M was charged against shareholders' equity. This goodwill pertains to the acquisition of Gambro by the then Incentive. As a result, amortization of goodwill amounting to approximately SEK 560 M per year will be eliminated. This action has no effect on cash flow, nor does it have any tax consequences. The proposed sale of ABB AB shares to Gambro's shareholders will be considered at a Special General Meeting today, August 5, 1998. If the Meeting adopts the proposal, Gambro plans to conduct the sale of approximately 114 million shares during the month of September and to complete the transaction by September 25. In June, an agreement was reached covering the sale of the MacGREGOR subsidiary at a price of SEK 900 M. The transaction is being implemented through the sale of the majority interest - 60% of the voting rights and capital - in a new company that includes MacGREGOR. It is expected that the transaction can be completed during the third quarter of the current year. It will result in a capital gain of approximately SEK 400 M and will release about SEK 1,000 M in liquid funds. Gambro's financial position following completion of the transactions noted above - amortization of goodwill, the sale of ABB AB shares and the sale of the MacGREGOR subsidiary - is shown in the pro forma balance sheet as of June 30, 1998, on page 10. Net debt amounts to approximately SEK 5.2 billion and the equity/assets ratio is 57%. Stockholm, August 5, 1998 Mikael Lilius President This report has not been subject to examination by the Company's auditors. For further information: Bengt Modéer, Senior Vice President, Corporate Communications, +46-8-613 65 00, +46-70-513 65 33 Future 1998 financial report date: October 27 (Nine-month interim report). Gambro's financial information is also available on the Internet: http://www.gambro.com 1) Sales by business area 2) January - June Change Full yr 1) SEK M 1998 1997 % 1997 Medical Technology, 9,007 6,341 41 15,033 of which Dialysis Products 3,824 3,587 7 7,435 Dialysis Care 4,338 1,802 120 5,716 Internal -294 -131 -376 Total Renal Care 7,868 5,258 49 12,775 Blood Component 559 503 9 1,076 Technology Cardiopulmonary Care 580 580 -4 1,182 Materials Handling 1,593 1,613 1 3,591 Total, present 10,600 7,954 33 18,624 structure Divestments 2,388 773 Intra-Group -33 93 Total 10,600 10,309 3 19,490 1) For present structure 2) Corrected for exchange effects 1) Sales by market January - June SEK M 1998 % 1997 % Nordic region 331 3 337 4 Rest of Europe 3,531 33 3,432 43 Americas 5,537 52 2,888 36 Asia, Australia 1,146 11 1,208 15 Rest of world 55 1 89 2 Total 10,600 100 7,954 100 1) For present structure 1) Operating earnings by business area January - June Full yr Januari - Mars 2) 3) 2) 3) 2) SEK M 1998 % 1997 % 1997 % Medical Technology 818 9.1 776 12.2 1,721 11.4 Materials Handling 83 5.2 38 2.4 60 1.7 Total, present 901 8.5 814 10.2 1,781 9.6 structure Divested companies 153 31 Group items: - Items affecting 875 11,101 12,949 comparability - Depreciation and -293 -293 -590 amortization - Other -21 -25 -36 Total 1,462 13.8 11,750 114.0 14,135 72.5 1) After depreciation 2) Operating margin 3) For present structure GAMBRO GROUP INCOME STATEMENT January - June July 97 Full year SEK M 1998 1997 - June 1997 98 Revenues 10,600 10,309 19,781 19,490 1) Operating expenses -9,138 1,441 -15,934 -5,355 Operating earnings 1,462 11,750 3,847 14,135 (EBITDA) 2) Financial items, net -135 -15 -365 -245 Earnings before taxes 1,327 11,735 3,482 13,890 (EBIT) Taxes -505 -1,912 -935 -2,342 Minority interest -29 -12 -45 -28 793 9,811 2,502 11,520 Net income 1) Of which, 875 11,101 2,723 12,949 nonrecurring items amortization, -675 -405 -1,331 -1,061 goodwill depreciation, -499 -438 -876 -815 other assets 2) 33 204 237 Of which earnings in companies divested - during the year. Of which earnings in associated 355* - 355* companies - * (Jan-March 1997) QUARTERLY DATA PER BUSINESS AREA (Present Group structure) 1998 1997 SEK M Q 1 Q2 Q 1 Q 2 Q 3 Q 4 Total Medical Technology Revenues 4,447 4,560 2,904 3,437 4,214 4,478 15,033 Operating earnings 858 823 532 694 837 881 2,944 - before depr. (EBITDA) Operating 19.3 18.0 18.3 20.2 19.9 19.7 19.6 margin % Operating earnings 431 387 345 431 453 492 1,721 - after depr. (EBIT) Operating 9.7 8.5 11.9 12.5 10.7 11.0 11.4 margin % Materials Handling Revenues 761 832 569 1,044 848 1,130 3,591 Operating earnings 37 62 0 61 5 37 103 - before depr. (EBITDA) Operating 4.9 7.5 0 5.8 0.6 3.3 2.9 margin % Operating earnings 27 56 -11 49 -6 28 60 - after depr. (EBIT) Operating 3.5 6.7 -1.9 4.7 -0.7 2.5 1.7 margin % Total business areas Revenues 5,208 5,392 3,473 4,481 5,062 5,608 18,624 Operating earnings 895 885 532 755 842 918 3,047 - before depr. (EBITDA) Operating 17.2 16.4 15.3 16.8 16.6 16.4 16.4 margin % Operating earnings 458 443 334 480 447 520 1,781 - after depr. (EBIT) Operating 8.8 8.2 9.6 10.7 8.8 9.3 9.6 margin % GAMBRO GROUP BALANCE SHEET SEK M June 30, 98 June 30, 97 Dec 31, 97 ASSETS Fixed assets Intangible assets 25,281 24,468 25,570 Property, plant and equipment 4,790 4,796 4,439 Shares and participations 2,471 2,804 2,749 Long-term receivables 372 426 334 Total fixed assets 32,914 32,494 33,092 Current assets Inventories 2,928 3,380 2,757 Trade receivables, etc 8,442 13,258 13,151 Liquid assets 501 2,041 881 Total current assets 11,871 18,679 16,789 TOTAL ASSETS 44,785 51,173 49,881 SHAREHOLDERS' EQUITY AND LIABILITIES 1) Shareholders' equity 25,496 23,714 25,385 Minority interests 115 44 98 Accruals 987 906 698 Long-term liabilities 5,716 12,359 10,064 Advances from customers 517 1,222 408 Current liabilities 11,954 12,928 13,228 TOTAL SHAREHOLDERS' EQUITY 44,785 51,173 49,881 AND LIABILITIES 1) Total number of shares outstanding 341.869.335 (of which, Series A: 250.574.090, Series B: 91.295.245) STATEMENT OF CHANGES IN FINANCIAL POSITION January - June SEK M 1998 1997 Earnings after financial items 1,327 11,380 (excl. associated companies) Depreciation according to plan 1,174 843 Change in operating capital -643 -959 Investments in fixed assets -881 -556 Cash flow from operations 977 10,708 Acquisitions -394 -11,588 Cash flow from operations after 583 -880 acquisitions GAMBRO GROUP PRO FORMA BALANCE SHEET* SEK billion June 30, 98 Pro forma ASSETS Fixed Assets 32.9 20.7 Current assets 11.9 9.3 TOTAL ASSETS 44.8 30.0 SHAREHOLDERS' EQUITY AND LIABILITIES Shareholders equity 25.5 17.4 Minority interests 0.1 0.1 Accruals 1.0 0.9 Long-term liabilities 5.7 4.9 Advances from customers 0.5 0 Current liabilities 12.0 6.7 TOTAL SHAREHOLDERS EQUITY AND 44.8 30.0 LIABILITIES Following the adjustment of goodwill as of July 1, 1998, the receipt of payment for the Electrolux shares, the assumed completion of the sale of approx. 114 million ABB shares, and the assumed completion of the sale of the MacGREGOR subsidiary.