Nine month report January-September 1999

Nine month report January - September 1999: Good growth and stable margins *Revenues amounted to SEK 14,501 M (13,657). This represented an increase of 13% (for present structure). *Earnings after financial items amounted to SEK 1,761 M (5,915) incl. non- recurring items. *Operating margin (EBITDA) and earnings have been stable. *Continued good growth for Renal Care Services. Sales for Renal Care Products developed in line with market trends. Positive but somewhat slower sales development in Blood Component Technology. *Restructuring and efficiency improvement program in Renal Care Products proceeds as planned. Continued efficiency improvement initiatives within Renal Care Services. *US government agency makes overpayment determination of USD 18.8 M (SEK 155 M) for laboratory services. For further information please contact: Bengt Modéer, Senior Vice President, Corporate Communications, +46-8-613 65 00, +46-70-513 65 33 Lars Granlöf, Senior Vice President, CFO, +46-8-613 65 00 Anna Augustson, European Investor Relations Manager, +46-8-613 65 00, +46-70-513 65 34 Tim Schoenberg, Vice President, US Investor Relations Manager, +1-949-425-2185 NINE MONTH REPORT JANUARY - SEPTEMBER 1999 Revenues amounted to SEK 14,501 M (13,657). For present structure revenues rose 13% (9%, currency adjusted) compared to the first nine months 1998. Operating earnings before depreciation (EBITDA) amounted to SEK 3,558 M (7,765). This includes non-recurring items of SEK 811 M (5,279). Excluding non-recurring items EBITDA was SEK 2,747 M (2,486) with a corresponding margin of 18.9% (18.2). Operating earnings after depreciation (EBIT) amounted to SEK 2,089 M (6,160) including non-recurring items of SEK 811 M (5,279). Earnings after financial items amounted to SEK 1,761 M (5,915) including non-recurring items. Earnings per share amounted to SEK 2.35 (8.78), of which SEK 1.41 (8.39) was attributable to non-recurring items. Development in the Renal Care Service business area continued to be charac- terized by a good revenue growth. Revenues increased by approximately 21% (16%, currency adjusted) including a good organic growth. Efforts have continued to improve efficiency and reduce costs. For the Renal Care Products business area revenues grew by approximately 4% (1%, currency adjusted) including good growth in sales volumes on the European market. The restructuring program has proceeded as planned and manufacturing has run with high efficiency and a good capacity utilization. The Blood Component business area has had a continued positive development with a good, but somewhat reduced, revenue growth. Revenues grew by approximately 11% (6%, currency adjusted). For the group operating margin and earnings have been stable. Group key ratios Jan - Sept Oct 1998 Jan- Dec SEK M 1999 1998 -Sept 1998 1999 Revenues 14,501 13,657 19,578 18,734 Operating earnings (EBIT) 2,089 6,160 1,303 5,374 Operating margin, % 14.4 45.1 6.7 28.7 Earnings after financial 1,761 5,915 837 4,991 items Net debt 3,851 2,534 3,851 2,242 Return on shareholders' 6.0 18.3 0.6 10.7 1) equity, % Return on total assets, % 9.0 21.1 5.1 14.6 1) Earnings per share, SEK 2.35 8.78 0.34 6.70 Shareholders' equity per 52.11 53.58 52.11 51.79 share, SEK Solidity (equity/assets 56 56 56 54 ratio), % 1) After full tax BUSINESS AREAS Renal Care Services Total revenues rose to SEK 7,985 M (6,619), an increase of 21% (16 %, currency adjusted). At the close of the period the total number of patients treated worldwide in 581 clinics owned, operated or managed by Gambro was about 43,200. The total number of treatments given to patients in clinics consolidated by Gambro was 4,219,000. The corresponding average revenue per treatment (excluding non dialysis clinics) was SEK 1,824, corresponding to USD 221. In the US Gambro owns, operates or manages 479 clinics in 33 states and the District of Columbia. The development in the Renal Care Services business area has been characterized by a continued good growth. This especially applies to the two main markets, the Americas and Europe. This includes a good organic growth, the establishment of new own clinics as well as the acquisition of clinics. During the first half year 1999 acquisitions were made in Europe and the US of 21 clinics with 1,635 patients. The third quarter 1999 included acquisitions of two clinics in France with a total of 160 patients and one clinic in Connecticut, US with 180 patients. Continued attention and efforts are made to increase quality and efficiency both clinically and operationally. A number of quality indicators are used and followed closely for all patients. These indicators include adequate dialysis, anemia, nutrition and mortality. In the US the special anemia management program, started earlier this year, is under introduction in all clinics. A special vascular access program is also introduced. The use of single use dialyzers - which is a major component in the strategic drive towards higher quality care and clinic efficiency - has continued to be introduced. It is an important part of a total systems approach whereby the entire process in the dialysis clinic is reengineered to improve efficiency. During the year initiatives to improve efficiency have also included staff reductions. First quarter included consolidation of key functions in the US which affected 50 persons. During the period June-August staff reductions corresponding to 340 full time employees have been made in the US. An overpayment determination for laboratory services delivered by Gambro has been made by a US government agency. As announced by Gambro in August 1998, the billing records of Gambro's US subsidiaries for laboratory testing, Gambro Healthcare Laboratory Services, Inc. and Dialysis Holdings Laboratory Services, Inc. (located in Ft. Lauderdale and Deland in Florida, respec- tively), have been the subject of investigations regarding Medicare billings. Both investigations arose out of Operation Restore Trust, a project conducted by multi-government agencies that targeted numerous health care providers in a number of states. The agencies have requested the records from two different periods, namely January, 1996 through December, 1996 and January, 1997 through May, 1998 for the Ft. Lauderdale laboratory, and June, 1996 through December, 1996 and January, 1997 through May, 1998 for the Deland laboratory. Health Care Financing Administration (HCFA), which is one of the agencies involved, has made overpayment determinations for a total amount of USD 18.8 M of which USD 14 M relate to the first period for the Ft. Lauderdale laboratory and USD 4.8 M to the second period for the Deland laboratory. Upon request by HCFA, these amounts have been repaid in order to avoid interest penalties. The respective rights of appeal of the laboratories have been preserved. Total billing by the Ft. Lauderdale laboratory amounted to USD 16.3 M for the first period and USD 37.9 M for the second period. The Deland laboratory closed in November, 1998 and transferred its laboratory services to the Ft. Lauderdale laboratory. The refunded amounts have been charged against the third quarter results of operations. It is not known whether additional claims will be made with respect to the second period for the Ft. Lauderdale laboratory and the first period for the Deland laboratory. It is also not known whether the United States Department of Justice or the United States Attorney's office will take any action against either laboratory. The validity and accuracy of the overpayment determinations currently is the subject of discussion with HCFA. The Company believes that not all relevant information has been considered and has advised the agencies of its intent to appeal the overpayment determinations. The Company continues to cooperate fully with the government and has estab- lished a productive dialogue with government representatives. Because of the government investigations, the Ft. Lauderdale laboratory and the Deland laboratory respectively discontinued submitting claims for its laboratory services effective June 1, 1998 and July 1, 1998. From that date up to August 31, 1999 the Company has recorded Medicare revenues of approximately USD 47 M for such services. Renal Care Products Revenues increased to SEK 5,882 M (5,634), an increase of 4% (1% currency ad- justed). On the European market sales volumes continued to show a positive development in line with overall market trends, while on other markets sales development has been stable. Sales have developed well in major markets like Italy, Germany, France and the UK as well as in Korea and Taiwan. An important contract for disposable products has been granted in Kuwait. Some markets in Eastern Europe, Russia, Ukraine and others, have experienced a strong decrease in sales due to weak demands. In Japan sales growth has decreased compared to the same period last year. Both product brands, Gambro and Hospal, have shown a continued good sales development. Major product categories, including equipment as well as disposables, had a positive sales development. Manufacturing has continued to proceed with high efficiency and a good capacity utilization. A decision has been taken to invest SEK 150 M in increased production capacity for powder cartridges for dialysis. The investment, which will be made in Lund, Sweden is an important part of Gambro's ongoing strategic development of advanced on-line systems for production of dialysis fluids. This will enable Gambro to meet the continued strong demand for the BiCart Select on-line system including products like BiCart, SelectCart and CleanCart. With the increased capacity Gambro will be able to double the production of cartridges in a few years. The extensive restructuring and efficiency improvement program, which was launched early this year, has continued to proceed according to plan. Steps have been taken to consolidate manufacturing operations. At the end of the second quarter this year a factory in Virginia, US was closed after the manufacturing of disposables had been transferred to corresponding units in Mexico and Italy. Thus production of bloodlines and cassettes has been moved to factories in Tijuana, Mexico and Mirandola, Italy. In a separate move the production of machines for acute dialysis treatment has been transferred to the machine production facility in Mirandola, Italy. A new plant for the manufacturing of dialysis solutions has been opened in Florida, US. The consolidation in the logistics supply chain continues. Significant savings in the area of procurement have been identified. Important strategic consolidation moves have also been taken within the sales operations. In a series of transactions sales rights have been taken over from sales agents in Brazil, Korea, Belgium, Switzerland and the Nordic market during 1999. This gives a direct access to the customers and the market and control over sales resources, thereby strengthening Gambro's position on these markets. In Japan one sales joint venture has been ended and another will be dissolved at end of this year. Since mid 1999 Gambro in Japan has a new management team, merged its activities and moved to new joint facilities for administration, marketing, technical services and warehousing with significant improvement in efficiency. These steps consolidate and reinforce Gambros commitment to the Japanese market in terms of more efficient, direct and active marketing and customer support. Blood Component Technology Revenues for the Blood Component Technology business area increased to SEK 978 M (880), an increase of 11% (6 %, currency adjusted). The business area showed a continued good development. Sales growth has been lower, mainly due to somewhat lower demand in the blood industry where the pace of consolidation has slowed down. The third quarter included stable sales volumes compared to the same period last year, which included exceptionally high sales of equipment. Sales development has been favorable in Europe but weaker in Japan. Sales growth in the US has been reduced due to weaker demands in the blood industry. Sales of the COBE Spectra blood component system and related disposable products have been good. In the US the introduction of the COBE Trima automated blood collection system has continued. In May this year the strategic position was considerably strengthened through an alliance with HemaSure Inc. providing Gambro with over 30% ownership in the company. An agreement also provided worldwide sales rights (excl. the American Red Cross) for the r\LS filter system produced by HemaSure and deliveries of these filters have started. They are especially well suited for blood centers taking responsibility for high quality pre-storage leukoreduced blood components to hospitals. THE THIRD QUARTER 1999 During the third quarter the expansion of the Renal Care Services business area has continued. This included a good organic growth as well as acquisition of three clinics with 340 patients in Europe and the US. In the US efforts continued to increase efficiency, including staff reductions. The Renal Care Products business area had a somewhat lower revenue growth than previously during the year. The restructuring program has proceeded as planned. Transfer of manufacturing from the US to units in Mexico and Italy has been finalized. As outlined on page 2-3, a US government agency has made an overpayment determination for laboratory services for a total amount of USD 18.8 M. The amount has been provided for as an operating expense, resulting in EBITDA of SEK 766 M (15.8%) and EBIT of SEK 274 M (5.6%) for the quarter. For information on financial performance for the third quarter 1999, see table on page 9. THE RESTRUCTURING PROGRAM The restructuring program initiated in January this year has proceeded according to plan. Actions and initiatives taken within the program are described above. As of September 30, 1999, 480 employees had left the group through cutbacks, reorganizations and divestitures of operations. Approximately SEK 346 M has been utilized of the provision of SEK 1,100 M that was made during the fourth quarter 1998. THE YEAR 2000 The overall Y2k readiness status of the group is good. A new updated Y2k readiness report can be found on Gambros Internet site. INVESTMENTS Group investments during the period amounted to SEK 1,120 M (1,085). ACQUISITIONS Group acquisitions during the period amounted to SEK 721 M (922). Acquisitions included clinics with 1,975 patients in the US and Europe, sales distribution companies and sales rights in different countries in the Americas, Asia and Europe as well as ownership in the filter company HemaSure Inc. FINANCIAL POSITION Net debt (loans and accruals for pension less cash and short-term investments) amounted to SEK 3,851 M at the close of the period. The equity/assets ratio at the close of the period was 56%. To avoid currency exposure in the parent company, liquid assets have been swapped from SEK to USD, resulting in an interest expense of SEK 52 M (representing the interest differential between USD and SEK) in the first nine months of 1999. PERSONNEL The total number of employees in the Gambro group decreased by 591 during the period. By the end of the period the total number of employees was 17,205. Through the divestiture of the Cardiopulmonary Care business area during the second quarter the number of employees decreased by about 950. Rationalizations etc. within the restructuring program, affecting mainly the Renal Care Products business area, have involved a reduction of 480 employees. In Renal Care Services efficiency improvement initiatives have included staff reductions of about 400 during the year. New employees have joined the group during the year mainly through the acquisition of clinics. OTHER In September Swedish tax authorities ruled to reassess the taxes of a wholly owned subsidiary of Gambro AB upward with an amount of SEK 4,143 M, which generates a tax payment of SEK 1,281 M. This decision is based on the tax authority not approving the manner in which the tax base of the ABB shares, which were sold 1997, was calculated. Gambro has made provision for taxes for this transaction in accordance with conservative accounting principles, which also formed the basis for the information given when the transaction was announced in June 1997. Thus no further tax expenses will be charged against the group's earnings. However, the company does not agree with the tax author- ity's assessment in this matter. Accordingly, the ruling will be appealed to higher court. The company's assessment is supported by external tax expertise. Stockholm, October 21, 1999 Mikael Lilius President and CEO 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 Lars Granlöf, Senior Vice President, CFO, +46-8-613 65 00 Anna Augustson, European Investor Relations Manager, +46-8-613 65 00, +46-70-513 65 34 Tim Schoenberg, Vice President, US Investor Relations Manager, +1-949-425-2185 Gambro's financial information is also available on the Internet: http://www.gambro.com Coming reports and events: Year end report 1999: February 23, 2000 Annual General Meeting: March 27, 2000 Three month report January-March 2000: April 26, 2000 Six month report January - June 2000: July 26, 2000 Nine month report January - September 2000: October 26, 2000 Revenues by business area 1) January - Change Full year September SEK M 1999 1998 % 1998 Renal Care Services 7,985 6,619 16 9,087 Renal Care Products 5,882 5,634 1 7,771 Intra-Group -344 -324 - -488 Total, Renal Care 13,523 11,929 9 16,370 Blood Component 978 880 6 1,212 Technology Total, present 14,501 12,809 9 17,582 structure Cardiopulmonary Care - 848 1,152 Total 14,501 13,657 18,734 1) Currency adjusted 1) Revenues by market January - September SEK M 1999 1998 +/- % Europe 4,572 4,416 4 Americas 8,801 7,500 17 Asia, Pacific, RoW 1,128 893 26 Total 14,501 12,809 13 1) For present structure 1) Operating earnings January - September Full year 2) 2) 2) SEK M 1999 % 1998 % 1998 % Operating earnings 1,278 8.8 1,195 8.8 1,509 8.1 (EBIT) Group: Depreciation and -293 -293 amortization Other -21 -21 Non-recurring items 811 5,279 4,179 Total 2,089 14.4 6,160 45.1 5,374 28.7 1) After depreciation 2) Operating margin GAMBRO GROUP INCOME STATEMENT January - Oct 1998 Full September year SEK M 1999 1998 - Sept 1998 1999 Revenues 14,501 13,657 19,578 18,734 1), 2) Operating expenses -12,412 -7,497 -18,275 -13,360 Operating earnings (EBIT) 2,089 6,160 1,303 5,374 3) Financial items, net -328 -245 -466 -383 Earnings after financial 1,761 5,915 837 4,991 items (EBT) Taxes -899 -2,877 -657 -2,635 Minority interest -52 -36 -64 -48 Net income 810 3,002 116 2,308 1) Earnings before 3,558 7,765 3,246 7,452 depreciation and amortization (EBITDA) 2) Of which, non- recurring items result from 966 5,279 966 5,279 divestitures provision for -155 - -155 - repayment of lab. billing restructuring reserve - - -1,100 -1,100 811 5,279 -289 4,179 amortization, -713 -865 -925 -1,077 goodwill depreciation, other -757 -740 -1,018 -1,001 assets 3) Of which - 84 - 84 earnings in companies divested during the year Of which dividends from - 259* - 259* associated companies * (April-June 1998) QUARTERLY DATA 1) Present structure 1999 199 8 SEK M Q1 Q2 Q3 Tota Q 1 Q 2 Q 3 Q 4 Tota 2) 2) l l Operations Revenues 4,6 4,9 4,85 14,5 4,4 4,56 4,6 5,07 18,7 54 90 7 01 47 0 50 7 34 Operating earnings 878 948 921 2,74 858 823 826 787 3,29 - before depr. 7 4 (EBITDA) Do. margin % 18. 19. 19.0 18.9 19. 18.0 17. 15.5 17.6 9 0 3 8 Operating earnings 406 443 429 1,27 431 387 377 314 1,50 - after depr. 8 9 (EBIT) Do. margin % 8.7 8.9 8.8 8.8 9.7 8.5 8.1 6.2 8.1 Group Overhead costs - - - - 19 -40 - - -21 Non-recurring - 966 -155 811 274 601 4,4 - 4,17 04 1,10 9 0 Depreciation - - - - - -147 - - -293 146 Financial net Associated companies/ -7 -3 -5 -15 -10 248 -11 -12 215 /dividends Income in divested - - - - - - 84 - 84 companies Interest net - -95 -84 -307 - -199 - -111 -665 128 162 193 Other -8 3 -1 -6 -9 -3 10 -15 -17 financial items Financial net - -95 -90 -328 - 46 - -138 -383 143 181 110 1) Quarter 1, 1999 restated because of the sale of the business area Cardiopulmonary Care during Quarter 2, 1999 2) Including provisions for repayments of laboratory billing: - EBITDA 766(15.8%)and2,592 (17.9%) in Q3 and total respectively - EBIT 274(5.6%) and1,123(7.7%)in Q3 and total respectively GAMBRO GROUP BALANCE SHEET SEK M Sept 30, Sept 30, Dec 31, 99 98 98 ASSETS Fixed assets Intangible assets 15,515 15,234 15,593 Property, plant and equipment 5,340 4,911 5,340 Shares and participations 347 276 244 Long-term receivables 454 474 638 Total fixed assets 21,656 20,895 21,815 Current assets Inventories 2,228 2,263 2,282 Trade receivables, etc. 7,928 7,036 8,140 Liquid assets 589 2,863 1,169 Total current assets 10,745 12,162 11,591 TOTAL ASSETS 32,401 33,057 33,406 SHAREHOLDERS' EQUITY AND LIABILITIES 1) Shareholders' equity 17,959 18,319 17,850 Minority interests 132 106 149 Accruals 3,411 1,119 3,681 Long-term liabilities 1,628 3,442 1,182 Current liabilities 9,271 10,071 10,544 32 TOTAL SHAREHOLDERS' EQUITY 32,401 33,057 33,406 AND LIABILITIES NET DEBT 3,851 2,534 2,242 1) Total number of shares outstanding 344,653,288 (of which, Series A: 250,574,090, Series B: 94,079,198) STATEMENT OF CHANGES IN FINANCIAL POSITION January - Full September year SEK M 1999 1998 1998 Operating activities Earnings after financial items 1,761 5,915 4,991 Non-cash items 1,404 1,606 1,800 3,165 7,521 6,791 Taxes paid -834 -2,911 -2,750 2,331 4,610 4,041 1) Changes in operating capital: Inventories 54 -161 -180 Receivables 396 -235 -1,551 Liabilities -2,191 828 3,670 Cash flow from operating 590 5,042 5,980 activities Investment activities Capital expenditure -1,120 -874 -1,095 2) Acquisitions -721 1,768 985 Cash flow from investment -1,841 894 -110 activities Financing activities New issue - - 342 Change in short term loans 578 -2,903 -2,694 Change in long term loans 446 -6,622 -8,882 Change in accruals for pensions 5 -113 -48 Dividend paid -344 -684 -684 Change in financing activities 685 -10,322 -11,966 Cash flow this period -566 -4,386 -6,096 Liquid assets opening balance 1,169 7,249 7,249 Currency effect in liquid assets -14 0 16 Liquid assets closing balance 589 2,863 1,169 1) Of which change in -132 -523 -1,254 operating working capital 2) For previous periods the figures are stated net of acquisitions and divestitures ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/10/21/19991021BIT00030/bit0001.doc http://www.bit.se/bitonline/1999/10/21/19991021BIT00030/bit0002.pdf