INTERIM REPORT JANUARY – JUNE 2006
Highlights
(For table see attached file)
· Underlying operating income adjusted for non-recurring items and earnings from currency forwards contracts was MSEK 297, a 25% increase year-on-year.
· In total, earnings from currency forwards contracts were MSEK 28, and non-recurring items affecting operating income were MSEK -20. Non-recurring items affecting income before tax were MSEK -41.
· Sustained robust volume growth—volumes grew by 9% in the first half-year.
· The US powder market staged a rally in the second quarter, although for the first half-year, the market contracted because of development in the American automotive industry.
GROUP
NET SALES
First half-year 2006
Net sales were MSEK 2 624 in the first half-year, an 18% increase. In addition to previously implemented price increases in North America and Europe, volumes exerted a positive impact on turnover. Additionally, currency effects resulting from a weaker krona exerted a 5% positive effect on turnover.
Volumes expanded by 9% year-on-year despite weak development on the North American market. Höganäs’ volume growth has been good on all markets apart from China and Taiwan.
North American car sales decreased in the first half-year, year-on-year, while car production has remained stable. The North American powder market rallied in the second 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 first half-year. The US powder market represents about half of the global market. The market in Western Europe continued to rally.
Second quarter 2006
In the second quarter, turnover increased by 16% year on-year, the increase mainly due to sustained robust volume expansion. In addition to these volume gains, higher prices and a weaker Swedish krona exerted a positive effect. Currency effects resulting from a weaker krona exerted a positive 1% effect on turnover.
Pricing model—Europe
Höganäs' pricing model on the European market will alter in the third quarter. The time-lag on the implementation of metal prices will be reduced from two quarters to one. This will mainly affect the Components business area.
EARNINGS
First half-year 2006
Operating income was MSEK 305 (282) in the first half-year. Excluding the non-recurring items stated below and the profits from currency forwards contracts, operating income was MSEK 297 (238), a 25% increase.
Turnover in the first half-year was healthy, making a positive impact on income. Metal prices increased in the quarter, i.e. metals important to Höganäs: scrap, nickel, molybdenum and copper. This adversely affected earnings.
Other operating income and operating expenses were MSEK 7 (104) including earnings from currency forwards contracts of MSEK 28 (74) and non-recurring items. These non-recurring items primarily consist of a MSEK 41 tax expense in Brazil, and earnings of MSEK 19 from the sale of CO2 emission rights.
As previously announced, in the second quarter, Höganäs provisioned estimated costs of MBRL 18.1, equivalent to approximately MSEK 62, in its Brazilian operations. The majority of this figure is for value-added tax on importing machinery to Brazil coincident with building up operations after their acquisition in 1999. The company has contested the claim it has received, and expects the tax proceedings to continue for several years. Of the MSEK 62 total, MSEK 41 affects operating income, and the remainder, net financial income and expenses.
Disregarding currency forwards contracts, a weaker Swedish krona in 2006 exerted a positive impact of some MSEK 10 on operating income.
Income before tax was MSEK 257 (259). The provisioning in Brazil exerted a negative MSEK 21 effect on net interest income/expenses.
Income after tax was MSEK 188 (189), or SEK 5.41 per share (5.50). The effective tax rate was 26.8% (27.0).
Second quarter 2006
Operating income was MSEK 141 (120); provisioning for costs in Brazil was effected in the second quarter, and accordingly, affected this earnings figure in its entirety. Höganäs sold CO2 emission rights in the quarter, generating earnings of MSEK 17. Earnings from currency forwards contracts were MSEK 16 in the quarter. Underlying earnings, excluding non-recurring items and earnings from currency forwards contracts were MSEK 147 (115).
Income before tax was MSEK 107 (110).
BUSINESS AREAS
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 encompasses 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 represents some 70% of consolidated turnover, and Consumables, some 30%.
Components
The net sales of the Components business area were MSEK 1 880 (1 536), an 22% increase year-on-year. Apart from price changes implemented in North America and Europe in the first quarter, the turnover increase is due to higher volumes, a weaker krona and higher metal prices.
Volumes increased by 10% in the first half-year. All markets saw positive volume growth, apart from China and Taiwan.
Operating income was MSEK 186 (134). Operating income was negatively affected by the above stated non-recurring items. Excluding the non-recurring items the margin was 11.2% (10.6) in the first half year.
Consumables
For Consumables, net sales were MSEK 744 (695), a year-on-year increase of 7%. The increase is due to higher volumes, metal price fluctuations and price changes effected in the quarter. As for Components, the weaker krona had a positive turnover effect.
In the first half-year, volumes increased by 5% year-on year. Volume growth remained positive, mainly in China, South Korea and South America.
Operating income was MSEK 91, against MSEK 74 for the first half of the previous year. Non-recurring items had a small positive impact in the second quarter and first half year. Operating margin in the first half year, excluding the non-recurring items was 11.7% (10.8).
PROFITABILITY
Return on capital employed was 12.0% (14.5); return on equity was 11.7% (17.2). Returns are calculated on the most recent 12-month period.
FINANCIAL POSITION AND CASH FLOW
The equity/assets ratio was 47% at the end of the period, against 48% at year-end 2005. Shareholders' equity per share was SEK 71.80, against SEK 73.30 as of 1 January.
Consolidated financial net debt was MSEK 1 114 at the end of the period, down MSEK 273 since the previous year-end. Net financial income and expenses were MSEK -48 (-23), 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 471 (138). Working capital improved by MSEK 158. Investments in fixed assets were MSEK 105 (134). During the year emission rights have been sold which has affected the cash flow with MSEK +23. The financing activities have affected the cash flow by MSEK 312 (79) in pursuance of dividend paid MSEK 200 and net change of loans MSEK 112.
HUMAN RESOURCES
Höganäs had 1 537 employees at the end of the period, against 1 551 as of 1 January.
PARENT COMPANY
Parent company net sales were MSEK 1 450 (1 191) of which MSEK 622 to group companies. Income after financial items was MSEK 260 (144). Investments in tangible fixed assets were MSEK 63 (71). The parent company's liquid funds were MSEK 33 at the end of the period, against MSEK 30 as of 1 January.
OUTLOOK FOR 2006
Höganäs expects continued positive development on Asian and South American powder markets. Höganäs also anticipates weaker development on the US powder market continuing. The powder market in Europe expects to have a slight growth during this year. Metal prices are expected to remain volatile in 2006.
Earnings from currency forwards contracts are estimated to be substantially lower than in 2005, based on current exchange rates.
Alrik Danielson
CEO and President
Höganäs, Sweden, 14 July 2006
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ACCOUNTING PRINCIPLES
This Report has been prepared pursuant to IFRS (International Financial Reporting Standards) and IAS
34.
This Interim Report has not been reviewed by the company's auditors.
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FINANCIAL INFORMATION
Höganäs intends to publish the following financial information in 2006:
* Third-quarter Interim Report, 20 October
* Year-end Report 2006, 14 February 2007
Höganäs AB (publ), SE-263 83 Höganäs, Sweden
tel +46 (0)42 33 80 00 fax +46 (0)42 33 83 60 www.hoganas.com
(For complete report see attached file)