Pergo Interim Report - Six months ended June 30, 2002

Interim Report - Six months ended June 30, 2002 (All figures in parentheses pertain to corresponding period in the preceding year) · Operating profit for the first six months amounted to SEK 13 M (loss: 105) and profit before tax to SEK 5 M (loss: 123). · Net sales for the period after elimination of foreign-exchange effects declined by 9%. · Cash flow from ongoing operations for the first six months amounted to SEK 228 M (-134), which is one of the reasons to that net financial debt has decreased to SEK 77 M (570). · The action program is proceeding more successfully than anticipated and the result effect for the first six months amounted to about SEK 200 M. · Higher license fees as well as price decreases in the US effected the gross margin negatively. · Pergo was granted a patent for tight glueless joints in the US and has initiated legal proceedings against four US competitors. · After the closing date, Pergo terminated the shareholder agreement regarding Witex. SEK M QII: April - June QI - II: January - June Net sales SEK 834 M (1,006) SEK 1,740 M (1,856) - North SEK 528 M (655) SEK 1,093 M (1,161) America SEK 257 M (311) SEK 557 M (619) - Europe Operating profit SEK 6 M (loss: 51) SEK 13 M (loss: 105) Profit before tax SEK 4 M (loss: 68) SEK 5 M (loss: 123) Net sales and earnings Net sales during the first six months amounted to SEK 1,740 M (1,856), which after elimination of foreign-exchange effects was a decline of 9%, compared with the preceding year. The reduction in sales was due to lower prices, particularly in the US, as well as a decline in volumes in Europe following the planned phasing out of deliveries of low-price products to IKEA, which have now been discontinued. Sales during the second quarter amounted to SEK 834 M (1,006), which after elimination of foreign-exchange effects was a decline of 17% compared with the corresponding period of the preceding year. The decline in sales was due to price reductions, lower deliveries to IKEA and the fact that sales to specialty stores in the US were extremely strong during the second quarter last year. The higher level of sales to the US specialty stores at that time primarily reflected a recovery following inventory reductions that occurred during the first quarter. Sales during the second quarter also declined when compared with the first quarter of this year. Significantly higher sales volumes to The Home Depot, could not compensate lower prices in the US, lower volumes to specialty stores in the US and lower volumes in Europe. Compared with the first quarter, the gross margin fell by 3.5 percentage units during the second quarter and amounted to 22% for the first six months. The decline was primarily attributable to price reductions in the US. Operating profit for the first six months amounted to SEK 13 M (loss: 105). The improvment in earnings is attributable to the action program. Fixed costs in the Group were reduced. Price reductions and higher license fees have on the other hand had a negative impact on the result. USD and EUR, which are important currencies for Pergo, rose only marginally with respect to SEK, compared with the first six months last year. In total, forward contracts cover 50% of the current year's estimated transaction exposure in USD, CHF, GBP and NOK. In addition, 25% of the estimated transaction volume in USD for the period from January to April 2003 is hedged. The effect on earnings of the Group's forward contracts amounted to a gain of SEK 2 M for the second quarter and loss of SEK 2 M for the first six months of the year. North America Sales during the first six months amounted to SEK 1,093 M (1,161) which after the elimination of foreign-exchange effects was a decline of 9%. Sales during the second quarter amounted to SEK 528 M (655), which after the elimination of foreign-exchange effects was 18% lower than during the preceding year. Higher sales volumes to The Home Depot did not offset lower prices and lower volumes to specialty stores. The laminate flooring market is estimated to have a continued low volume growth in an otherwise declining market for flooring products. Competition creates in general a continued price pressure in the mid- and low price segment. A favorable ruling by the ITC (see Disputes below) had the effect that the North American market became more attractive for European manufacturers. Competition in North America is therefore expected to increase. The effects of Pergo's newly won patent, however, are not yet evident in the market. As a result of a successful sales campaign, Pergo's sales to The Home Depot increased during the second quarter, compared with the first quarter of this year. This was despite increased competition in the stores. The product program that Pergo offers through The Home Depot has been well received in the market, and the most recent product, Pergo Prodigy, exceeded expectations. Sales volumes to The Home Depot were substantially higher during the second quarter than during the corresponding period of the preceding year. Despite strong volumes during the second quarter, sales for the first six months of the year were lower than during the corresponding period of the preceding year, above all due to lower prices. Following the first quarter's positive trends with favorable development for Pergo, sales in the specialty segment during the second quarter were weak. This was due to acceleration of the transition from glued flooring products to click joints in the specialty segment and intensification of price competition in the low-price segment. In response to these rapid changes, Pergo implemented price reductions for glued products, while the launch of new competitive click products was moved up to the middle of the third quarter. Europe Sales during the first six months amounted to SEK 557 M (619), which after elimination of foreign-exchange effects was a decline of 11%, compared with the corresponding period during the preceding year. The decline was due to the planned phase out of low-price products for IKEA, while sales to other customers increased. During the second quarter, sales amounted to SEK 257 M, compared with SEK 311 M for the corresponding period during the preceding year. After elimination of foreign-exchange effects, the decline was 17%. Deliveries of low-price products to IKEA were low and were discontinued toward the end of the quarter. Sales to other customers during the second quarter remained at the same level as during the corresponding period of the preceding year, yet declined compared with the first quarter of the year. Following market development that exceeded industry expectations during the first quarter, demand weakened significantly during the second quarter. Exports by major European manufacturers to Asia, particularly China, declined during the second quarter with the result that competition in Europe was further intensified thus leading to price pressures, for example. Current trends in the laminate flooring market are continued transition to glue-free products, larger focus on professional applications and that most laminate flooring manufacturers now supply products with attached underlayment. The market continues to show strong interest in the products that Pergo launched during 2001. Delivery capacity is now at a high and stable level following the measures that were taken to correct the problems that were experienced during last year. Production and distribution The first step in the transformation of production to direct laminate flooring and flooring with glue-free joints was completed as a new production line for glue-free joints was taken into operation in the US towards the end of the first quarter of this year. In total, three new production lines for flooring with glue-free joints were taken into operation in Trelleborg, Sweden and Garner in the US, during 2001 and 2002. Ramp-up of production in the proprietary production process PMP (Pergo Multilayer Process) is proceeding according to plan. PMP is a new and proprietary technology developed by Pergo that combines the best characteristics in the processes for direct laminate (DL) and high- pressure laminate (HPL) flooring. The process was verified at the end of 2001. During the first quarter, commercial production was started in Perstorp on a limited scale. The goal is to successively increase volumes over the year. The new distribution center in the US was taken into operation during the second quarter and is functioning as planned. Action program for earnings improvement Pergo's action program, which was initiated in the autumn of 2001, is proceeding more favorably than planned and has thus more than offset price reductions in the US, as well as higher license fees. Work in reducing fixed costs advanced more rapidly than planned. In total, the workforce has been reduced by slightly more than 160 persons since November 2001, corresponding to a reduction of more than 15%. The earnings effect from the action program amounts for the first six months to approximately SEK 200 M. Because of the favorable outcome of the action program implemented to date, as well as the negative effects on earnings attributable to reduced prices in the US and higher license fees management intends to raise the ambition level for the action program. The previously announced target for the earnings improvement is at least SEK 500 M annually over a two-year period. A higher level of ambition is necessary to ensure the attainment of the Group's financial objectives. New share issue The Board of Directors of Pergo decided in January 2002 to implement a new share issue of at most SEK 394 M with preferential rights for the company's shareholders. The Board of Director's share issue decision was approved by an Extraordinary General Meeting on February 7, 2002. In accordance with the terms for the new share issue, shareholders in the company, were entitled to subscribe for two new shares for each share held at the subscription price of SEK 11 per share. The subscription rate for the new share issue was 99.7%, corresponding to a total of 35,672,255 shares with a total value of SEK 392,294,805, including premium. The issue resulted in a capital contribution of SEK 382 M after issue costs. Thereafter, the share capital amounted to SEK 535,696,850. Disputes In June 2002, Pergo was granted a broad patent relating to glue-free joints in the US. The patent includes tight glue-free joint systems that are milled directly into a wood-based carrier, an area in which Pergo has conducted pioneering work. Pergo recently initiated legal proceedings against four competitors in the US market, and all other market players have been informed of Pergo's patent. Because click joints that are milled directly into the carrier are a segment with explosive growth, this new patent may have a large strategic and commercial value. A Belgian competitor, Unilin, was granted a similar patent for Europe in late-June of this year. Unilin has informed the largest European manufacturers that they consider these competing products to be an infringement of their patent. Through the license agreement that Pergo has with Unilin, Pergo's deliveries of products manufactured in Europe with its own SmartLock and ProLock joint systems are subject to license fee. Thus, as previously announced, Pergo's costs for license fees have increased. As previously announced, the United States International Trade Commission (ITC) ruled on March 22, 2002 that the joint that Pergo produces on license from Unilin does not infringe on the patent held by Välinge Aluminium AB. The ITC's decision has been appealed in the Court of Appeal of the Federal Circuit by Välinge Aluminium AB. After the closing date, Pergo terminated the shareholder agreement with Witex AG and its principal owner HW Industries GmbH & Co KG. The reason was that Pergo considers that Witex is in violation of the agreement on several important points. Pergo will also request economic compensation for the loss incurred in conjunction with the contract violations. Pergo's termination and its claim for compensation are expected to result in a legal dispute. Partly in view of the termination of the shareholder agreement, Pergo does not intend to exercise its option to acquire an additional 23.9% of Witex AG. Pergo currently has several suppliers of DL products and intends to continue to partly supply such products from Witex. The previous supplier claims on Pergo were settled during the first quarter of 2002 within the scope of previous reserves. The year-end accounts for 2001 included reserves for anticipated costs for ongoing disputes and claims. Costs for possible disputes in conjunction with the new patent Pergo was granted in the US and the termination of the shareholder agreement with Witex has not been accrued for. Investments The Group's investments in fixed assets amounted to SEK 40 M (153) for the interim period. The majority of these investments related to projects initiated during 2001. Working capital/capital employed Working capital amounted to SEK 239 M on the closing date and declined by SEK 50 M since January 1, 2002. An active effort to reduce accounts receivable produced the desired effect during the first six months. Accounts payable were also reduced since the beginning of the year, since the Group was able to reinstate normal payment routines during the first quarter. Payments relating to costs of a non-recurring nature for which reserves were allocated in the year-end accounts for 2001 resulted in an increase in working capital. A sharp decline in the USD/SEK exchange rate towards the end of the period also had a positive impact on working capital. Capital employed amounted to SEK 1,462 M on the closing date, which was a reduction of SEK 180 M, compared with January 1, 2002. The fact that capital employed decreased more than working capital was primarily due to a larger repayment of tax (loss carried backwards) in the US. Financial position/cash flow During the first six months, Pergo reported positive cash flow from ongoing operations in an amount of SEK 228 M. This, in combination with the implemented new share issue and modest investments, resulted in a reduction since January 1, 2002 of SEK 570 M in net financial debt, which amounted to SEK 77 M on the closing date. New terms were established during the first quarter for Pergo's borrowing. Total available credits and credit guarantees amounted to about SEK 990 M on the closing date. On that date, SEK 164 M of approved credit facilities had been utilized. Financial net During the interim period, SEK 3 M in set-up costs in conjunction with external borrowing was charged against net financial items. Tax The Group's tax rate for the year is estimated at 35%. Deferred tax claims on loss carry-forwards for tax purposes that can be expected to be used within the foreseeable future amounted to SEK 157 M. The decrease since year-end is largely due to exchange rate differences. Shareholders' equity Shareholders' equity amounted to SEK 1,294 M on the closing date. Shareholders' equity was increased through a contribution of SEK 382 M from the new share issue and by earnings of SEK 3 M for the period. Shareholders' equity was also positively affected by translation differences in an amount of SEK 7 M. To compensate for the possible social costs that Pergo's employee stock option program may entail, the company entered a stock-swap agreement during 2001. An evaluation of this agreement on the closing date indicated a need for reserves in an amount of SEK 4 M, which was charged directly against shareholders' equity. Personnel The Pergo Group had 798 employees at the end of the period, compared with 939 at the beginning of the year, of whom 513 were in Europe and 244 in North America. The decrease of 141 employees since year-end was due mainly to the decisions on personnel cutbacks that were announced in December 2001/January 2002. Parent Company The Parent Company's operating result for the period amounted to a loss of SEK 24 M (loss: 17), and profit after financial items amounted to SEK 11 M (2). At the end of the period, 10 persons were employed in the Parent Company (which includes Group management and certain Group-wide functions). Annual General Meeting At the Annual General Meeting held on April 11, it was decided that the Board of Directors should consist of eight members. The Meeting resolved to reelect Kurth Augustson, Hans Larsson, Mikael Nachemson, Karl Stenström and Katarina Wendt Englund as members of the Board. In addition, Stefan Johansson, Björn Rosengren and Bertil Villard were elected as new Board members. Gunnar Brock, Christer Gardell and Thomas Svensk had declined reelection. Bertil Villard was named Chairman of the Board at the statutory Board meeting immediately after the Annual General Meeting. Outlook for 2002 The new patents granted to Unilin in Europe and Pergo in the US have significantly increased uncertainty in the market. This since it is not clear which companies will have the right to continue milling click systems directly on the carrier. In addition, it is difficult to foresee over the short term what the compensation levels for these rights will be and whether this will result in the selling off of existing products. Over time, the perception is that the Group´s own patents as well as the license rights will strengthen Pergo´s position and its future competetiveness. The present license fees to Unilin and the trend in the US require a higher level of ambition in the action program to be able to retain Pergo's financial objectives. This, in combination with the fact that the action program is proceeding more favorably than planned, leads to that the target for the action program will be set higher than the previously announced level of at least SEK 500 M annually over a two- year period. The weaker development for Pergo in specialty in the US and the uncertainty regarding how the patent situation will develop and its impact on the market makes the prediction for the development of the second half-year difficult. At present, Pergo's earnings forecast of an operating profit of SEK 50 M for 2002 is retained. Cash flow from ongoing operations, has during the first six months shown a more favorable trend than expected as a result of implemented measures and exchange-rate changes. At present, it is expected to be slightly negative for the full-year 2002, which is a more positive view than previously announced. In 2003 the cash flow from ongoing operations is expected to be positive. Trelleborg, July 22, 2002 Board of Directors The interim report has been prepared in accordance with the recommendation of interim reporting of the Swedish Financial Accounting Standards Counsil (RR20). No changes have been made in the Company´s accounting principles, compared with the latest Annual Report, with additions of those recommendations issued by the Swedish Financial Accounting Standards Counsil that have come into force as per January 1, 2002. In the transition to RR 1:00 no retroactive translation of previous acquisitions have been made. This report has not been examined by the Company´s auditors. All financial data pertaining to year 2000 is pro forma. Future financial reports (preliminary dates): Interim report, nine months ended September 30, 2002, to be released on October 28, 2002 Year-end report for 2002, to be released in February 2003 Pergo AB (publ) Corporate Communications For further information please contact: Raimo Issal, CEO Annette Kumien, CFO Telephone number: +46 410 36 31 00 ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2002/07/22/20020722BIT00100/wkr0001.doc The full report http://www.waymaker.net/bitonline/2002/07/22/20020722BIT00100/wkr0002.pdf The full report