Pergo Interim Report Q1, 2002

Interim Report - Three months ended March 31, 2002 (All figures in parentheses pertain to corresponding period in the preceding year) · Operating profit amounted to SEK 7 M (loss: 54), and profit before taxes amounted to SEK 1 M (loss: 55). · Net financial debt amounted to SEK 203 M (514). · The action program that will result in annual earnings improvements of at least SEK 500 M over a two-year period is proceeding according to plan. Personnel cutbacks affecting slightly more than 100 persons were made during the period. · A favorable ruling in the click joints dispute in the US (ITC) was received in March. · The new share issue was favorably subscribed, generating SEK 392 M before issue costs, in parallel as credit facilities were increased by SEK 200 M to approx. SEK 990 M. 2002 Q1: 2001 Q1: Jan-March Jan-March * Net Sales SEK 905 M SEK 850 M - Europe SEK 300 M SEK 308 M - North America SEK 565 M SEK 506 M * Operating SEK 7 M SEK -54 M profit/loss * Profit/loss SEK 1 M SEK -55 M before tax Net sales and earnings Net sales during the period amounted to SEK 905 M (850), largely unchanged compared with the preceding year, after the elimination of foreign-exchange effects. In North America, higher sales volumes to specialty stores more than compensated for a volume decline in sales to The Home Depot and lower sales prices. In Europe, increased sales to other customers did not fully offset the phasing-out of deliveries to Ikea. The gross margin rose from 23% to 24%. The action program has resulted in generally lower product costs and, in parallel, the product mix in Europe has been favorable, with sales of products with higher processing value. The lower prices in comparison with the same period last year, particularly in North America, have therefore been offset. Operating profit for the period amounted to SEK 7 M (loss: 54). Most of the improvement in earnings is attributable to the action program. Fixed costs in the company were reduced and gross margins improved. Foreign-exchange movements, compared with the first quarter of 2001, had only a marginal impact on earnings, since the positive effect of a stronger USD was neutralized by purchases in EUR, which also increased in value relative to SEK. During the second quarter of 2001, 50% of the coming year's estimated transaction exposure in USD and 75% of GBP and CHF were hedged through forward contracts. In addition, 25% of the next year's estimated transaction exposure in USD was at the same time hedged through forward contracts. The effect on profit of this hedging in the period amounted to an expense of SEK 4 M. North America Sales during the first quarter amounted to SEK 565 M, compared with SEK 506 M in the corresponding period of 2001, an increase of 4% after the elimination of foreign-exchange effects. Higher volumes to the specialty stores had a positive impact on sales, whereas lower volumes to The Home Depot and lower prices had a negative impact. The laminate flooring market is estimated to have increased by about 5% in volume, in an otherwise declining market for flooring products. Competition in general has created continued price pressure in the mid- and low-price segment. Sales by specialty stores of laminate flooring show a continued positive trend. The launch of new Pergo products was implemented according to plan in March, and favorable market reception has been noted for the products. Pergo's sales to specialty stores were significantly higher, compared with the first quarter of 2001, when distributors reduced their inventories. The company's delivery capacity also improved considerably during the period. The Home Depot's retail sales remained strong during the first quarter of 2002. The new product launch that was planned during the fourth quarter of 2001 was completed during the period. Favorable market reception has been noted for the new products. Sales to The Home Depot during the period, however, were lower than sales in the corresponding period of the preceding year, since the stores now also sell some competing products. Following the launch of new products mentioned above, Pergo's current product lines for specialty stores and The Home Depot are now completely different, which is expected to have positive effects on sales. Europe Sales in the first quarter amounted to SEK 300 M, compared with SEK 308 M in the corresponding period of 2001, a decline of 5% after the elimination of foreign-exchange effects. The decline was attributable to the phasing-out of deliveries to Ikea. Sales to other customers increased by 6%. The market for laminate flooring is characterized by price pressure and, as a result, Pergo is focusing on laminate flooring with higher processing value. The company also re-organized the market organization to increase the efficiency of its sales operations. Continued favorable market reception was noted for the separate product lines developed during 2001. Increased demand was noted for products such as flooring materials with sound-absorption underlining, which are intended primarily for the contract market. Successful sales were also reported for products with glue-free joints and the new line of kitchen flooring materials. As earlier communicated deliveries to Ikea of low priced products are now being phased out, and the company expects to discontinue these deliveries during the second quarter. After the problems in 2001 created due to delivery delays, corrective measures implemented by the company have resulted in a substantial improvement in delivery ability. Production and distribution The first step in the transformation of production to direct laminate flooring and flooring with glue-free joints has entered the final stage. During 2001, a total of three production lines for flooring with glue- free joints were placed in service at the production plants in Trelleborg, Sweden, and Garner, North Carolina, in the US. An investment was also started during 2001 in a new production line for glue-free joints in Garner. The line was placed in operation during the first quarter. At year-end 2001, the production process for PMP (Pergo Multilayer Process) was verified. PMP is a new technology developed by Pergo that combines the best features of production processes for direct laminated (DL) and high-pressure laminated (HPL) flooring. Commercial production was started on a modest scale at the unit in Perstorp during the first quarter. The company plans to increase volumes gradually during 2002. Operations at the new distribution center in the US are expected to start during the second quarter. Distribution efficiency for Pergo's products will be increased through the distribution centers in Trelleborg, Sweden and Garner in the US. Both distribution centers are covered by long-term leasing contracts under current market conditions. Action program for improved earnings Pergo is conducting a comprehensive action program. Program planning was started in 2001, and the action program is now being implemented at full strength. The objective is to achieve a positive operating profit during 2002 and a positive cash flow during 2003. Actions designed to generate annual improvement in profits of at least SEK 500 M within a two-year period are included in the program. In parallel, it is also important to create changes in operating methods and simplify internal structures. In the long-term perspective, Pergo will eventually achieve its operational and financial goals. The action program was necessitated by a sharp decline in Pergo's profitability during recent years in flooring markets characterized by growth in Europe and the US. The negative trend of profitability was due mainly to the company's late adaptation to less cost-intensive production technologies, low utilization of proprietary production capacity and generally high cost levels in parallel with current market trends characterized by increased competition and price pressure. All units of Pergo are included in the action program. About 25 definied areas comprised of nearly 500 activities have been identified. The most critical activities include a reduction in the number of employees and lower product costs, where the in-house developed process technology, Pergo Multilayer Process, will play an important role. Efforts focused on the action program, which among others include reductions in fixed costs and improved efficiency in the supply chain, product range and tied-up capital, are proceeding according to plan. In total, the workforce has been reduced by 134 employees since November 2001. New share issue The Board of Directors of Pergo decided in January 2002 to carry out a new share issue of Pergo shares not to exceed SEK 394 M, with preferential rights for the company's shareholders. An Extraordinary General Meeting on February 7, 2002 approved the Board's issue decision. In accordance with terms for the new share issue, shareholders in the company were entitled to subscribe for two new shares for each old share held, at a subscription price of SEK 11 per share. The issue was subscribed to 99.7%, whereby shareholders purchased 35,672,255 shares for a total of SEK 392,394,805, including premiums. As a result, the company's share capital now amounts to SEK 535,696,850. After issue costs, the new issue is expected to generate SEK 382 M. The new issue was prompted by a weakening in the company's financial position, particularly during the latter part of 2001. The capital infusion will be used to provide Pergo with sufficient financial resources and liquidity to carry through the aforementioned action program and enable the company to assume an active role in ongoing structural changes in the industry. Trading in Pergo shares was suspended during the period January 2-7, 2002 due to discussions concerning the new share issue. At the Extraordinary General Meeting, Mikael Nachemson, President of AB Custos, was elected as a new member of the Board. Disputes On March 22, 2002, the US International Trade Commission (ITC), confirmed its preliminary ruling from November 5, 2001, when the ITC announced that joints manufactured by Pergo under license from Unilin do not violate the patent held by Välinge Aluminium AB. The ruling means that Pergo is free to import and sell products with these joints in the US without restrictions. ITC's ruling can be appealed in the Court of Appeal of the Federal Circuit. Välinge Aluminium AB has filed an appeal, and the Court of Appeal will decide if the appeal shall be heard. Other patent disputes and discussions concerning glue-free joints are now in progress between several companies, including Pergo. New patents of the license holder affect the ongoing license costs for Pergo on glue free joints. License costs are expected to considerably increase during this year. At the present time, the disputes and discussions are not expected to create any significant negative effects on Pergo's operations. A dispute with a supplier that submitted a claim due to a not insignificant volume reduction in sales to Pergo was settled during the period. Provisions were made in the 2001 year-end accounts to cover anticipated costs for ongoing disputes and claims. Payments made during the first quarter of 2002 as a result of these disputes and claims did not have any significant effect on earnings during the period. Investments Group investments in fixed assets during the period amounted to SEK 18 M (59). The investments were largely attributable to projects initiated during 2001. Working capital/capital employed Working capital increased by SEK 22 M since year-end 2001. Determined efforts to reduce accounts receivable created a positive trend in customer payments received during the first quarter. Accounts payable have also been reduced since year-end following the Group's restoration of normal payment routines. Payments concerning costs of a nonrecurring nature for which provisions were made in the financial accounts for 2001 resulted in an increase in working capital. Capital employed at the end of the period amounted to SEK 1,593 M, a decrease of SEK 49 M since the beginning of the year. The decline in capital employed, as opposed to the increase in working capital, was due primarily to a larger tax repayment (loss carried backwards) in the US. Financial position/cash flow Pergo reported a positive cash flow of SEK 79 M from ongoing operations during the first quarter. Combined with the new share issue and moderate investments, net financial debt declined by SEK 444 M since the beginning of the year and amounted to SEK 203 M at the end of the period. Pergo and its lenders have established new terms and conditions for the Company's loan financing. In January 2002, Pergo's lenders decided in favor of expanding credit facilities and to retain the existing credit agreement. Total available credit and credit lines at the end of the period amounted to about SEK 990 M, of which credits totaling SEK 303 M had been utilized at the end of the period. Financial net Net financial items during the period were charged with approximately SEK 2 M for set-up costs in connection with external loan financing. Tax The Group's tax rate for the year is estimated at 35%. Deferred tax claims on taxable loss carryforwards, which are judged to be usable in the foreseeable future, amount to SEK 180 M. Shareholders' equity Shareholders' equity at the end of the period amounted to SEK 1,286 M. Equity was increased by an estimated capital infusion of SEK 382 M from the new share issue and net profit of SEK 2 M. To offset social costs that may arise from Pergo's stock option program, the company entered a stock swap agreement in 2001. A valuation of the agreement at the end of the period necessitated a provision of SEK 5 M, which was charged directly against shareholders' equity. Personnel The Pergo Group had 832 employees at the end of the period, compared with 939 in the beginning of the year, of whom 527 were in Europe and 252 in North America. The decrease of 107 employees since year-end was mainly due 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 13 M (loss: 4), and profit after financial items amounted to SEK 3 M (10). At the end of the period, 11 persons were employed in the Parent Company (which includes Group management and certain Group-wide functions). Annual General Meeting The Annual General Meeting was held after the end of the quarter. A decision was made that the Board of Directors shall 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 Board meeting following election immediately after the Annual General Meeting. Outlook for 2002 Pergo is implementing an extensive action program which is projected to improve earnings by at least SEK 500 M annually within a two-year period, and enable the company to eventually reach the operating and financial objectives set. The objective is that Pergo shall attain an operating result of SEK 50 M in 2002, which means that more than half the overall earnings improvement is expected to be achieved this year. Cash flow from ongoing operations is calculated to be negative during 2002, and to be positive in 2003. Trelleborg, April 22, 2002 The Board of Directors The Interim Report has been prepared in accordance with the recommendations of the Swedish Financial Accounting Standards Council. No changes have been made in the company's accounting principles, compared with the latest Annual Report. 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, six months ended June 30, 2002, to be released on July 22, 2002 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 phone number +46 410 36 31 00 Annette Kumlien, CFO, phone number +46 410 36 31 00 This is Pergo Pergo is a laminate flooring company with leading market positions, particularly in Europe and the North America. The Company also sells system components, such as glue, floor-installation tools and moldings that are adapted to Pergo's products. Pergo had sales of SEK 3,729 M in full-year 2001 (3,632) and the number of employees was 939 at December 31, 2001 (1,083). Pergo developed laminate flooring at the end of the 1970s and launched the product in Europe during the 1980s. The company started sales in North America in 1994 and, to a smaller degree, in Asia in 1995 and Latin America in 1997. The company's products have been marketed under the Pergo® brand name since 1989. The company is listed on the O- list of the Stockholm Stock Exchange. For further information about Pergo, please visit our homepage www.pergo.com. ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2002/04/22/20020422BIT00650/wkr0001.doc The full report http://www.waymaker.net/bitonline/2002/04/22/20020422BIT00650/wkr0002.pdf The full report