SANDVIK AB - Interim Report

SANDVIK AB - Interim Report, Six months ended 30 June 1999 * Invoiced sales amounted to about SEK 20,000 M for the first six months. Positive trend noted in second quarter. * Profit after financial items also improved in the second quarter compared with the first, and amounted to SEK 1,811 M (2,275) for the first six months. * Sandvik Mining and Construction increased earnings - structural measures are gaining effect. * Sale of Sandvik Saws and Tools approved by Special General Meeting. Market The business climate within the OECD was largely unchanged during the second quarter. Industrial production grew by about 1% on an annual basis. Production declined in the UK and Germany but increased somewhat in the rest of Europe. In the US growth continued for the ninth consecutive year, with a growth rate of about 2.5%. In South America a recovery occurred in Brazil after the devaluation at the beginning of the year. The situation in Southeast Asia and Japan stabilized and industrial production rose sharply in South Korea. The confidence in an improved business climate increased in the second quarter and the OECD Secretariat increased its forecast for GDP growth in 1999 to 2%. Activity within certain key customer segments, such as the oil and gas, mining and process industries, was restrained by low investments and depressed raw material prices. However, prices of certain raw materials rose in the quarter, primarily the price of oil. The consumer-based customer segments, including the automotive industry, showed continued favorable activity. Taken as a whole, this means that demand for Sandvik's products has been largely unchanged during the past year. Sales (see appendix 2) [REMOVED GRAPHICS] Order intake amounted to SEK 20,130 M (22,080) in the first six months, corresponding to a decline of 9% compared with the year-earlier period. However, order intake rose 3% from the second half of 1998. Invoiced sales in the first half of the year totaled SEK 19,990 M (21,250), down 6% compared with the first and second half of 1998. Invoiced sales in the second quarter of 1999 increased compared with the first quarter. Higher currency exchange rates, including the USD, increased invoiced sales by 3% for the half-year. Invoicing in Europe declined 5%, with Sandvik Specialty Steels posting the largest decline. Sales in the NAFTA region were down 8% due to lower demand from the oil and gas, mining and aerospace industries. The decline in South America was 23% despite a strong recovery in Brazil during the quarter. The increase in Asia/Australia was 3% following a sharp rise in the second quarter. Earnings (see appendix 1) Q1-2 Q1-2 Change % 1998 1999 Invoiced sales, SEK M 21 250 19 990 -6 Operating profit, SEK M 2 582 2 101 -19 as % of invoiced sales 12 11 Profit after financial 2 275 1 811 -20 items, SEK M as % of invoiced sales 11 9 Net profit, SEK M 1 100 1 118 +2 as % of invoiced sales 5 6 Operating profit in the first six months amounted to SEK 2,101 M (2,582). Earnings were restrained by generally lower volumes and lower selling prices for Sandvik Specialty Steels. Earnings improved in the second quarter for the large business areas. The reasons included improvements in Asia, higher capacity utilization in Sandvik Mining and Construction, currency effects and reduction of costs. Profit after financial income and expenses amounted to SEK 1,811 M (2,275). Net profit amounted to SEK 1,118 M (1,100). Earnings per share amounted to SEK 4.30 (4.25). Earnings per share for the most recent 12 months totaled SEK 8.15 (8.10 for full-year 1998). Return on net assets during the most recent 12 months amounted to 14.3% (16.3% for full-year 1998). Return on shareholders' equity was 11.8% (11.9% for full-year 1998). The Parent company reported invoiced sales of SEK 5,209 M (6,677) and operating profit of SEK 390 M (713). [REMOVED GRAPHICS] Business areas (see appendix 2) During 1999, Sandvik changed the organization of its business areas. As of the second quarter, Sandvik Hard Materials is included in Sandvik Tooling with Sandvik Coromant and CTT Tools. Sandvik Specialty Steels includes Sandvik Steel, Kanthal and Sandvik Process Systems. Sandvik Tooling's invoiced sales declined 3% to SEK 6,709 M (6,934). Order intake was SEK 6,787 M, 4% lower than in the first half of 1998 but 6% higher than in the second half. The trend was weakly negative in Europe but positive in Asia. Invoicing in the US was at a lower level than in the beginning of 1998 and was unchanged between quarters. Sales of solid cemented-carbide drills and end mills continued to increase sharply. The operating margin increased somewhat in the second quarter and operating profit amounted to SEK 1,279 M (1,457), in the first six months, corresponding to 19% of invoiced sales. The decline compared with the year- earlier period is due mainly to lower volumes. Sandvik Hard Materials is included in Sandvik Tooling's values for the first half of 1999 in the amount of SEK 744 M (717) in invoiced sales and SEK 114 M (99) in operating profit. Sandvik Mining and Construction's invoiced sales amounted to SEK 4,336 M (4,576), down 5%. Order intake was SEK 4,455 M, 7% lower than in the first half of 1998 but 1% higher than in the second half. Demand from the mining industry remained low, particularly for machines. The focus on the aftermarket was successful and many new service contracts were signed during the first half of the year. The sales of service, spare parts and tools currently account for more than half of total sales. The reduction of personnel due to restructuring proceeded as planned and the number of employees declined during the first half of the year by nearly 600. Operating profit amounted to SEK 293 M (242), corresponding to 7% of invoiced sales. Operating profit improved compared with the first quarter as a result of cost reductions and higher capacity utilization. Sandvik Specialty Steel's invoiced sales amounted to SEK 6,011 M (6,772), down 11%. Order intake was SEK 5,922 M, or 18% lower than in the first half a year earlier and unchanged compared with the second half. Demand in Asia continued to improve during the quarter. The decline in sales pertained primarily to project-related products to the oil & gas and petrochemical segments. The development for consumer-oriented products was favorable. This affected Kanthal in particular, resulting in better performance than for Sandvik Steel. Operating profit declined to SEK 288 M (568) due to lower sales volume and primarily to continuing lower prices. The measures initiated to reduce expenses continued. Nickel prices rose during the quarter, with a marginal positive impact on inventory valuation. Sandvik Process Systems was included in the values reported for Sandvik Specialty Steels with invoiced sales of SEK 629 M and operating profit of SEK 14 M. (SEK 135 M of invoiced sales were attributable to Sorting Systems in the first quarter of 1999, which was reported first in the second quarter. The corresponding order intake was SEK 96 M). Sandvik Saws and Tool's invoiced sales of SEK 1,335 M (1,341) and operating profit of SEK 102 M (101) were unchanged compared with a year earlier. A recovery in Asia occurred during the quarter. Capital expenditures Group investments in property, plant and equipment amounted to SEK 897 M (1,328). Company acquisitions were made amounting to SEK 193 M. Sandvik's Board of Directors today decided to invest a total of SEK 265 M, of which SEK 210 M will be used to increase and modernize the production of cemented-carbide powder. Most of this investment will be made in Sandvik Coromant's plant in Gimo, Sweden. Structural changes In January 1999 Sandvik's business sector Kanthal acquired the American company MRL Industries Inc., one of the world's largest manufacturers of furnace cassettes for the electronics industry. MRL reported sales of SEK 87 M for the first half of 1998. On 22 April, Sandvik reached an agreement with the American company Snap-on Incorporated covering the sale of the Sandvik Saws and Tools business area. The selling price for the operations, debt free, is about SEK 3,300 M. The capital gain is estimated at about SEK 1,600 M. The Board of directors' proposal to sell was approved by a Special General Meeting of Sandvik's shareholders in June. Transfer is planned for 30 September and results will be reported in the third quarter of the year. In February 1999, Sandvik reached agreement with the American investment company Advent International, covering the sale of operations within Sorting Systems. The divestment would have had a marginal effect on earnings for Sandvik. Despite a binding agreement between the parties, it was apparent in June that the investment company was not going to complete the transaction. Accordingly, Sandvik has sued the company in the US. Consequently, Sorting Systems is again included in Sandvik's accounting. Financing and liquidity Interest-bearing liabilities less liquid funds yielded net debt of SEK 10,826 M (8,412 at 31 December 1998). Liquid funds amounted to SEK 1,807 M (1,800) and loans totaled SEK 10,144 M (7,529). Cash flow from ongoing operations amounted to SEK 744 M and SEK 20 M net. The number of shares at 30 June 1999 was 258,696,000. Shareholders' equity per share was SEK 68.20 (72.00 at 31 December 1998) and the equity/assets ratio 44% (47). Personnel The number of employees at 30 June 1999 was 36,368 (37,520 at 31 December 1998), corresponding to a decline for comparable units of about 1,300. Convertibles and options The special issue of convertible debentures to personnel in Sweden attracted great interest and was oversubscribed. About 70% of the employees applied for an allotment. The total amount of the convertible loan was SEK 955 M, corresponding to 4,360,150 shares at full conversion. A total of 560,900 options were issued to employees outside Sweden. At exercise, the options generate the same number of shares. At full conversion and exercise of options, a total of 4,921,050 shares are created, yielding a dilution of 1.9%. Options for senior executives Sandvik's Board of directors has decided to implement an options plan from and including 1999 for about 300 senior executives in Sweden and abroad which replaces the current long-term incentive program concluded during the year. The options plan provides a possibility of an annual allotment of so-called personnel options in Sandvik shares with a lifetime of five years and right to exercise after three years. The options plan will be based on existing shares and, accordingly, does not result in any dilution for current shareholders. The first allotment will be made in March 2000. The total value of the annual allotment is based on the Group's return on net assets and can amount to a maximum of SEK 50 M with the addition of social security expenses. The options plan is secured financially so that future increases in the price of the Sandvik share do not affect the company's expenses. Market outlook There are several indications that an improvement in the business climate is under way. Sandviken, 11 August 1999 SANDVIK AB; (publ) Clas Åke Hedström President and CEO Appendices: 1.Group summary 2.Invoicing and operating profit This six-month interim report is unaudited. The next interim report, covering the first nine months of 1999, will be released on 3 November 1999. For additional information, please call +46 (0)26-26 10 01. Group summary, SEK M Q1-2 Full- Q1-2 year Income statement 1998 1998 1999 Invoiced sales 21 250 42 400 19 990 Cost of goods sold -13 -28 -13 939 813 601 Gross profit 7 311 13 587 6 389 Selling, general and administrative -4 669 -8 755 -4 255 expenses Share of profits in associated companies 20 -4 7 Other operating income and expenses -80 -233 -40 Operating income 2 582 4 595 2 101 Financial income and expenses, net -307 -660 -290 Profit after financial income and 2 275 3 935 1 811 expenses Taxes -1 060 -1 675 -614 Minority interest -115 -165 -79 Net profit 1 100 2 095 1 118 Consolidated balance sheet Fixed assets 18 078 19 461 19 353 Inventories 10 522 10 350 10 433 Current receivables 10 581 9 995 10 520 Liquid assets 1 805 1 800 1 807 Total assets 40 986 41 606 42 113 Shareholders' equity capital 16 621 18 621 17 632 Minority interests 845 872 821 Interest-bearing provisions and 11 084 10 212 12 633 liabilities Non-interest-bearing provisions and 12 436 11 901 11 027 liabilities Total provisions, liabilities and 40 986 41 606 42 113 shareholders' equity Summary cash-flow statement** Profit after financial items 2 275 3 935 1 811 Depreciation added back 982 2 099 1 069 Taxes paid -486 -759 -1 210 Change in working capital -1 382 -1 356 -926 Cash flow from operations 1 389 3 919 744 Net investments -1 424 -2 956 -1 079 Cash used in financing, activities, -653 -1 754 355 change of loans, dividends Cash flow -688 -791 20 Key figures Order intake, SEK M 22 080 41 700 20 130 Earnings per share* 9.35 8.10 8.15 Return on net assets* 18.2% 16.3% 14.3% Return on shareholders' equity* 13.5% 11.9% 11.8% * Rolling 12 months. **In accordance with new recommendations from the Swedish Financial Accounting Standards Council 1998. Invoiced sales by market area, SEK M Q2 Q1-2 Q3 Q4Full Q1 Q2 Q1-2 Change - year 1 1998 1998 1998 1998 1998 1999 1999 1999 % % ) EU (excl. Sweden) 4 8 3 4 16 4 4 8 -3 -8 107 427 806 545 777 078 086 164 Sweden 701 1 417 592 2 554 637 1 - - 366 375 191 13 15 Rest of Europe 634 1 604 540 2 534 613 1 -9 - 257 401 147 10 Europe total 5 11 4 5 21 5 5 10 -5 -9 442 050 827 677 553 166 336 502 NAFTA 2 5 2 2 10 2 2 5 -8 - 730 430 627 569 626 373 645 018 12 South America 481 985 555 438 1 330 431 761 - - 978 23 25 Africa, Middle 429 915 452 548 1 406 357 763 - - East 916 17 11 Asia, Australia 1 2 1 1 6 1 1 2 3 2 397 869 560 898 327 355 591 946 Group total 10 21 10 11 42 9 10 19 -6 - 480 250 020 130 400 630 360 990 10 Change compared with year earlier excluding currency effects and structural changes. Invoiced sales by business area, SEK M 2) Svk Tooling 3 6 3 3 13 3 3 6 -3 -7 406 934 209 433 576 326 383 709 Svk Mining and 2 4 2 2 9 2 2 4 -5 -7 Construction 234 576 389 414 379 101 235 336 Svk Specialty 3 6 3 3 13 2 3 6 - - 3) Steels 407 772 018 789 579 733 278 011 11 16 Svk Saws and Tools 632 1 661 692 2 669 666 1 0 -4 341 694 335 4) Seco Tools 792 1 737 803 3 794 791 1 -2 -5 611 151 585 Group activities 9 16 6 -1 21 7 7 14 / / Group total 10 21 10 11 42 9 10 19 -6 - 480 250 020 130 400 630 360 990 10 Operating profit by business area, SEK M 2) Svk Tooling 760 1 630 637 2 614 665 1 457 724 279 Svk Mining and 132 242 34 64 340 115 178 293 Construction Svk Specialty 258 568 176 158 902 123 165 288 3) Steels Svk Saws and Tools 32 101 39 65 205 64 38 102 4) Seco Tools 170 364 135 178 677 140 143 283 Group activities -55 -150 -40 -63 -253 -97 -47 -144 Group total 1 2 974 1 4 959 1 2 297 582 039 595 142 101 Operating profit by business area, % of invoicing 2) Svk Tooling 22 21 20 19 20 18 20 19 Svk Mining and 6 5 1 3 4 5 8 7 Construction Svk Specialty 8 8 6 4 7 5 5 5 3) Steels Svk Saws and Tools 5 8 6 9 8 10 6 8 4) Seco Tools 22 23 18 22 22 18 18 18 Group total 12 12 10 9 11 10 11 11 Sandvik Hard Materials is included in Sandvik Tooling. Values for prior periods are adjusted for comparison. Sandvik Process Systems is included in Sandvik Specialty Steels. Values for prior periods are adjusted for comparison. As a result of the majority holding in Seco Tools, Sandvik consolidates this company. For comments, refer to the company's six-month interim report. ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/08/11/19990811BIT00260/bit0001.doc http://www.bit.se/bitonline/1999/08/11/19990811BIT00260/bit0002.pdf