Sandvik ab - interim report, six months ended 30 june 1998

SANDVIK AB - Interim Report, Six months ended 30 June 1998 -Invoiced sales rose 37%; excluding acquisitions and currency effects, 6%. -Profit after financial items, SEK 2,275 M (2,105). -Continued strong operating profit for Sandvik Tooling. Sharp decline in price of nickel adversely affected Sandvik Specialty Steels. Net profit charged with SEK 335 M for tax cases dating from the 1980s. Forecast for 1998: improved profit despite weaker than previously anticipated business climate. Market conditions and sales The business climate weakened during the second quarter as a result of the crisis in Asia, where particularly Japan's economy deteriorated significantly. Countries in South America and several developing nations were also affected. Growth was strong within NAFTA and parts of EU, although some signs of more moderate growth were noted during the second quarter. France and Germany showed continued strong growth. The weaker economic conditions were also reflected in the form of falling raw material prices and generally lower demand for steel products throughout the world. [REMOVED GRAPHICS] Sandvik's order intake amounted to SEK 22,080 M (16,158) in the first half of 1998, an increase of 37% compared with the corresponding period a year earlier. At fixed exchange rates and for comparable units, the order intake rose 6% during the first half year, but remained virtually unchanged in the second quarter. Invoiced sales during the six months of 1998 amounted to SEK 21,250 M (15,482), an increase of 37%. At fixed exchange rates and for comparable units, invoicing rose 6%. The corresponding increase in the second quarter was 2%. Average prices for products sold by the Group's business areas were largely unchanged. At fixed exchange rates and for comparable units, invoiced sales rose 12% in Europe and 6% in the NAFTA region, excluding a major project order in 1997. The increase in sales by Sandvik Tooling in the NAFTA region was significantly higher than the average figure for the region. In the Asia/Australia region, sales invoiced by comparable Group units were SEK 450 M lower compared with the first half of 1997, down about 20%. The sharpest decline was reported in Southeast Asia and Korea. Sales by acquired units totaled SEK 5,100 M. Acquired units include mainly Tamrock, which reported a 4% increase in sales at fixed exchange rates, and Kanthal, which reported a 4% decline. Sales by acquired units in the Asia/Australia region fell by approximately SEK 250 M. Earnings (Appendix 1) Q1-2 Q1-2 Change, % 1997 1998 Invoiced sales, SEK M 15 482 21 250 +37 Operating profit, SEK M 2 100 2 582 +23 as % of invoicing 13 % 12 % Profit after financial 2 105 2 275 +8 items, SEK M as % of invoicing 14 % 11 % Net profit, SEK M 1 407 1 100 -22 as % of invoicing 9 % 5 % Operating profit in the first six months of 1998 amounted to SEK 2,582 M (2,100), 23% higher than the year-earlier period. New units contributed SEK 320 M to the Group's operating profit, but reported relatively lower operating margins. Operating profit also benefited from higher volumes and productivity, but were affected adversely by developments in Asia and the sharp decline in nickel prices. Profit after financial income and expenses amounted to SEK 2,275 M (2,105), an increase of 8%. As anticipated, the net of financial items was an expense, SEK -307 M (5), after the share redemption program and companies acquired in 1997. Net profit for the six-month period totaling SEK 1,100 M (1,407), includes an extra tax charge, which exceeds previous provisions for taxes by SEK 335 M, related to rulings in tax cases from the end of the 1980s handed down after the close of the first quarter. Accordingly, Sandvik has charged estimated tax expenses for resolved cases and similar cases in progress against profit for the first half of 1998. Earnings per share amounted to SEK 4.25 (5.10). Earnings per share for the most recent 12 months was SEK 9.35 (10.15 for full-year 1997). Return on net assets during the most recent 12 months amounted to 18.2% (17.7% for full-year 1997). Return on shareholders' equity was 13.6% (14.3% for full-year 1997). Excluding the extra tax expense, earnings per share in the first half of 1998 would have totaled SEK 10.65 with a return on net assets of 15.4% for the most recent 12 months. The Parent Company reported invoiced sales of SEK 6,677 M (6,245) and operating profit of SEK 713 M (655). [REMOVED GRAPHICS] Business areas (Appendix 2) Sandvik Tooling's invoiced sales rose by 19% to SEK 6,217 M (5,215). The increase at fixed exchange rates and for comparable units was 9%. Business development was very strong in Europe and the NAFTA region. Operating profit improved to SEK 1,358 M (1,100) on the strength of high invoicing and productivity. Sandvik Mining and Construction's invoiced sales amounted to SEK 4,576 M. The increase at fixed exchange rates and for comparable units was 5%. Demand from the mining industry was affected adversely by low raw material prices, while the construction sector showed improved development, particularly in the U.S. The coal mining sector was characterized by continued weak demand. Operating profit amounted to SEK 242 M, corresponding to 5% of invoicing. Sandvik Specialty Steels' invoiced sales amounted to SEK 6,195 M. The increase at fixed exchange rates and for comparable units was 4%. Demand has leveled off generally in 1998. Prices for Sandvik Steel were down about 4%, compared with the first half of 1997, due mainly to lower prices for alloys. Operating profit amounted to SEK 548 M, or 9% of invoiced sales. Higher volumes and productivity improvements yielded favorable effects on profit. The value of inventories, however, was written down due to a sharp decline in the price of nickel, and second-quarter profit was charged accordingly in the amount of SEK 100 M. Invoiced sales for Sandvik Hard Materials increased in Europe and Asia, among other regions, and profits developed favorably. Sales invoiced by Sandvik Saws and Tools were down 3% due mostly to reduced sales in Southeast Asia, which also caused a decline in earnings during the second quarter. Invoicing by Sandvik Process Systems declined 13% due to the previously low order intake, but order backlog is satisfactory. Capital expenditures Group investments in property, plant and equipment amounted to SEK 1,328 M (922). Financing and liquidity Interest-bearing liabilities less liquid funds yielded net debt of SEK 9,279 M (7,160 at 31 December 1997). Liquid funds amounted to SEK 1,805 M (2,494) and loans to SEK 8,503 M (6,976). The cash flow was SEK -2,131 M. The number of shares at the end of the first half of 1998 was 258,696,000. Shareholders' equity per share was SEK 64.30 (67.30 at 31 December 1997) and the equity/assets ratio was 43% (51%). Personnel The number of employees at 30 June was 38,483 (38,406 at 31 December 1997). Acquisition Sandvik Steel reached an agreement in the first half of 1998 concerning the acquisition of the German company Poppe & Potthoff's unit for production of stainless steel precision tube. The unit has annual sales of approximately SEK 160 M and about 80 employees. Forecast for 1998 The business climate is expected to become weaker than previously anticipated. Nevertheless, profit after financial items is expected to be higher than 1997. Sandviken, 11 August 1998 SANDVIK AB; (publ) Clas Åke Hedström President and Group CEO Appendices: 1.Group summary 2.Invoicing and operating profit This report on the first half of 1998 has not been the subject of any specific examination by the Company's auditors. The next report will be released on 3 November 1998 and will cover the first nine months of 1998. For additional information, please call +46 (0)26-26 10 01. Group in summary, SEK M Q1-2 Full-year Q1-2 Income statement 1997 1997 1998 Invoiced sales 15 482 34 119 21 250 Cost of goods sold -10 274 -22 926 -13 939 Gross profit 5 208 11 193 7 311 Selling, general and administrative -3 293 -7 111 -4 669 expenses Share in profits in associated companies 221 300 20 Other operating income and expenses -36 -12 -80 Operating profit 2 100 4 370 2 582 Financial income and expenses, net 5 -165 -307 Profit after financial income and 2 105 4 205 2 275 expenses Taxes -620 -1 283 -1 060 Minority interest -78 -197 -115 Net profit 1 407 2 725 1 100 Consolidated balance sheet Fixed assets 15 333 17 481 18 078 Inventories 8 281 10 039 10 522 Current receivables 8 609 10 047 10 581 Liquid assets 1 745 2 494 1 805 Total assets 33 968 40 061 40 986 Shareholders' equity 16 282 17 414 16 621 Minority interests 1 104 1 169 845 Interest-bearing provisions and 7 123 9 654 11 084 liabilities Non-interest-bearing provisions and 9 459 11 824 12 436 liabilities Total provisions, liabilities and 33 968 40 061 40 986 shareholders' equity Consolidated funds statement Profit after financial items 2 105 4 205 2 275 Reversal of depreciation 669 1 486 982 Other -162 -258 -88 Accrued taxes -540 -905 -1 019 Dividends -1 926 -1 930 -2 198 Total funds from operations 146 2 598 -48 Change in working capital -489 456 -659 Net financing from operations -343 3 054 -707 Net investments -2 229 -5 089 -1 424 Net cash flow -2 572 -2 035 -2 131 Key ratios Order intake, SEK M 16 158 34 603 22 080 Earnings per share*, SEK 9.90 10.15 9.35 Return on net assets* 17.3% 17.7% 18.2% Return on shareholders' equity* 13.9% 14.3% 13.5% * Rolling 12 months. Invoiced sales by market area, SEK M Q2 Q1-2 Q3 Q4 Full Q1 Q2 Q1-2 Change -year 1997 1997 1997 1997 1997 1998 1998 1998 % %* EU 3 442 6 720 3 203 3 876 13 799 4 320 4 107 8 427 25 12 (excl uding Sweden) Sweden 600 1 109 453 669 2 231 665 632 1 297 17 14 Rest 453 826 405 657 1 888 623 634 1 257 52 9 of Europe Europe 4 495 8 655 4 061 5 202 17 918 5 608 5 373 10 27 12 total 981 NAFTA 1 769 3 433 2 006 2 756 8 195 2 700 2 800 5 500 60 3 South 411 773 444 486 1 703 504 481 985 27 -1 America Africa, 214 378 197 412 987 486 429 915 142 11 Middle East Asia, 1 266 2 243 1 250 1 823 5 316 1 472 1 397 2 869 28 -* Aust- 20* ralia Group 8 155 15 482 7 958 10 679 34 119 10 770 10 480 21 37 6 total 250 Change compared with year earlier excluding currency effect and company acquisitions. **Change including currency effect but excluding company acquisitions. Invoiced sales by business area, SEK M Svk 2 5 215 2 615 2 973 10 803 3 154 3 063 6 217 19 9 Tooling*** 745 Svk Mining and Const- 569 1 076 597 1 909 3 582 2 342 2 234 4 576 325 5 ruction*** Svk 2 621 5 008 2 597 3 175 10 780 3 120 3 075 6 195 24 4 Specialty Steels*** Svk 363 676 311 374 1 361 374 343 717 6 6 Hard Materials Svk Saws 700 1 383 693 711 2 787 709 632 1 341 -3 -3 and Tools Svk 406 676 440 757 1 873 245 332 577 -15 -13 Process Systems Seco Tools 742 1 428 698 763 2 889 819 792 1 611 13 11 Group 9 20 7 17 44 7 9 16 activities Group 8 155 15 482 7 958 10 679 34 119 10 770 10 21 37 6 total 480 250 Operating profit by business area, MSEK Svk Tooling*** 616 1 100 537 457 2 094 653 705 1 358 Svk Mining and Construction*** 34 83 46 105 234 110 132 242 Svk Specialty 273 504 219 198 921 300 248 548 Steels*** Svk Hard 44 71 36 41 148 44 55 99 Materials Svk Saws and 50 109 62 68 239 69 32 101 Tools Svk Process 11 20 17 43 80 10 10 20 Systems Seco Tools 144 263 138 174 575 194 170 364 Group activities 6 -50 65 65 79 -95 -55 -150 Group total 1 178 2 100 1 120 1 150 4 370 1 285 1 297 2 582 Operating profit by business area, % of invoicing Svk Tooling*** 22 21 21 15 19 21 23 22 Svk Mining and Construction*** 6 7 5 6 5 Svk Specialty 8 6 9 10 8 9 Steels*** Svk Hard 12 11 12 11 11 12 16 14 Materials Svk Saws and 7 8 9 10 9 10 5 8 Tools Svk Process 3 3 4 6 4 4 3 3 Systems Seco Tools 19 18 20 23 20 24 22 23 Group total 14 13 14 11 13 12 12 12 Precision Twist Drill included from 1 Sept. 1997, Tamrock from 1 Nov. 1997 and Kanthal from 1 July 1997.