Interim Report January - June 1998

Summary of the first six months Income after net financial items rose by 88 per cent to SEK 102 million (54m). Sales rose by 29 per cent to SEK 2,265 million (1,754m). For comparable units, sales rose by 7 per cent. The acquisition of the Arctia hotel chain took effect on 1 April, adding 19 hotels in Finland to the Scandic chain of hotels, as well as one hotel in Sweden and one in Belgium. Another hotel, situated in Rovaniemi in Finland, was also acquired during the period. This hotel, which was taken over by Scandic on 9 July, has a total of 167 rooms. A separate property company, Hotellus International AB, has been formed to which Scandic's five property holdings have been transferred. Hotellus, which at 30 June 1998 was a wholly-owned subsidiary of Scandic, added two properties to its portfolio during the first six months of 1998. At the beginning of July, Hotellus acquired a further 5 properties and now has a total of 12 hotels with a book value of approximately SEK 1,300 million. Scandic's ownership interests in the company have been reduced to 61 per cent. The cash flow amounted to SEK -288 million (-65m). The change year on year is attributable primarily to the higher rate of capital expenditure, particularly in the newly-formed subsidiary company, Hotellus. The cash flow for the last four quarters amounted to SEK -10 million. Earnings per share rose to SEK 3.14 (2.53). Market developments The trend of stable market growth has continued. Demand has been strong in virtually all those countries where Scandic operates hotels whilst capacity growth has remained limited. In the Swedish market, where growth last year was relatively limited, demand has been good during the first 6 month. Demand in Norway remains strong, but increases in occupancy levels have been limited due to new capacity in the major cities. In Finland, which is a new market for Scandic, the number of room nights sold and occupancy levels have both increased. Demand in Denmark, whilst less buoyant, has nevertheless been positive, and there has been no significant increase in capacity. There has been an increase in room rates for all Nordic markets. The trend is positive also in Scandic's non-Nordic markets. In Germany, both demand and room rates have continued to rise in those cities where Scandic operates hotels. The same applies to the Benelux countries. Demand and occupancy levels in the UK and Austria have levelled off, although room rates continue to rise. Hotel operations At 30 June 1998, the Scandic Group operated 122 hotels with a total of 20,860 rooms in nine countries. Since the company's Stock Exchange listing in December 1996, 29 hotels, with a total of 5,083 rooms, have been added to the Group's portfolio. Agreements have also been reached regarding a further 4 hotels, with a total of 1,007 rooms. During the period, four hotels with 359 rooms have been sold. Scandic's hotels, as Hotels under at 30 June 1998 construction/ Future take-overs Land No. No. No. of No. of Total Total of of hotel rooms hotels rooms hotel rooms s s Sweden 57 9,789 - - 57 9,789 *) Norway 13 1,848 2 490 15 2,338 Denmark 16 2,194 - - 16 2,194 Finland 19 3,387 2 517 21 3,904 Germany 9 1,874 - - 9 1,874 UK 3 836 - - 3 836 Belgium 2 304 - - 2 304 Austria 2 543 - - 2 543 Netherla 1 85 - - 1 85 nds Total 12220,86 4 1,007 12621,86 0 7 *) The hotel in Gothenburg/Mölndal will be replaced in the Year 2000 with a new hotel, raising room capacity by 80 rooms. In Germany, business operations at the loss-making hotel in central Frankfurt were wound up on 30 June 1998. The management contracts for the Holiday Inn hotels in London/Victoria and Edinburgh expire on 31 December 1998 and will not be renewed. The management contract for the Holiday Inn Nelson Dock in London was re-negotiated as a leasing agreement, effective 9 July. The overall effect of these changes on earnings during 1998 will be marginal. During the first six months of 1998, Scandic has managed to improve or defend its market position in all countries where it operates hotels. Occupancy levels have risen in all markets except the UK and Austria, where occupancy has levelled off and followed general market trends. Average room revenues have risen in all markets. Business operations at the Finnish hotels, which were incorporated into the Scandic concept as of 1 April, are developing according to plan. Scandic's various market initiatives and concepts have been launched in this market. Average room rates have risen and improvements in operational efficiency have been achieved. In June, an agreement was signed regarding Scandic's take-over of the Hotel Rovaniemi in Finland. The hotel has 167 rooms and the take-over took place on 9 July. Hotellus International AB At the turn of the 1997/98 financial year, Scandic formed a separate property company, Hotellus International AB, to which all of its five hotel properties were transferred. The objective of this move was to enable Scandic to continue to focus on the core business of managing hotels and to increase the company's flexibility for future growth. As Hotellus expands further, Scandic aims to reduce its ownership interests in the company. By the end of 1998, it is expected that Scandic's shareholding in the company will be less than 50 per cent. Long term, Scandic aims to retain a 20 per cent stake in the company. At 30 June 1998, Hotellus was still a wholly-owned subsidiary company of Scandic. During the first six months of the year, the company acquired a property in Bremen, in which Scandic now operates a hotel, and a plot in Mölndal, where Scandic plans to have a hotel built to replace its existing hotel there. At the end of the first half-year, Hotellus thus owned seven hotels. At 7 July, Hotellus increased the number of property holdings in its portfolio from 7 hotels to 12 properties, with a book value of approximately SEK 1,300 million. The acquisition was partly financed by an increase in borrowings, partly by a share issue directed at the former owners of the properties, Scandic and at institutional owners. Scandic presently owns 61 per cent of the business. The diversification of ownership was carried out in such a way that the Scandic Group's pre-tax income for the first six months of the year will be charged with a small capital loss. The net income after tax, however, will be positively affected, as tax deductions can be claimed for losses incurred previously. Earnings trend The total sales for the Scandic Group during the first six months of the year amounted to SEK 2,265 million (1,754m), an increase of 29 per cent. The business operations acquired in Finland accounted for 19 percentage units of this increase. For comparable units, sales rose by 7 per cent compared with the same period in 1997. Income after net financial items amounted to SEK 102 million (54m), an increase of 88 per cent. For comparable units, this represents an increase of 65 per cent, corresponding to SEK 35 million. The Finnish business has developed according to plan. After all conversion and introduction costs (SEK 13 million) charged to the accounts during the period, the Finnish business reported a zero result. The labour market conflict in Denmark during the spring led to a reduction in sales corresponding to approximately SEK 13 million. This had an adverse effect on operating income, reducing it by around SEK 4 million. The operating income for the entire Scandic Group amounted to SEK 108 million (66m), corresponding to an operating margin of 4.8 per cent (3.8%). Operating income for the company's hotel operations in the Nordic region amounted to SEK 93 million (67m) and to SEK 7 million (-1m) for its non-Nordic operations. Operating income derived from hotel operations has been affected by the fact that items previously relating to financial expenses and depreciation for the Group's own properties are now booked as lease payments made to Hotellus. Hotellus' operating income amounted to SEK 8 million. The group's income after finance during the first six months were unaffected by Hotellus. The improvement in earnings is the result of positive market trends and the fact that the company has continued to consolidate its market position in most of the countries where it operates, with increases in occupancy levels and average room rates. These advances have been accompanied by further gains in productivity through continued improvements in operational efficiency and cost reduction, resulting among other things from environmental measures, which have reduced energy and water consumption. Income after net financial items by quarter and rolling 12 months figures (excluding the effect of non-comparable items) [REMOVED GRAPHICS] Financing and liquidity The Group's interest-bearing liabilities as at 30 June amounted to SEK 542 million (483m). Net borrowing totalled SEK 464 million (416m). Average borrowing for the period January to June was SEK 49 million lower than for the corresponding period in 1997. The purchasing sum and other expenses relating to the acquisition of Arctia's hotel and restaurant business totalled SEK 797 million and was financed by a share issue. The acquisition gave rise to goodwill of SEK 334 million, which will be depreciated over a 15-year period. Cash flow Q2 1998 Q2 1997 Income after financial 102 54 income/expenses Depreciation according to plan 155 114 Dividend -53 0 Change in working capital -79 -124 Investments made in - existing hotels -147 -84 - new hotels -24 -22 - Hotellus -208 0 Tax paid -18 -6 Other changes in capital employed -10 -1 Cash flow from operations excluding the effect of -282 -69 acquisitions and sale of fixed assets Minority interests, Finland 5 0 Acquisitions, Finland -797 0 New share issue, Finland 783 0 Sale of fixed assets 3 4 Cash flow from operations -288 -65 Cash flow from operations, excluding the effect of acquisitions and sale of fixed assets, amounted to SEK -282 million (-69m). The difference compared with the previous year is primarily attributable to the increase in capital expenditure. Investments during the first six months of 1998 totalled SEK 379 million (106m), of which SEK 208 million relates to Hotellus' business operations. Investments relating to the maintenance of existing hotels were slightly higher than normal during the period, but will be maintained at a level of around 4 per cent of sales over a business cycle. The cash flow for the past twelve-month period amounted to SEK -10 million. Parent Company The Parent Company reported sales of SEK 1,027 million (876m) for the period. Income after financial items amounted to SEK 134 million (51m). Capital expenditure totalled SEK 84 million (69m). Liquid assets as at 30 June 1998 were SEK 5 million (56m). The Scandic share The Scandic share's closing price on 31 July was SEK 352, to be compared with SEK 194 on 31 December 1997. This represents an increase of SEK 158, or 81 per cent. During the same period, Affärsvärlden's market index rose by 24 per cent. Movements in the share price since the date of its listing up to 31 July 1998 [REMOVED GRAPHICS] Q1 + Q2Q1 + Q212 months Full GROUP 1998 1997 rolling*) year 1997 SEKm CONSOLIDATED INCOME STATEMENT Net sales 2,265 1,754 4,208 3,697 Cost for goods sold -1,866 -1,474 -3,440 -3,048 Gross income 399 280 768 649 Selling costs -161 -117 -294 -250 Administrative costs -130 -97 -241 -208 Operating income 108 66 233 191 Financial items -6 -12 -14 -20 Income after net 102 54 219 171 financial items Tax -33 -11 -55 -33 Minority interests -2 -2 Net income 67 43 162 138 *) The acquired Finnish operations are included from the second quarter of 1998. BALANCE SHEET Assets Q2 Q2 1997-12 1998 1997 Fixed assets Intangible fixed assets 477 147 159 Tangible fixed assets 1,747 1,059 1,065 Financial fixed assets 44 32 26 Total fixed assets 2,268 1,238 1,250 Current assets Inventories 43 26 25 Current receivables 504 292 197 Short-term investments 35 57 Cash and bank 78 32 29 Total current assets 625 385 308 Total assets 2,893 1,623 1,558 Equity and liabilities Equity 1,433 548 642 Minority interests 7 Provisions Non-interest-bearing 60 30 49 Interest-bearing 51 43 47 Total provisions 111 73 96 Long-term liabilities Interest-bearing 437 321 175 Current liabilities Non-interest-bearing 851 562 609 Interest-bearing 54 119 36 Total current 905 681 645 liabilities Total equity and 2,893 1,623 1,558 liabilities Key ratios Group Q1 + Q2 Q1 + Q2 12 mths 1997- *) 1998 1997 rolling 12 Operating margin, % 4.8 3.8 5.5 5.2 Return on capital 8.3 7.3 16.7 23.3 employed, % Return on equity, % 6.4 8.2 16.4 24.0 Equity ratio, % 50 34 41 Earnings per share, 3.14 2.53 8.48 8.10 **) SEK *) The acquired Finnish operations are included from the second quarter of 1998. **) Earnings per share have been calculated on the basis of 17 million shares for 1997 and 21.25 million shares for 1998.For the rolling 12-month figure, the calculation has been carried out on the basis of the averagenumber of shares. INFORMATION BY BUSINESS AREA SEKm Q2 Q2 1998 1997 Net sales, hotel operations Nordic region 1,803 1,318 Outside the Nordic region 462 436 Total for the Scandic 2,265 1,754 Group Net sales, hotel properties Internal rents 18 Items affecting - - comparison Operating income 1) Nordic region 93 67 Outside the Nordic region 7 -1 Hotel properties 8 Total for the Scandic 108 66 Group Capital employed Nordic region 1,220 496 Outside the Nordic region 133 468 Hotel properties 551 Total for the Scandic 1,904 964 Group Key operating performance indicators Nordic region Occupancy level, % 59.2 56.7 Average room rate, SEK 695 678 RevPAR, SEK 411 385 Average number of rooms 15,32 12,95 available per day 0 2 Outside the Nordic region Occupancy level, % 62.9 60.7 Average room rate, SEK 667 614 RevPAR, SEK 420 373 Average number of rooms 3,489 3,601 available per day Note. Conversion from local currencies to SEK has been calculated at the average exchange rate for the period. 1) All Group overhead costs, including information technology development costs, relate to the Nordic business. Definition of key operating performance indicators: Occupancy level: Number of room nights sold as a percentage of the number of rooms available. Average room rate: Room revenues divided by number of rooms sold. Room revenues: Revenues from room lettings. RevPAR: Room revenues divided by number of rooms available. Average number of rooms per day: Average room capacity available per day. Stockholm, 7 August 1998 Roland Nilsson President & CEO This report has not been externally audited. For further information, please contact: Roland Nilsson, President & CEO, @+46 (0)8 610 52 00 Kerstin Lindberg Göransson, Executive Vice President & CFO, @ +46 (0)8 610 51 21 Gunnar Brandberg, Vice President Marketing & Investor Relations, @ +46 (0)70 728 8450 or +46(0)8 610 52 12. Financial information 1998 Interim report Q3 28 October These reports will be distributed directly to shareholders. Copies of this document and other financial reports may also be obtained directly from Scandic Hotels AB at the address given below. Scandic is the largest hotel company in the Nordic region, with 122 hotels in 9 countries. Scandic's strategy is to be a dedicated hotel operator. The company's business mission is "to offer many people the highest value for money when staying in its hotels, during work and leisure." [REMOVED GRAPHICS] Scandic Hotels AB (publ) Box 6197, SE-102 33 Stockholm Tel: +46 (0)8 610 50 00, Fax: +46 (0)8 610 52 80 E-mail: info@scandic-hotels.com, Internet:www.scandic-hotels.com Org. no.: 556299-1009