Scania Interim Report January - June 1998

HIGHLIGHTS, SECOND QUARTER OF 1998 Operating income rose by nearly 30 percent. A stronger market in Europe and a resulting increase in sales volume improved earnings. Price levels in Europe stabilised. In central and eastern Europe, rapid market growth continues. Scania is continuing to invest in its marketing organisation. Order bookings rose by 30 percent during the quarter. In Latin America, the production changeover to the new truck range has been completed. RESULTS Second quarter of 1998, compared to second quarter of 1997 Number of trucks and buses sold: 13,041 (12,274). Sales: SEK 11,604 m. (10,137) [USD 1,458 m. (1,273)]*. Operating income: SEK 1,010 m. (781) [USD 127 m. (98)], equivalent to a margin of 8.7 (7.7) percent. First half of 1998, compared to first half of 1997 Number of trucks and buses sold: 24,710 (22,433). Sales: SEK 22,027 m. (18,941) [USD 2,767 m. (2,380)]. Operating income: SEK 1,639 m. (1,423) [USD 206 m. (179)], equivalent to a margin of 7.4 (7.5) percent. Income after financial items: SEK 1,489 m. (1,348) [USD 187 m. (169)]. Net income: SEK 1,054 m. (1,001) [USD 133 m. (126)]. Earnings per share: SEK 5.25 (5.00) [USD 0.67 (0.63)]. Earnings per share according to U.S. GAAP: SEK 5.45 (6.30) [USD 0.68 (0.79)]. THE MARKET Second quarter of 1998, compared to second quarter of 1997 Order bookings for heavy trucks in western European markets rose by more than 20 percent. In European operations, truck deliveries rose by about 15 percent. First half of 1998, compared to first half of 1997 Order bookings for heavy trucks in western European markets rose by more than 20 percent. Scania's market share for heavy trucks in western Europe was 15.2 (15.4) procent. In Latin America, truck deliveries declined due to the production changeover. Scania's market share in Brazil was 33.1 (41.5) percent. * Translated solely for the convenience of the reader at an exchange rate of SEK 7.96 = USD 1.00. [REMOVED GRAPHICS] SCANIA INTERIM REPORT, JANUARY - JUNE 1998 Scania's operating income during the first six months of the year improved by SEK 216 m. or 15 percent to SEK 1,639 m. This improvement in earnings was attributable to operations in Europe, where higher volumes led to greater capacity utilisation. Operating income for Latin America was negative due to expenses for the introduction of the 4-series truck generation as well as expenses for employee cutbacks. The market The market for heavy trucks in western Europe continued to grow during the first half of 1998. Scania's order bookings rose by more than 20 percent, compared to the corresponding period of 1997. Price levels stabilised during the second quarter. The trend in the total western European market indicates an annual volume of 200,000 heavy trucks, compared to an average total market of about 170,000 vehicles annually over the past three years. Scania's market share for the first half of 1998 amounted to 15.2 (15.4) percent. The market trend in central and eastern Europe remained strong. Scania's order bookings rose by more than 50 percent and deliveries by 80 percent, compared to the same period of 1997. Scania continued the expansion of its marketing organisation. During the second quarter, Scania signed an agreement in principle to acquire Italscandia, the importing company in Italy. A number of importer and distributor facilities in central and eastern Europe were inaugurated. In the Far East, market activity remained low. Scania's operations focused mainly on providing service to existing customers and on keeping its distribution network intact. In Latin America, the Brazilian market was nearly unchanged during the first half, compared to the same period of 1997. In the run-up to the coming presidential election in Brazil, there is some uncertainty about the market trend for the remainder of the year. In Argentina, the total market expanded by about 30 percent during the first half. During June, truck production reached planned levels after certain initial problems, mainly related to deliveries from sub-contractors. The introduction of Scania's 4-series product range involves the establishment of a new sub- contractor structure. As its truck deliveries have gradually increased, Scania has started to regain market share both in Brazil and Argentina which was lost in conjunction with the 4-series introduction. In May the new Scania bus and coach range was introduced in Latin America. The bus production changeover is taking place during the second and third quarter. Sales and earnings During the first half, Scania Group sales rose by 16 percent to SEK 22,027 m. (18,941). Sales of Scania products rose by 15 percent. Currency rate effects were marginal. [REMOVED GRAPHICS] Operating income improved by 15 percent to SEK 1,639 m. (1,423), equivalent to an operating margin of 7.4 (7.5) percent. In European operations, higher volumes and the resulting better capacity utilisation improved operating income to SEK 1,739 m. (1,067), equivalent to an operating margin of 10.2 (7.7) percent. During the second quarter, operating income amounted to SEK 978 m. (513), equivalent to an operating margin of 11.1 (6.9) percent. Earnings of European bus and coach operations during the first six months were lower than in 1997, due to the production changeover to the new bus range. Operating income for Latin American operations amounted to SEK -271 m. (207). The introduction of the new product range had an estimated negative impact of SEK 250 m. on operating income. In addition, employee cutback expenses slightly exceeded SEK 100 m. during the first quarter. Taking the above circumstances into account, income was lower due to lower volume. Second quarter operating income amounted to SEK -55 m. (194). During June, positive operating income was achieved. Operating income for Svenska Volkswagen products improved to SEK 133 m. (116). Svenska Volkswagen strengthened its position as the market leader in Sweden for passenger cars, with a 24.1 (20.5) percent share. Selling and distribution expenses included in operating income rose by SEK 544 m. About SEK 200 m. of this was related to expenses in acquired, and to a lesser extent, in newly established companies. The additional expense from acquired companies was offset by corresponding gross income in their business operations. Furthermore, the introduction of the new product range in Latin America, as well as marketing-related investments, increased selling expenses in that region by SEK 125 m. The continued expansion of Volkswagen operations also increased selling expenses by SEK 50 m. Net financial items of SEK -150 m. (-75) were at about the same level as during the corresponding period of last year, after eliminating a nonrecurring effect of SEK 71 m. from the sale of securities in Latin America. Tax expenses were equivalent to 29 (26) percent of income after financial items. Last year's lower percentage was due to nontaxable revenues in Latin America. Cash flows Scania's cash flows, excluding customer finance operations, improved during the second quarter and amounted to SEK 634 m. (336) during the first half. Tied-up working capital was largely unchanged during the second quarter. A reduction in working capital in European operations was offset by an increase in tied-up capital in Latin American operations, mainly consisting of inventory build-up. Net capital expenditures continued to decline, since investments for the production of the 4-series and for other capacity increases have largely been completed. Capital expenditures in the marketing organisation were higher than last year. Personnel The number of employees at the end of the report period was 23,700, a decrease of 60 since the beginning of 1998. In production, the number of employees rose by 60 in Europe while it declined by 350 in Latin America. In European marketing companies, the number of employees increased. Parent Company The Parent Company of the Scania Group, Scania AB, is a "public company" as defined by the Swedish Companies Act. Its assets consist of shares in and financial balances with the subsidiary Scania CV AB, ownership of the Latin American subsidiaries and the 50 percent shareholding in Svenska Volkswagen AB. Scania CV AB is a public company and the parent company of the Scania Group's European operations, comprising European production and marketing companies as well as Scania's other companies outside Latin America. The income of Scania AB after financial items amounted to SEK 16 m. (-63). Södertälje, Sweden, 3 August 1998 Leif Östling President and CEO This Interim Report has not been subject to special review by the company's auditors. The next Interim Report will be published on 26 October 1998. EARNINGS BY AREA OF OPERATIONS Amounts in SEK m. unless First half Change FullJuly 97- year otherwise stated USD m.* 1998 1997 in % 1997 June 98 Sales European operations 2,14017,034 13,815 2329,061 32,280 Latin American 385 3,062 3,231 -5 6,973 6,804 operations Less intra-Group sales -117 -929 -408 -947 -1,468 Total Scania products 2,40819,167 16,638 1535,087 37,616 Svenska Volkswagen 359 2,860 2,303 24 4,632 5,189 products Scania Group total 2,76722,027 18,941 1639,719 42,805 Operating income European operations 218 1,739 1,067 63 2,309 2,981 Latin American -34 -271 207 - 407 -71 operations Customer finance 5 38 33 15 73 78 operations Total Scania products 189 1,506 1,307 15 2,789 2,988 Svenska Volkswagen 17 133 116 15 258 275 products Scania Group total 206 1,639 1,423 15 3,047 3,263 Operating margin in % European operations 10.2 7.7 7.9 9.2 Latin American -8.9 6.4 5.8 -1.0 operations Total Scania products 7.9 7.9 7.9 7.9 Svenska Volkswagen 4.7 5.0 5.6 5.3 products Scania Group total 7.4 7.5 7.7 7.6 SALES BY PRODUCT CATEGORY Amounts in SEK m. First half Change Full July year 97- unless otherwise stated USD 1998 1997 in % 1997June 98 m.* Trucks 1,64413,082 11,385 1524,005 25,702 Buses 223 1,778 1,594 12 3,251 3,435 Engines 23 185 179 3 392 398 Service-related products 370 2,948 2,733 8 5,649 5,864 Used vehicles etc 148 1,174 747 57 1,790 2,217 Total Scania products 2,40819,167 16,638 1535,087 37,616 Svenska Volkswagen 359 2,860 2,303 24 4,632 5,189 products Total 2,76722,027 18,941 1639,719 42,805 * Translated solely for the convenience of the reader at an exchange rate of SEK 7.96 = USD 1.00. INCOME STATEMENT Amounts in SEK m. First half Change Full July year 97- unless otherwise stated USD m* 1998 1997 in % 1997 June 98 Sales 2,767 22,027 18,941 16 39,719 42,805 -2,119 - - -30,407 -32,788 Cost of goods sold 16,871 14,490 648 5,156 4,451 16 9,312 10,017 Gross income Research and development -68 -541 -598 -1,169 -1,112 expenses -352 -2,797 -2,253 -4,786 -5,330 Selling expenses -47 -377 -344 -668 -701 Administrative expenses Income from customer 5 38 33 73 78 finance operations Share of income of 20 160 134 285 311 associated companies 1) 206 1,639 1,423 15 3,047 3,263 Operating income Financial income and -19 -150 -75 -296 -371 expenses 187 1,489 1,348 10 2,751 2,892 Income after financial items -54 -432 -347 -764 -849 Taxes 0 -3 0 -2 -5 Minority interests 133 1,054 1,001 5 1,985 2,038 Net income Number of shares: 200 million 7.4 7.5 7.7 7.6 Operating margin, % 20.5 16.4 20.9 20.5 Return on equity, % Return on capital employed 16.4 13.5 16.3 16.4 excl customer finance operations, % 0.67 5.25 5.00 9.90 10.20 Earnings per share, SEK Earnings per share according 0.68 5.45 6.30 11.10 10.25 2) to U.S. GAAP, SEK 1) -120 -953 -824 -1.672 -1.801 Includes depreciation of 2) According to U.S. GAAP, adjustments are made for translation differences that arise when translating the USD- based income statements and balance sheets of Latin American operations into SEK by using the current method. * Translated solely for the convenience of the reader at an exchange rate of SEK 7.96 = USD 1.00. EARNINGS BY QUARTER Amounts in SEK m. Q 2 1998 1998 1997 unless otherwise USD m.* Q 2 Q 1 Q 4 Q 3 Q 2 Q 1 stated Sales European operations 1,111 8,839 8,195 8,776 6,470 7,403 6,412 Latin American 208 1,658 1,404 1,792 1,950 1,831 1,400 operations Less intra-Group -54 -431 -498 -287 -252 -313 -95 sales Total Scania 1,265 10,066 9,101 10,281 8,168 8,921 7,717 products Svenska Volkswagen 193 1,538 1,322 1,250 1,079 1,216 1,087 products Scania Group total 1,458 11,604 10,423 11,531 9,247 10,137 8,804 Operating income European operations 123 978 761 838 404 513 554 Latin American -7 -55 -216 68 132 194 13 operations Customer finance 2 15 23 23 17 15 18 operations Total Scania 118 938 568 929 553 722 585 products Svenska Volkswagen 9 72 61 75 67 59 57 products Scania Group total 127 1,010 629 1,004 620 781 642 Operating margin in % European operations 11.1 9.3 9.5 6.2 6.9 8.6 Latin American -3.3 -15.4 3.8 6.8 10.6 0.9 operations Total Scania 9.3 6.2 9.0 6.8 8.1 7.6 products Svenska Volkswagen 4.7 4.6 6.0 6.2 4.9 5.2 products Scania Group total 8.7 6.0 8.7 6.7 7.7 7.3 * Translated solely for the convenience of the reader at an exchange rate of SEK 7.96 = USD 1.00. UNITS BY QUARTER 1998 1997 Q 2 Q 1 Q 4 Q 3 Q 2 Q 1 ORDER BOOKINGS, TRUCKS - Western Europe 9,025 8,225 8,007 7,268 7,409 6,749 - Central and eastern 605 799 697 691 463 426 Europe - Latin America 2,601 2,109 1,829 2,915 2,622 2,495 - Asia 319 251 462 445 910 1,183 - Other markets 464 515 416 370 310 212 Total 13,014 11,899 11,411 11,689 11,714 11,065 TRUCKS SOLD - Western Europe 8,228 7,654 8,536 5,460 6,786 5,974 - Central and eastern 603 629 716 430 335 352 Europe - Latin America 2,147 1,699 2,417 2,622 2,533 2,077 - Asia 488 298 658 636 1,141 661 - Other markets 415 399 411 293 228 126 Total 11,881 10,679 12,738 9,441 11,023 9,190 ORDER BOOKINGS, BUSES - Europe 452 428 644 443 397 363 - Latin America 726 615 414 566 600 456 - Other markets 84 56 71 86 474 498 Total 1,262 1,099 1,129 1,095 1,471 1,317 BUSES SOLD - Europe 496 392 419 375 497 399 - Latin America 449 414 449 496 506 378 - Other markets 215 184 336 289 248 192 Total 1,160 990 1,204 1,160 1,251 969 During the first half of 1998, sales of industrial and marine engines totalled 1,364 (1,448) units. BALANCE SHEET WITH CUSTOMER FINANCE COMPANIES REPORTED ACCORDING TO THE EQUITY ACCOUNTING METHOD Amounts in SEK m. 30 3031 Mar31 Dec30 Sep30 Jun June June unless otherwise stated USD 1998 1998 1997 1997 1997 m.* ASSETS Property, plant and 1,64013,05213,12113,14612,95612,580 equipment etc 253 2,017 2,010 1,952 1,735 1,692 Shares and participations 917 7,297 7,159 6,803 6,524 6,250 Inventories 768 6,109 5,683 5,109 5,154 4,809 Other receivables Interest-bearing 160 1,274 1,294 1,420 1,294 1,422 receivables 196 1,562 1,718 2,064 3,302 3,684 Liquid investments 3,93431,31130,98530 49430,96530,437 Total assets SHAREHOLDERS' EQUITY AND LIABILITIES 1,28410,22010,60710,236 9,404 9,204 Shareholders' equity 243 1,936 1,915 1,887 1,857 1,826 Provisions for pensions 421 3,351 3,306 3,258 3,023 3,138 Other provisions 835 6,645 6,232 5,906 6,015 5,966 Other liabilities 1,151 9,159 8,925 9,20710,66610,303 Borrowings Total shareholders' equity 3,93431,31130,98530,49430,96530,437 and liabilities Net indebtedness, excl 955 7,597 7,207 7,143 7,364 6,619 provisions for pensions Net indebtedness as ratio of 0.74 0.68 0.70 0.78 0.72 shareholders' equity * Translated solely for the convenience of the reader at an exchange rate of SEK 7.96 = USD 1.00. BALANCE SHEET CUSTOMER FINANCE OPERATIONS Amounts in SEK m. unless 30 3031 Mar 31 Dec 30 30 June June Sep June otherwise stated USD 1998 1998 1997 1997 1997 m.* ASSETS 445 3,546 3,412 3,230 2,511 2,396 Leasing assets 770 6,126 5,367 4,870 4,087 4,012 Financial receivables 56 446 421 437 287 261 Other assets 1,27110,118 9,200 8,537 6,885 6,669 Total assets SHAREHOLDERS' EQUITY AND LIABILITIES 97 776 745 722 556 540 Shareholders' equity 1,061 8,446 7,651 7,022 5,680 5,549 Borrowings 113 896 804 793 649 580 Other liabilities and provisions Total shareholders' equity 1,27110,118 9,200 8,537 6,885 6,669 and liabilities * Translated solely for the convenience of the reader at an exchange rate of SEK 7.96 = USD 1.00. BALANCE SHEET INCLUDING CUSTOMER FINANCE OPERATIONS Amounts in SEK m. unless 30 3031 Mar31 Dec 30 June June June otherwise stated USD 1998 1998 1997 1997 m.* ASSETS 2,08716,61016,54216,39114,984 Property, plant and equipment etc 156 1,242 1,265 1,230 1,152 Shares and participations 934 7,432 7,255 6,902 6,313 Inventories 798 6,354 5,886 5,331 4,924 Other receivables 928 7,387 6,615 6,245 5,410 Interest-bearing receivables 204 1,625 1,821 2,133 3,737 Liquid investments 5,10740,65039,38438,23236,520 Total assets SHAREHOLDERS' EQUITY AND LIABILITIES 1,28410,22010,60710,236 9,204 Shareholders' equity 243 1,939 1,917 1,889 1,828 Provisions for pensions 458 3,644 3,599 3,549 3,409 Other provisions 910 7,242 6,719 6,371 6,240 Other liabilities 2,21217,60516,54216,18715,839 Borrowings 5,10740,65039,38438,23236,520 Total shareholders' equity and liabilities * Translated solely for the convenience of the reader at an exchange rate of SEK 7.96 = USD 1.00. STATEMENT OF CASH FLOWS Amounts in SEK m. First Half 1998 unless otherwise stated USD 1998 1997 USD Q 2 Q 1 m.* m.* 256 2,033 1,776 152 1,211 822 Cash from operating activities -55 -437 -143 -5 -38 -399 Change in working capital 201 1,596 1,633 147 1,173 423 Cash flows from operating activities -121 -962-1,297 -53 -426 -536 Net cash used by investing activities Operating cash flows excl customer 80 634 336 94 747 -113 finance operations Expansion in the Customer -188 -1,496 -854 -115 -918 -578 finance operations Change in net indebtedness including -108 -862 -518 -21 -171 -691 Customer finance operations Change in net indebtedness from 180 1,433 2,298 135 1,078 355 finance activities -138 -1,100-1,100 -138-1,100 Dividend to shareholders Net change in cash and short-term -66 -529 680 -24 -193 -336 investments Effect of exchange rate fluctuations on cash and short-term 2 21 220 -1 -3 24 investments Cash and short-term investments at beginning of period 268 2,133 2,837 229 1,821 2,133 Cash and short-term investments at end of period 204 1,625 3,737 204 1,625 1,821 NUMBER OF EMPLOYEES 30 June 31 Mar 31 Dec30 Sep 30 June 1998 1998 1997 1997 1997 Production companies etc 13,256 13,203 13,19713,11312,694 Marketing companies 6,377 6,286 6,160 5,649 5,092 Customer finance 122 115 107 95 78 companies European operations 19,755 19,604 19,46418,85717,864 Latin American operations 3,948 3,989 4,299 4,357 4,236 Total number of employees 23,703 23,593 23,76323,21422,100 * Translated solely for the convenience of the reader at an exchange rate of SEK 7.96 = USD 1.00. Scania's ten largest truck markets and market shares during the first six months, in percent 1998 1997 Brazil 33.1 41.5 Great Britain 17.5 19.4 Germany 8.8 8.3 France 10.2 9.4 The 22.6 20.6 Netherlands Spain 16.3 16.0 Italy 12.7 14.9 Sweden 44.9 40.4 Belgium 17.4 18.9 Denmark 30.1 30.6 Western Europe 15.2 15.4 Scania's ten largest truck markets and registrations of trucks during the first six months Change 1998 1997 in percent Brazil 2,800 3,432 -18 Great Britain 2,628 2,264 16 Germany 2,239 1,763 27 France 2,080 1,463 42 The 1,737 1,211 43 Netherlands Spain 1,400 1,025 37 Italy 982 933 5 Sweden 800 638 25 Belgium 756 749 1 Denmark 724 686 5 Western Europe 15,959 12,897 24