The President's speech at AssiDomän's Annual General Meeting

President Roger Asserståhl´s speech at AssiDomän's Annual General Meeting 14 June 1999 This year's annual general meeting marks in several ways the end of the first period of AssiDomän's development. The company has been operating for five years with a structure and business focus that was based on the circumstances that prevailed at its formation in 1994. During these five years, considerable resources have been invested to create the AssiDomän that is today one of the leading forest products companies in Europe within several product areas. The investments that have been made have created a strong potential for increasing return on capital and thus greater value for shareholders. We are now entering a new period when the focus will be on raising the efficiency of operations while we also play an active role in the necessary consolidation and structural transformation currently taking place within the industry. Summary of 1998 AssiDomän's profitability trend, especially in the past year, is not satisfactory. Instead of the expected positive development of markets in 1998, demand dipped for several of AssiDomän's products. The crisis in Asia was the main reason for this fall in demand. Several of our paper mills and converting units were forced to limit production as a result during the second half of the year. Start-up of several rebuilt plants was also more difficult and required greater costs than anticipated. The establishment last year of new corrugated plants in Russia, Czech Republic, Poland and Italy further restricted profitability. These plants will only reach full capacity this year. Despite all these factors, ongoing operations did improve compared with 1997. Profit before real estate sales and restructuring costs was up by 20%. Operating profit for all the business units, except sack production and corrugated conversion, improved. Review of 1994-1998 AssiDomän was formed in 1994 by the merger of Domän and ASSI and the taking over of the part State-owned company, Ncb, on the initiative of the earlier owners. Operations consisted of a very large forest holding and several manufacturing plants producing sawn timber products and various types of primarily virgin-fibre based packaging material and packagings. The situation for the different operations when the company was formed can be summarised by the following three points: 1.A weak presence on markets outside Europe and low capacity in the conversion chain for several of our major product areas. 2.Most manufacturing sites were in great need of improvement and renewal in terms of product quality and efficiency. 3.There was a need to form a structure that was more integrated and had a sharper focus while selling non-core operations. The strategy that was adopted from the start was based on good access to high quality fibre that is very suitable for both sawn timber products and strong packaging material, and a number of sawmills and pulp and paper mills focusing on packaging material. Over the past five years large resources have been invested in order to create the AssiDomän that is today one of the leading European companies in its product areas. In Europe today we are number one, two or three in terms of size within most of our product areas. For sawn timber products we are the fourth largest. Following the Sveaskog deal, we will still be a major forest owner, with holdings primarily sited within our core areas. Our presence on geographical markets in Europe has been strengthened considerable, mainly through acquisitions but also by the construction of completely new conversion plants. Overall the situation has changed and improved significantly, in terms of geographic presence on markets, product quality and efficiency. Operations also now have a much more concentrated structure. Unsatisfactory profitability for industrial operations Despite its strengths, the company has not succeeded in meeting profitability goals for industrial operations. Above all, in the past two years the company has not fulfilled its own or the market's expectations regarding the results and return on completed investments. Why has this happened? There are several reasons, of course. 1.The investment level has been high - perhaps, with the benefit of hindsight, too high. A large amount of production interruptions and start-up problems in several plants at the same time have had a large negative impact on results. 2.Developments in Central and Eastern Europe and in Asia have been much worse than expected. This has especially hit corrugated, sack paper, board and sawn timber - areas where AssiDomän is strongly represented. 3.Pulp markets have been very weak in recent years. Even though AssiDomän is not usually considered to be a large manufacturer of pulp, it still produces 350,000 tonnes of market pulp, which corresponds to about one quarter of the amount currently produced by the largest pulp producer in Sweden. 4.The integration of acquired companies and realisation of synergy potential have taken longer than expected. 5.The large-scale investment programme has made demands on many resources and made it more difficult to focus on internal efficiency and continuous improvement in production. 6.The need to restructure has been considerable. Restructuring costs affected results in 1996 and 1997, and to an even greater extent in 1998. Increased efficiency and strategic overview The most important task now facing AssiDomän's new management is to improve efficiency in existing operations. This, however, will not be enough. Efficient structural changes must also be made, especially considering the fragmented nature of our industry. In late 1998 and during the spring of 1999 a series of measures have been implemented in order to achieve large-scale improvements in the company's profitability and to increase value for our shareholders. * The capital structure and the balance between forest capital and industrial capital have been reviewed, which, together with other decisions which will benefit shareholders, has resulted in the proposed Sveaskog transaction. Later today, the shareholders' meeting will make a decision on the Sveaskog transaction. * The intensive investment period has now ended and the pace of investment in existing operations has been significantly reduced to a level that is around SEK 500 million lower than annual depreciation and represents around 6% of sales in 1999. * The previous, relatively heavy organisation, comprising five separate business areas with their own boards of directors and subordinate levels for different product areas, has now been replaced by ten product-specific and operational-specific business units that report directly to the executive management group. The different operational parts of this new organisation have a much sharper focus on profitability. Management resources have also been better directed at making improvements in market performance and internal efficiency. Reduced bureaucracy and quicker decision-making are other positive effects. * All of the business units are now implementing a programme aimed at raising profitability in existing operations through various measures for reducing costs, increasing revenues and cutting tied-up capital. Some parts of the cost-cutting programme have been presented earlier and they continue to be implemented as planned. Further measures have also been put in place. * A review is also being performed at corporate level regarding the best structure and business portfolio for creating shareholder value in the future. Today, AssiDomän is characterised by having most of its capital in product segments where growth is relatively moderate and where continued industrial consolidation is required to achieve better profit margins and value for shareholders. In order to meet the expectations of our owners in the future I believe it will be absolutely necessary to combine increased overall efficiency in existing operations with action aimed at creating a better structure of the industry. Within this process of change we remain open to the possibility of questioning our full ownership in certain of our current areas, while we can also create the opportunities for strengthening our positions in other areas. How this can be achieved, how far we intend to go, and which solutions are the best ones for all of our shareholders - these are issues that we will return to at a later date. Outlook in brief for the remainder of 1999 The general factors that affect the prices and demand for our products seem to be gradually improving at present. Examples include: * Gradual, although cautious, recovery in several of the major Asian economies. * The crisis in South America was not as bad as feared and recovery has begun there. * The US economy remains very strong with high levels of activity. * Inflation is low, long-term interest rates remain stable. * Capacity increases within the industry are slowing down, improving the balance between supply and demand. For these reasons we believe that prices and demand within several of our product areas will improve gradually and cautiously. AssiDomän AB Corporate Communications June 14, 1999 ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/06/14/19990614BIT00360/bit0001.doc http://www.bit.se/bitonline/1999/06/14/19990614BIT00360/bit0002.pdf