Year-end report 1998

YEAR-END REPORT 1998 Earning per share SEK 13 SEK M 1998 1997 Change Q IV Q IV Change 98 97 Order 14 709 14 544 +1 % 3 407 3 327 +2 % booking s Sales 14 394 13 592 +6 % 4 079 3 697 +10 % Operati 1 083 218 ng profit excl.no 1 053 982 +7 % 402 417 -4 % n- compara ble items Profit 882 163 after financi al net excl.no 821 781 +5 % 337 362 -7 % n- compara ble items Profit 676 124 after taxes excl.no 626 565 +11 % 286 263 +9 % n- compara ble items Chief Executive Officer's comments: Continued increase in earnings in 1998 The favorable trend in Svedala's earnings continued in 1998. Net sales increased from SEK 13.6 billion to SEK 14.4 billion. Profit after net financial items rose by 5 percent to SEK 821 million, corresponding to earnings per share of SEK 13. In 1997 the profit per share was 11.80 SEK excluding and 14.10 SEK including non-comparable items. Overall growth was inhibited by weak investor interest particularly in metallic minerals, which was offset by sharply increased sales in the aftermarket sector. Companies in industries to which we supply equipment are dependent on service and wear and spare parts to keep their equipment in reliable and economical operating condition and guarantee high accessibility. Moreover, our strong focus on the after- market sector has made us less dependent on cyclical fluctuations. To illustrate clearly the current focus of Svedala's business and future outlook, I shall discuss our operations in terms of three areas. The aftermarket is the fastest growing area, currently accounting for a full 44 percent of 1 net sales. Equipment for processing industrial minerals accounts for 44 percent of sales, whereas only 12 percent of Svedala's sales pertain to equipment for processing metallic minerals. Aftermarket growing rapidly and high profitability The aftermarket - that is, sales of service and wear and spare parts - accounted for about 80 percent of Svedala's operating profit in 1998, producing the highest profit margin, 13 percent. Svedala's aftermarket sales amounted to SEK 6.3 billion and are increasing by approximately SEK 1 billion annually - producing annual growth of 20 percent in the past two years. There is good potential for further sales growth, due partly to the fact that the total market is growing and partly to the fact that we can increase our market share. We are currently rethinking our business concept to include offering customers non-proprietary equipment to an increasing degree. Equipment represents only a small part of the total business potential awaiting Svedala. The value of service agreements and the average amount of wear and spare parts our machines consume during their economic life is about four times higher. As more new equipment is sold, the amount of equipment to service increases and, therefore, Svedala's potential market also increases. The rapidly growing sales of service and wear and spare parts was made possible by our presence in local markets as Svedala Houses and Svedala Service Houses. In 1998 we continued to expand our marketing organization. We now operate 48 Svedala Houses in the same number of countries, and 185 local Svedala Service Houses, excluding a widespread network of distributors. We are focusing on continued expansion of the Svedala House organization. The great success of the Svedala Houses and the increasingly significant sales of wear and spare parts have tied up more capital. We have taken corrective measures and developed a global computer system to enhance the level of service we offer customers and reduce inventory costs. The computer system will be placed in operation during 1999. With the help of the new system, we aim to reduce inventories by at least SEK 500 million. The large volume of wear and spare parts also necessitates a more efficient Group-wide system for logistics, which is now being developed by Svedala Logistics. By means of maintenance systems, global logistics and inventory supply, as well as the local customer service provided by Svedala Houses, we can assume total responsibility for our customers' operating reliability and offer greater accessibility. Leading position lends strength in development and production During the past decade, Svedala has built up a unique position through acquisitions and organic growth. Svedala is currently a global player in an industry previously local in character and considerably fragmented. Our market-leading position enables us to produce the market's best equipment in a cost-effective and rational manner. 2 Our size lends strength in the development of new, more efficient equipment. By combining the expertise contributed by the companies we acquire and using the best, we are ahead of the competition in know-how. Svedala's global service concept, broad range of equipment and capacity to build complete systems are unique. Our size and combined expertise enable us to maintain a leading position in the development of new products and concepts. The profit margin for equipment amounted to 4 percent in 1998. This weak result is due to poor profitability in the companies acquired in the past two years - for example, in the area of recycling, which generated a loss throughout the first three quarters of 1998, but which now, following restructuring of the units involved, is reporting a profit. Global penetration creates more consistent demand Some 44 percent of the equipment and systems Svedala sells are used to crush and process industrial minerals used in, for example, the production of concrete, asphalt and ballast for various infrastructural projects. Other examples of industrial minerals are ceramics, fertilizers, and filler substances for plastics and paints. Consumption of such materials is less sensitive to cyclical fluctuations, which is particularly important for a global company. Wide range of applications for metallic minerals Iron, copper and zinc are examples of metallic minerals extracted and processed with the help of Svedala equipment. These minerals have a wide range of applications and are used in buildings, electric cables, cars and computers. Metallic minerals are the materials whose price is most sensitive to fluctuations in the international business cycles of the sectors where Svedala's equipment is used. On the other hand, equipment for metallic-mineral processing accounts for only 12 percent of Svedala's sales. In phases of decline, the prices of raw materials drop, resulting in weaker interest in investing. In the mining industry, plant upgrading and efficiency-enhancement are widely under way - while at the same time, due to increased consumption of metallic minerals (even if the rate of increase is slower), new mining projects are still being planned. Globalization means greater demand Increasingly global trade and commerce requires continued expansion of roads, railroads, ports and airports, in the industrial world and in developing countries. Properly functioning infrastructure is an essential precondition of growth and wealth. In Europe, the need for new, reinforced east-west transport routes is under discussion. The need for new infrastructure is growing in the Asian countries, especially China and India. Nor is there any reason why demand for minerals should decline in the future. On the contrary, our modern society and welfare are increasingly dependent on products based on various minerals. 3 Svedala in 1999 The present year will be marked by continuing sluggish global growth, accompanied by weak investment interest, particularly in equipment for metallic-mineral processing. The overall consumption of minerals is increasing somewhat, however. Plant construction is also showing a certain recovery, primarily in the U.S. where decisions have been taken regarding further investment in the public road network. The need for maintenance and upgrading of existing infrastructure will also bring increased activity. In 1999, we will focus on enhancing the efficiency of the Svedala Group by integrating acquired units and expanding our marketing organization, to enable us to continue to enlarge our market share in terms of systems, equipment and the after-market. We will also continue to concentrate on streamlining production, enhancing logistics efficiency and further developing financial solutions. Malmö, February 11, 1999 Thomas Oldér President & CEO ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/02/11/19990211BIT00510/bit0001.doc http://www.bit.se/bitonline/1999/02/11/19990211BIT00510/bit0002.pdf