Chairman of the Board of Directors Jørgen Worning today presented the following report at the Annual General Meeting of FLS Industries at Radisson SAS Falconer Center, Frederiksberg.
Welcome to FLS Industries Annual General meeting. It is gratifying to see so many of our shareholders in attendance.
The Board of Directors has appointed Mr Klaus Søgaard, lawyer, Chairman of the meeting to guide us through the business to be transacted.
On 7 March 2002 the present Board of Directors took office at an Extraordinary General Meeting. The Board's task was to find a new ownership structure for the company over a three to five year period, and at the same time maximise the return to the shareholders.
Well, what has been achieved?
The Board decided that the strategy for realising this objective should be published in conjunction with release of the half-yearly report on 29 August 2002. At the same time it was decided to sharpen the focus on the Group's cash flow so as to reduce the Group's bank debt, both through divestments and reduced investments and increased earnings.
Proceeding to the report for 2002:
I refer to the printed report and accounts which are also to be found on FLS Industries website.
In the following I shall only elaborate on specific areas, whilst referring to the report and accounts.
The difficult global business trends of 2001 continued in 2002, which thus also became a particularly tough year for the Group's companies. The weak economic situation allied to the growing crisis in the Middle East and the resulting unrest in many markets meant that many of our customers were extremely reluctant to make new investments. We have had to fight hard to win contracts in a squeezed market. Seen in this perspective it is gratifying that our operational core businesses have succeeded in maintaining and expanding their leading market positions and have achieved a positive financial result, which, while not satisfactory, is acceptable under the prevailing market conditions.
If we look at our non-core activities, however the results must be considered very unsatisfactory. I will revert to this later.
The strategy adopted by the Board, entails a strong focus of attention on our core business area, all other activities being sold or merged with suitable partners. Our core business area is defined as supply of service, equipment, spare parts, machinery and entire production lines for the cement and mineral industry worldwide, and production and distribution of cement and cement based building materials in selected market areas, primarily in Northern Europe.
It was also decided to streamline the current management and bring the new Board far closer to the operational companies and reduce the Group's holding function.
The Board estimates that implementation of the focusing strategy, divestments, cash-flow control and structural changes are well under way. A list of the completed divestments can be found at the bottom of page 8 and 9 of the printed report.
The Group's total earnings before interest and tax (EBIT) were, however, extremely unsatisfactory, with a loss of DKK 647m as against DKK 195m in 2001. This performance includes significant project processing costs and provisions in FLS miljø as well as unsatisfactory earnings in FLS Aerospace. Corporate divestments had a net adverse impact of DKK 639m on the year's financial result, of which DKK 456m was related to sale of our equity share in NKT Holding.
Earnings before tax (EBT) were also significantly affected by corporate divestments. Earnings before tax showed a total loss of DKK 1.3bn. Tax for 2002 amounted to DKK 103m, and earnings after tax amounted to DKK -1.4bn, as against DKK 19m last year.
Against the background of the substantial loss it might seem surprising that tax amounted to DKK 103m. This is explained by profits in a number of subsidiaries abroad.
The Group's net financial expenses were reduced to DKK 248m from DKK 343m in 2001. The change is primarily attributable to a reduction of the Group's net interest-bearing debt by around DKK 2bn. Such a reduction was a high-priority objective in the Board's plan of action for the year, as a healthy financial platform is essential to support and develop the operational core companies. I am pleased to see that this has now been achieved.
Taking the FLS Group's core areas first, total earnings before interest and tax (EBIT) amounted to DKK 439m, down DKK 79m from last year.
Core activities posted a positive cash flow of DKK 773m - an improvement of DKK 645m compared to last year. This improvement was primarily due to increased prepayments and a reduction of the F.L.Smidth Group's debtors.
In briefly describing the major companies within our core area I shall start with F.L.Smidth Group, which in 2002 continued its focus on the cement and mineral industry. Also in 2002, this market accounted for 90% of the Group's total turnover.
F.L.Smidth A/S and the Group's product companies address the cement industry with a complete range of machinery and services. A substantial product programme is also offered to the mineral industry.
Turnover by the F.L.Smidth Group was DKK 7.2bn, as against DKK 8.0bn in 2001. Ordinary earnings before interest and tax were DKK 105m, which considering the market situation represents a fairly satisfactory performance from engineering activities, whereas earnings by the product companies FLS Automation, Maag Gear and F.L.Smidth Materials Handling were unsatisfactory. By contrast, FFE Minerals posted record-high earnings for the sixth successive year. Ventomatic and Pfister also posted satisfactory earnings.
During 2002 F.L.Smidth Group's activities were supplemented by two new product companies and the Group therefore comprised eight specialised product units at 31 December. The new units produce equipment for transport and storage of raw materials and for transport, loading and discharge of cement and other types of bulk materials in the new company F.L.Smidth Materials Handling, which was merged at the beginning of the year. In addition, in July, the electrostatic precipitator activities of FLS miljø and the former Fuller Bulk Handling were merged in a new company, F.L.Smidth Airtech, organised within F.L.Smidth Group.
The global market for new kiln capacity shrank in 2002 to its lowest level for the past 15 years, excluding China. In 2002, contracts for new kiln capacity for producing an annual 13 million tonnes for cement were signed. This compared to an average new installed capacity of around 33 million tonnes a year during the 1990s. At 2002 levels, global renewal of cement production machinery would take around 100 years. All things being equal, the need for new kiln capacity must therefore be expected to increase.
Despite the low level of global market activity, F.L.Smidth Group posted a record-high order intake, DKK 8.3bn, for the second successive year, winning significant contracts in Algeria, Australia, China, Libya, New Zealand, South Africa, USA and Wales.
2003 has also started well for F.L.Smidth Group. In January F.L.Smidth signed the largest ever single order in the company's history, amounting to DKK 1.8bn, comprising the supply of three new production lines, each more than
5,000 tpd, to the privately owned Nigerian Dangote Group. The three cement plants will produce more than 5 million tonnes per year.
The previous year's growth of 11% proved unsustainable, not only in the area of new construction, but also in the spare parts and service market. This was due to customers' reluctance to invest and cost focus in a receding cement market. Efforts will continue to be targeted on the spare parts sales and technical service market.
Based on the satisfactory order backlog of DKK 7.6bn at the beginning of the year, total earnings before tax for 2003 for F.L.Smidth Group are expected to be slightly higher than in 2002.
The business area FLS Building Materials posted earnings before interest and tax (EBIT) of DKK 319m, an improvement of DKK 25m on 2001. Turnover amounted to DKK 4.9bn. Return on capital employed amounted to 8%, an improvement of 2.5% percentage points on 2001. This was particularly due to the successful divestment of non-core activities.
Aalborg Portland strengthened its position as the world's largest exporter of white cement, and with the opening of the two new facilities the company took a large step towards realising its ambition of also becoming the world's largest producer of white cement.
The 410,000 tpy facility in Egypt was inaugurated in the first half of 2002 and in November a new facility in Malaysia with a capacity of around 200,000 tpy came on stream. Furthermore, it was decided to invest around DKK 200m with a view to increasing white cement production at the Aalborg plant, 620,000 tpy at present, to around 850,000 tpy. The Group's total annual white cement capacity doubled to 1.5m tpy in 2002, and will be increased to 1.7m tpy in 2003. This will position Aalborg Portland as the world's largest producer of white cement. The company's white cement products are today sold in more than 70 markets worldwide. In the grey cement segment Aalborg Portland exploited its full productive capacity of 2.1m tpy. Sales on the Danish market increased by 4% compared to 2001.
Aalborg Portland continues to pursue its commitment towards increased use of waste as an alternative fuel and as a raw material substitute for coal, petcoke and oil in cement production. The company's goal is to increase its use of alternative fuel in grey cement production to 40%. An increased use of waste in Danish cement production ought also to be socially desirable as it will help to solve the problem of shortage of capacity for waste incineration and reduce the growing need for combustible waste products to be disposed of by landfill. However, the reality of the situation is different. A significant obstacle is the Danish waste tax of DKK 330 per tonne of incineration material. This tax has a discriminatory effect as it is not levied on Aalborg Portland's competitors abroad. We continue to hope that the politicians will recognise the unfair and inappropriate nature of this tax and take steps to remove it.
In January this year the Supreme Court found in favour of Aalborg Portland in legal proceedings instituted against the Ministry of Taxation concerning payment of tax relating to waste disposed of at Aalborg Portland's own
landfill site in the period 1992 to 1997. The Supreme Court decision means that Aalborg Portland will be refunded the DKK 32m tax amount plus interest in 2003.
In Unicon, the narrowing of focus to concentrate solely on producing and supplying ready-mix concrete in Scandinavia and Poland was successfully implemented. Earnings before interest and tax fell in 2002 and must be considered unsatisfactory compared to 2001. 2002 saw a general decline in activity levels within the building and construction industry in the Scandinavian and Polish markets, with attendant increased price competition and falling prices.
While Dansk Eternit Holding recorded a loss on earnings before interest and tax, it was pleasing that these earnings were up on 2001 and turnover also improved. Dansk Eternit is Europe's second-largest producer of fibre cement products. The growth in turnover was recorded not only in the Danish market but also in the UK, Swedish and Czech markets.
Results with regard to non-strategic activities were highly unsatisfactory.
Where FLS miljø was concerned it was quite evident to the Board that a winding up of existing activities was necessary and that the binding contracts for the supply of desulphurisation plant in UK and USA should be completed. In addition to winding-up costs and completion of various projects not anticipated in the projections for the year, it was only after a detailed scrutiny by certain members of the Board of Directors of FLS Industries that the realities relating to the contracts signed were revealed.
The West Burton contract, which was signed in 1999, would result in a loss of around DKK 0.5bn. This was not anticipated in the projections for the year and was not revealed until the third quarter. The terms of the West Burton contract are extremely tough, with large penalties for delays. A major UK subcontractor responsible for mechanical equipment erection was unequal to the task, delaying the project by several months before the summer. The subcontractor has now been dismissed, and with sterling efforts from FLS miljø's own personnel and the new subcontractor, most of the delay has been recouped. Although project control has been very significantly improved, significant risks will remain until project handover in December 2003.
A similar project, also in the UK, is progressing satisfactorily and to plan.
The number of employees was reduced during 2002 from 800 to 200 at 31 December. A number of business areas have been sold off, and the environmental activities will be reduced to a very low level during the second half of this year. For FLS miljø, a loss before interest and tax is forecast for 2003.
Also in 2002, in line with the rest of the sector, the other non-strategic business, FLS Aerospace, suffered from the after-effects of the terrorist events of 11 September 2001. Despite implemented capacity adjustments of around 12%, the significantly changed structures in the aviation sector adversely affected the year's financial result. Earnings before interest and tax (EBIT) were unsatisfactory at DKK -202m as against DKK -116m in 2001 based on turnover of DKK 2.7bn in 2002 and DKK 3.0bn in 2001. The result includes write-downs of DKK 75m on certain types of stocks and write-down on hangars of DKK 25m.
The company's capacity was cut by around 30% in 2002. The number of employees was reduced by around 450, hangar capacity was reduced, and a joint venture was established with myTravel at Manchester airport. All in all, the company was better equipped at the end of 2002 that at the end of 2001. However, a negative factor is the uncertainty surrounding the situation in the Middle East. Earnings before interest and tax in 2003 are expected to be up on 2002.
Further to the Board's announcement on 29 August 2002 I can announce that the process of finding a partner or divesting the company has been initiated. The Board continues to expect a solution to be found before the end of 2003.
In conjunction with Peter Assam's resignation in August 2002 the Board of Directors decided to appoint the individual managing directors of the major business areas to the Corporate Management. At the same time members of the Board of Directors of FLS Industries took over the board chairmanship of the major subsidiaries. The purpose of these measures was to provide a shorter chain of command and a far more efficient organisational form. In the view of the Board of Directors this reorganisation has had the intended effect.
The Board plans to change this organisational form when the short-term goals to divest non-core activities have been achieved, which is expected to take place in 2003.
Prospects for 2003
Overall, a significant part of the objectives set out in the strategic plan were fulfilled or initiated in 2002. Sale of non-core activities generated around DKK 1.4bn and interest-bearing debt was reduced by around DKK 2bn to just under DKK 3bn, which gives us with the required freedom to develop our primary areas of activity.
Concurrently with the initiatives to meet the strategic goals, a series of rationalisation measures and organisational adjustments have been carried out.
The costs of the parent company FLS Industries are expected to be halved from DKK130m in 2002 to DKK 60m in 2003. Work on divesting the remaining non-core activities will continue in the current year, the goal being to complete divestment by year-end. Another significant step in this direction was made with the sale of our shareholding in the Portuguese cement group Secil. On 12 March, FLS received DKK 1,150m from the buyer of this shareholding, the Portuguese company Semapa, S.A.
The expectations for 2003 stated in the printed annual report hold good, although the revenue from the sale of Secil has a positive impact. The earnings forecast is paralleled by special risks relating to the sequence, timing and impact on results of planned divestments during 2003.
Concluding remarks
In conclusion I would like to add a few comments concerning the media coverage received by the FLS Group in Denmark.
Since the announcement made by the majority shareholder Potagua in December 2001, FLS has received unusually frequent mention in the columns of the press. There have been innumerable speculations about the future of the Group - and there has been sharp focus on the management's actions.
I would like to emphasize that the job of the press is naturally to be critical and keep a watchful eye on the activities of companies. The problem is that the influence of the press is today so great that negative criticism can have a disproportionately negative effect on companies. The least that one can ask for therefore is that journalists should do their research thoroughly, and that the source material they use should be relevant and based on analyses and statements from persons who have some degree of insight into what they are talking about. In my view, a number of the articles published about FLS have not lived up to this minimum requirement.
It is similarly disappointing that announcements from the FLS Group concerning positive events receive nowhere near as much attention and detailed discussion as the problems which, according to media reports of dubious accuracy, FLS is reportedly facing.
An example of the media's somewhat distorted sense of priorities was the newspaper comment occasioned by the DKK 1.8bn order received by F.L.Smidth from Nigeria in January 2003. Despite being the largest single order ever received by F.L.Smidth and probably one of the largest ever received by Danish industry - an order corresponding to 30% of those obtainable at global level - Børsen, "the newspaper for Danish business", devoted three lines in its domestic trivia column. The news from FLS was sandwiched between the news that Holsterbro-based seed producers Hunsballe Frø had established a new distribution outlet in Denmark and the news that the chipmaker Chemitalic had revised its annual earnings prediction downward from DKK +5m to DKK -5m. Not only Børsen's coverage of this billion-Kroner order, but also that of Denmark's other dailies was extremely limited - although to be fair - the business section of Jyllands-Posten did devote four columns to the story.
When Birgitte Nielsen decided to resign from the Group, Børsen ran the story on two front pages and four centre pages. Berlingske News Magazine published dramatic-looking articles about secret guarantees. Here too the journalists neglected to report factual information, as presented to them in writing beforehand, to the effect that in
the 120-year life of the FLS Group such guarantees had cost the company USD 800,000 - which I can only suppose would have rendered the article totally uninteresting.
I would like to conclude by saying that despite the unreasonable press criticism, the Group's many thousands of employees have put in a superb effort of work for which I would hereby like to thank them.
I would like to thank the Management and Board members who have made a quite extraordinary effort to get us where we are today.
It has been a difficult year with many changes and new initiatives, but all parties have loyally done their very best in the interests of the FLS Group. I will not promise that 2003 will be an easier year, but I am convinced that a continued joint effort will deliver the required results.
As stated in the printed report, the Board of Directors proposes to the Company in General Meeting that no payment of dividend be made for 2002.
FLS Industries A/S
Corporate Public Relations