The ÅF Group - Summary of Annual Report for 2004
A few words from the President, Jonas Wiström
As far as profits were concerned, the fourth quarter was a disappointment for the ÅF Group. Despite the implementation earlier in the year of a raft of measures designed to improve profitability, the performance of the Systems Division continued to remain below par. As a result, a new package of vigorous measures was introduced in the fourth quarter with the aim of shaving some SEK 3 million a month off the division's fixed costs. The target now is for Systems to show a return to profit with effect from the first quarter of 2005.
The market for technical consulting services improved in a number of areas during the second half of 2004. The ÅF Group noted an increased demand both from the process industry and in the market for infrastructure investments, which had a positive effect on invoiced-time ratio.
It is worth noting that, excluding capital gains and figures for the Systems Division, the ÅF Group's earnings for 2004 showed an improvement of almost 15 percent on 2003.
The ÅF Group's main objectives for 2005 remain clear:
- To achieve substantial improvements in profits and cash flows compared to 2004.
- To continue to grow more quickly than the market as a whole.
The ÅF Group believes that the market for technical consulting services as a whole will remain unchanged in 2005 or show only a slight improvement on 2004. The anticipated improvement in profits is therefore based on the confident assumption that the Systems Division will once again return to profitability and that the rest of the Group's operations will continue to develop in a positive fashion. The reorganisation of the Group carried out at the end of 2004 is also designed to create an ÅF Group with a clearer market profile and more earnings synergies.
Important events in the fourth quarter
The ÅF Group announced plans to merge its six divisions - Installations, Infrastructure, Industry, Systems, Energy & Environment and Pulp & Paper - into just three: Infrastructure, Process and Systems. The change, which was implemented on 1 January 2005, has not incurred any restructuring costs. The ÅF-Kontroll company (with approximately 200 full-time equivalent posts) remains as an independent subsidiary for accreditation reasons. At the same time, in order to increase local sales and improve coordination, four regional organisations were created in Sweden. The regional managers, tasked with exploiting local business potential in their region to the full, are all included in the ÅF Group's executive management team.
Against the background of profitability problems in the Systems Division a decision was reached to implement an action programme to prune approximately SEK 3 million a month off the division's fixed costs. The cost for implementing these measures has been estimated at no more than SEK 15 million. At the same time a warning was issued that the fourth-quarter loss for the division was expected to nudge SEK 30 million, including the cost for the action programme.
Sales and earnings
Net sales for the ÅF Group in 2004 amounted to SEK 2,160 million (2003: 1,995 million). Sales for the fourth quarter rose to SEK 588 (569) million.
Operating profit for the year was SEK 38 (53) million, and the operating margin was 1.7 (2.7) percent. The fourth quarter showed an operating loss of SEK 12.9 million (compared to a profit of SEK 10.9 million in 2003) and the operating margin was -2.2 (+1.9) percent.
Sales of real estate have had a positive effect in the ÅF Group's accounts for 2004 adding some SEK 24 million to the net result. The fourth quarter figures do not, however, include any capital gains. On the other hand, restructuring costs, chiefly in the Systems Division, have had a negative effect, reducing the net result for the Group by a total of SEK 40 million during 2004, SEK 15 million of this amount being incurred in the fourth quarter.
Capacity utilisation (expressed as invoiced-time ratio) was 68.5 (67.6) percent during the year as a whole, and 68.6 (65.8) percent during the final quarter.
Group consolidated profit after net financial items totalled SEK 33 (47) million, yielding a profit margin of 1.5 (2.3) percent. After allowances for net financial items the fourth quarter saw a loss of SEK 13.9 million (as opposed to a profit of SEK 11.6 million for the corresponding period in 2003), to give a profit margin of -2,4 (2.0) percent.
Earnings per share for the year as a whole amounted SEK 5.11 (5.24), while EPS for the fourth quarter was - SEK 1.18 (0.66).
The performance of the ÅF Group's Divisions in 2004
Energy & Environment
Given the positive conditions in the market, the result for Energy & Environment for 2004 was less than satisfactory. Following the reorganisation that took place on 1 January 2005, as one aspect of a change aimed at generating earnings synergies, Energy & Environment now forms part of the Process Division. During the first six months in 2004 the division took an important step towards consolidating the ÅF Group's position in the energy sector via the acquisition of Fortum Teknik & Miljö with 140 employees.
The Industry Division's performance for 2004 was relatively weak. There was an increase in demand - albeit from a low level - for consulting services linked to automation and technical solutions for the electric power segment, but the division was burdened by some significant write-downs in projects and structural costs incurred early in the year. The Electric Power business area showed strong growth thanks to the integration of electric power operations from Fortum Teknik & Miljö.
The market for consulting services in infrastructure projects was relatively strong in 2004. The Infrastructure Division captured new market share and is extensively involved in major assignments such as the "City Tunnel" rail project in Malmö (southern Sweden) and the "City Line" (Citybanan) double-track rail tunnel in Stockholm. Since the end of the reporting period the ÅF Group has also been contracted by the Swedish National Rail Administration (Banverket) to carry out the project planning work for systems directly related to the rail track in the tunnel through the Hallandsåsen Ridge. First and foremost this assignment revolves around work on electrics, signals and telecommunications. Demand in the telecoms area has improved gradually throughout 2004.
The market for construction and property consulting showed signs of a steady improvement throughout the whole of the second half of 2004. An improved market, increased sales activities and a more systematic approach to demonstrating the ÅF Group's ability to save money for its clients in the energy area combined to help Installations maintain an acceptable level of business. There was an upturn in the number of new starts recorded for single-family homes and the steep decline in commercial properties flattened out during the year. The market for rebuilds and renovation remained buoyant.
Inspections & Testing
ÅF-Kontroll continued to grow at a greater rate than the overall market for inspections, testing and certification. Sales increased by almost 10 percent with particularly strong growth in inspections. However, final earnings were slightly down on expectations as a result of slacker demand during the second half of the year. On a more positive note, ÅF-Kontroll has been selected as a long-term partner for a number of major industrial projects with clients such as Scanraff and Stora Enso.
Pulp & Paper
The market for consulting services within the pulp and paper industry in Sweden was strong throughout 2004. Investments in Swedish pulp and paper mills increased noticeably compared to 2003, and this clearly benefited the ÅF Group as the market leader in Sweden. Demand was brisk in Spain and Germany as well, but operations in Finland and France were affected by the relatively low levels of investment in those countries and the surrounding regions.
The profitability headaches for Systems continued in 2004. Despite a clear improvement in the telecom sector, the markets for IT and product development remain depressed. Systems' invoiced-time ratio remained low and the division's costs were too high given the current price levels. After it became clear that the package of measures announced in the first quarter was insufficient, far-reaching new measures were implemented in the fourth quarter aimed at reducing the division's fixed costs by SEK 3 million a month. All in all, the various action programmes incurred one-off costs totalling some SEK 33 million in 2004.
Gross investments in machines and equipment totalled SEK 43 (42) million for the period January-December 2004.
Cash flow and financial status
The cash flow for the year was SEK 83 (24) million. Before shareholders' dividends and the amortisation of loans, cash flow was SEK 109 (44) million. The sale of certain of the Group's premises had a positive effect of SEK 124 million on cash flow.
The cash flow for the fourth quarter before shareholders' dividends and the amortisation of loans was SEK 35 (53) million.
The ÅF Group's liquid assets totalled SEK 175 (93) million at the end of the reporting period.
Equity per share was SEK 65, and the Group's equity/assets ratio was 30 percent. These figures compare with SEK 59 and 31 percent respectively at the beginning of the year.
Parent company sales totalled SEK 129 (171) million, yielding a loss after net financial items of SEK 5 million (compared to a profit of SEK 85 million in 2003). The previous year's result was, however, affected positively by a restructuring reserve in the parent company.
This interim report has been compiled in accordance with the recommendations of the Swedish Financial Accounting Standards Council and the guidelines provided by the Council's Emerging Issues Group. The accounting principles and methods of calculation used are the same as those adopted in the most recent annual report, with the exception of the details provided for defined-benefit pensions schemes, which have been reported in accordance with the Financial Accounting Standards Council's recommendation RR 29 relating to the remuneration of employees, which came into force on 1 January 2004. The transition to the new rules has had a positive effect by increasing equity by SEK 2.1 million as of 1 January 2004.
Up until the 2004 financial year, the ÅF Group's financial reporting has been prepared in compliance with the Swedish Annual Accounts Act, the recommendations of the Swedish Financial Accounting Standards Council and the guidelines provided by the Council's Emerging Issues Group. Despite recent moves towards convergence between the Swedish Financial Accounting Standards Council's recommendations and International Financial Reporting Standards (IFRS), there is still a relatively large number of differences between the two standards.
With effect from 2005 the ÅF Group will adopt a system of financial reporting that accords fully with IFRS, supplemented by the addition of any further disclosures that may be required by the Swedish Annual Accounts Act.
The transition to IFRS does, of course, place special demands on the first set of accounts drawn up in accordance with the new standard. The regulations stipulate that, for the sake of comparison, figures for 2004 must also be supplied in a form that accords with IFRS, although this information need not be made available until the publication of the first interim report for 2005.
We have made a thorough review of the changes that the introduction of IFRS will mean for the ÅF Group.
The most significant change for the ÅF Group is the introduction of IFRS 3 ("Business Combinations"), which deals with the issue of corporate acquisitions and mergers. The ÅF Group will report acquisitions made during 2004 in accordance with the new rules. According to the review we have made, the restructuring reserves set aside in conjunction with the acquisitions of CTS and Fortum Teknik & Miljö must be reversed, which will give rise to a charge against profits of SEK 17 million. The tax effect of this reversal will be plus SEK 6 million. Depreciation on goodwill, which amounted to SEK 14 million in 2004, will be replaced by an annual impairment test.
The introduction of IFRS 5 ("Non-current Assets Held for Sale and Discontinued Operations") means than the ÅF Group's properties for sale in the opening balance sheet from 1 January 2004 are transferred from fixed assets to current assets. As a result, there is no depreciation in real estate, which has a positive effect on the accounts of SEK 3 million.
The overall effect of reporting the accounts for 2004 in accordance with IFRS adds approximately SEK 6 million to the result for the year and to equity. In addition, earnings and equity are affected by the minority share.
Real estate administration
In spring 2003, the Board of Directors resolved to sell the ÅF Group's properties.
During the fourth quarter of 2003, the Härolden 1 property (approximately 3,500 square metres in size) in central Stockholm was sold to Humlegården HB, which accordingly took possession of the property at the beginning of 2004. The sale made a positive contribution to the ÅF Group's net profits of SEK 21.5 million during the first quarter of 2004.
Five other properties were sold to Estancia Fastigheter AB in January 2004. The sale had a positive impact of SEK 2.1 million on the ÅF Group's net profit for the second quarter.
The sole remaining property owned by the ÅF Group is Härolden 44 (10,700 square metres), the ÅF Group's head office on Fleminggatan in central Stockholm. The property, which has a book value of SEK 126 million, was valued at SEK 225 (220) million at the end of 2004 by Forum Fastighetsekonomi AB.
At the end of the reporting period, Ångpanneföreningen class "B" shares were valued at SEK 132 each. This corresponds to an appreciation in value of approximately 14 percent since the start of the year, when they were being traded for SEK 116 each. The Stockholm Stock Exchange's all-share index (Sax) rose by approximately 18 percent during the same period.
The Board of Directors proposes a dividend for 2004 of SEK 2.60 (2.60) per share. This is in line with the established policy of issuing a dividend to shareholders that corresponds to 50 percent of the Group's earnings after tax.
Reporting dates for financial information 2005
The ÅF Group will publish financial information on the following dates in 2005:
Summary of Annual Report for 2004 15 February
Summary of Annual Report for 2004 15 February
Interim report January-March 2005 28 April
Report from the Annual General Meeting 28 April
Interim report January-June 2005 19 August
Interim report January-September 2005 9 November
Annual General Meeting
The Annual General Meeting of Shareholders will take place take place at 17.00 (5.00 pm) on 28 April 2005 at AB Ångpanneföreningen's head office at number 7 Fleminggatan in Stockholm, Sweden. A formal call to the meeting will be issued via an advertisement placed in the national Swedish daily newspapers. The ÅF Group's Annual Report for 2004 will be despatched by post to shareholders who have indicated their interest. It will also be available at the ÅF Group's offices from 11 April 2005.
Stockholm, Sweden - 15 February 2005
AB Ångpanneföreningen (publ)
Jonas Wiström, President and CEO
The full report including tables can be downloaded from the following link: