Cardo AB: Interim Report

... continued and the inflow of orders also continued to rise with an organic growth of almost 5 percent after an increase of 6 percent during the second quarter. After the weak first quarter for Cardo Door's Garage field, both the second and third quarters have shown improvements as far as the inflow of orders and earnings are concerned, even if there are still difficulties in compensating for higher prices of raw materials. In the Industrial field, the trend during the third quarter remained weak, principally owing to the situation in the big German, UK and French markets.

• Inflow of orders: SEK 5,881 million (5,872)
• Net sales: SEK 5,476 million (5,491)
• Net earnings: SEK 113 million (117)
• Earnings per share: SEK 3.77 (3.91)
• Cardo Pump's positive trend continued

Interim period January-September

The Group's inflow of orders amounted to SEK 5,881 million (5,872), which adjusted for the effects of exchange rate movements is on a par with the previous year. The inflow of orders at Cardo Door was lower than the previous year, while Cardo Pump's inflow of orders rose after a trend that remained good during the third quarter.

Net sales amounted to SEK 5,476 million (5,491), a decrease of 1 percent after adjustment for the effects of exchange rate movements.

Operating earnings amounted to SEK 185 million (190). Earnings for the previous year include a cost of SEK 70 million for reorganization at Cardo Pump. This year's earnings have been affected by a weak trend for Cardo Door's Garage field, particularly at the beginning of year, and by termination costs of SEK 26 million in connection with the changes in Group management that occurred during the second quarter. Cardo Pump's earnings rose compared with the previous year. The impact of exchange rate movements on operating earnings was only marginal.

Apart from in the Garage field, it was in the main possible to compensate for higher raw-material prices by raising product prices.

Net earnings amounted to SEK 113 million (117), which is equivalent to SEK 3.77 (3.91) per share.

Cash flow from operating activities was SEK 64 million (214) after tax, which is equivalent to SEK 2.13 (7.13) per share. The lower cash flow is principally explained by the fact that the cost of the reorganization within Cardo Pump was charged to earnings for the previous year, while the cash-flow effect is largely affecting the current year.

Cardo Door

For the Cardo Door business area, the inflow of orders decreased by a total of 2 percent after adjustment for the effects of exchange rate movements. The inflow of orders was weak in Germany, the UK and France. In the Industrial field, the inflow of orders was 3 percent lower after a decrease for industrial doors and dock loading systems and an increase for service. For the Garage field, the inflow of orders was on a par with the previous year.

Net sales amounted to a total of SEK 3,423 million (3,459), which is a decrease of 2 percent after adjustment for the effects of exchange rate movements. The decrease was 1 and 4 percent for Industrial and Garage respectively. Operating earnings for the business area as a whole amounted to SEK 105 million (180), made up of SEK 145 million (165) for Industrial and SEK -40 million (15) for Garage. The decline in earnings at Garage is explained by the lower net sales and by difficulties in compensating for the rises in the prices of raw materials.

Cardo Pump

For the business area as a whole, the inflow of orders rose by 3 percent after adjustment for the effects of exchange rate movements. The inflow of orders rose in both the wastewater technology applications and the construction industry segments, while it was lower in the pulp and paper industry segment.

Net sales amounted to SEK 2,053 million (2,032), an increase of 1 percent after adjustment for the effects of exchange rate movements. Operating earnings amounted to SEK 152 million (56). Earnings for the previous year include a cost of SEK 70 million in connection with a reorganization with a view to increasing competitiveness and the rate of the geographical expansion. The measures, which are expected to provide a net annual saving of approximately SEK 40 million, whereof the main part as of 2005, are taking effect on earnings according to plan.

Cardo being reorganized

In the interim report for January-June 2005, it was announced that a decision had been taken to reorganize Cardo into a purely operational industrial group aimed at business-to-business customers. Activities will be more market-focused and cost-effective in order to create necessary conditions for good profitability and organic growth.

The concentration on business-to-business customers means that Cardo Door's operation in the Garage field, with products that are entirely aimed at the consumer market, does not fit in at Cardo. The commitment to this operation is therefore currently under review.

On January 1, 2006, the present business areas Cardo Door and Cardo Pump will be replaced by the following divisions: Door & Logistics Solutions, Wastewater Technology Solutions, Pulp & Paper Solutions and Residential Garage Doors.

In the new organization, operational and decision processes will be simplified and the activities of the divisions will be aimed at increasing organic growth. In order to take full advantage of potential synergy effects, groupwide functions are being formed in the areas of purchasing, IT, finance, HR and marketing communications.

The objective is for the reorganization to reduce the cost level in the new, streamlined Group by at least SEK 200 million annually, achieving full effect as of 2008. The costs of the changeover will be reported in the financial statements for 2005 and are today not expected to exceed SEK 200 million.

The financial targets for the new, streamlined Group are to have an operating margin of at least 10 percent no later than 2008 and an organic growth of at least 5 percent and a return on capital employed of at least 20 percent annually over a business cycle.

Expanded Group management

Maria Bergving has been appointed head of the new groupwide function for marketing communications and will be a member of Cardo's group management team as of January 1, 2006. As Vice President Group Communications, Maria Bergving will be in charge of brand strategy, internal and external communications and IR, where she will take over responsibility from Christer Roskvist, who will be retiring at the turn of the year. Maria Bergving comes from Cardo Pump, where she has been in charge of marketing communications since 1999.

Liquidity and financing

At September 30, the Group's liquid funds stood at SEK 149 million (154) compared with SEK 213 million at the beginning of the year. In addition, there are unutilized credit facilities of approximately SEK 2 billion (approximately 1).

The Group's gross investments, excluding company acquisitions, stood at SEK 183 million (194).

Net interest bearing debt at September 30 amounted to SEK 631 million (531) compared with SEK 268 million at the beginning of the year.

Equity amounted to SEK 2,882 million (2,709), which is equivalent to SEK 96.07 (90.30) per share.

The Group's equity ratio at September 30 was 52.7 percent (51.8).

Personnel

The average number of employees during the period was 5,708 (5,937).

Repurchase of shares

At this year's Annual General Meeting of Cardo AB, a resolution was passed authorizing the Board of Directors to acquire up to so many own shares before the next Annual General Meeting that the Company's holding at no time exceeds 10 percent of all shares in the Company. Acquisition is to be made on the Stockholm Stock Exchange at the market value applying on the occasion of acquisition. The purpose of the repurchase is to give the Board the opportunity to adjust the capital structure of the Company during the period until the next Annual General Meeting. The Board has yet to resolve to utilize the authorization and thus no repurchase has been made.

Accounting principles

As of January 1, 2005, Cardo draws up it financial reports for the Group in accordance with International Financial Reporting Standards (IFRS), which have been endorsed by the EU Commission. This interim report has therefore been drawn up in accordance with IAS 34, Interim Financial Reporting, which accords with the requirements of recommendation RR 31 of the Swedish Financial Accounting Standards Council concerning interim reports for groups. Cardo's transition date to IFRS is January 1, 2004, which means that comparative figures for 2004 in this report have been recalculated as if IFRS had been applied then as well. For a description of the effects of the transition to accounting in accordance with IFRS, please see appendix 5.

In previous financial reports, Cardo has presented financial information for the two business areas Cardo Door and Cardo Pump in accordance with IAS 14, Segment Reporting. As of the interim report for January-June 2005, separate information is also presented for the two fields Industrial and Garage within Cardo Door.

The parent company

The parent company's earnings after financial items amounted to SEK -17 million (-12), its gross investments to SEK 0 million (0) and its liquid funds to SEK 0 million (0) as against SEK 0 million at the beginning of the year.

Election committee

The election committee that has been appointed ahead of the 2006 Annual General Meeting under a resolution of the 2005 Annual General Meeting consists of:

Ulf Lundahl (chairman), L E Lundbergföretagen AB, Stockholm

Britt Reigo, Robur funds, Stockholm

Kerstin Hessius, Third National Swedish Pension Fund, Stockholm

Fredrik Lundberg, chairman of Cardo's board of directors

Proposals regarding election of members of the board of directors and the board fee may be sent either to a member of the election committee or to the Company to be forwarded to the election committee.

Annual General Meeting

The Annual General Meeting will be held in Malmö, Sweden, on Thursday, April 6 2006.

Market prospects

The following market prospects still apply: it is difficult to assess the trend in the immediate future as far as demand for construction-related products is concerned, while for wastewater technology applications, the assessment is that market growth will remain good.