direct/ Marel hf (IS) - Marel - 3Q Results 2006 - Press release

Sales for the 3rd quarter 2006 totalled EUR 57.6 million (ISK 5.2 billion), compared with 30.4 million (ISK 2.4 billion) at the same time previous year. Sales therefore increased by about 90%. Since the third quarter 2005, the companies AEW Delford Systems and Scanvægt have joined the Group at 7th of April and 4th of August respectively.

Proforma increase in sales in 3rd quarter was just over 3% compared to last year all coming from the newly aquried companies.

Profit from operations EBIT during the 3rd quarter 2006 was EUR 1.7 million (ISK 152 million), which is 2.9% of income compared with 2.1 million (ISK 165 million) last year. During the quarter, one-time costs entered as a result of Marel´s acquisition of new companies were approximately EUR 1.5 million.

Net loss for the 3rd quarter totalled EUR 0.7 million (ISK 61 million).

Sales for the first nine months of 2006 totalled EUR 136.8 million (ISK 11.9 billion), compared with 94.3 million (ISK 7.5 billion) from last year, an increase of about 45%.

Profit from operations EBIT from January to the end of September 2006 was EUR 6.4 million (ISK 561 million), which is 4.7% of sales revenue compared with 8.4 million or 9.0% of sales the previous year.

Financial expenses were about EUR 3.8 million, compared with EUR 2.0 million the year before. The increase is in particular the result of increased operation due to external growth connected with the acquisition of AEW Delford Systems and Scanvægt. Loss by associated company may be attributed to a share-price decline in Dutch company Stork NV., which is accounted for at market price.

Net profit for the first three quarters of 2006 was EUR 0.7 million (ISK 58 million), compared with 5.1 million in 2005.

Net cash at end of period amounted to EUR 63.9 million and equity ratio 39.4%.

Hörður Arnarson. CEO:
"The merging of five Group companies in North America, which has already begun, will strengthen sales and service activities through significant savings in administrative costs. Integration of the companies in other areas has progressed according to schedule, and it is expected that operational goals that were introduced in connection with the acquisition of Scanvægt will start to appear in increased operating profits in 2007 and be fully realized in 2008, which is somewhat earlier than anticipated.

As announced in connection with the company´s six-month interim financial statements, operations in the third quarter were framed by extensive integration measures involving Marel, AEW/Delford, Carnitech and Scanvægt.

Integration expenses will primarily be incurred during the next three quarters. These costs are estimated at about EUR 8-10 million, and will return an increase in operational profits of about EUR 15 million annually. All integration expenses will naturally appear initially, while the benefits will become apparent as time progresses."

The quarterly report for the Marel Group for the nine months of 2006 was approved at Marel hf´s Board of Director´s meeting today, 7 November 2006.

The Marel Group comprises 35 companies with operations in 23 countries.

The following are the main results from the consolidated financial statements for Marel:

Operations for the 3rd quarter in thous. of euros

Operating results 2006 2005
Sales 57.648 30.416
Cost of goods sold (38.729) (20.494)
Contribution margin 18.919 9.922

Other operating income 516 246
Sales & marketing income (7.387) (3.818)
Development expenses (3.285) (1.588)
Administrative expenses (7.092) (2.626)

Profit from operations EBIT 1.671 2.136
Finance costs - net (1.890) (778)
Share of results of associates (498) -
(Loss)/profit before tax (717) 1.358
Calculated income tax 43 (127)
(Loss)/net profit for period (674) 1.231

EBITDA 4.094 3.399

Percent of sales
Contribution margin 32.8% 32.6%
Sales & marketing income 12.8% 12.6%
Development expenses charged 5.7% 5.2%
Administrative expenses 12.3% 8.6%
EBITDA 7.1% 11.2%
EBIT 2.9% 7.0%
(Loss)/net profit for period (1.2%) 4.0%

Operations first 9 months in thous. of euros

Operating results 2006 2005
Sales 136.754 94.254
Cost of goods sold (91.601) (61.896)
Contribution margin 45.153 32.358

Other operating income 1.080 703
Sales & marketing income (18.095) (11.512)
Development expenses (7.453) (4.804)
Administrative expenses (14.236) (8.299)

Profit from operations EBIT 6.449 8.446
Finance costs - net (3.762) (2.063)
Share of results of associates (1.213) -
Profit before tax 1.474 6.383
Calculated income tax (800) (1.247)
Net profit for period 674 5.136

EBITDA 11.949 12.050

Percent of sales
Contribution margin 33.0% 34.3%
Sales & marketing income 13.2% 12.2%
Development expenses charged 5.4% 5.1%
Administrative expenses 10.4% 8.8%
EBITDA 8.7% 12.8%
EBIT 4.7% 9.0%
Net profit for the period 0.5% 5.4%

Financial position at end of period 30.09.06 31.12.05
Total assets 366.070 114.890
Equity 144.198 41.032
Working capital 95.874 16.557

Cash flow first 9 months of year 2006 2005
Cash generated from/(to) operations (6.385) 5.850
Increase/(decrease) in net cash 60.255 1.449
Net cash at end of period 63.907 5.407

Highlights at end of September 2006 2005
Return on owners´ equity 2.2% 20.6%
Current ratio 2.0 1.4
Quick ratio 1.3 0.7
Equity ratio 39.4% 34.8%
H/V ratio (Earnings to price) 0.00 0.03
V/H ratio (Price to earnings) 252.7 30.1
Earnings per share in euro cents 0.26 2.21
Market cap. in millions of euros
based on exchange rate at end of Sept. 316.6 211.8

Sales for the first nine months of 2006 totalled EUR 136.8 million (ISK 11.9 billion), compared with EUR 94.3 million (ISK 7.5 billion) the previous year. Sales have therefore increased by about 45%. Without the impact of AEW Delford Systems, which entered the Group´s consolidated financial statements last 7 April, and Scanvægt from 4 August, the sales are almost unchanged.

The contribution margin of product sales during the period was EUR 45.2 million or 33.0% of sales compared with EUR 32.4 million or 34.3% of sales during the same period in 2005. Income in Icelandic króna was about 2% of the Group´s total sales, but expenses were about 18%, in particular because of employee wages in Iceland. The króna has weakened by about 8.8% against the euro from the average during the first nine months of 2005 to the same period in 2006. The company has entered into forward exchange rate contracts to offset all estimated costs in Icelandic króna until November 2007. The average exchange rate of these contracts during the period March - September 2006 was ISK/EUR 84.30, so the company has not fully benefited from the decrease in the Icelandic króna´s exchange rate. The average exchange rate of the contracts from October 2006 to November 2007 is ISK/EUR 97.70.

Operating expenses other than the cost of goods sold totalled EUR 39.8 million and were 29.1% of sales, compared with 26.1% the year before. Sales and marketing expenses were EUR 18.1 million, which is about 57% higher than the previous year. Charged development expenses, including depreciation of product development costs from previous years, were about EUR 7.5 million, an increase of about 55%. The primary emphasis in sales and marketing, as well as in product development, has been to improve productivity and synergy, and to accelerate integration within the Marel Group. Administrative costs were EUR 14.2 million, compared with 8.3 million the year before, an increase of about 71%. The increase may in part be attributed to the affect of integration expenses.

Profit from operations (EBIT) was EUR 6.5 million or 4.7% of sales, compared with 9.0% in 2005.

Net finance costs totalled EUR 3.8 million, compared with EUR 2.1 million last year. The increase is the result of borrowing in the form of a debenture offering, which has in part been earmarked to purchase the companies AEW Delford, Scanvægt, associated company and investment in property, plant and equipment. Marel´s share in the operational loss of associated company totalled EUR 1.2 million, which may be attributed to the investment of LME ehf., and Marel owns 20% in LME. LME owns 8% of Stork NV´s shares.

Net profit of the Marel Group for the first nine months of 2006 totalled EUR 0.7 million (ISK 58 million), compared with EUR 5.1 million (ISK 408 million) the previous year.

Total assets of the Group at the end of September 2006 were EUR 366 million, and they have more than tripled from the beginning of the year. This increase is primarily due to the establishment of AEW Delford Systems, which took over operations and assets of two UK companies, the acquisition of Scanvægt, a debenture offering and new share capital. The equity ratio has increased: it was 39.4% at the end of September, compared with 35.7% at the end of 2005.

Investment in property, plant and equipment during the first nine months of 2006 was EUR 7.6 million, compared with EUR 2.3 million during the same period last year, the main investment was in the extension of production facilities in Garðabær.

Net cash to operations totalled EUR 6.4 million. The main reason for this is increased financial commitment in inventory and accounts receivable, but this is offset by an increase in accounts payable. At the end of the 3rd quarter 2006, net cash was EUR 63.9 million, compared with 5.4 million at the end of September 2005.

On average, 1,445 employees worked for the Marel Group during the first nine months of 2006, compared with 866 at the same time last year. Of these 1,445 employees, 358 were in Iceland while 1,087 worked outside Iceland in 34 companies in 22 countries. At the end of September 2006, employees totalled 2,127.

5-year comparison

Key figures from Marel´s operations for the 3rd quarter

Thous. EUR 2006 2005 2004 2003*) 2002*)
Sales
57.648 30.416 26.821 20.421 22.985
Profit from operations(-loss) (EBIT)
1.671 2.136 2.833 1.135 (2.274)
EBIT as a % of sales
2.9% 7.0% 10.6% 5.6% (9.9%)
Net profit/(loss)
(682) 1.231 1.757 53 (2.413)
Net profit/(loss) as % of sales
(1.2%) 4.0% 6.5% 0.3% (10.5%)
EBITDA
4.094 3.399 3.941 2.036 (1.207)
EBITDA as % of sales
10.0% 11.2% 14.7% 10.0% 5.3%


Assets at end of period
366.070 107.028 92.074 85.950 86.209
Equity at end of period
144.158 37.231 32.035 24.859 21.738
Working capital at end of period
95.874 16.972 18.816 18.027 10.948


Cash generated from operations
288 3.138 3.361 (300) 1.811
Net cash at end of period
63.907 5.407 5.459 6.343 5.314


Current ratio
2.0 1.4 1.6 1.6 1.3
Quick ratio
1.3 0.7 0.8 0.8 0.7
Equity ratio
39.4% 34.8% 34.8% 28.9% 25.2%
Earnings per share in millions of
euros based on the exchange rate
at end of Sept.
316.6 211.8 151.1 73.7 53.5

*) Previous presentation that is not in conformity with IFRS.

Integration activities

The acquisition of AEW/Delford in April and Scanvægt in August of this year has doubled the company´s annual turnover. The companies have a very similar product range and operate on the same markets. It is therefore necessary to integrate operations with the aim of improving and coordinating customer services and clarifying employee positions, while improving performance of the companies. Major integration activity has been launched within the company with participation of key employees from all companies. The goal is to develop the strengths of each company and thereby support the Group´s future growth. Since operations of the companies are similar, integration will inevitably lead to changes in individual companies with accompanying one-time expenses.

After analyzing the strengths and weaknesses of the companies it has become evident that there are greater strengths than originally projected, in particular regarding services, sales activities and production. In many instances, a company has had a superior working procedure in a particular area that gives much greater results than that used by the other companies. It is therefore believed that the operational goals that were presented in connection with the acquisition of Scanvægt, i.e. that profit from operation (EBIT) would be at least 10% after 2-3 years, will be achieved sooner, or after about 1.5 - 2 years.

It is projected that integration of the companies will increase operational profits by about EUR 15 million from 2008. The integration process addresses all elements of the companies´ operations, with focus on reducing costs relating to production, purchasing and subsidiary activities. Organizational changes generate one-time expenses that are estimated at EUR 8-10 million, in part because of retirement payments, wages, moving of business premises and consulting services. When evaluating one-time costs, only direct outlays are included, and not contribution margin, which would be created by the work of employees involved in integration activities at any given time. Integration expenses will naturally appear initially, while the benefits will become apparent as time progresses.

The most extensive integration work already implemented is the consolidation of five sales and service companies in North America. With the consolidation, the Group´s sales and service network will be strengthened, and thereby better able to support the company´s continued growth on its largest market. It is estimated that annual operational costs will be reduced by about EUR 2 million from mid 2007. One-time costs resulting from these changes will be about EUR 1.5 million.

LME holding company

Marel hf., Eyrir Invest and Landsbanki Íslands founded the holding company LME ehf last February for the purpose of purchasing shares in Dutch company Stork NV (www.stork.com). It was the intention of Stork´s management to delist the company from the stock exchange, but that plan has been discarded. Shareholders reacted badly to this attempt, and to the large expense that consequently fell on the company, which caused a lowering of Stork NV´s share price.

This has resulted in a controversy between a large majority of company shareholders and company management regarding the direction to be taken in this matter. In actuality, the company´s future policy in not at issue, but rather the influence of shareholders in Dutch public companies and the ownership of foreign, short-term investors in the flagship of industrial companies in Holland. Different points of view are also at issue: on the one hand Dutch law that limits the rights of shareholders, and on the other Corporate Governance that Stork has approved and should protect the rights of shareholders.

Marel has held informal discussions with Stork´s management regarding closer cooperation between the companies. No formal discussions have been held regarding merging Marel and Stork Food System.
LME ehf has an 8% share in Stork, which was financed with loans from company shareholders, and other loans. Marel´s share in LME is 20%, and capital employed in this investment is in proportion with its share. Marel believes that despite the calculated loss in the quarter, in the long-term the investment will prove to be profitable for the company.

Debenture issue

Marel hf. issued debentures for ISK 6 billion. Half was issued last February and the second part in April 2006. Marel has also concluded an interest swap agreement that is connected with the issuance of debentures that ensured the company financing in foreign currency with payment of the interest and principal due in 2012.

New shares sold

A public offering of Marel shares proved successful. Investors subscribed for shares in excess of ISK 35.8 billion, which is significantly more than the company´s overall market value.
A total of 75 million new shares were sold for ISK 5,550 million. The total number of Marel shares after the offering and delivery of shares to Scanvægt´s former owners is 367,080,732. Eyrir Invest hf is still Marel´s largest single shareholder with a 26.5% share. Landsbanki Íslands has a 24.6% share and Grundtvig Invest ApS has a 14.2% share. Shareholders in Marel hf. number 3,240, and prior to the offering they were 1,100.

Prospects

Prospects for the company´s operations are good. The consolidation of Marel, Carnitech, AEW/Delford and Scanvægt will create a company with a broad product range, strong marketing network, outstanding service network and a unique position in various product categories. The economy of scale of the new company is considerable including increased sales and cross selling.

In the short term - particularly the next three quarters - one-time costs resulting from integrating the companies will impact the Group´s performance. It is projected that the synergistic effect will start to appear in increased operating profits in 2007 and be fully realized in 2008.

Consolidated Financial Statement publishing for 2006

- Marel will publish the Financial Statements for 2006 on Tuesday, 13 February 2007.
- The Annual General Meeting for Marel hf is scheduled for Thursday, 8 March 2007.

Marel will present performance results for the 3rd quarter of 2006 at a meeting on Wednesday, 8 November 2006 at 08:30 at company headquarters at Austurhraun 9 in Garðabær, Iceland.

Marel - 3Q Results



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