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FLS Industries' Annual General Meeting 23 April 2004

23.04.2004
Chairman of the Board of Directors Jørgen Worning today presented the following report at the Annual General Meeting of FLS Industries A/S at Radisson SAS Falconer Center, Frederiksberg.
It is now two years since the new Board of Directors took up office and, consequently, the second time the Board is presenting its report at the FLS Industries Annual General Meeting. Initially, I would like to state that the steps the Board had planned to take during 2002 and 2003 have essentially been implemented in a satisfactory way.

Our aim was to carry out the strategic plan, which was announced in August 2002, by the end of 2003. This has been achieved through the divestments of a great number of non-core undertakings - and the organisational set-up has been streamlined, enabling short lines of decision-making and rationalisation of the core activities.

The strong focus on the Group's cash flow has produced the desired results. Since the spring of 2002, the Group's bank debt has been reduced from DKK 5.5bn to DK 2.4bn.

Finally, the future managerial structure is now in place, with a Corporate Management consisting of Mr Jørgen Huno Rasmussen, Group CEO; Mr Poul Erik Tofte, Group CFO; and Mr Bjarne Moltke Hansen, Group Executive Vice President.

2003 was therefore an extremely active year which saw a number of initiatives being taken, all with the overall purpose of creating an optimum basis for future profitability.

The high level of activity has continued during the first months of this year which marked the next phase of the strategy with even stronger focusing on the Group's core competencies. I shall revert later on in my report to the considerations on which these developments are based.

Annual Report
As to the financial results of the year, I refer to the printed Annual Report which can also be seen on the FLS Industries website. I shall limit my comments to a few specific issues.

Viewed against a net turnover of DKK 14.9bn, down from DKK 16.4bn in 2002, the Group's earnings before tax (EBT) were a highly unsatisfactory loss of DKK 2.5bn as against a loss of DKK 1,347m in 2002.

The year's financial result is primarily affected by the DKK 2bn write-down of fixed assets in FLS Aerospace. Aerospace was established over a number of years based on a series of business acquisitions. As it appears, the carrying amounts of these acquisitions could not be realised, due to the fact that FLS Aerospace was never able to produce a return on the investments.

The financial result also reflects higher expenditure and provisions for the completion of FLS miljø's two desulphurisation projects in the UK at a total cost of DKK 0.6n.

Among the individual business activities, F.L.Smidth Group achieved a record turnover of DKK 8.3bn compared to DKK 7.7bn the year before. Earnings before tax (EBT) at DKK 5m as against DKK 49m in 2002 did not, however, see similar gratifying growth, and the year's result is considered very unsatisfactory.

The unsatisfactory earnings mainly reflect a nearly DKK 200m increase in order processing costs attributable to major projects contracted in previous years. Of particular relevance here are the problems incurred in connection with the Buxton Cement Project. The financial result also reflects considerable variations in the earnings developments of the F.L.Smidth Group product companies. FFE Minerals, in particular, but also Pfister and Ventomatic continued the positive trends of latter years, whilst MAAG Gear and F.L.Smidth Materials Handling fell short of expectations.

The order backlog is healthy and the intake of orders reached a record high at DKK 8.8bn, with major contracts being signed in USA, Iran, Nigeria and China. These results were achieved despite the sharply declining dollar rate. After several years of weak demand for fresh production capability, it is encouraging to note that the market for new kiln capacity (exclusive of China) nearly doubled in 2003, up from approximately 13 million tonnes per year in 2002 to a more normal level of nearly 25 million tonnes per year in 2003. The Board is convinced that the large volume of orders in hand contains a reduced element of risk compared to previous years. At the same time, F.L.Smidth Group has managed to uphold its 50%+ market share.

In the cement industry, key figures and trends are always stated exclusive of China, because unlike the rest of the global market exact information about existing and new capacity in the world's largest single market is not readily available.

F.L.Smidth Group has been very successful in this challenging market, which is currently growing at a very rapid pace, with sales in excess of DKK 1bn. This is twice the level of last year's turnover. Today in terms of business volume, we are clearly the number one foreign supplier to China's cement and minerals industries, and - which is worth noting - our earnings have seen similar rewarding growth.

F.L.Smidth Group not only supplies equipment to the cement industry, but also to the minerals processing industry, a market that offers significant prospects and is producing satisfactory results. We expect this gratifying development to continue in the coming years.

The minerals market is a potential growth sector for FLS. It is five times bigger than the market for cement-making equipment. The FLS Group is today among the market leaders in raw material grinding and in pyro technology for calcination and processing of raw materials. There is considerable technological overlap between cement and minerals production which enables the FLS Group to apply and benefit from its long standing experience and product development expertise. The F.L.Smidth Group is thus in a unique position which allows it to employ the same technology with few adjustments in two major market segments.

Over the past years, FFE Minerals has focused its development efforts on flotation technology for separation of materials in water. This separation technology is being tested at production plants and is expected to be ready for commercialisation later this year.

In recent years, FFE Minerals has developed its customer services business which comprises not only technical services and spare parts, but also preventive maintenance and facilities operation contracts. Some of these concepts will also be applied in an attempt to boost customer service sales in the cement industry.

FLS Building Materials again in 2003 produced a solid and satisfactory EBIT result at DKK 318m and an EBT result at DKK 943m the sale of Secil inclusive. The result is on a par with that for 2002, but due to a number of divestments the EBIT ratio increased from 6.5% in 2002 to 8.5% in 2003. The Building Materials sector posted a total turnover of DKK 3.7bn, down from DKK 4.9bn in 2002. Exclusive of divestments, the turnover was DKK 181m lower in 2003 than in 2002.

Aalborg Portland achieved satisfactory earnings (EBIT) at DKK 358m against DKK 338m in 2002, despite the continuing slowdown in the world economy and keener competition. The satisfactory result is mainly due to exports of white cement which grew some 30% and an unchanged level of sales of grey cement.

Aalborg Portland strengthened its position as a global market leader in the production and exportation of white cement. Its total production capacity at plants in Denmark, Egypt, Malaysia and USA increased to 1.5 million tonnes per year in 2003.

In November, Mr Bendt Bendtsen, the Danish Minister for Economic and Business Affairs, inaugurated a new production line at the Aalborg plant which increased its white cement capacity from 620,000 to 850,000 tonnes per year. The new white cement production line is a DKK 200m conversion project based on an existing kiln.

Since its inauguration in the first half of 2002, the white cement plant in Sinai, Egypt - which is 45%-owned by Aalborg Portland and 11%-owned by the Industrialization Fund for Developing Countries - has attained a strong local position and a market share exceeding 40%. Exports and earnings have progressed very satisfactorily, and the plant is operating at full capacity - corresponding to 410,000 tonnes of white cement per year. The plant is prepared for a parallel production line of the same capacity. This will be a reasonable investment considering the capacity thereby achieved.

After the inauguration of Aalborg White Asia's new plant in Malaysia at the end of 2002, this facility is among the leading producers of white cement in Asia with a total capacity of 200,000 tonnes per year. On 1 January 2003, Aalborg Portland increased its shareholding by 10% to 70% and the Industrialization Fund for Developing Countries acquired the remaining 30% from the former owner Rock Chemical Industries which has thus ceased to be a shareholder in the company.

In the grey cement segment, Aalborg Portland fully utilised its production capacity which amounts to more than 2 million tonnes per year. Despite a 4% slump in the Danish market, Aalborg Portland managed to slightly increase its domestic sales. This is primarily due to the fact that Aalborg Portland acquired the activities of Mørch Cement with effect from January 2003.

In 2003, Aalborg Portland continued its programme for the use of waste as an energy source to replace petcoke, coal and oil which is purchased abroad. These efforts are helping to improve the company's competitive standing and may also be seen as a contribution to society and as a supplement to the Danish waste incineration industry. It remains beyond comprehension that Aalborg Portland must pay DKK 330 per tonne of waste that is recycled. Meanwhile, no tax is charged on imported waste, for example from Norway.

It is also worth noting that in October 2003, Aalborg Portland received a diploma from the Institute of State Authorized Public Accountants in Denmark and the Børsen business daily for the year's best environmental reporting - and at the beginning of April this year it received a similar award for the Best European Environmental Report at an official ceremony held in Brussels.

Unicon recorded satisfactory earnings before interest and tax (EBIT) of DKK 91m, up from DKK 40m in 2002. These results were achieved despite fiercer price competition and a declining market for building and construction in the Scandinavian region.

The turnover dropped some DKK 1 billion from DKK 2.3 billion in 2002 to DKK 1.3 billion in 2003 due to the disposal of operations in the USA. When comparing the same operational areas the decline in turnover amounted to merely DKK 60m. During the year under review, Unicon carried through a major rationalisation and efficiency improvement programme.

In 2003, Unicon strengthened its market leadership in Scandinavia by acquiring five facilities in Norway situated in Bergen and Ålesund, plus a facility at Verdal, north of Trondheim.

Towards the end of the year, the company sold a 250,000 sq. metre site to the City of Roskilde for the sum of DKK 58m.

In 2003, Dansk Eternit Holding posted a turnover of DKK 903m. This is DKK 110m lower than in 2002 and explained by the sale of non-core activities at the start of 2003.

In order to secure Dansk Eternit's future competitive standing, it was decided in October to move the production of corrugated sheets from the plant in Aalborg to Cembrit in the Czech Republic during this year. The decision to move is based on the fact that notwithstanding several rationalisation attempts and a strong and loyal effort by the company's employees it has proved impossible to maintain profitable operations in Denmark.

Earnings (EBIT) for the year were a DKK 83m loss. This figure includes provisions for redundancies and write-down of fixed assets due to the decision to move the Danish production to the Czech Republic.

Dansk Eternit Holding is now well placed to improve profitability, with all production mainly concentrated in Eastern Europe at the end of the year.

As part of the strategy to strengthen its position in the Scandinavian market, Dansk Eternit Holding in 2003 acquired the fibre cement distribution companies Tepro Byggmaterial in Sweden and Norsal in Norway.

The niche company Densit posted earnings of DKK 1 million based on a turnover of DKK 117m. The company produces cement-based special-purpose materials for selected industrial applications.

FLS miljø's turnover in 2003 amounted to DKK 404m as against nearly DKK 901m in 2002, reflecting the fact that the company is being phased out. The financial result was highly unsatisfactory with earnings before interest and tax (EBIT) amounting to DKK -933m compared to DKK -608m the year before.

In 1999, FLS miljø signed a supply contract for a very comprehensive desulphurisation project at the large West Burton power station in the UK. On signing the contract, a Group guarantee was issued which commits FLS Industries. The Japanese company Mitsubishi Heavy Industries Ltd. (MHI) is a consortium partner and supplier of the actual desulphurisation technology.

The terms of the contract were unusually demanding and the complexity of the project and the costs of implementing it were grossly underestimated. The insolvency of several key subsuppliers and a breakdown of a large pump added to the difficulties and the costs of the project. The plant is now finished and is being tested under normal operating conditions. The final handing-over will take place in September.

A similar, but smaller desulphurisation project was sold to the Eggborough power station in 2000. Here too, costs were underestimated, and FLS Industries issued a guarantee for the project. Erection of the plant has just been completed in accordance with schedule and operational testing has begun.

The plant is expected to be handed over to the client in September.

In the 2003 Annual Accounts provisions have been made for the estimated costs of completion and warranties for the two plants.

It is obvious today that the contracts for the two British desulphurisation projects were entered into on a highly inadequate basis and that the considerable risks related to the supply of such complicated installations were not sufficiently known in time. Combined with the provision of Group guarantees this has had grave financial consequences.

The project team responsible for completing the projects has contributed significantly to turning around the course of events and generating the progress that is now being seen.

After long and complicated negotiations with several prospective buyers, early February finally saw the announcement of an agreement with SR Technics, a Swiss aircraft maintenance company, on the sale of FLS Aerospace. The company is being sold free from debt at an approximate sum of DKK 350m. As part of the agreement, the buyer will take over the company's pension obligations, which amounted to DKK 611m at the end of 2002. The buyer shall also take over all obligations in connection with the current restructuring, which in the longer term are expected to amount to a substantial multi-million sum. As mentioned previously, the deal includes a number of issues to be settled before the actual transfer of shares can take place. One of the provisos was the approval by the EU, which has now been granted. There are no changes in the previously announced time schedule.

FLS Aerospace earnings before interest, tax and amortisation (EBITA) amounted to DKK 41m compared to DKK 54m in 2002. Earnings before interest and tax (EBIT) amounted to DKK -2,267m compared to DKK -202m in 2002.

The financial result negatively reflects the DKK 2bn write-down of fixed assets in the wake of the agreement. The result is also affected by a DKK 50m loss on the sale of activities in Copenhagen Airport which took place in March 2003. It should be noted that the DKK 2bn write-down will have no cash flow effect, but is merely a write-down of the shareholders' equity for accounting purposes.

The sale of FLS Aerospace marks the end of a Group activity which never succeeded in fulfilling the high expectations 15 years ago when it was decided to enter the industry. This is a venture that has cost us dearly both in financial terms and in terms of managerial resources - an expenditure that in hindsight could have been put to better use in developing other activities in the Group.

Strategy
With the disposal of non-core activities in place we have entered the next phase of the focusing process and the continued development of 'the new FLS'.

When the new Board took up office two years ago, it was obvious that the level of costs at FLS Industries was very high and its decision-making process was very heavy. There was a long distance from the Management of the holding company to the managements of the subsidiaries. This was not least due to the two-string structure of the organisation with external Board members in many of the subsidiaries.

Over the past couple of years, FLS Industries' costs have been reduced to nearly one third and the expenditure on external Board members' fees has been halved. This financial year will see a further reduction of costs.

It is therefore natural that the Board of Directors decided at the end of January to carry through an operational integration of the parent company, FLS Industries A/S, and F.L.Smidth A/S, and to introduce a streamlined forward-looking managerial structure with clear allocation of responsibilities and short and efficient lines of communication.

The goal is a legally binding merger of the two companies. Such a merger is a complicated process, and many issues need to be analysed and considered before taking the final decision. However, we have chosen to reap the obvious benefits by immediately integrating the two companies on an administrative basis.

Hence, the integration of FLS Industries' and F.L.Smidth's administrative functions related to Finance, Control, Human Resources, IT and Legal has been effected and the future structure of the staff functions is in place. As a result of the administrative integration of the two companies the Board of Directors of FLS Industries will also serve as Board of Directors for F.L.Smidth and Group CEO, Mr Jørgen Huno Rasmussen, has become CEO of F.L.Smidth.

With the intention of creating a streamlined managerial structure and maintaining short and efficient lines of decision-making at Board level also, the members of the Corporate Management have joined the Boards of the F.L.Smidth Group subsidiaries, replacing the former external members of these Boards.

The next phase of the strategy process is to further concentrate the Group's activities on development and production of machinery, equipment, systems and services including complete production lines and plants for the global cement and minerals industries. The goal is to achieve a return equivalent to five per cent of turnover. It is uncertain whether we shall see top line growth in the years to come, but one thing is definite: bottom-line growth is crucial.

We expect to see improvement in the core business earnings already in 2004 and additional improvement of the bottom line in each of the coming years.

As a consequence of the above-mentioned strategy and the owners' wish to find a different ownership structure for the Group, it has been decided to initiate the sale of Aalborg Portland and Unicon.

The selling process has already been started.

The Board has been confronted with the question why we have decided to sell two profitable and well-run undertakings to concentrate on a business area which in recent years has been unable to generate satisfactory earnings. I would like to take this opportunity to explain our position.

We are strongly convinced and it is our experience that maximum profitability - and hence optimum long-term value creation for the shareholders - is achieved if the company's activities:
- are focused on a sustainable market
- have a considerable market share
- involve market-leading products offering possibilities of cross-synergy
- are able to utilise opportunities for international purchasing
- are able to utilise aftermarket opportunities through a strong service organisation.

The Group's engineering activities meet these criteria. The F.L.Smidth Group is operating in a sustainable and growing world market, and the company clearly holds a leading position with a market share in excess of 50%. We offer competitive, energy-saving and environmentally compatible products with considerable opportunities for synergy. Being a global company, we are ideally placed to undertake flexible international purchasing, and there is an attractive aftermarket both in the cement and in the minerals sectors. Efficient utilisation of these opportunities will lay the foundation for a long-term profitable business and, hence, value creation for the shareholders.

This is not quite the case with the building materials production of Aalborg Portland and Unicon. Although they are currently the Group's most profitable activities, they are already optimised to such a level that FLS will hardly be able to add significant value to them over the next few years.

In addition, since little synergy is considered to exist between the two business areas, the owners will gain no long-term added value by retaining the two activities in the same Group. Aalborg Portland today does not play the same important role as it used to as a facility for testing and running in new machinery and equipment developed by the engineering organisation. Such pilot installations are today carried out in collaboration with a great number of the F.L.Smidth Group's other customers worldwide.

The sale of the two well-run and profitable building material undertakings will also release considerable values. As a consequence, the Group's bank debt will be reduced after the sale. The additional cash funds will be channelled back to the shareholders to the extent permitted by operations and developments.

Earnings from the cement machinery business have in recent years been affected by a number of individual projects in the turnkey sector. The risks entailed in turnkey projects are much greater, on the other hand the opportunities for better contribution margins also exist. Unfortunately, we were disappointed by a number of existing projects in 2003, which actually led to financial losses. These particular projects have overshadowed the many encouraging achievements of the F.L.Smidth Group which is basically a healthy and strong business.

FLS's current order portfolio, which is at an all-time high, contains very few turnkey projects and, as previously mentioned, is the strongest ever.

To sum it all up, the "new FLS" is one enterprise operating within a few, coherent and market-leading business areas that offer cross-synergies, and based on a simpler managerial structure with more clout and fewer organisational tiers, faster lines of decision-making, consistent control systems and greater transparency. In addition, there will be stronger focus on Customer Services.

All these initiatives should be viewed against the market trends. The world consumption of cement has grown continuously since 1984. This growth reflects both the increasing population and a constant rise in per capita consumption. All forecasts of future trends indicate continued growth in cement consumption at the rate of 3 to 4 per cent per year until 2020.

Whilst the underlying growth in cement consumption is stable, the market for investment in kiln capacity is highly cyclical and may vary considerably in the short term - from approximately 50 million tonnes per year in the mid nineties to 13 million tonnes per year (exclusive of China) in recent years. However, we consider the latter years' low level a temporary phenomenon, as the yearly growth has amounted to little more than 1% of the total global capacity of more than 1.2 million tonnes per year (some 1.7 million tonnes per year including China). This rate of expansion is not even sufficient to maintain the necessary capacity for the present level of consumption. The coming years are therefore expected to see growth up to the average level over the past decades of 23 to 24 million tonnes per year.

Overall, our definite aim is to achieve a profitability which is equivalent to 5% of turnover in the F.L.Smidth Group. There are signs of gratifying development in both the cement and minerals sectors. We are happy to see that the market seems to share this opinion.

We presented our plans for 'the new FLS' in connection with releasing the Annual Report for 2003. Despite the highly disappointing and very unsatisfactory financial result, the stock market reacted favourably, and the share price rose and has continued to improve since then, with many investors appearing keen to buy. We interpret this as an expression of confidence in the course we have set for the Group's future.

Prospects for 2004
2004 may in many ways be considered a year of transition. It is the year in which FLS miljø's two current projects are being finished and the company is finally phased out. It is the year in which the administrative integration of the parent company, FLS Industries, with F.L.Smidth and the steps taken to strengthen project management and project focus in F.L.Smidth will begin to have an effect. These measures will initially be reflected in the bottom line for 2004, and their impact will be very visible in 2005.

For this year we expect a consolidated turnover of more than DKK 12 billion and earnings before interest, tax and amortisation around DKK 400 to 500 million.

Earnings before interest and tax are expected to reach between DKK 300 and 400 million, and earnings before tax are forecast at DKK 250 to 350 million.

These prospects are based on the present activities of the Group and do not include any divestments of activities. The results and timing of the divestments may therefore have a significant impact on the prospects.

The operating performance has been satisfactory during the first few months of 2004 and in accordance with the plans agreed on.

As to the closing provisions, I refer to page 73 in the Annual Report.

As mentioned in the printed Annual Report on page 13, the Board of Directors proposes to the Company in General Meeting that no dividend be paid out for the 2003 financial year - due to the negative results.

Finally, I would like to thank the Board of Directors and the Management for their very constructive cooperation and the employees of the Group for their dedicated efforts under difficult and changeable conditions.

Everyone in the Group has contributed whole-heartedly to the Group being better placed than for a long time to meet the challenges of the future.


FLS Industries A/S
Corporate Public Relations