2012 was the fifth year to be characterized by the effects of the financial crisis that began at the start of 2008 and culminated with the Lehman Brothers crash. Like most financial crises, this one was triggered by a real estate bubble, with severe consequences for the financial system in general and the banking industry in particular. The problems began in the U.S., where after a half decade the country has now left the crisis behind and is moving towards growth, as moderate as that may be.
The past year was characterized by problems in Europe, which at their core are rooted in real estate crises in a number of European countries and have exposed numerous difficulties. When the lending banks encountered problems, governments that were already highly in debt were forced to step in to rescue the privately owned financial system with public funds. So what essentially has transpired is a solvency crisis. Even though major challenges remain, there are now signs that the euro crisis is also on a path to stabilization. In China as well as the rest of Asia, accelerating growth is forecast. Such is also the case in South America, led by Brazil, which had weak performance in 2012. There is therefore reason for some optimism.
For a long-term oriented and active owner as Industrivärden, the most central factors are to ensure that the companies we invest in have the right management, a clear direction, and organicly develop their core business. It is also important that we, in our capacity as a holding company, adjust our portfolio composition over time. Here I would like to give some examples on a number of concrete activities of various kinds that were carried out in 2012.
Handelsbanken has continued to perform very well in terms of profitability, growth and stability as well as customer satisfaction. The bank’s success and its unique organizational model for its banking business are the focus of growing attention, including in the international press. Its profitability is once again, for the 41st year in a row, better than the average return for its competitors. During the year, Handelsbanken continued to perform well in markets outside Sweden. In the UK, where it is growing organically, Handelsbanken opened its 133th branch in 2012.
Despite the weak economic development during the second half of 2012, Sandvik managed to post strong full-year earnings, with improved margins and higher profitability. This is tangible proof that the necessary work begun by the company’s new management on changing Sandvik into a more modern and global enterprise is beginning to generate results. Sandvik is now taking extensive measures to strengthen profitability through sharper focus and higher efficiency. With a starting point in major know-how in value-based sales that are centered around customers’ processes and efficiency improvement needs, Sandvik is well equipped to develop into an even stronger company.
In connection with Renault’s sale of all 139 million of its Class A shares in Volvo, of which 110 million were converted to B-shares, we bought another 10 million A-shares for SEK 0.9 billion. With 19% of the votes, Industrivärden is thereby the largest shareholder of the world’s leading provider of commercial transport solutions. Together with the Handelsbanken Pension Foundation and Handelsbanken Pension Fund, we now control 21% of the votes. We have a strong belief in Volvo’s development potential, and the efficiency and profitability enhancement work that has been initiated by Volvo’s management bodes well for the future. In January 2013, Volvo entered into a strategic alliance with the Chinese vehicle manufacturer Dongfeng, making Volvo the world’s largest manufacturer of heavy-duty trucks and strengthening its position and growth opportunities in Asia.
Through the acquisition of Georgia-Pacific’s European tissue operation, the previous acquisition of Procter & Gamble’s European tissue operation, the sale of the European packaging operation and the divestment of the paper mill in Laakirchen and of its part ownership in Aylesford Newsprint, SCA has carried out a strategic transformation towards more stable and highly refined products with higher profitability. SCA is now the clear market leader in Europe in tissue and hygiene products. Moreover, the acquisitions are enabling further efficiency improvement measures and are giving rise to both revenue and cost synergies. The foundation has now been laid for SCA to take advantage of its strong and profitable position in Europe to move forward with ventures in emerging markets in Asia and South America. SCA’s focus on products with stable demand and higher profitability has been well-received by the stock market. In 2012 SCA’s stock rose 40%, compared with 12% for the Stockholm Stock Exchange. It can also be noted that SCA, for the first time in a long time, is now valued above its visible equity.
Ericsson, which is a leading provider of communications networks and related services to telecom operators, further strengthened its positions in 2012. The company has long been a major player in the important U.S. market and stands up very well against its Chinese competitors in the world market. In recent years, Ericsson has focused on capturing market shares in Europe, where operators are upgrading and expanding their networks. This has resulted in lower gross margins but creates good future potential. Through selected acquisitions and divestments, in recent years Ericsson has further geared its business towards its core areas – networks and related services.
Skanska is one of the world’s leading construction companies, with strong positions in Europe and the U.S. By combining efficient construction operations with a successful model for value-creating project development, Skanska has generated substantial shareholder value over time. The company is working actively to capitalize on its size and global presence by developing operational synergies in areas such as knowledge, purchasing and development. In 2012 Skanska started its first infrastructure project in the U.S. and sold its first commercial real estate project in the country. We have a strong belief in Skanska’s future opportunities, and in 2012 we bought additional shares in the company for slightly more than SEK 700 M.
In 2012 SSAB, whose Nordic operations produce mainly sheet steel, was hit hard by the recession in large parts of Europe. Parallel with this, the company concluded the strategic investment program that was started in 2008 through the acquisition of the North American steel maker IPSCO. This acquisition has been a very good deal for SSAB, where the North American operations have carried SSAB through the crisis that plagued the European steel industry in recent years. Through the investments that have now been completed, SSAB has consolidated its market-leading positions in high-strength and quenched steels – now also with substantial manufacturing capacity for specialty products in North America. A higher need for lightweight and energy-efficient steel with special material properties creates good future opportunities for SSAB.
The equities portfolio had good growth in value in 2012, and a large share of the drop in value that occurred in the wake of the financial crisis has now been recovered. Net asset value, including reinvested dividends, rose 29% to SEK 129 per share. Industrivärden’s Class A and C shares posted total returns of 33% and 37%, respectively, compared with 16% for the Stockholm Stock Exchange return index. For the longer 5-, 10-, 15- and 20-year periods, Industrivärden’s stock has generated a higher total return than the Stockholm Stock Exchange – a comparison that is even stronger next to the European or world indexes. It is also gratifying to note that our short-term trading had a good year, despite a difficult derivatives market with relatively low turnover. Profit totaled SEK 118 M, and the operation has now earned approximately SEK 1.1 billion since its start in 2003.
The Board’s proposal for a dividend of SEK 5.00 per share represents an increase of 50 öre, or 11%, compared with last year. This also means that we continue to fulfill our goal of paying a favorable dividend yield that is higher than the average for the Stockholm Stock Exchange.
Our portfolio companies have leading positions in their business areas, global coverage and a growing presence in emerging markets. With a well developed business model and strong financial base, we have favorable prospects for creating competitive shareholder value.