Annual Report 2006 of the LEGO Group

Lego News - 21th February, 2007

2006 results contribute to securing the future of the LEGO Group

The business strategy followed by the LEGO Group in recent years is the most significant reason for the company’s highly satisfactory 2006 results. This became clear at a press conference today, at which the LEGO Group presented its Annual Report.

Profit for the year before tax amounted to DKK 1,562 million against DKK 456 million in 2005. (In 2005, profit for the year before tax including discontinuing activities was DKK 702 million.)
Net profit for the year amounted to DKK 1,430 million against DKK 505 million in 2005, which gives a return on equity of 34.4%.
The Group’s equity increased from DKK 3,589 million at the end of 2005 to DKK 4,727 million at the end of 2006.
Revenue amounted to DKK 7,823 million against DKK 7,050 million in 2005, an increase of 11%.
Profit before special items, financial income and expenses and tax amounted to DKK 1,348 million against DKK 468 million in 2005. This corresponds to an operating margin (ROS) of 19.5% against 6.5% in 2005.
The Group’s total cash flows were DKK 45m in 2006. The total cash flows in 2005 were DKK 2,549m primarily due to the cash flow related to the sale of the LEGOLAND parks.

The increase in revenue is evenly distributed on the Group’s markets, including the market for direct sales to consumers. Particularly sales of the re-launched, classic product lines such as LEGO City, LEGO DUPLO, and LEGO Technic as well as the re-launched LEGO MINDSTORMS have developed more positively than expected. Moreover, inventories held by retailers at the beginning of 2006 were extraordinarily low. At the beginning of the year, these were increased to a healthier level. Finally, sales of LEGO Star Wars™ products were stronger than expected in a year without any related film releases. The increased demand meant that the company was not entirely able to meet the demand from retailers during the year.

Following the financial reconstruction of the company in 2004 and 2005, the years 2006, 2007 and 2008 will focus on building a profitable core platform. The results for 2006 are to be seen as an important step in the implementation of the second phase of the strategy and therefore contribute to securing the company’s future.

New company structure in the LEGO Group

The simplification of the company structure which the LEGO Group has been working on in recent years is expected completed during the spring of 2007. The simplification means that, in future, all LEGO related activities on the toy market will be united in the LEGO A/S Group, and therefore the name ‘LEGO Group’ will in future refer to this entity.

LEGO Holding A/S is still the largest shareholder of LEGO A/S.

As LEGO A/S is now the operating company, the previous Board of Directors of LEGO Holding A/S will in future constitute the Board of Directors of LEGO A/S (board members are listed in the Annual Report).

The future Board of Directors of LEGO Holding A/S will consist of Mr. Kjeld Kirk Kristiansen (Chairman), Mr. Thomas Kirk Kristiansen, Mr. Mads Øvlisen and Mr. Peter Gæmelke.

Expectations for 2007

LEGO CEO Jørgen Vig Knudstorp

On the whole, the global toy market is expected to remain unchanged, and therefore the LEGO Group’s largest markets, the USA and Germany, are expected still to be under pressure in 2007. On this basis, the LEGO Group expects slightly lower revenue in 2007 than in 2006.

The most significant challenge for the company in 2007 will be the continued changes in the business model, which particularly comprises the outsourcing of most of the production. The implementation of the outsourcing is not an easy task, and it is decisive that neither product quality nor delivery service is affected negatively.

2007 will see increased expenses in connection with both the outsourcing and investments in IT and innovation. Moreover, the results for 2007 are not expected to be positively affected by one-off income. Therefore, the profit before tax in LEGO A/S is expected to be in the region of DKK 550 million, while the profit before tax of LEGO Holding is expected to be in the region of DKK 750 million.

Comments

"I consider the results highly satisfactory”, says Mr Jørgen Vig Knudstorp, CEO. ”It clearly shows that there is plenty of life and relevance in the LEGO products and that our strategy of focusing on the core of our brand is the right approach. We are however very much aware that, despite the good results, we do not meet all our objectives in relation to being a sustainable business. Despite the announcement in 2006 of the outsourcing of most of the production, the employees delivered a great and impressive effort, even though the pressure on the employees has without doubt been very heavy. Furthermore, due to the unexpectedly great demand, we have not been able to meet the retailers’ needs in a completely satisfactory way. In the coming years, we will increase our focus on meeting our objectives in relation to all our stakeholders. This is also the reason why we expect considerably lower results in 2007. However, our long-term goal is still an operating margin (ROS) of 13.5%”, says Mr Knudstorp.