Annual Report 2004: A step in the right direction

April 6 2005

Substantial improvement in result before special items and financial income and expenses, increased market share, and marked improvement in cash flows despite decline in turnover.

The main points of the LEGO Group's Annual Report for 2004 are discussed below.

Structure of the Group
Ownership of the Group changed during the year between its subsidiary companies. LEGO Holding A/S is now the parent of both the Danish and the Swiss parts of the Group.
In 2004 it was also decided to dispose of activities which are not regarded as part of the LEGO Group's core business. These were the LEGOLAND parks and a significant equity holding in KOMPAN A/S. These activities are regarded as discontinuing, and their results are not included in the following.

The Group's toy sales fell by 7% in 2004 from DKK 7,196m to DKK 6,704m. Just under half of this decline was attributable to exchange-rate movements, in particular the weaker US-dollar. The rest of the decline stemmed from the retail trade reducing its inventories; retail sales of LEGO products were largely unchanged. As the toy market overall diminished in 2004, the fact that sales of LEGO products to the consumer were unchanged means that the LEGO Group managed to increase its share of the market slightly.

The Group's result before special items, financial income and expenses, and tax improved substantially in 2004. The result for the year was DKK 103m compared with DKK -1,061m in 2003. The primary reason is that by reducing many of its activities and generally improving its efficiency the Group succeeded in cutting its costs by DKK 1,523m (20%) below 2003 levels. In addition, there were net gains of DKK 133m from the sale of assets.

The pre tax result was DKK -1,237m compared with DKK -1,498m in 2003.
This result should be seen in the light of restructuring costs of DKK 502m and asset impairments of DKK 723m.
The non recurring impairments of assets were made because the Group expects to utilize the assets less in the future. This is due partly to a 30% drop in Group sales since 2002 and partly to productivity improvements achieved in recent years.

Balance sheet
In 2004 the LEGO Group reduced its total assets from DKK 10,049m at the beginning of the year to a current level of DKK 8,089m. The decline is due mainly to a reduction in the LEGO Group's fixed assets (impairments of DKK 1,251m) combined with the disposal of fixed assets and a generally lower level of investment.

Cash flows
Despite the year's negative result, the Group's cash flows improved by DKK 753m in 2004, from DKK -215m to DKK 538m. The improvement came mostly from reducing working capital (for example, inventories and receivables), fewer investments and sale off assets.

Discontinuing activities
In order to be able to concentrate on its core business, the LEGO Group has decided – wholly or partly – to find a new owner for the LEGOLAND Parks. Activities relating to LEGOLAND Parks are therefore regarded as discontinuing. The result after tax on the parks is DKK -508m, comprising a positive result of DKK 20m and an impairment of DKK 528m in asset values.
The activities of KOMPAN A/S, which are also regarded as discontinuing, resulted in a net result of DKK 50m, mainly from divestment of shares.
As mentioned above, the results of discontinuing activities are not included in the pre tax result of DKK -1,237m.

The market
The toy industry had difficult market conditions to contend with in 2004. A tighter consumer economy combined with a growing interest in consumer electronics such as MP3 players and mobile telephones meant that most countries were experiencing a stagnating or falling market. Globally, sales of traditional toys fell 2% during the year.
The market is also affected by increased competition at the retail level. Medium size toy retail chains are finding it more difficult to compete with very large chains. At the same time major supermarket chains are accounting for a rising proportion of toy sales, often on discount terms. As a result, there has been sustained pressure on prices and a further diminishing of profit margins.

The Group's Action Plan launched in 2004 will also have a significant effect on 2005. In general terms, the plan will produce a leaner but financially stronger and more focused and fast Group, ready to deal with a low growth industry and product sector.
In the future, the Group's main thrust will be in the field of classic construction toys, which represent its core business.
The LEGO Group's target for 2005 is to maintain an unchanged level of turnover in DKK terms and to be able to report a profit before special items and tax in the region of DKK 200m.

CEO Jurgen Vig Knudstorp says of the result:
"It is a positive development that we managed to improve our result before special, non recurring items by more than DKK 1 billion – and in global terms halted what had been a decline in our market. In 2004 we could tell the world: we're back in the game! During the year we cut our costs by more than DKK 1.5bn, and we made substantial asset reductions. At the same time we increased our competitiveness by working closer with our customers and focusing more sharply on our core products. In view of prevailing market conditions, our fiscal result and stronger competitive position are a good step in the right direction. At the same time, we have laid the foundations for 2005 and for our aim of restoring a satisfactory level of profitability for the company in 2006."

About the new year, the CEO says:
"As we move into 2005, we are well placed to improve our share of the global market. We have helped retailers raise their profit on LEGO products through better service, higher margins, lower inventories, and more competitive pricing. At the same time, we are introducing a range which is very definitely based on the core of the LEGO idea, and we are recording healthy sales of this revitalised core range – for example, our DUPLO products. We are thus well placed to achieve our 2005 objective of a profit in the region of DKK 200m before special items and tax."

For further information, please contact:
Charlotte Simonsen
Head of Corporate Communications
LEGO Group
Phone: +45 70 50 65 79

The LEGO Group is a privately held, family-owned company, based in Billund, Denmark. It was founded in 1932 and today the group is one of the world's leading manufacturers of play materials for children, employing approximately 4,500 people globally. The LEGO Group is committed to the development of children's creative and imaginative abilities. LEGO products can be purchased in more than 130 countries.

LEGO and the LEGO logo are trademarks of The LEGO Group. ©2007 The LEGO Group.