The results for 2005 better than expected at the beginning of the year
Lego Group on the Right Track
February 15 2006
The LEGO Group’s results before tax have improved considerably from a loss of DKK 1,688 million in 2004 to a profit of DKK 702 million in 2005. Also the Group’s financial resources (cash at bank and in hand less short-term debt) have improved considerably from a negative DKK 82 million to a positive DKK 2,604 million at 31 December 2005.
These are some of the highlights in the Annual Report of the LEGO Group presented by the Board of Directors and Corporate Management at a press conference in Billund on Wednesday.
The Board of Directors considers the results for the year satisfactory in view of the extensive changes that have affected the Group during the year as well as the generally very difficult market. The Group’s financial base has improved considerably although earnings from the continuing activities have not yet reached a satisfactory level.
Consequently, the Action Plan initiated at the beginning of 2004 provided the expected financial results. The LEGO Group is still facing considerable strategic challenges, but the financial crisis has been overcome.
The traditional toy market is still extremely difficult and is characterised by lack of growth and keen competition at the retail level. The increasing competition results in increased pressure on prices and margins. Moreover, children are getting more and more interested in electronic products – in the form of game consoles and pc games, as well as consumer electronics such as mobile phones and mp3 players.
Revenue amounts to DKK 7,050 million in 2005, an increase of 12 per cent, of which 3 per cent relates to positive exchange rate effects, particularly in respect of the US dollar. The increase in revenue is attributable to global sales increases. Despite the general recession for traditional toys, the LEGO Group has captured market shares on most markets.
The increasing sales are attributable, among other things, to an even closer dialogue with retailers, which enables the Group to meet the wishes and needs of the customers.
The BIONICLE line was also in 2005 the LEGO Group’s biggest-selling product line.
Furthermore, the increased focus on the Group’s core products has had a positive effect on 2005. The list of the biggest-selling products in 2005 includes classic products such as LEGO City, LEGO Vikings and LEGO Technic, and also the ‘pre-school’ products in the DUPLO line have seen considerable growth.
Two of the Group’s licence based lines were also among the biggest-selling products, namely the Ferrari models in the LEGO Racers series and not least the LEGO Star Wars products.
The LEGO Group’s results before special items, financial income and expenses and tax improved by DKK 405 million in 2005, from DKK 63 million in 2004 to DKK 468 million in 2005. The improved results are attributable partly to a 12 per cent increase in sales, partly to the cost level remaining unchanged compared with 2004. Total operating expenses were reduced by DKK 314 million, or 8 per cent, which is however set off by increasing expenses for royalties and bonus to the employees.
Results after tax, including discontinuing activities, improved considerably, from a loss of DKK 1,931 million in 2004 to a profit of DKK 505 million in 2005. The improvement of DKK 2,436 million should be seen in the light of the large impairments of fixed assets and the restructuring expenses incurred by the LEGO Group in 2004.
In 2005, the LEGO Group’s total assets were reduced by 5 per cent, from DKK 8,089 million in 2004 to DKK 7,689 million in 2005.
The composition of the balance sheet has improved towards more liquid assets after the sale of the ownership shares in the LEGOLAND Parks and KOMPAN A/S as well as other assets, such as land, sales and production facilities and company aircraft.
At the end of 2005, equity amounted to DKK 3,589 million, including minority interests. This corresponds to an equity ratio of 47 per cent. The return on equity (ROE) is 18.1 per cent.
The LEGO Group’s cash flows from operating activities amounted to DKK 1,057 million in 2005 against DKK 774 million in 2004. The positive cash flows in 2005 are primarily attributable to the profit for the year. Moreover, the working capital has been reduced through continued focus on a reduction.
Total free cash flows, including discontinuing activities, amounted to DKK 2,549 million in 2005 compared with DKK 538 million in 2004.
Based on the profit for the year and the cash flows from the sale of the LEGOLAND Parks, the Group’s financial resources have improved considerably at the end of 2005 compared with the previous year.
In order to ensure increased focus on the core business, in the autumn of 2004
the LEGO Group decided to sell off the LEGOLAND Parks. The sale was carried through
in July 2005 and was finally approved by the competition authorities on 24 August
The buyer was Blackstone Capital Partners, and the selling price amounted to EUR 375 million. In connection with the sale, a new, jointly owned company was established, Merlin Entertainments Group Luxemburg S.a.r.l., which now runs both the four LEGOLAND Parks and Merlin’s previous attractions, Sea Life, Dungeons and Earth Explorer.
The new company is owned 70 per cent by Blackstone Capital Partners and 30 per cent by the LEGO Group and KIRKBI.
The Group’s remaining shareholding in KOMPAN A/S was also sold at a profit in 2005.
The profit after tax of the discontinuing activities amounted to DKK 174 million, compared with a loss of DKK 458 million in 2004.
Expectations for 2006
2006 will be another difficult year for the LEGO Group. The size of the global toy market is still expected to decrease, and the suppliers of traditional toys will therefore still be facing strategic challenges.
With focus on the reestablishment of a strong core business with classic construction toys, the LEGO Group expects to maintain its market position in 2006 as a smaller, but financially stronger and more competitive Group.
No films supporting existing or new products will be launched in 2006, and Group revenues are expected to decrease slightly compared with 2005. The focus on earnings will continue, both through product and customer profitability and through streamlining, which will involve transferring production - in whole or in part - to low-pay countries.
On this basis, a profit before tax in the region of DKK 500 million is expected in 2006 compared with DKK 456 million in 2005, which reflects the need for a further increase in earnings in the coming years.
"I consider the results satisfactory in view of the very difficult market in which we are operating", says Mr. Jørgen Vig Knudstorp, President and CEO. "At the same time, it is very satisfactory that we have now created the necessary financial base for returning the LEGO Group to a value creating enterprise. This is an impressive achievement, which is attributable to the great efforts made by our employees."
As regards the future, Mr. Knudstorp says:
"In the coming years, we will first of all concentrate on improving the Group’s profitability. This will be done through streamlining and cost savings. Not until satisfactory profitability has been ensured will we turn towards sales growth."
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For further information, please contact:
Head of Corporate Communications
The LEGO Group
Phone: +45 79 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.