Summary of CEO Jan Kvarnström's speech

Summary of CEO Jan Kvarnström's speech at Esselte's 1999 Annual General Meeting in Stockholm Summary of strategy Dear shareholders and meeting participants, The strategy that we established in the fall of 1997 aimed to enhance the value of the company by streamlining the Group's business areas and transforming them into strong, independent units. This strategy was based on the following considerations: 1.E sselte consisted of three separate operations without any synergies between them. 2.T he growth and consolidation potential of each business area would be improved if they could operate as independent units with a greater freedom of choice. 3.T here would be greater possibilities to analyze the Group's situation, which would provide a better basis for evaluating operations in a more consistent manner. In 1998, we focused on implementing this established strategy. @ New legal structure established A new legal structure was a basic necessity for dividing up or spinning off Esselte's businesses, since operations were interlaced through a number of country-based holding companies. You could say that there was no Meto or Office Products - instead, there were a number of units in different countries that were interconnected by a management system. By creating separate units and arranging that the Meto Group would be directly owned by the Parent Company, Esselte AB, the conditions were created for demerging Meto. The expense of this restructuring process was limited to a fraction of our original cost estimate. @ Nielsen & Bainbridge divested In 1997, we came to the conclusion that there were no further possibilities to enhance the value of Nielsen & Bainbridge within Esselte's structure. We therefore decided to sell the business. It became a difficult and drawn-out process because of the turbulence in financial markets in the early autumn of 1998. The divestment was finalized at year-end, however. Nielsen & Bainbridge was sold for close to SEK 1.3 billion; the profit per share was SEK 10.50 and cash flow from the transaction totaled nearly SEK 1 billion. @ Meto positioned for spin-off The transition from division, to a group of companies separately listed on the stock exchange, is a big step to take. Our work to demerge Meto, and to transform the business into a separate company, has therefore involved a review of the company's strategy, its management and its organization. The decision to spin-off Meto is on the agenda for today's meeting and we will return to this subject later. @ An Office Products company was created out of regional organizations. This was, and is, a very comprehensive process. The objective of merging the Office Products unit into a single company was to take advantage of the substantial opportunities for coordinating production, distribution, purchasing and marketing activities, among others. This is being achieved through the new organizational platform that we created. An extensive change process of this scope is trying for Esselte Office Products' employees and it has also created a need to recruit new personnel. In 1998, we hired around ten new executives for positions within Office Products' operations. In 1998, we also made two acquisitions of strategic importance: Leitz, the number one office products company in Germany, was acquired for SEK 2.6 billion. The acquisition of Leitz strengthened our weak position in Germany (which is the third largest office supplies market in the world after the United States and Japan) and Esselte became the dominant company in the industry in Europe. We also purchased CoStar, a company in the United States that develops and sells products for office identification labeling. CoStar has solid know-how in systems based on information technology and develops its own software. The acquisition strengthens our development capacity considerably in the Dymo identification labeling program and has extended the product range. As part of our efforts to increase the efficiency of Office Products' operations by coordinating production, logistics and other areas - as I mentioned earlier - we allocated funds in 1997 to cover the cost of a major overhaul of the business. This program is being implemented on schedule and will have a full impact in the year 2000. Financial performance in 1998 Let me now comment of our financial performance in 1998. In 1998, income of the Esselte Group totaled close to SEK 1.2 billion before tax, compared with SEK 413 million last year. It is not quite accurate to compare the two years, however, because earnings in 1997 were charged with nonrecurring costs totaling SEK 227 million for the restructuring program, and earnings in 1998 were credited with the capital gain on the sale of Nielsen & Bainbridge. If we eliminate these items, operating income increased 8.9 percent, or SEK 67 million. Office Products' income was higher than in 1997, but did not reach our goal. One of the reasons was disappointing income in the Computer Products business. Office Products' sales grew by more than 3 percent, based on comparable exchange rates. Divested units had a negative impact on sales, reducing them 2.5 percent. Office Products' gross margin was maintained, however, and operating expenses as a percentage of sales were reduced as a result of the ongoing rationalization program. Meto improved its income sharply. Income was 28 percent above last year. Sales grew 6 percent and the company's key financial ratios, such as gross margin and return on capital employed, showed improvements over 1997. Nielsen & Bainbridge was included in the Group's financial statements for the full year 1998, since the business was sold on December 31, 1998. As you can see, Nielsen & Bainbridge's income was more or less the same as in 1997. Central expenses (Parent Company expenses) were reduced nearly 40 percent through personnel cutbacks at headquarters, which were part of our efforts to transfer head office functions to Esselte Office Products and Meto. First quarter of 1999 Let me now comment briefly on our financial results for the first quarter this year. (A press release with the first-quarter report can be found outside this auditorium). The Esselte Group is already reporting first-quarter results, excluding Meto. Thus, the Esselte Group is in many different respects a new company, compared with before, and not least in financial terms. Office Products' sales increased 24 percent in the first quarter. This strong increase in sales was an effect of the Leitz acquisition, of course. Without Leitz, we would have had to report a decline in sales, since demand has been weak throughout our markets around the world. Eastern Europe is a spectacular exception, however. Here, Esselte is achieving additional sales successes In my judgment, the soft market is also affecting our competitors and we are maintaining all of our market shares. Due to the decline in sales, income was lower than planned and totaled SEK 120 million, which was slightly less than last year's first-quarter income of SEK 134 million. Based on comparable units, income before tax was higher than in the corresponding period last year, due to net financial income. In its first-quarter report, Meto noted a strong first three months. As shown in the overhead, Meto reports its financial results in euros. (One euro is worth about SEK 9.00.) Although sales were unchanged, compared with the first quarter of 1998, Meto's operating margin remained high at 7.8 percent. However, when comparing this year's first-quarter results with last year, it should be kept in mind that the first quarter of 1998 was the strongest recorded by Meto in the 1990s, which makes the comparison difficult. In my opinion, the way Meto has started off the year strongly confirms our proposal for listing the company on the stock exchange. The future What does the future look like for Esselte? Provided that the proposed distribution of Meto is approved here today, Esselte will be a company focusing exclusively on office supplies in the future. The global office market is worth more than USD 300 billion (SEK 2,400 billion), of which the office supplies business - the area we operate in - accounts for about 10 percent. In this total market, Esselte has chosen to focus on five product categories, where our sales amount to SEK 12 billion, representing a global market share of approximately 12 percent. The market is undergoing dynamic development characterized by the following: @ Consolidation of customers, a process that has come the furthest in the United States. Small stationary supply stores are disappearing and large chains of megadealers, with supermarkets for office products, are emerging at an increasingly fast pace. In the United States, ten store chains accounted for 85 percent of our sales, and 40 percent of our business in Europe comes from some 20 customers. The efficiency of distribution operations is increasing as a result of stricter customer requirements for on-time deliveries. @ Products are becoming more international, especially as a consequence of computerization. It is true that standards for binders and other office products still vary between some countries, but new products - especially for computer use - are tending to become more and more similar throughout the world. @ Customers are becoming global and they are conducting operations on several continents to a growing extent. As a consequence, there is a trend towards coordinated purchasing and the number of distributors is declining. Esselte's vision is to be a world-leading provider of solutions that satisfy the needs of users for improved office productivity and organization, regardless of whether this office work is done in homes (there are 25 million home offices in the United States and they are growing at a rate of 20 percent annually) or at workplaces around the world. Our strategy is based on three fundamental elements: @ Increased efficiency throughout the global supply chain in purchasing, production and distribution, and a competitive cost base and excellent support systems with well-thought-out solutions based on information technology. @ Global presence to meet the needs of international customers. @ A focus on a limited number of strategic product categories where core brand positioning and active product development will result in high margins. Our new organization is crucial for implementing this strategy. Important aspects here are: @ Our global supply chain - our production, logistics and purchasing operations - is now coordinated in a single unit for the entire organization in order to benefit from efficiency gains and to utilize possibilities for benchmarking, for example. @ Coordination of business with major customers who are becoming increasingly dominant by appointing special key customer account managers and establishing wider geographic sales regions. @ Introduction of business units for our different product categories to monitor profitability and increase the efficiency of the product development process. Our financial targets are set very high but are still realistic in my opinion. It is true that our operating margin has been rather below our goal of 8 percent over the past few years, but when analyzing it, we should keep the following in mind: @ Divested units have reduced the margin in the short term; @ Our rationalization program will not have a full impact until a year from now; @ Synergistic benefits from the integration of Leitz will be fully realized in 2001 and are expected to amount to SEK 220 million per year. Let me also describe our future management structure. As Esselte is streamlined and transformed into a specialized office products company, it becomes natural to coordinate and rationalize the Group Management function by combining it with the present management for Esselte Office Products. This means that our CFO Mats Lönnqvist and I, as well as other Group functions, will move to Office Products' present offices in London. Esselte's new headquarters address will be London as of July 1 this year. The management for "the new Esselte" will be lean and operative, and consist of the Chief Executive Officer (CEO), the Chief Financial Officer (CFO) and the managers of operating units and their staffs. I would like to emphasize that, even if operations are managed from London (which is natural, in view of the fact that 98 percent of our business is outside Sweden), Esselte will remain a Swedish company with its legal domicile in Sweden, and with a listing on the Stockholm Stock Exchange. In summary, I can state that the strategy for the restructuring of Esselte will be completed after Meto is spun off. Now our task is to develop the new Esselte as a company focused on the office products business. After the acquisition of Leitz and CoStar, we are now in an excellent position to do this. We must now complete the ongoing integration of these units quickly in order to ensure the realization of all synergistic benefits. From this base, Esselte can continue to play a leading role in the growing consolidation of our industry. I am expecting the next step of this process to take place in the United States, since we have now established a stable platform in Europe. Thank you for your attention. ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/1999/04/21/19990421BIT00590/bit0001.doc http://www.bit.se/bitonline/1999/04/21/19990421BIT00590/bit0002.pdf