since it was founded in 1963 in the town of Bredebro in southwestern Denmark,

Transcription

1 since it was founded in 1963 in the town of Bredebro in southwestern Denmark, ECCO has been owned and managed by the Toosbuy family. Today, Hanni Toosbuy Kasprzak the daughter of Birte and Karl Toosbuy is the sole owner of the Company and Chairperson of the Supervisory Board. Her husband, Dieter Kasprzak, is Chief Executive Officer (CEO), and Mikael Thinghuus is Chief Operating Officer (COO). ECCO Annual Report

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3 Dieter Kasprzak people create results Mikael Thinghuus At ECCO we are passionate shoemakers. We constantly aim to defy conventions. We strive to surprise, and we want to develop innovative designs and products without having to compromise on the quality and comfort concept that is the heart of every ECCO product and indeed of our Company. In a highly competitive market, we generate results through the proactive and conscious choices we make. Whereas many competitors are phasing out and subcontracting their production to third parties, it is essential to ECCO that our business is based on manufacturing our products in-house. ECCO develops shoes for people who lead active lives and require unique comfort, fit and functionality. This philosophy has characterised ECCO right from the beginning more than 40 years ago, and it epitomises the qualities necessary to meet the targets for the future. ECCO masters the production technology better than anyone, and the integrated partnership between design, product development, brand development, tanneries, production and distribution is one of the keys to understand ECCO s business philosophy and results. We do not aim to be the biggest we just want to be the best. We aim to generate profitable growth and maintain the greatest possible degree of financial independence and the financial strength to pursue our long-term targets on our own terms. Another factor is ECCO s decentralised organisational structure: Decisions should be made where things happen, and the changes to our organisation with increased decision-making powers in our production and sales units have proven to be right already from year one was an important step in the right direction. ECCO generated new growth and increased earnings, not least as a result of the far-sighted plans and investments we have made in recent years. ECCO is represented in all segments of the footwear market Ladies, Men s and Kids shoes as well as in those sports shoe categories where we can play a leading role. Today, these categories include Golf, Outdoor, Walking and Running. We generated growth in each of these market segments in 2004, and selling more than 12 million pairs of shoes we increased our total sales volume by some 7%. This was the highest volume growth rate in five years, and it translated into substantially improved results and earning capacity as our profit before tax rose by more than 70%. ECCO s results are created by people who believe and are confident that they will shape the future by doing things differently. This approach was an important part of Karl Toosbuy s business philosophy and outlook on life, and it has characterised ECCO since our Company s inception. To build on the best of our past will help secure our future. Dieter Kasprzak Mikael Thinghuus Chief Executive Officer Chief Operating Officer ECCO Annual Report

4 highlights of 2004 Number of pairs (thousands) Result The ECCO Group s performance in 2004 was in the circumstances satisfactory. Profit before tax increased by DKK 86.2 million or 71.7% to DKK million from DKK million in This good performance increased the return on assets to 7.0% from 4.3% in A major reason for the higher profit was a 7.3% increase in sales to 12,045,000 pairs of shoes, a record-high number, and the highest growth rate for the past five years. To this should be added sales by ECCO s licensee in Japan totalling more than 1 million pairs of shoes. Growth was recorded in all product groups: Ladies, Men s, Kids, Golf and Sports shoes. Pairs of shoes sold (thousands) 14,000 12,000 10,000 8,000 6,000 4,000 2, which contribute to a growing, albeit still moderate part of total revenues. Moreover, sales revenue reductions and discounts on sales of obsolete products showed a significant decline. On the other hand, net revenues from leather and rawhides were down 11% to DKK million. Net revenues were negatively impacted by exchange rates,especially the USD/DKK exchange rate. Net revenues would have increased by 9.8% had exchange rates remained at the year-end 2003 level. Profit before financials increased by 47% to DKK million, and the operating margin increased from 5.7% to 7.9%. The improvement in earnings was the result of higher revenues and an improved gross margin achieved through lower manufacturing costs and the efficiency improvements and cost-saving initiatives implemented in the Group. ECCO s visibility and branding are important focusareas, and marketing costs consequently rose by 22% in Net financial expenses amounted to DKK 60.6 million, compared to DKK 61.4 million in In 2004, net financial expenses included a positive exchange rate adjustment of DKK 4.4 million, mainly relating to debt denominated in foreign currencies. The corresponding exchange rate adjustment in 2003 was DKK 5.0 million. The interest related items thus reflect a minor improvement as a result of the Group s positive cash flow performance. DKK million Consolidated net revenues increased by DKK 225 million or 7.1% to DKK 3,394 million up from DKK 3,169 million in Net revenues comprise both sales of shoes and accessories, and of leather and rawhides. 3,500 3,400 3,300 3,200 3,100 3,000 2,900 2,800 2,700 2,600 2,500 Net revenue/return on assets Net revenue (DKK million) Return on assets Net revenues from shoes and accessories increased by 9%, partly driven by the general growth in pairs of shoes sold and partly by strong growth in sales of accessories, 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Profit for the year after tax and minority interests was DKK million compared to DKK 61.8 million in This profit should be seen in light of the fact that ECCO continues to invest in the development of new markets in Asia and Eastern Europe and in an expansion of the network of dedicated ECCO shops. Balance sheet The consolidated balance sheet totalled DKK 2,945 million as of 31 December 2004, representing an increase of 5.6%.The increase was partly attributable to a DKK 68 million increase in cash, and partly to a DKK 101 million increase in receivables. Inventories were further reduced in 2004 by DKK 42 million. In recent years, ECCO has focused on reducing working capital. From year-end 2001 to year-end 2004, the value of ECCO s inventories was reduced from DKK 1,345 million to DKK 890 million, and trade receivables were 4

5 reduced from DKK 459 million to DKK 417 million, whilst net revenues increased by 5.5% during the same period. Fixed assets totalled DKK 1,113 million, of which property, plant and equipment constituted DKK 948 million. Net investments totalled DKK 213 million compared to DKK 229 million in The production units accounted for DKK 98 million of this, mainly in the form of an increase in production capacity and an upgrading of existing plant and equipment. On the sales side, investments primarily relate to ECCO-owned and partner-owned shops, and in the acquisition of an administration building and distribution centre in the United States. The net cash outflow for investing activities was DKK 213 million compared to DKK 229 million in The cash outflow for investments in intangible assets totalled DKK 12 million compared to DKK 15 million in 2003, while the cash outflow for investments in property, plant and equipment was DKK 200 million in 2004 compared to DKK 213 million in Long-term debt increased by DKK 58 million, whilst shortterm debt was reduced by DKK 44 million. Dividend paid during the financial year amounted to DKK 23 million. The solvency ratio rose from 34.1% to 35.1%, which is in line with ECCO s overall goal of achieving the greatest possible financial independence. Equity stood at DKK 1,034 million compared to DKK 951 million at year-end The proposed dividend in respect of the financial year is DKK 30 million. Cash flow statement The cash flow statement for 2004 showed a cash inflow from operating activities of DKK 273 million compared to DKK 336 million in 2003, where a substantial reduction of receivables and inventories was achieved. ECCO did not plan any major inventory reductions in 2004, and the cash flow from operating activities is consequently considered satisfactory. Cash flow from operating activities (DKK 000) 700, , , ,000 DKK , , , , ECCO Annual Report

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7 consolidated financial highlights and key ratios FINANCIAL HIGHLIGHTS DKK 000 Net revenue 3,393,693 3,168,930 3,359,838 3,216,314 2,835,885 Profit before amortisation and depreciation 447, , , , ,688 Amortisation and depreciation (180,937) (188,657) (187,215) (166,592) (143,475) Profit before financials 267, , , , ,213 Net financials (60,594) (61,394) (73,465) (93,134) (111,700) Profit before tax 206, ,244 82, , ,513 Group profit 163,558 70,980 60, , ,615 Profit for the year 150,661 61,788 51, , ,205 Fixed assets 1,112,597 1,073,447 1,024, , ,484 Current assets 1,832,582 1,714,309 1,884,018 2,115,547 1,947,449 Assets 2,945,179 2,787,756 2,908,200 3,079,504 2,861,933 Equity 1,034, , , , ,456 Other liabilities 56,877 31,257 37,413 12,285 9,674 Debt 1,854,276 1,805,483 1,912,627 2,100,789 1,962,803 Liabilities 2,945,179 2,787,756 2,908,200 3,079,504 2,861,933 Cash-flow from operating activities 272, , ,382 (38,122) 110,820 Cash-flow from investing activities (212,811) (228,551) (230,346) (256,698) (322,711) Cash-flow from financing activities (392) (73,808) (263,633) 206, ,136 Pairs of shoes sold (thousands) 12,045 11,225 10,564 10,145 9,603 Number of employees (as at 31 December) 9,657 9,388 8,839 9,087 8,853 KEY RATIOS Operating margin 7.9% 5.7% 4.6% 7.8% 14.7% Return on assets 7.0% 4.3% 2.8% 5.0% 10.6% ROIC 9.1% 6.5% 5.3% 8.1% 14.5% Investment ratio Return on equity 15.2% 6.5% 5.3% 12.4% 25.7% Solvency ratio 35.1% 34.1% 33.0% 31.4% 31.1% Liquidity ratio DEFINITIONS OF KEY RATIOS Operating margin: Profit before financials x 100 Investment ratio: Investments for the year Liquidity ratio: Current assets Net revenue Amortisation and depreciation Short-term debt Return on assets: Profit before tax x 100 Return on equity: Profit for the year x 100 Assets Average equity ROIC: Profit before financials x 100 Solvency ratio: Equity x 100 Assets Assets ECCO Annual Report

8 sales and market conditions growth in all ECCO markets Global growth of 7% In 2004 ECCO achieved progress in all their markets, ECCO has chosen to operate in. Despite intensified competition in nearly all markets, ECCO s continued focus on strong branding and concept sales was instrumental in generating the growth. Measured by the number of shoes sold, global growth was 7% in 2004 with Asia, North America and Eastern Europe recording the strongest growth rates. Asia ECCO has a very large potential in Asia. The effort in the region generated a substantial sales improvement of 21% corresponding to an increase of 650,000 pairs of shoes due not least to significant growth in China and Hong Kong. ECCO expects to continue this favourable trend in the region in the years ahead. In the long term, Asia has the potential to become ECCO s most important market. This is the reason ECCO currently makes and will continue to make significant investments in the region. North America ECCO continues to gain market share in North America. Measured by the number of shoes sold, sales in the USA and Canada increased by 12% to 2.7 million pairs of shoes. ECCO s golf division made excellent progress in the USA and is now established as the most prestigious brand in the golf shoe market. Our expectations for continued growth are based on ECCO s strong position, including in particular ECCO s model for partnership shops which was very successfully implemented in Eastern Europe Due not least to strong growth in Russia, sales in the Eastern European region increased by 15% overall corresponding to 1.4 million pairs of shoes. An important element in this favourable trend is the extremely strong position enjoyed by the ECCO brand in Russia and Ukraine in particular. ECCO has almost 100 shops in Russia alone, and the potential remains great throughout the region. 8

9 Western Europe ECCO s Western European region consists of the Benelux countries, the UK and southern Europe. The region generated overall growth of 1% in terms of pairs of shoes sold. ECCO strengthened the UK sales organisation and introduced a new retail concept. Growth in the Italian market was highly satisfactory, primarily because ECCO established its own company. ECCO also performed excellently in the Netherlands, in particular within Kids shoes, and expect to sustain this level of performance in the years ahead. Central Europe ECCO s Central European region consists of the German-speaking countries and Scandinavia. Accessories ECCO s accessories sales, which make up 1% of Group revenue, increased by 84%. Activities were streamlined in 2004 and consolidated in Switzerland. Continued growth The positive developments underline that the markets in North America, Eastern Europe and Asia and selected Western European markets still have excellent growth potential. Our continued organic growth will be based on the newly established regional organisations, thereby placing operational responsibility as close to the customers and the market as possible. Recording overall growth of 6% in terms of pairs of shoes sold, ECCO performed remarkably well in these highly competitive markets. The increase recorded in Germany was highly satisfactory despite a very difficult retail environment. Both Sweden and Norway recorded handsome growth rates from the newly established regional service centre based in Varberg, and ECCO successfully retained its position as the market leader in Scandinavia. 5% 23% 12% 20% 40% Composition of sales volume by geography, 2004 Western Europe Central Europe Eastern Europe Asia North America ECCO Annual Report

10 10 ECCO Arena concept

11 shop concept It is ECCO s aim to increase the awareness of ECCO amongst consumers and to create reliable sales access through concept sales. This aim will be achieved through further expansion of ECCO s network of partnership shops. ECCO Shop in Kuwait A key element in developing ECCO s position is to enhance the visibility of the ECCO brand in the retail segment. ECCO therefore focuses on improving concept sales primarily by expanding the franchise network. As part of this strategy, ECCO systematically works to upgrade and expand partnerships with a view to turning retail outlets and shop-in-shops into dedicated ECCO shops. At year-end 2004, ECCO operated 446 concept shops worldwide (+13% compared to 2003), 828 shop-in-shops (+9%) and 2,067 points or retail outlets (+3%). In addition, ECCO operates 41 factory outlets. Growth in the number of retail outlets was primarily attributable to the growth markets in Eastern Europe, Asia and North America, but Germany, Sweden and Great Britain also expanded considerably. ECCO Shop in Austria Partnerships Own Total Shops ECCO Shop in Poland Shop-in-shops Points 2,067-2,067 Factory outlets ECCO Shop in Hong Kong ECCO Shop in Denmark ECCO Annual Report

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13 innovation and product development Unique development ability The core of ECCO s product strategy is and will continue to be products based on direct injected technology. This technology is ECCO s unique mark, and together with innovative strength and functionality it represents the philosophy behind ECCO. The year 2004 proved that the combination of these competencies is very popular with our customers. New, exciting products increase attention and sales and contribute to extending the limits of the technical capabilities of our factories. Men s shoes Based on its strong position in the City segment, ECCO launched its flagship, ECCO President, which set new standards for design and exclusivity in the ECCO collection. ECCO has chosen to operate in all segments of the footwear market (Ladies, Men s and Kids shoes) as well as in selected segments of the sports shoe market in which ECCO s products can play a leading role, for example Golf, Outdoor, Walking and Running was characterised by ECCO s ambition to strengthen its core business area, to establish a global collection concept and to win market share based on exciting and innovative products. Ladies shoes The successful introduction in 2003 of the ECCO Shark product concept was followed up by the launch of the ECCO Shark sandal in This range has laid the foundation for a whole new generation of ECCO products. ECCO s casual collection for men underwent a revival in 2004, as exemplified by the successful innovation of the ECCO Transporter group. The success of ECCO Shark inspired ECCO s men s division to design a corresponding product for men, ECCO Gyro, which attracted new customers. This will also be ECCO s target for the years ahead. Sales of the 2005 spring/summer collection already indicate good results, and the future thus seems to hold the prospect for increasingly impressive growth rates in the men s segment. Kids shoes The success of ECCO Kids continued in 2004, and the segment performed well in all markets. ECCO s interpretation of modern casual shoes, such as the ECCO FYM sandal, ECCO Globetrotter, ECCO Shade and ECCO Twilight, was instrumental in generating strong global growth. In addition to the successful modernisation of our core collection, ECCO achieved outstanding results with the newly launched ECCO City collection. The foundation for continued success in 2005 has been secured by a very positive reception of the spring/summer 2005 collection. Direct injected products such as ECCO Infant and the entire group of GORE-TEX membrane products spearheaded the development of ECCO Kids in The kids division is experiencing very strong growth, and it will play an increasingly important role in ECCO s future. Following the great success of ECCO Kids in Scandinavia, USA and Eastern Europe, ECCO is now ready to launch the Kids products globally. ECCO Annual Report

14 14 Thomas Bjørn and Dieter Kasprzak discussing product development

15 Golf shoes and other sports shoes The year 2004 marked the definitive breakthrough for ECCO s golf division. ECCO s golf shoes were the centre of much attention on golf courses around the world in 2004 not least because of ECCO s sponsorship agreements with some of the very best players in the world. ECCO currently supports world-famous players such as Colin Montgomerie, Thongchai Jaidee, Aaron Baddeley as well as Iben Tinning and Thomas Bjørn. These players also contribute to the development of new, innovative ECCO Golf products, thereby accentuating ECCO s unique position in the market for golf shoes. Thongchai Jaidee Thomas Bjørn The separation from the rest of the sports division ensured total focus on ECCO Golf, and 2004 became the year when ECCO s ladies golf shoes set new standards for comfort and design. Turning to ECCO s men s line, the ECCO World Class range in particular set new standards for design and technology. ECCO expects 2005 to become yet another great year characterised by strong growth in ECCO Golf. Iben Tinning As far as the remaining part of ECCO s sports shoe segment is concerned, ECCO was able to strengthen its already strong position in the Outdoor and Sandal markets. In 2005, ECCO intends to continue the development of the sales force. In terms of products, ECCO will focus even more on the market for running shoes. Colin Montgomerie 11% 12% 30% 47% Composition of shoe sales, 2004 Ladies shoes Men s shoes Kids shoes Sports shoes ECCO Annual Report

16 production and value chain the commitment to go our own way Bucking the trend In 2004, ECCO once again demonstrated its commitment to pursue its philosophy. In a time when practically all competitors are phasing out in-house production, ECCO has chosen to strengthen coherence and consistency throughout ECCO s value chain. ECCO is confident that control and constant adjustment of the total process from idea and design over production of leather and shoes to marketing and sales will prove the best way forward both in terms of innovative strength, development and quality, and in terms of long-term financial performance. This basic philosophy drives the way ECCO structures its value chain, and in 2004 formed the basis of the initiatives ECCO launched and completed. Unique technology ECCO is a pioneer within the special direct injection technology where the upper part of the shoe is placed in a mould before the sole is sprayed-on directly under high pressure. This unique technology, which guarantees unrivalled lightness, flexibility and quality in the individual shoe, is ECCO s hallmark. It will continue to form the basis of new and innovative designs. ECCO s own control of the use and further development of the technology ensures that new materials and production processes can be implemented quickly and efficiently anywhere in our production. ECCO s factories ECCO owns shoe factories in Slovakia, Portugal, Indonesia and Thailand. In order to ensure the strongest possible focus on direct injected products, ECCO in 2004 discontinued its inhouse production of shoes which were not based on this production method. The factory in Indonesia, which previously only produced uppers, has started producing shoes. The production of shoes has been diversified with due consideration for geographic and currency risks. Accordingly, 2.6 million pairs of shoes were produced in Portugal, 2.8 million pairs in Slovakia, 3.9 million pairs in Thailand and 0.2 million pairs in Indonesia in Local development centres have been set up at all ECCO factories to ensure uniform and integrated product development. ECCO in China In August 2004, ECCO began the construction of its most sophisticated production unit to date in China. The factory is located in the growth centre of Xiamen, and ECCO expects to start up production in late Q Construction is progressing according to plan. The factory is the first of five planned factories at this location. Each factory will have the capacity to produce one million pairs of shoes annually. In addition, ECCO plans at a later time to establish a tannery in connection with the shoe factory. ECCO s investments in China are expected to total between DKK 300 million and DKK 500 million over the course of the next five years. After careful consideration, China was chosen as the best geographic location for this type of strategic commitment. Today, China produces more than 50% of the world s shoes. There is significant growth potential in the country s own economy and last, but not least, China offers a highly skilled and motivated workforce. The establishment of the business in China is to a large extent based on knowledge transfer from Denmark, Thailand and Indonesia. ECCO s tanneries ECCO s tanneries in the Netherlands, Indonesia and Thailand will continue as primary suppliers of leather to ECCO s factories all over the world. Retaining and developing ECCO s competencies in this part of the value chain enables the company to maintain the high quality, the unique production technology and the professional knowhow upon which ECCO s products are based. The in-house production of leather ensures high quality and flexibility in ECCO s own value chain. In addition, ECCO Leather is today among the world s leading suppliers of high quality leather for manufacturers of car and airplane seats, bags and gloves as well as for other shoe manufacturers, and ECCO expects to further strengthen this position in the years ahead. 16

17 ECCO and the environment ECCO gives high priority to environmental considerations in its development and production. ECCO is focused on optimising production methods and on developing new and more environmentally friendly methods. In 2004, ECCO s tanneries made a dedicated effort with respect to environmental improvements, among other things through participation in international environment projects. These innovative projects will not only benefit ECCO but also the entire tannery sector, and the results may be applied in the timber, paper and textile industries as well. In 2004, ECCO s shoe factories were focused on further developing energy-saving and waste management measures. For additional information on the Group s environmental performance, see the environmental statement included with this Annual Report, which includes a presentation of a number of environmental initiatives implemented at ECCO s tanneries and shoe factories and statements from ECCO s individual units containing environmental performance indicators for Tangible fixed asset investments (DKK 000) ECCO s new factory in Xiamen, China Third-party suppliers Notwithstanding ECCO s focus on controlling and strengthening all links of its value chain, ECCO needs a wide range of strong and reliable third-party partners and suppliers now and in the future. ECCO puts high demands on and has great expectations of its partners in terms of ethical conduct, environment, product specifications and quality. ECCO also requires their partners to carry out specific inhouse development activities for ECCO products so that they constantly contribute to sustaining efficiency and flexibility in ECCO s production and distribution. Interaction in the value chain ECCO s efforts to control the value chain from idea and design over production to marketing and sales enables the company to constantly optimise the relationship between factories, tanneries and suppliers in order to minimise the response time to changes in market requirements and to reduce inventories and the amount of capital tied up. DKK , , , , , ,000 50, ECCO aims to continue this optimisation, and specific initiatives for 2005 include audits of ECCO s supply and logistics systems. ECCO s aim is to effect delivery directly from factory gate to customer and to operate three major regional distribution centres in Europe, North America and Asia. ECCO Annual Report

18 organisation - decisions are made where things happen ECCO bases its business on mastering three basic functions: Brand, product and concept development Production Sales In 2004, ECCO made a number of radical changes to its organisational structure to increase the ability to take action and become more effective and profitable by placing responsibilities and decision-making powers as close as possible to the day-to-day operations of our units. ECCO s operational activities are now managed by 11 strong business units: five sales units, five production units and one leather unit. The five sales units are: ECCO Europe West (Benelux, UK and Southern Europe) based in Rosmalen, the Netherlands ECCO Europe Central (German-speaking countries and Scandinavia) based in Tønder, Denmark ECCO Europe East and Middle East based in Warsaw ECCO Americas based in New Hampshire, USA ECCO Asia/Pacific based in Hong Kong The five production units are: ECCO Portugal in Feira ECCO Slovakia in Martin ECCO Indonesia in Surabaya ECCO Thailand in Ayudhthaya ECCO Xiamen in Xiamen ECCO Sko A/S Group structure as of 1 January 2005 Subsidiaries, Sales ECCO Europe West ECCO Europe Central ECCO Europe East and Middle East THE NETHERLANDS ECCO Benelux B.V. UK ECCO Shoes UK Limited BELGIUM ECCO Belgium N.V. FRANCE ECCO France Diffusion S.a.r.l. PORTUGAL ECCO (Portugal) Sales Comercialização de Sapatos, Lda. SPAIN ECCO Shoes Iberica, S.L. ITALY ECCO Scarpe Italia S.r.l. SWEDEN ECCO Sverige AB DENMARK Salgsselskabet ECCO Danmark A/S - DENMARK ECCO Retail A/S NORWAY ECCO Norge A/S FINLAND Oy ECCO-Suomi Ab GERMANY ECCO Schuhe GmbH AUSTRIA ECCO Trading GmbH SWITZERLAND ECCO Schuhe Schweiz GmbH POLAND ECCO Europe East and Middle East Sp. z o.o. (under incorporation) POLAND ECCO Shoes Poland Sp. z o.o. THE CZECH REPUBLIC ECCO Boty Ceská republika s.r.o. Accessories: SWITZERLAND ECCO Shoes International AG Dormant companies have been left out 18

19 In addition, ECCO s leather activities have been consolidated in the ECCO Leather Group, which is headquartered in Dongen, the Netherlands. Headquarters As a result of the organisational change, ECCO s headquarters will be responsible for brand, product and concept development and for central Group functions such as logistics, IT, treasury, taxation and legal services. In addition, the headquarters will act as a support and control unit vis-à-vis the individual business units. supervisory board and budget and financial statements. The business units have thus been given a clear and more direct responsibility for their day-to-day operations and related processes as well as significantly more freedom to act. Business units As a result of the organisational change, each of ECCO s 11 business units now has its own management, Subsidiaries, Production ECCO Americas ECCO Asia / Pacific ECCO Shoe Factories USA ECCO USA, Inc. - USA ECCO Retail LLC CANADA ECCO Shoes Canada, Inc. HONG KONG ECCO Asia Limited - HONG KONG ECCO Shoes Hong Kong Limited - SINGAPORE ECCO Singapore Pte. Ltd. - AUSTRALIA ECCO Shoes Pacific Pty. Ltd. - NEW ZEALAND ECCO Shoes (NZ) Limited - INDIA ECCO India Trading Private Limited PORTUGAL Ecco let (Portugal) Fábrica de Sapatos, Lda SLOVAKIA ECCO Slovakia, a.s. INDONESIA P.T. ECCO Indonesia THAILAND ECCO (Thailand) Co., Ltd. SINGAPORE ECCO China Holding (Singapore) Pte. Ltd. - CHINA ECCO (Xiamen) Co. Ltd. ECCO Leather THE NETHERLANDS ECCO Leather B.V. - THE NETHERLANDS ECCO Tannery (Holland) B.V. THAILAND ECCO Tannery (Thailand) Co., Ltd. ECCO Annual Report

20 employees our most valuable resource Throughout ECCO s more than 40-year history, our employees have played a vital role in the Company s success. Cultivating the good relationship requires a special effort on behalf of both employees and the Company, and therefore training and constant development are key elements of being an ECCO employee. Investments in training and upgrading our 9,500 employees continued in Staff ECCO s global staff totalled 9,657 at 31 December 2004 an increase of almost 3% over A total of 8,094 employees work in production, 1,010 in sales companies and 553 at Danish headquarters. No. of employees at 31 December 2004 Composition of employees according to function, ,800 No. of employees 9,600 9,400 9,200 9,000 8,800 6% 10% 84% 8,600 8, Production companies HQ Training and continued development All new employees sign up for the course From cow to shoe, which is a combination of theory and practice ending with the employees sewing a pair of shoes for themselves. This very practical exercise provides the employees with a clear idea of and respect for the competencies required in sophisticated shoe production. Sales companies Composition of employees by geography, 2004 During the introduction process Welcome to the World of ECCO new employees also meet representatives of each business unit who provide a thorough understanding of the overall structure of the Group. 6, All ECCO s factory units make targeted efforts to upgrade their employees through multi-skill programmes intended to enable employees to carry out versatile production tasks, thereby achieving job variation. Initiatives to strengthen in-house recruitment ECCO offers several targeted trainee programmes which select, support and develop employees to take on greater responsibility in new management or specialist positions. In 2004, ECCO focused specifically on middle and top management training. Western Europe Eastern Europe North America Central Europe Asia/Pacific 20

21 financial matters Financial risks Due to the international scope of ECCO s business activities, a number of financial matters impact the Group s results of operations and its equity. The approach to handling financial risk is determined by the Supervisory Board and the Managing Board. Foreign exchange risks Foreign exchange risk is managed centrally. Through active management of purchase and selling of currencies, ECCO aims to minimise the net positions in the main currencies, EUR and USD. Material currency positions which are not used commercially are hedged at least 12 months ahead. Positions cannot be hedged more than 15 months ahead. Credit risks The Group has no material credit risks apart from what has been recognised in the financial statements. The Group collaborates with a number of suppliers and customers none of which constitute an unusual business risk. ECCO Annual Report

22 material events after 31 December 2004 ECCO Sko A/S has exercised its right to acquire 45% of the shares in ECCO Benelux B.V. ECCO Sko A/S now owns the entire share capital of that company. Management believes that no other significant events have occurred after the end of the financial year which would materially change the Group s financial status. Outlook for 2005 ECCO expects to continue the Group s good performance in In 2005, ECCO in particular intends to focus on the growth markets in Eastern Europe and Asia, on sustaining market share growth in North America and Western Europe, on implementing additional efficiency improvements and on generating overall growth in all of ECCO s business areas. On this basis, ECCO expects earnings in 2005 to exceed the 2004 result. ECCO thus remains confident that the company is on the right track to attaining the 10-year goal for 2013 of doubling the 2003 revenues and volumes, while achieving an operating margin of 10% after tax. 22

23 annual accounts 2004 ECCO Annual Report

24 financial Statements 2004 Statement by the Management The Supervisory Board and Managing Board of ECCO Sko A/S have today considered and adopted the Annual Report for The Supplementary Environmental Report of ECCO Sko A/S provides a true and fair view within the framework of generally accepted guidelines for the area. The Annual Report is presented in accordance with the Danish Financial Statements Act. We consider the accounting policies to be appropriate to the effect that the Annual Report provides a true and fair view of the Group s and the Company s assets, liabilities and financial position as of 31 December 2004 and of the results of the Group s and the Company s operations and the consolidated cash flows for the financial year ended 31 December We recommend that the Annual Report be adopted by the shareholders at the Annual General Meeting. Bredebro, 9 March 2005 Managing Board Dieter Kasprzak Chief Executive Officer Mikael Thinghuus Chief Operating Officer Jens Christian Meier Executive Vice President, Production Søren Steffensen Executive Vice President, Sales & Retail Supervisory Board Hanni Toosbuy Kasprzak Chairperson Karsten Borch Vice Chairman Torsten Rasmussen Michael Fiorini Aage Andersen Bernd Scheelke Jakob Møller-Hansen Employee representative Employee representative Employee representative 24

25 auditors report To the shareholders of ECCO Sko A/S We have audited the Annual Report of ECCO Sko A/S for the financial year ended 31 December 2004, which is presented in accordance with the Danish Financial Statements Act. Our audit did not include the supplementary environmental report on pages 45-58, as this is not required by Danish law. policies used and significant estimates made by the Supervisory Board and the Managing Board, as well as evaluating the overall annual report presentation. We believe that our audit provides a reasonable basis for our opinion. Our audit has not resulted in any qualifications. The Annual Report is the responsibility of the Company s Supervisory Board and Managing Board. Our responsibility is to express an opinion on the Annual Report, on pages 1-44, based on our audit. Basis of opinion We conducted our audit in accordance with Danish auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance that the Annual Report is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the Annual Report. An audit also includes assessing the accounting Opinion In our opinion, the Annual Report gives a true and fair view of the Group s and the Company's assets, liabilities and financial position at 31 December 2004 and of the results of the Group s and the Company s operations and the consolidated cash flows for the financial year ended 31 December 2004 in accordance with the Danish Financial Statements Act. Bredebro, 9 March 2005 KPMG C. Jespersen Statsautoriseret Revisionsinteressentskab John Lesbo State Authorised Public Accountant Kenn K. Karlsen State Authorised Public Accountant ECCO Annual Report

26 accounting policies Basis of preparation The financial statements of the Parent Company and the Group for 2004 are presented in accordance with the provisions of the Danish Financial Statements Act applicable to class C companies. Income statement Net revenue: Sales are recognised on dispatch of products, and net revenue consists of amounts invoiced excluding VAT and less returned products, discounts and rebates. Basis of consolidation The consolidated financial statements comprise ECCO Sko A/S and subsidiaries in which ECCO Sko A/S has a controlling influence on the company s operations. The consolidated financial statements are prepared on the basis of the audited financial statements of ECCO Sko A/S and its subsidiaries by adding items of a similar nature. The financial statements used for consolidation are adapted to the accounting policies of the Group. Raw materials and consumables: Raw materials and consumables include raw materials and consumables used for in-house production. Cost also includes consumption of commercial products. Other external costs: Other external costs comprise costs relating to the Company s primary, ordinary activity, including lasts, cutting dies, maintenance, rent of plant, premises, office expenses, sales promotion expenses, fees, etc. On consolidation, intercompany income and expenses, intercompany accounts and gains on intercompany sales and purchases between the consolidated companies are eliminated. On acquisition of subsidiaries, the share of the acquired company s net asset value is determined based on the Group s accounting policies. If the acquisition price deviates from the net asset value, the difference is allocated, wherever possible, to the assets and liabilities or provisions that have a higher or lower value. The income statements of foreign subsidiaries are translated at average exchange rates, and the balance sheet is translated at the exchange rates ruling on the balance sheet date. Exchange differences arising on the translation of the opening equity of foreign subsidiaries at the exchange rates ruling on 31 December, and differences between the net profit of subsidiaries at average exchange rates and the exchange rates ruling at 31 December are recognised in equity. As in previous years, property, machinery, plant and equipment in the production subsidiaries in Portugal, Indonesia, Thailand and Slovakia is measured at cost in DKK less accumulated depreciation. Currency translation of receivables from foreign subsidiaries, where the receivables are part of the total investment in the subsidiary, is recognised directly in equity. Minority interests Minority interests share of profits and equity of subsidiary undertakings is stated separately. Staff costs: Staff costs comprise remuneration to employees, including pension and social security costs. Profit from subsidiaries: Profit from subsidiaries comprise the proportionate share of profits before tax. The proportionate share of tax in the companies is recognised in the line item income taxes. Unrealised intercompany profits: Unrealised intercompany profits comprise profits unrealised in the Group on trading in products and fixed assets between consolidated companies. Income taxes: Estimated tax on the profit for the year is recognised in the income statement along with the year s change in deferred tax. No tax is set aside for investments in subsidiaries as it is intended to hold the investments for more than three years. ECCO Sko A/S is taxed jointly with a few wholly-owned subsidiaries. Income tax in respect of the jointly taxed companies is allocated to the profit-making Danish companies in proportion to their taxable income. Jointly taxed companies are registered for the Danish on-account tax scheme. Calculated supplements, deductions and allowances regarding the tax payment are recognised as part of the year s tax charge. Deferred tax is calculated at 30% of the difference between the carrying amounts and tax values of current assets and fixed assets. Furthermore, the tax value of 26

27 tax losses carried forward is recognised in the amount at which they are expected to be used. If, on a net basis, there is a tax asset, the amount of future tax savings is recognised, provided that it is deemed more likely than not that the deduction can be offset against future taxable profits. Balance sheet Intangible assets: Intangible assets are recognised at cost less accumulated amortisation. Amortisation is charged on a straight-line basis over 5-10 years. Development projects: Development projects which are clearly defined and identifiable and which are deemed to be marketable in the form of new products in a future potential market are recognised as intangible assets. Development costs are recognised at cost under intangible assets and are amortised over the expected useful life of the project, when the criteria for such treatment are met. When the Parent Company acquires shares at a price higher than the value determined applying the equity method, such excess value is recognised as an intangible asset and amortised over the same period as goodwill on consolidation. Property, plant, and equipment: Property, plant and equipment is recognised at cost plus any revaluation and less accumulated depreciation. Depreciation is charged on a straight-line basis over the expected useful lives of the assets. The expected useful lives are as follows: - Buildings 20 years - Plant and machinery, vehicles, fixtures and fittings 5 years - Computer software 3 years Depreciation is not charged on land and staff housing. Assets with a cost of less than DKK 10 thousand per unit are charged to the income statement in the year of acquisition. Investment grants are offset against the assets that form the basis for the grants. Development costs that do not meet the criteria for recognition in the balance sheet are recognised as costs in the income statement when incurred. Recognised development costs are measured at the lower of cost less accumulated amortisation and writedowns and the recoverable amount. Patents and trademarks: The costs of registering new patents and trademarks are recognised and amortised over the term of the patent/trademark or its economic life (5 years). If an asset type is revalued, this applies to all assets within that group of assets. Investments: Investments in subsidiaries are recognised applying the equity method at the proportionate share of the equity of the companies, determined based on the Group s accounting policies, less unrealised intercompany profits. Dividend receivable in subsidiaries is recognised in the balance sheet when adopted by the shareholders at the annual general meeting. Costs of maintaining existing patents/trademarks are recognised in the income statement when incurred. Goodwill on consolidation: Goodwill on consolidation is determined at the date of acquisition as the difference between the cost and the net asset value of the acquired company applying the Group s accounting policies. Consolidated goodwill acquired from and including 1 January 2002 is capitalised and amortised on a straightline basis over the expected useful economic life, determined on the basis of earnings projections for the individual business areas, not to exceed 20 years. Dividends to be paid by the Parent Company are recognised as a liability in the financial statements at the time of adoption by the shareholders at the annual general meeting. Dividend proposed in respect of the financial year is stated as a separate line item under equity. Inventories: Raw materials are measured at cost determined on the basis of the most recent purchases. Work in progress and finished products are measured at calculated cost, consisting of the cost of raw materials and consumables and manufacturing costs plus a share of production overheads. ECCO Annual Report

28 Commercial products are valued at acquisition price. Products with a net realisable value lower than the cost or acquisition price are written down to the lower value. Receivables: Receivables are measured at amortised cost less provisions for anticipated losses determined based on an individual evaluation. Securities: Securities are measured at the most recently quoted market price. Financial instruments: Derivative financial instruments are initially recognised in the balance sheet at cost and subsequently remeasured at their fair value. Derivative financial instruments are included in other receivables and other debt. Cash flow statement The cash flow statement shows the Group s cash flow during the year and liquidity position at the beginning and end of the year. The cash flow statement is divided into three principal areas: operating, investing and financing activities. Cash and cash equivalents in the cash flow statement comprise cash and securities carried as current assets. In the statements, figures in brackets represent losses or items deducted. Changes in the fair value of derivative financial instruments that meet the criteria to be designated as fair value hedges of a recognised asset or a recognised liability are recognised in the income statement together with any changes in the fair value of the hedged asset or hedged liability. Changes in the fair value of derivative financial instruments that meet the conditions for hedging future assets or liabilities are recognised in equity under retained earnings. Income and expenses relating to such hedge transactions are transferred from equity on realisation of the hedged item. Treasury shares: The cost of treasury shares is recognised directly on the Company s share capital and is consequently not stated as an asset in the balance sheet. Currency translation: Receivables and payables denominated in foreign currencies are translated to the exchange rate ruling at year-end. Provisions Provisions comprise anticipated costs of warranty obligations, restructuring, etc. Provisions are recognised when, as a consequence of a past event, the Company has a legal or constructive obligation, and it is likely that the obligation will materialise. 28

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31 income statement for the year ended 31 December 2004 Note DKK 000 Group Parent Company Net revenue 3,393,693 3,168,930 2,314,365 2,181,919 Change in inventories of finished products and work in progress (81,957) (137,046) (97,395) (145,792) Costs of raw materials and consumables (1,346,339) (1,201,345) (1,671,913) (1,587,592) Other external costs (713,786) (707,046) (253,267) (294,239) 2 Staff costs (803,639) (753,198) (222,238) (220,772) 5,6 Amortisation and depreciation (180,937) (188,657) (56,046) (57,105) Profit before financials 267, ,638 13,506 (123,581) 3 Financial income 32,256 34,274 8,064 26,863 Financial expenses (92,850) (95,668) (36,260) (58,032) Profit from subsidiaries , ,034 Intercompany profit - - 5, ,087 Profit before tax 206, , , ,371 4 Income taxes (42,883) (49,264) (38,260) (45,583) Group profit 163,558 70, ,661 61, Minority interests (12,897) (9,192) - - Profit for the year 150,661 61, ,661 61,788 Proposed allocation: Revaluation reserve for undistributed profit in subsidiaries 120,720 47,249 Retained earnings (59) (8,461) Proposed dividend 30,000 23, ,661 61,788 ECCO Annual Report

32 balance sheet as of 31 December 2004 Group Parent Company Assets Note DKK 000 FIXED ASSETS: Intangible rights 51,856 49,564 9,018 6,676 5 Total intangible assets 51,856 49,564 9,018 6,676 Land and buildings 468, , , ,384 Plant and machinery 209, ,805 15,175 24,248 Other fixtures and fittings, tools and equipment 222, ,200 83,376 88,254 Property, plant and equipment in progress 48,766 40,268 18,742 12,911 6 Total property, plant and equipment 948, , , ,797 7,8 Investments in subsidiaries , ,830 8 Receivables from subsidiaries ,691 85,987 9 Deferred tax 112, ,867 95,996 89,296 Total long-term financial assets 112, ,867 1,090, ,113 TOTAL FIXED ASSETS 1,112,597 1,073,447 1,343,190 1,138,586 CURRENT ASSETS: Raw materials and consumables 171, ,636 5,887 6,975 Work in progress 59,064 56, Finished products and commercial products 659, , , ,350 Total inventories 890, , , ,325 Trade receivables 416, ,894 60,905 71,388 Receivables from subsidiaries , ,878 Other receivables 125,548 70,484 42,022 21,669 Prepayments 52,286 49,374 9,586 5,690 Total receivables 594, , , ,625 Securities 3,608 11, ,186 Cash 344, ,512 23,397 44,749 TOTAL CURRENT ASSETS 1,832,582 1,714, , ,885 TOTAL ASSETS 2,945,179 2,787,756 2,158,216 2,010,471 32