SUMMARY OF ANNUAL REPORT 2006
France 4%
Benelux 9%
UK/Ireland 23%
Nordic region 36%
Germany 22%
Others 1%
Eastern Europe and Russia 5%
Bong’s sales by market
Bong manufactures and sells a wide range of envelopes and other packaging solutions for distribution of information, advertising materials and lightweight goods.
Bong taking positions in expanding segments and markets Bong has a strong position in the mature Western European envelope market. For the past two years, Bong is also established in the fast-growing envelope markets of Eastern Europe, Russia and the Baltic countries.
Bong is benefi ting from accelerating consolidation of the European envelope industry and steadily rising demand in the growth economies.
ProPac gaining in pace with e-business
With its line of attractive and functional packages, Bong strengthens brands in both distance shopping and the traditional retail trade.
Bong’s packaging solutions are marketed under the brand name ProPac, and this product range is expected to account for an increasingly large portion of the Group’s future sales.
The Bong share is traded on the Stockholm Stock Exchange.
This is Bong
Bong Leadership Team
Anders Davidsson President & CEO
Elmar Schätzlein Managing Director Bong Germany
Sue Hale Managing Director Bong UK
Morgan Bosson Managing Director Bong Scandinavia and ProPac
Ulf Zenk
CFO
Acquisitions in 2006
Acquisition Holding, % Annual sales, approx., SEK m Acquired in
RCT 100 225 January
Nova
150 20 January
SMEAD 100 20 April
VOET 60 35 October
Lober
150 75 January 2007
1)
Net sales in Nova and Lober are not consolidated in Bong. Instead, these two companies are reported in the consolidated profi t and loss account within share in profi t of associated companies. Bong has an option to acquire the remaining shares within 3–5 years.
The year in brief
• Net sales for the full year rose by 11 per cent to SEK 1,985 million.
• Earnings continued to improve in 2006, with an adjusted profi t before tax of SEK 52 million (42).
• The underlying cash fl ow was SEK 84 million (91).
• Bong made a decision to move forward with continued restructuring in Germany, Finland and Ireland. When completed, these measures will result in a reduction of 160 positions.
• The year saw a high level of acquisition activity. Netherlands-based VOET International was Bong’s fi rst acquisition in the ProPac area.
• Sales of the ProPac line were up by 50 per cent, from SEK 110 million in 2005 to SEK 165 million in 2006.
• Sales in Russia increased to SEK 26 million (17) and the Russian operations posted an operating profi t in December 2006.
• The Board proposes a dividend per share of SEK 1 (0) for 2006.
Bong has solutions for customers
with diverse packaging needs
for everything from documents,
advertisements and catalogues
to e-business parcels that need
to be protected and sent both
effectively and attractively.
2006 was a year of vigorous activity throughout the Group. With several major acquisitions and the start-ups in Russia and Lithuania, we have strengthened our market positions and achieved a rapid increase in sales. At the same time, we took a few decisive steps to further optimise our manufacturing effi ciency.
Targeting new markets and products
After a downward trend in the European envelope market at the start of the new millennium, demand has gradually stabilised. 2006 started on a strong note and the fi rst quarter showed a marked improvement over the previous year. Vol- umes declined somewhat during the summer but picked up again in the fourth quarter and the year ended with full order books and good capacity utilisation throughout the industry.
It appears that the negative impact of digital communica- tion and transactions on mail volumes has subsided, at the same time that the market is being driven by robust economic development.
Bong has identifi ed certain market segments with particu- larly strong growth potential and is currently taking action to advance our position in these:
• Direct mail envelopes and overprinted envelopes in small series
• Eastern Europe and Russia
• ProPac – new packaging solutions for mail order and e-business packages, gift packages, etc.
As these growth segments expand and make up an increas- ingly large share of the total market and Bong’s sales, they will also improve the scope for sustainable organic growth.
Numerous acquisitions
2006 also saw a wave of consolidation in the industry where we played a leading role with four completed and one an- nounced acquisition in a single year. Of particular importance was the acquisition of our German competitor RCT, previously one of Europe’s ten largest envelope companies.
Of the other major players in the envelope market, Mayer
and Hamelin also contributed to the high rate of consolida- tion and carried out several acquisitions each. It was also interesting to note a number of acquisitions and mergers at the regional/national level. The two leading companies in Switzerland (Seetal-Schaller and Elco) were merged during the year. In the Netherlands, AMCO announced plans to take over its competitor Enfa, and in Scandinavia, Swedish-Finnish OP-Kuvert was sold to Danish Intermail just before Christmas.
At year-end 2006 the fi ve largest envelope manufacturers in Europe commanded more than two thirds of the market, com- pared with around 40 per cent at the beginning of the new millennium. Our assessment is that this consolidation will con- tinue until 3–4 companies control 75 per cent of the market.
A growing company
It is highly satisfying that we have succeeded in putting Bong back on a growth trajectory. Sales in 2006 were up by 11 per cent, most of which was acquisition-driven. At the same time, we are seeing the fi rst positive results of the Russian start-up where year-on-year sales rose by around 50 per cent.
This was possible thanks to the successive deployment of production in Kaluga, some 200 km south of Moscow, during the year. Our ProPac investment also started to bear fruit in the form of rapid sales growth, and sales during the year increased by 50 per cent (of which 43 per cent was organic) to SEK 165 million.
Better underlying earnings and cash fl ow
The year’s growth in volumes and sales was accompanied by a rise in costs, although not of equal magnitude, which meant that adjusted profi t excluding one-time items improved to SEK 52 million (42).
Average prices in the acquired companies were signifi cantly lower than Bong’s, but after a series of price increases during 2006 the fi nal effects of changes in prices and the product mix were marginal compared to the prior year. On the cost side, we do not expect the real synergies to emerge until 2007 and 2008 when the planned restructuring measures begin to have effect. It is also important to remember that costs of SEK 6 mil- lion for our Russian start-up were charged to profi t for the year.
Message from the CEO
Reported profi t before tax for the full year 2006 was positive at SEK 2 million (34), refl ecting our decision to recognise all restructuring charges for the merger of Bong and RCT in Germany and the closure of the plants in Tampere and Kilkenny as one-time items.
We still have a way to go before meeting our targeted long-term return of 15 per cent on capital employed (return on capital employed in 2006 was 7 per cent), but in the past year we took several important steps closer to this goal. It is a good accomplishment that we were able to improve our adjusted profi t in the midst of acquiring companies, estab- lishing operations in Russia and carrying out major adjust- ments in our production structure.
The underlying cash fl ow was strong and amounted to SEK 84 million (91), thanks to a better underlying earnings trend and a continued restrictive investment policy. Cash fl ow was used primarily to pay for acquisitions and fi nance parts of the ongoing restructuring programmes, i.e. for sound and forward-looking investments. A valuable addition to cash fl ow was provided by the sale of our property in Kilkenny, which generated proceeds of SEK 28 million in the fourth quarter.
Following the acquisition of RCT, whose machinery was more modern than Bong’s, we expect to maintain a low in- vestment requirement in existing operations over the next few years and therefore anticipate a sustained strong cash fl ow.
Productivity enhancement
After a systematic effort to raise gross margin in the com- pany during 2004 and 2005, we intensifi ed our focus on productivity in 2006. The addition of more modern envelope machines and increased volumes from the RCT acquisition will make it easier to raise productivity per employee. Aside from merging production in Wuppertal and Hilden during the year, we have also moved a number of envelope ma- chines and volumes to Scandinavia and England. The imple- mented measures will enable us to fi ll the existing factories and create the conditions for simpler production planning, longer series and a better overall fl ow in our facilities.
This will further improve in 2007 and 2008 when production
in Tampere is moved to Kaavi and production in Kilkenny is transferred to England and Germany.
As another example of our productivity initiative, in the fourth quarter of 2006 we began running production in our German factory 24 hours a day, 7 days a week during peak season (October–April), which has led to a substantial increase in capacity utilisation.
We are also continuing our monthly benchmarking of pro- ductivity between factories, and have launched new projects aimed at optimising results and productivity in purchasing, administration, etc.
All in all we made valuable progress in our productivity pro- gramme during 2006, and through our planned restructuring measures laid the foundation for even greater improvements in 2007. With higher productivity we can maximise profi t- ability and cash fl ow, both of which are essential for future ventures in our growth areas.
Exciting growth opportunities
In pace with improved gross margin and productivity in our Western European envelope operations, the ambition is to increase the focus on our growth areas:
• We will continue our expansion in overprinting, a growing market that demands speed, fl exibility and local presence.
A top priority in this context is to advance our positions in the non-Nordic countries were we already have a relatively strong share of the printing market.
• We will grow additionally in Russia and Eastern Europe.
I am especially enthusiastic about development in the Russian market, which has enormous potential in view of the country’s large size and explosive economic growth.
• We will further strengthen and develop our ProPac business. ProPac has undergone rapid growth in recent years and already makes up a sizeable part of our total operations. The underlying demand is rising steadily and the market is both larger and more multifaceted than the purely European envelope market. A few breakthrough orders in 2006 have given us good reason to feel optimistic about the future!
We made good headway in all of the above areas through our acquisitions and other preparations in 2006, but a great deal remains to be done. One thing is certain – that the focus on these growth areas and all the resulting acquisitions, recruitment, decisions and obstacles we face will create a new dynamism in the company and set the stage for exciting challenges ahead.
Outlook for 2007
Bong anticipates a continued positive earnings trend in the coming year and expects pre-tax profi t for 2007 to exceed the previous year’s level.
Kristianstad, March 2007
Anders Davidsson President & CEO
5
The correlation between GDP growth and demand for envelopes is not as strong as it once was. The impacts of new technology, new business models and cultural factors on the mail fl ow are increasingly complex. Bong is capitalising in these market dynamics by focusing on attractive segments.
More and wealthier households are using more envelopes
At the end of the 20th century, mail volumes in Western Europe rose at a rate equal to between 70 and 100 per cent of real GDP growth. Today, this correlation appears to have weakened. In the past four years the growth rate for mail volumes has fallen from a stable two per cent per annum to less than zero, although it is still too early to say whether this trend break is permanent.
However, other underlying correlations are stronger. The total mail volume in a given country is closely tied to the number of households and disposable incomes. Rising in- comes commonly lead to higher demand for fi nancial services, which in turn generate transaction-driven mail.
New technology – new opportunities
Technology or market-driven development in established areas of businesses is stimulating demand for envelopes and new packaging solutions such as those marketed by Bong under the ProPac brand. One such example is the powerful growth of mail order retailing, another is that established players such pharmacies are starting to distribute medications by mail.
New technology can also give rise to previously non-exis- tent industries with business models based on distribution by mail, including online retailers like eBay, Amazon, Bokus, video rental companies, etc.
The current surge in direct mail (DM) marketing is creating increased mail volumes and is a positive development for Bong, which can provide DM users with overprinted full-colour envelopes at short notice.
But mail volumes can also decrease as an effect of new processes and behaviours. One such example is the replace- ment of paper documents with electronic tickets and travel
booking. Another is that account information and statements are increasingly distributed over the Internet instead of by mail.
E-mail and letters fi ll different needs
Different communication channels fi ll different human needs, and the speed at which a means of communication wins acceptance is largely dependent on cultural factors. Technol- ogy shifts often lead to co-existence rather than competition between old and new channels such as in the case of fax, SMS and e-mail, all of which function more as complements to letters than substitutes. Much of the possible shift from mail to Internet appears to have already taken place. For each physical letter today, more than 30 e-mail messages are sent in the USA and some 20 in Europe. It is probable that e-mail has reached its saturation point and is now itself exposed to threats or restrictions.
Some analysts believe we are more likely to see an integra- tion of digital technology and physical documents, rather than a choice between one or the other. For example, paper documents can be equipped with digital information, making them “intelligent” and able to interact with other media.
Drivers and effects on mail volumes
Drivers
Exemples of applications
Effect on mail volumes Technical develop-
ment, new business models and industries
Direct mail and
distance shopping Increase Technical develop-
ment, rationalisations Electronic information Decrease Culturally determined
behaviour patterns
New channels co-exist
with traditional ones Unchanged
The mail fl ow is part of a larger and increasingly complex com- munication fl ow. To a large extent, the net effect of changing market conditions on Bong will depend on the company’s own actions. By identifying and adapting to new conditions at an early stage, Bong can use these to its advantage.
New opportunities in a changed mail fl ow
Mail E-mail
Unchanged mail volumes despite strong growth in e-mail
0 2,000 4,000 6,000 8,000 10,000
2003 2002 2001 2000 1999 1998 1997 0 80 160 240 320 400
Mail E-mail
Source: Pitney Bowes
Annual per capita volume of postal and electronic mail in Europe.
Gift packages are part of Bong’s extensive ProPac
range. The products reinforce brand impact and
perception among customers.
Although most of Bong’s sales are attributable to the mature envelope markets of Western Europe, the company is expanding rapidly in the envelope markets of the Baltic, Eastern Europe and Russia and in new packaging segments.
The brisk growth for ProPac and overprinted advertising envelopes is shifting Bong’s emphasis towards areas with higher margins and value added.
Fragmented European envelope market
The European envelope market is worth approximately EUR 2 billion and has a total volume of around 100 billion envelopes, of which around two-thirds are consumed in Europe’s most highly populated countries and largest economies. Eastern Europe, including Russia, represents close to ten per cent of the total market.
The European market is fragmented into several sub-markets.
Bong is active in four main areas characterised by different drivers, competitive conditions and growth scenarios – Western Europe, Eastern Europe, DM/Overprint and ProPac.
Most analysts predict a generally stable total mail volume in Europe over the next few years. However, the forecasts are based on assumed growth in certain segments and weak or declining growth in others. Bong’s chosen strategy is to expand in growth markets while at the same time defending its leading role in the mature segments.
Envelopes in Western Europe
In the mature envelope industry of Western Europe, where Bong is a leading player, delivery precision and the ability to manufacture large series at a low cost are critical competi- tive factors. The dominant products are standard envelopes for primarily administrative mail and the key customers are international offi ce supply chains.
Approximately 65 per cent of Bong’s total sales revenue comes from administrative envelopes in Western Europe, a market where future growth is expected to be low.
Internet a complement to paper
The use of administrative envelopes is stagnant or falling in Western Europe, partly as a result of competition from electronic media. But the pattern is not clear-cut. Although some types of administrative mail, such as simple business correspondence, have been largely replaced by e-mail, trans- action-related mail in the form of bills and statements is rising steadily as an increasing share of the population buys services from banks, credit card issuers and other transaction-intensive companies. According to Swedish and international surveys, consumers prefer to make payments electronically but to receive bills on paper. In general, the greater the signifi cance of the information for the recipient’s fi nances, the stronger the preference for paper.
Envelopes in Eastern Europe
Envelope consumption in Eastern Europe, the Baltic countries and Russia is rising in pace with economic growth, which is making this a dynamic and attractive market. Bong has been established in Eastern Europe for several years and took an additional step in 2006 when the new factory in Russia was deployed.
Sales of administrative envelopes in Eastern Europe, the Baltic countries and Russia account for around 5 per cent of the Group’s total sales. In the next few years, Bong expects the company’s sales in these markets to grow by between 10 and 15 per cent annually.
Growth driving envelope consumption
While the average Western European uses approximately 300 envelopes per year, the corresponding number in Russia and the Baltic states is between 20 and 30. This would indicate a considerable growth potential for envelopes in these countries.
The economies of the Baltic countries have gained real momentum with annual GDP growth of 8–10 per cent in Estonia, Latvia and Lithuania since 2002. Dramatic growth is
also being seen in other economies of Eastern Europe. Russia’s GDP strengthened by nearly 7 per cent annually between 1999 and 2005, and dropped to a still high 6 per cent in 2006.
Recent year’s upward price trend for energy and materials is stimulating the Russian economy and the country’s per capita GDP now exceeds USD 5,000, which is lower than Poland’s but higher than Turkey’s. Unemployment peaked at 13 per cent during the fi nancial crisis of 1998 and was just over 7 per cent at the end of 2006. This robust economic development is foste- ring the emergence of a middle class comparable to that of Western Europe, and private spending nearly tripled between 1998 and 2006. Aside from economic triggers, envelope con-
sumption in the growth economies is being fuelled by a more effi cient infrastructure for mass mailing, mail delivery, etc.
DM and overprint
Envelopes for direct mail (DM) marketing have gained a more prominent role in Western Europe. This segment is subject to regional or local competition and demands the ability to deliver relatively small and customer-adapted series at short notice for high frequency mailings. In 2006 Bong invested in in-house capacity and purchased several overprint operations.
Around 20 per cent of Bong’s sales are attributable to DM/overprinted envelopes. Bong predicts near-term growth of between three and fi ve per cent annually in this segment.
New markets emerging
Bong’s European markets
Envelopes DM/
Overprint
ProPac
Drivers
Western Europe
Eastern Europe Share of
Bong’s sales, % 65 5 20 10
Annual rate
of growth, % <5 10–15 3–5 10–20
The comparatively large degree of service in this segment raises the level of value added and justifi es a higher margin.
Individualised marketing
DM marketing has captured an increasing share of advertis- ing investments in the past ten years. In Europe, DM currently accounts for 30 per cent of total advertising expenditure through traditional channels (DM, TV, newspapers and maga- zines) and nearly half of the mail volume in certain countries.
The trend towards individualised marketing has encouraged more and more companies to add DM as a tool in their mar- keting mix. Modern database management makes it possible to direct targeted messages and offers to selected customer groups and reach them at the right time. DM is often used together with other advertising channels such as the Internet and TV to achieve greater impact. Several surveys in Sweden and abroad indicate the consumers are more receptive to DM advertising than other marketing channels.
ProPac
ProPac is Bong’s range of packaging solutions for lightweight goods that need to be protected and sent both effectively and attractively. The customers are found in the online, mail order and traditional retailing industries. The ProPac packages provide an ideal platform for brand exposure and are easy to store and use.
ProPac currently represents 10 per cent of Bong’s sales and is expected to grow by between 10 and 20 per cent per annually.
Fast growth for distance and traditional retailing Distance retailing is expanding rapidly in Sweden and the rest of Europe. The fastest-growing segment is online retailing, which made up around 60 per cent of total Swedish distance retailing in the autumn of 2006. Sweden’s online retail sales in 2006 rose from SEK 9 billion in 2005 to SEK 12 billion in 2006, equal to approximately 2.5 per cent of the total retail trade. Accord- ing to the Swedish Research Institute of Trade (HUI), the current rate of growth is around 30 per cent annually in Sweden.
ProPac has a higher value added content than administra- tive envelopes, and therefore also higher margins.
The limits are set only by the customers’ creativity.
More than 70 per cent of Bong’s sales consist of
products adapted to specifi c customer requirements.
Customers turn to Bong for solutions to their different packaging needs – from standard products to sophisticated custom envelopes with high quality printing for direct mail marketing and packages for online, mail order and retail shopping.
Bong’s customers are characterised by widely varying needs and preferences. They buy different products and services and value Bong for different reasons. For some customers, access to Europe’s most comprehensive range of envelopes is the key factor, and for others it is Bong’s size, availability and extensive international coverage. Many customers appreciate the security of stable long-term relationships, often personal, while other buyers put a premium on product quality and price. A high degree of fl exibility and innovation have increas- ingly emerged as decisive factors in attracting new customers.
The needs vary not only between markets but also between individual customers. Regardless of whether a customer is seeking advanced overprinting at short notice, gift packages or large volumes of standard envelopes, Bong’s ambition is to be an effi cient and reliable partner.
Local presence
Bong has an in-house sales organisation in all of its markets.
Direct customer contact takes place through local representa- tives, ensuring unique insight into local envelope specifi cations and familiarity with the local language and culture. Aside from an ambition to grow with the customers, Bong committed to improving its knowledge of customer needs, current and future trends and end-user preferences. In many cases this means providing inspiration and demonstrating Bong’s ability to deliver custom concepts and solutions for its customers – to join forces is creating maximum value for the end-consumers.
The customer decides
Today, more than 70 per cent of Bong’s products are adapted to specifi c customer needs. In the UK and Belgium, customised products made up 80 of the production volume in 2006.
Through local presence in a large number European envelope markets, Bong can offer international customers fl exibility
and unique knowledge about local products.
Custom solutions usually involve some type of printing, but can also be individualised with regard to format, choice of paper, window placement, type of sealing, etc.
A wide range of products
Bong has one of Europe’s most comprehensive ranges of en- velopes and packaging solutions – ProPac. The ProPac range can be divided into three sub-groups, where administrative envelopes accounted for 70 per cent of the Group’s sales in 2006, advertising envelopes for 20 per cent and ProPac for 10 per cent.
Administrative envelopes
Administrative envelopes consist of standard, non-printed en- velopes and bags in all sizes that are adapted to each market according to the applicable national standards. Administrative envelopes are manufactured in white or brown paper. The envelopes are adapted for use in modern printing presses and therefore provide an ideal surface for logotypes or advertising messages.
Advertising envelopes
Advertising or specially adapted envelopes give customers wide freedom of choice with regard to colour, shape, material and printing technique. These envelopes are often used for Direct marketing and can be designed as an integrated element of the message.
ProPac
ProPac is a line of expander bags, board pockets, padded bags, bubble bags, etc. The ProPac products are used to mainly to send documents, advertising/promotional materi- als, catalogues or e-business parcels, but are also increas- ingly sought after as gift packages in the retail trade. ProPac offers virtually unlimited options for individualised packaging through overprinting, paper selection and size. By extending adhesive fl aps, adapting window sizes, making perforations and adding customer printing, Bong can provide its custom- ers with packaging solutions that also serve as brand-builders.
With the gift packages, Bong offers an effective interface for highlighting a company’s profi le and image. Through the use of advanced printing technology, Bong can satisfy exacting demands on design and fi nish, such as partial coating, com- plex patterns, printed sides etc. The packages are manufactu- red in specially equipped envelope machines located mainly in Nybro, Sweden, and Wuppertal, Germany. Few packaging companies have access to the advanced envelope technology and printing expertise on which the gift packages are based.
The basic idea behind ProPac that is good packaging should offer an engaging mix of communication, presentation and functionality.
Products and services for every need
The bulk of sales take place via wholesalers, where the offi ce supply trade is the dominant buyer category. A smaller portion is sold directly to end-users. In the expanding packaging solutions segment, however, direct sales to end- users represent a steadily growing share of Bong’s sales.
Bong has a total of around 8,000 customers, of which the 25 largest account for approximately 45 per cent of sales.
Different categories of envelope customers:
• The offi ce supply trade
• Direct-buying customers
• Mail management companies
• Paper wholesalers
• Envelope printers
• The retail trade
Customers in the offi ce supply trade include large international chains, domestic offi ce supply wholesalers and purchasing partnerships. Sales are increasingly concentrated among major international players like Lyreco, Viking/Of- fi ce Depot/Guilbert and Corporate Express. This customer category accounts for around 26 per cent of Bong’s total sales in Western Europe.
Consolidation among the major offi ce supply chains is contributing to a corresponding trend among the suppliers.
For example, Bong has forged an alliance with Hamelin of France to provide envelope solutions for customers in most European markets.
Direct-buying customers are companies with large mail streams such as banks, utilities and telecom providers whose information handling in the form of outgoing mail is some- times handled directly, but frequently also through outsourc- ing to mail management companies. This has led to a decrease in the number of direct-buying customers in recent years. Around 17 and 12 per cent, respectively, of Bong’s sales in Western Europe go to direct-buying customers and mail
management companies such as Strålfors, Posten EPP and Pitney Bowes.
Paper wholesalers account for a sizeable share of total sales in the envelope market. These customers stock and sell a wide range of paper products, mainly to printing companies.
In recent years Antalis, Papyrus and Paper Links have grown rapidly through acquisitions. Paper wholesalers generate ap- proximately 16 per cent of Bong’s sales. Two vital competitive tools in Bong’s relationship with paper wholesalers are delivery precision and product range. Around 20 per cent of Bong’s deliveries to wholesalers consist of non-standard products.
Envelope printers are typically small local companies that often print for DM purposes, where deliveries in small series and at short notice are critical factors. This customer category accounts for roughly 12 per cent of Bong’s sales.
Bong has its own envelope printing facilities in all markets and collaborates with external partners when appropriate.
Through the acquisition of overprinting operations in England and Germany during 2006, Bong has expanded its market share in these countries.
Customers in the retail trade buy consumer-packaged enve- lopes via agents or directly from manufacturers. In the current trend, major chains like ICA, Tesco and Bokia are expanding both domestically and internationally. The retail trade ac- counts for approximately 4 per cent of Bong’s sales.
Cost-effi ciency and price are the decisive factors in this segment. Bong manufactures consumer-packaged envelopes at its factory in Estonia, which is specialised in production of this type.
ProPac customers
Traditional envelope buyers in the offi ce supply trade and paper wholesalers are still the largest customer group in the ProPac segment, and account for around 60 per cent of sales.
However, a growing share of Bong’s deliveries in this product area goes directly to end-users in the distance shopping and retail trades.
Customer categories
With high quality printing and innovative
design, envelopes become a central component
of advertising campaigns. Surveys indicate the
consumers are more receptive to DM advertising
than other marketing channels.
Scandinavia 29%
Consolidation and cooperation
The total Scandinavian market in 2006 is estimated at close to 5 billion envelopes. Overall, the market shrank by 1–2 per cent.
With a market share of approximately 45 per cent, Bong is the undisputed market leader in Scandinavia. The foremost competi- tor in the region is Germany’s Mayer-Kuvert, through its Scandi- navian operations. Imports to the Scandinavian market increased in 2006, but are still relatively limited. The factories in Kristianstad and Nybro export 4-colour printing and ProPac products to other business units in the Bong Group.
• Bong’s net sales in Sweden, Denmark and Norway amounted to SEK 582 million (570). Internal sales were SEK 61 million (73). Earnings were strengthened by a combination of cost sav- ings and favourable market conditions.
• The book value of assets at year-end was SEK 417 million (495). Capital expenditure was SEK 15.6 million (16).
• The national elections and a generally robust economy had a positive impact on the Swedish market.
• Danish InterMail announced the acquisition of its Swedish competitor OP-Kuvert and Mayer-Kuvert forged an alliance with Danish Bording, leading to further consolidation of the Scandinavian market. Five manufacturers have been reduced to three in 2007: Bong, InterMail and Mayer-Kuvert.
• Bong continued to coordinate its Scandinavian operations by centralising invoice handling and cash management, launching a new pan-Scandinavian customer magazine and increasing production for the Danish market in Kristianstad, Sweden.
• A 6-colour machine from the acquired RCT was transferred to the factory in Tønsberg, Norway, in order to increase printing quality in Scandinavia.
• All countries invested in overprinting equipment.
• Bong continuously reduced its fi xed costs in all countries.
Germany 28%
Coordination with RCT and acquisition of Lober
The total market in Germany during 2006 amounted to approxi- mately 20 billion envelopes. The market expanded somewhat thanks to robust economic development.
There are more than 25 envelope manufacturers active in the German market, where Bong has a share of approximately 25 per cent. Bong’s principal competitors are AWA, Mayer-Kuvert, Blessof and Curtis 1000.
The business unit is mainly focused on the German market but also exports products to the Netherlands, Switzerland, Austria, Italy and Spain.
• While the summer period was not as good as that of the previ- ous year, the envelope market improved in the fi rst and fourth quarters as an effect of the 2006 World Cup and a stronger economic growth in general.
• Bong and RCT merged their sales departments. Personnel were transferred to Bong Deutschland which was renamed Bong RCT.
• 55 employees were laid off as Bong’s and RCT’s production resources were brought together in Wuppertal and Torgau. The concentration of production was a part of a comprehensive restructuring programme that was undertaken during the year.
• A new shift-system was implemented at the beginning of the fourth quarter which means production 24 hours a day 7 days a week. The new system will be in effect during the peak season October-April.
• Bong agreed to buy 50 per cent of the stock of the South Ger- man envelope printer Lober. This will increase Bong’s presence in the Southern part of Germany where Bong’s footprint has been limited up till now. Lober supplies high-quality envelopes also in small series.
• Blessof moved its premises to Kircheim unter Teck and decided to close down its factory in Pfullingen, which means a capacity reduction of one billion envelopes and a headcount reduction of 150.
• The envelope manufacturer Pfl üger was acquired by the French fi rm Hamelin. Mayer-Kuvert bought the wholesaler Clausnitzer.
Bong has a decentralised organisation in which each unit is structured and staffed to capitalise on the business opportunities in its local market.
The Group is made up of seven geographical units, of which fi ve report directly to the CEO. The Polish business unit reports to the manager of the German unit, and the Russian business unit reports to the manager of the Finnish unit. The Group staff is responsible for certain coordination of accounting, fi nance, purchasing, IT, etc.
The managers of the three largest business units, together with the CEO and CFO, make up the Group Leadership Team.
Although the units operate with a relatively high degree of autonomy, there is a far-reaching coordination in certain areas in order to optimise effi ciency. Examples of such areas include handling of major European customers, purchasing of fi ne paper, fi nancing, IT and insurance.
Business units
The business unit’s share of the Group’s sales
United Kingdom 21%
Acquisition of Nova Envelopes and closure of the factory in Ireland
The total UK market in 2006 amounted to 24 billion envelopes, a decrease of 6–7 per cent due to lower activity in the fi nancial sector.
Bong is one of the dominant players in the UK, with a market share of around 15 per cent. The leading competitors are GPV/
Heritage, Hamelin/John Dickinson, Mayer-Kuvert and Tompla.
• Two new envelope machines from RCT that were moved to Milton Keynes during the summer were brought on stream in the third quarter.
• The small envelopes’ share of the product mix increased as changes made by the Royal Mail took effect at the beginning of the second half of 2006. Previously, postal rates were based only on the weight of the item. The new system is based on size. The market for postal services was completely deregulated the 1st January 2006. The Royal Mail accounts for 96 per cent of the market.
• Bong acquired fi fty per cent of the envelope printer Nova in the spring. As a consequence Bong wound down and moved its own capacity to Nova.
• Bong decided to close its factory in Kilkenny in Ireland in 2007.
The production will be moved to England and Germany. 35 employees will leave during the fi rst quarter of 2007.
• Mayer-Envelopes acquired the envelope manufacturers Eagle and Trimfold and bought two plants from Antalis which will be brought together under the name Diamond Envelopes.
Belgium 10%
Acquisition of packaging wholesaler
In 2006 the Belgian market fell by 2–3 per cent to around 5.6 billion envelopes.
In Belgium, Bong has a market share of 30 per cent. The key competitors are Elep and Antalis.
The business unit has primary responsibility for targeting the French and Dutch markets.
• Net sales amounted to SEK 200 million (188) and internal sales to SEK 4 million (7). Profi t was unchanged. Lower costs com- pensated for an inability to pass on the full increase in paper costs to customers in 2006.
• The unit’s total assets amounted to SEK 140 million (136).
Capital expenditure reached SEK 15.7 million (2).
• Bong acquired 60 per cent of the Netherlands-based packaging wholesaler VOET International, which will be responsible for all ProPac sales in the Benelux countries and France.
Finland and Baltics 9%
Streamlining in Finland and acquisitions in the Baltics
The total Finnish envelope market in 2006 amounted to approxi- mately 1 billion envelopes. The Baltic market grew by an estimated 5–8 per cent to around 180 million envelopes.
Bong is the clearly largest player in the Finnish market with a market share of around 70 per cent. The most signifi cant competitor is OP-Kuvert of Sweden.
Bong is also the dominant manufacturer in the Baltic countries, with market shares of 50 per cent or more. Furthermore, Bong is the only domestic envelope manufacturer in the Baltic region fol- lowing the acquisition of SMEAD’s envelope production in Estonia.
• Net sales in 2006 are reported at SEK 181 million (194) and internal sales at SEK 21 million (2). Profi t was unchanged.
• The book value of assets at year-end was SEK 213 million (198). Capital expenditure in 2006 totalled SEK 12.7 million (1).
• Bong strengthened its position in the Baltic region by establish- ing printing operations in Kaunas, Lithuania, through the joint venture company UAB Baltvokas. This unit is being provided with equipment from other parts of the Bong Group.
Poland 2%
New management and administration
The total Polish market in 2006 is estimated at 4.5 billion enve- lopes. Demand grew by 15 per cent during the year.
Bong commands around 10 per cent of this market and is thus a signifi cant player. The competitors include subsidiaries to the German envelope manufacturers Mayer, Curtis and AWA, and the Polish-owned A&G Koperty. Imports are limited.
Bong’s Polish business unit caters mainly to the local market via its sales offi ce in Dziekanóv Nowy, on the outskirts of Warsaw.
• Net sales totalled SEK 41 million (48). Internal sales amounted to SEK 1 million (0). Earnings declined due to lower volumes resulting from fi erce competition and the effects of delayed cost savings.
• The book value of assets at year-end 2006 was SEK 21 million (23).
The year’s capital expenditure amounted to SEK 1.4 million (1).
• Production was moved from central Warsaw to the suburbs.
• The management was replaced in the third quarter. The Polish sales director was promoted to manager of the business unit.
• Continuous rationalisation measures were carried out, for example in administration. The unit increased its focus on overprinting.
Russia 1%
Full speed in new factory
The total Russian market is estimated at 2.2 billion envelopes.
Bong’s sales volume was 161 million envelopes, representing a market share of approximately 7 per cent.
In 2005 Bong began setting up a factory in Kaluga, some 200 km south of Moscow. The employees were trained in 2006 and production was gradually deployed during the year. The robust market in 2006 led to a progressive rise in capacity utilisation.
The business unit reported an operating profi t in December 2006.
• The factory in Kaluga was offi cially inaugurated in September.
• Net sales reached SEK 26 million.
• The net value of the unit’s assets was SEK 29 million. Capital expenditure in 2006 amounted to SEK 5.2 million.
• Production was gradually increased from 1 million envelopes at production start in January to 18 million envelopes in December.
13
Financial overview
Balance sheets in summary, SEK million 2006 2005
Goodwill 342.9 326.3
Other intangible assets 3.7 4.6
Tangible assets 645.7 642.7
Financial assets 62.0 57.2
Total fi xed assets 1,054.3 1,030.8
Inventories 284.5 227.0
Current receivables 354.5 308.4
Cash and bank 38.4 69.2
Total current assets 677.4 604.6
Total assets 1,731.7 1,635.4
Equity 537.8 561.4
Convertible debentures 20.2 20.6
Interest-bearing provisions and liabilities 827.5 756.5
Interest-free provisions and liabilities 346.2 296.9
Total equity and liabilities 1,731.7 1,635.4
Key ratios 2006 2005
Operating margin, %
24.5 4.4
Profi t margin, %
22.6 2.4
Capital turnover rate, times 1.2 1.1
Return on equity, %
26 5
Return on capital employed, %
27 6
Equity/assets ratio, % 31 34
Net debt/equity ratio, times 1.50 1.26
Interest coverage ratio, times
22.3 2.1
Share of foreign sales, % 87 85
Average number of employees 1,379 1,280
2
Calculated on adjusted profi t as stated above.
Profi t and loss accounts in summary, SEK million 2006 2005
Net sales 1,985.0 1,782.1
Planned depreciation/amortisation –102.4 –100.7
Adjusted operating profi t
189.1 79.0
Net fi nancial items –37.6 –36.9
Adjusted profi t before tax
151.5 42.1
Income tax
119.1 –15.5
Adjusted profi t after tax
132.4 26.6
Reported profi t/loss after tax –0.6 23.3
1
Excluding one-time items according to the following:
Capital gains on the sale of equipment and properties 15.9 16.0
Restructuring charges –65.5 –24.4
Total one-time items before tax –49.6 –8.4
Tax attributable to one-time items 16.6 5.1
Total one-time items after tax –33.0 –3.3
Data per share 2006 2005 Number of shares
Number of shares outstanding at
the end of the year before dilution 13,017,298 13,004,986 Number of shares outstanding at
the end of the year after dilution 13,651,180 13,651,180 Average number of shares before
dilution 13,006,000 13,004,986
Average number of shares after
dilution 13,651,180 13,511,180
Earnings per share
1, 2Before dilution, SEK –0.04 1.79
After dilution, SEK –0.04 1.74
Before dilution, excl. one-time
items, SEK 2.50 2.05
After dilution, excl. one-time
items, SEK 2.40 1.99
Equity
Before dilution, SEK 41.31 43.17
After dilution, SEK 42.30 44.09
Other data per share
1Dividend, SEK
31.00 0.00
Quoted market price on the balance
sheet date, SEK 68.00 64.00
P/E ratio (incl. one-time items), times neg 37.2 P/E ratio (excl. one-time items), times 28.3 32.5 Price/equity ratio before dilution, % 165.0 148.3 Price/equity ratio after dilution, % 160.8 145.2
1
One-time items in 2006 consist of: Capital gains on the sale of properties (SEK 15.9 million) and restructuring charges (SEK –65.5 million), and in 2005: Capital gains on the sale of properties (SEK 16.0 million) and restructuring charges (SEK –24.4 million).
2
The dilution effect is not taken into account when it leads to a better result.
3
For 2006, according to the Board’s proposal.
(c) FINDATA Number of shares SEK
The share
Number of shares traded, thousands (incl. afterhours)
2002 2003 2004 2005 2006
Carnegie Small Cap Index SIX General Index
800
600
400
200 40
80
60 120 100 160 140 180
15
