Seco Tools Annual Report
2007
Business report
Highlights of 2007 1
CEO’s comments 2
The Seco Tools share 4
Business mission, vision, targets and strategies 6
Seco Tools’ corporate accountability 8
Seco Tools’ Code of Conduct 8
Organisation and employees 10
Environment and quality 12
Research and development 16
Market overview 18
Products and services 20
The power industry in Italy 23
DuratomicTM 24
BRIC – Sales offensive in fast-growing markets 26
Administration report and financial statements
Administration report 31
Consolidated income statement 36
Consolidated balance sheet 38
Consolidated statement of changes in equity 40
Consolidated cash flow statement 42
Parent Company income statement 44
Parent Company balance sheet 45
Parent Company statement of changes in equity 47
Parent Company cash flow statement 48
Accounting policies and notes 49
Proposed appropriation of profits 71
Audit report 72
Corporate governance
Corporate governance report 74
Picture gallery
Board of Directors 80
Group Executive Management 82
Group Executive Council and auditors 83
Addresses 85
Annual General Meeting 88
Definitions of key financial ratios 89
Contents
Seco Tool’s vision is for the customers to see them as the most dedicated partner in total solutions for metal cutting machining. Seco Tools aim to realise this vision through a personal commitment to maximising the customers’ competitiveness by offering solutions built on high-performance products and services.
The Seco Tools Group, headquartered in Fagersta, Sweden, has over 4,600 employees worldwide and annual revenue of approximately SEK 6,000 million.
About 95 per cent of the Group’s revenue is generated in markets outside Sweden.
Seco Tools is represented in some 50 countries and has more than 40 wholly owned foreign subsidiaries. The company also collaborates closely with a large number of agents and distributors around the world.
Production is based primarily in Sweden, the Czech Republic, France and India.
Seco Tools AB, SE-737 82 Fagersta, Sweden. Tel +46 223-400 00 www.secotools.com
SECO TOOLS
nA N N U A L R EP O R T 2 00 7
eport has been produced by Seco Tools in association with Hallvarsson & Halvarsson. © Seco Tools AB. Photos: Kenneth Sundh, etc. Printing: Strokirk-Landströms, Lidköping 2008. Translation: GH Language Solutions.
Seco Tools Annual Report
2007
Business report
Highlights of 2007 1
CEO’s comments 2
The Seco Tools share 4
Business mission, vision, targets and strategies 6
Seco Tools’ corporate accountability 8
Seco Tools’ Code of Conduct 8
Organisation and employees 10
Environment and quality 12
Research and development 16
Market overview 18
Products and services 20
The power industry in Italy 23
DuratomicTM 24
BRIC – Sales offensive in fast-growing markets 26
Administration report and financial statements
Administration report 31
Consolidated income statement 36
Consolidated balance sheet 38
Consolidated statement of changes in equity 40
Consolidated cash flow statement 42
Parent Company income statement 44
Parent Company balance sheet 45
Parent Company statement of changes in equity 47
Parent Company cash flow statement 48
Accounting policies and notes 49
Proposed appropriation of profits 71
Audit report 72
Corporate governance
Corporate governance report 74
Picture gallery
Board of Directors 80
Group Executive Management 82
Group Executive Council and auditors 83
Addresses 85
Annual General Meeting 88
Definitions of key financial ratios 89
Contents
Seco Tool’s vision is for the customers to see them as the most dedicated partner in total solutions for metal cutting machining. Seco Tools aim to realise this vision through a personal commitment to maximising the customers’ competitiveness by offering solutions built on high-performance products and services.
The Seco Tools Group, headquartered in Fagersta, Sweden, has over 4,600 employees worldwide and annual revenue of approximately SEK 6,000 million.
About 95 per cent of the Group’s revenue is generated in markets outside Sweden.
Seco Tools is represented in some 50 countries and has more than 40 wholly owned foreign subsidiaries. The company also collaborates closely with a large number of agents and distributors around the world.
Production is based primarily in Sweden, the Czech Republic, France and India.
Seco Tools AB, SE-737 82 Fagersta, Sweden. Tel +46 223-400 00 www.secotools.com
SECO TOOLS
nA N N U A L R EP O R T 2 00 7
eport has been produced by Seco Tools in association with Hallvarsson & Halvarsson. © Seco Tools AB. Photos: Kenneth Sundh, etc. Printing: Strokirk-Landströms, Lidköping 2008. Translation: GH Language Solutions.
2007 2006 2005 2004 2003
Revenue, SEK M 6,034 5,451 4,936 4,333 3,917
Operating profit, SEK M 1,491 1,266 1,100 840 677
Profit after financial items, SEK M 1,437 1,235 1,094 812 630
Operating margin, % 24.7 23.2 22.3 19.4 17.3
Profit margin, % 23.8 22.7 22.2 18.7 16.1
Basic earnings per share, SEK 6.99 6.00 5.39 3.97 3.01
Diluted earnings per share, SEK 6.99 6.00 5.39 3.93 2.99
Regular dividend, SEK 4.201) 3.80 3.40 3.00 2.80
Extra dividend, SEK 2.001) 2.20 2.00 2.00 –
Return on capital employed, % 42.6 40.9 40.5 31.9 25.3
Return on equity, % 43.9 39.4 37.0 29.7 22.7
Equity, SEK M 2,406 2,221 2,207 2,028 1,809
Cash and cash equivalents, SEK M 294 243 226 268 339
Cash flow, SEK M 47 36 –74 – 59 103
Cash flow from operating activities, SEK M 1,126 1,004 802 877 611
Equity/assets ratio, % 46 49 53 55 48
Capital expenditure on fixed assets, SEK M 563 426 377 248 254
Number of employees at end of year 4,662 4,224 4,036 3,910 3,882
1) According to Board proposal.
The key financial ratios have been calculated according to the recommendations of the Swedish Financial Accounting Standards Council through the end of 2003, and in compliance with IFRS from 2004 onwards.
For definitions of key ratios, see page 89. To obtain comparable figures, the key ratios per share have been restated as if the share split in 2006 had been carried out at an earlier date.
Financial overview 2003–2007
Capital employed
Total assets less interest-free liabilities and deferred tax liabilities.
Operating margin
Profit after amortisation/depreciation divided by revenue.
Profit margin
Profit after financial items divided by revenue.
Return on capital employed
Profit after financial items plus interest expenses and foreign exchange expenses on loans divided by average capital employed.
Return on equity
Profit after reported tax divided by average equity.
Equity/assets ratio
Equity divided by total assets.
Cash flow from operating activities
The total of cash generated by ordinary activates during the year plus changes in working capital excluding cash and cash equivalents.
Earnings per share before dilution
Profit after reported tax divided by the weighted average number of shares outstanding based on the number of days a certain number of shares was outstand- ing in relation to the year as a whole.
Earnings per share after dilution
Profit after reported tax plus interest expenses on convertible debentures divided by the weighted average number of shares outstanding based on the number of days a certain number of shares was outstanding in relation to the year as a whole.
Revenue
Refers to revenue arising from the sale of goods measured at fair value less VAT, discounts and returns.
All key financial ratios, tables and diagrams in the annual report have been calculated according to the recommendations of the Swedish Financial Account- ing Standards Council through the end of 2003 and in compliance with IFRS from 2004 onwards.
Definitions of key financial ratios
2007 2006 2005 2004 2003
Revenue, SEK M 6,034 5,451 4,936 4,333 3,917
Operating profit, SEK M 1,491 1,266 1,100 840 677
Profit after financial items, SEK M 1,437 1,235 1,094 812 630
Operating margin, % 24.7 23.2 22.3 19.4 17.3
Profit margin, % 23.8 22.7 22.2 18.7 16.1
Basic earnings per share, SEK 6.99 6.00 5.39 3.97 3.01
Diluted earnings per share, SEK 6.99 6.00 5.39 3.93 2.99
Regular dividend, SEK 4.201) 3.80 3.40 3.00 2.80
Extra dividend, SEK 2.001) 2.20 2.00 2.00 –
Return on capital employed, % 42.6 40.9 40.5 31.9 25.3
Return on equity, % 43.9 39.4 37.0 29.7 22.7
Equity, SEK M 2,406 2,221 2,207 2,028 1,809
Cash and cash equivalents, SEK M 294 243 226 268 339
Cash flow, SEK M 47 36 –74 – 59 103
Cash flow from operating activities, SEK M 1,126 1,004 802 877 611
Equity/assets ratio, % 46 49 53 55 48
Capital expenditure on fixed assets, SEK M 563 426 377 248 254
Number of employees at end of year 4,662 4,224 4,036 3,910 3,882
1) According to Board proposal.
The key financial ratios have been calculated according to the recommendations of the Swedish Financial Accounting Standards Council through the end of 2003, and in compliance with IFRS from 2004 onwards.
For definitions of key ratios, see page 89. To obtain comparable figures, the key ratios per share have been restated as if the share split in 2006 had been carried out at an earlier date.
Financial overview 2003–2007
Capital employed
Total assets less interest-free liabilities and deferred tax liabilities.
Operating margin
Profit after amortisation/depreciation divided by revenue.
Profit margin
Profit after financial items divided by revenue.
Return on capital employed
Profit after financial items plus interest expenses and foreign exchange expenses on loans divided by average capital employed.
Return on equity
Profit after reported tax divided by average equity.
Equity/assets ratio
Equity divided by total assets.
Cash flow from operating activities
The total of cash generated by ordinary activates during the year plus changes in working capital excluding cash and cash equivalents.
Earnings per share before dilution
Profit after reported tax divided by the weighted average number of shares outstanding based on the number of days a certain number of shares was outstand- ing in relation to the year as a whole.
Earnings per share after dilution
Profit after reported tax plus interest expenses on convertible debentures divided by the weighted average number of shares outstanding based on the number of days a certain number of shares was outstanding in relation to the year as a whole.
Revenue
Refers to revenue arising from the sale of goods measured at fair value less VAT, discounts and returns.
All key financial ratios, tables and diagrams in the annual report have been calculated according to the recommendations of the Swedish Financial Account- ing Standards Council through the end of 2003 and in compliance with IFRS from 2004 onwards.
Definitions of key financial ratios
Seco Tools’ business mission is to develop, manufacture and globally market metal cutting products and solutions that satisfy customer requirements on quality, service and cost-efficiency. The product portfolio consists of solutions for milling, turning, hole making and holding systems.
Seco Tools also offers a range of complementary services within the Seco Tools Business Solutions concept.
Highlights of 2007
• Revenue at fixed exchange rates rose 13 per cent to SEK 6,034 M, the highest level ever recorded by the Group. All market regions showed stable growth.
• Operating profit for 2007 was SEK 1,491 M, an increase of 18 per cent.
• Continued large market efforts and capacity investments.
• Acquisition in Russia strengthens market position in this emerging market.
• Successful launch of carbide inserts with the Duratomic
TMcoating technology.
• New financial targets that include an increased growth ambition and a capital structure target were adopted by the Board during the year.
Seco Tools’ offering
CEO’S COMMEnTS
a very successful year
Reflections
After three years as CEO of Seco Tools it seems natural to make a few reflections.
Our customer environment is character- ised by a few dominant trends, such as a need for continuous productivity improve- ments and a higher degree of specialisa- tion to handle a fast-changing market.
These trends are in turn leading to higher demands on the choice of core competen- cies and position in the value added chain, as well as a greater need for globalisation.
Another consequence of these trends is that more and more of our customers are expressing a strong desire for Seco Tools to play a clearer and more active role in their product development, regardless of which country they operate in.
Our chosen strategy, “The Seco Way”, addresses precisely these needs and has proven highly successful. It is essentially based on the shift from a product-driven focus to a more solution-oriented approach. The strategy also calls for a transition from a federation of national enterprises to a globally networking organisation, to create the conditions for value-based partnership and thereby also faster growth. The established overall targets are to grow faster than the market and by 2010 to increase the market share by one per cent relative to 2005.
This more solution-oriented approach demands both greater customer closeness and the ability to meet specific customer requirements. One concrete measure to increase customer closeness over the past three-year period is a substantial 30 per cent increase in our technical sales force, which now numbers around 1,200.
Customer closeness and the ability to meet customer requirements demand a
high level of technical expertise. For this reason, technical education has been given high priority through group-wide training programmes that have had a very positive impact.
Another example is found in the area of Custom Tooling, where the ability to meet specific requirements has been addressed in the form of both a near 50 per cent increase in equipment capacity and a methodical improvement in the response time to customer requests.
In practice, this higher degree of global networking extends to virtually all functions in the company and can apply to a range of different aspects, from our successful partnerships with distributors and sharing of industry-specific applica- tion know-how between countries to the creation of a globally-managed purchasing organisation and internationalisation of our R&D activities.
Another cornerstone of the globally networked company consists of common programmes that are implemented by all countries and units. In this context, I would like to highlight two prioritised group-wide programmes – continuous improvement and value-based sales training.
Among other things, the new financial objectives established by the Board also reflect our new and higher growth ambitions, with a growth target of 7 per cent excluding acquisitions, driven by our goal to outpace the market.
Market development
The year’s powerful demand for cutting tools drove steady and strong growth for Seco Tools in every quarter of the year and in all regions. I am particularly
2007 was a very successful year for Seco Tools in many ways, as demonstrated by increased market shares, growth, stronger operating margins and higher earnings per share.
The chosen strategic direction has been strengthened and
important decisions have been made regarding capacity
investments and market efforts that will further enhance
Seco Tools’ future position.
CEO’S COMMEnTS
satisfied with Seco Tools’ even and stable growth in North America during 2007, despite an stagnant market. It is also very encouraging that we recorded robust growth in all of the strategically impor- tant BRIC markets (Brazil, Russia, India and China).
Product development
A number of new products were launched during the year, of which the most notable and innovative was the introduction of our new Duratomic turning grades. The surface coating in this new series has been manipulated at the atomic level to enable major advances in tool life and cutting perfor- mance, which has been confirmed by many satisfied customers. Our overall level of product innovation is measured as the share of revenue derived from products introduced less than five years ago. This metric was on par with the previous year’s level of more than 40 per cent, which is good.
Global production structure
Efforts to globalise our production structure are progressing and we have an excellent base for ongoing expansion that combines technological strength and cost-effective production.
Important decisions were made during the year regarding expansion of the production units for cemented carbide manufacturing, in terms of both capacity and technology. On the tool side, produc- tion volumes in the plant that opened in Pune, India, during 2006 were ramped up according to plan. In the future, this facility will be further enlarged.
The ratio of machinery and equip- ment investments to annual revenue for the years 2007 and 2008 will reach a historically high level.
Acquisitions
The increased focus on acquisition activities has resulted in an agreement to acquire the Russian carbide tool manufacturer ALG with an annual turnover of over SEK 100 M. The intention is to strengthen Seco Tools’
position in the important Russian
market, and the acquisition is expected to make a valuable contribution to Seco Tools’ ongoing growth in Russia after approval from the relevant authorities in the spring of 2008.
Profitability and return
It is pleasing to note that our operating profit for 2007 rose by 18 per cent, resulting in an operating margin of 24.7 per cent. Return was also strong, amounting to 43.9 per cent on equity and 42.6 per cent on capital employed.
All of these figures are well in line with our financial targets, and earnings per share were up by 16 per cent.
Seco Tools’ solid financial position gives us ample scope to combine market expansion initiatives with an active dividend policy and additional acquisi- tions, without jeopardising our financial target to maintain a net debt/equity ratio of less then 1.0 over time.
Outlook for 2008
The company’s clearly charted course, future-oriented efforts, competitive and high-performance products, good momentum in growth regions and ongoing operational development all support my conviction that Seco Tools has another successful year ahead.
In conclusion, I would like to thank all of Seco Tools’ employees around the world for their excellent contributions in the past year. I look forward to 2008 with confidence.
Fagersta, January 2008
Kai Wärn President and CEO
THE SECO TOOLS SHarE
The Seco Tools share
History
Seco Tools AB was introduced on the Stockholm Stock Exchange in 1989. At 31 December 2007 the company had 101,967,690 class B shares quoted on the OMX Stockholm Stock Exchange. The class A shares are not publicly listed.
Changes in the number of shares outstanding are shown in the table below.
Share price development
The closing price of the Seco Tools share in 2007 was SEK 111.25, representing a decrease of 1 per cent during the year.
Over the same period the OMX Stock- holm Index fell by 6 per cent. The year’s highest bid price was quoted at SEK 148 on 26 April 2007, and the lowest at SEK 102 on 22 November 2007. The Seco Tools share has produced a solid yield over the past ten years and the share price including reinvested dividends has risen by an average of 27 per cent annually over the past five-year period.
Share capital
At 31 December 2007 the share capital in Seco Tools amounted to SEK 73 M (73) consisting of 145,467,690 shares with a quota value of SEK 0.50 each. The shares are divided between class A and class B shares. Class A shares are held by Sandvik AB and grant entitlement to ten votes each, while the class B shares grant one vote each.
Share trading
A total of 13.7 million (8.3) Seco Tools shares were traded in 2007, equal to 13 per cent (8) of all class B shares. The average trading volume was 54,756 shares (32,980) per business day and the average number of transactions was 27 per day.
Dividend
The main objective for the Seco Tools Group is to provide the shareholders with an attractive yield and value growth over time, with a dividend payout ratio of
at least 50 per cent. The Board proposes that the 2008 AGM approve a regular dividend of SEK 4.20 per share (3.80) and an extra dividend of SEK 2.00 per share (2.20). The proposed regular dividend is equal to 60 per cent of earnings per share for 2007. The average dividend payout ratio over the past five years is 68 per cent, excluding extra dividends amounting to SEK 8.20 per share over the same period.
Ownership structure
The number of shareholders at 31 December 2007 was 11,955, compared to 11,820 at the beginning of the year. The ten largest shareholders controlled 89.2 per cent (91.1) of the share capital and 97.2 per cent (97.5) of the votes at year-end 2007. Swedish legal entities, including institutions such as insurance companies and equity funds, held 31.8 per cent of the share capital and 8.6 per cent of the votes at year-end.
The share price, including reinvested dividends, has risen by an average of 27 per cent annually over the past five-year period.
Earnings and regular
dividend per share Changes in the number of shares outstanding no. of a shares
no. of B shares
Total no.
of shares
Share capital, SEK
IPO in 1989 8,700,000 19,700,000 28,400,000 71,000,000
Conversion in 19921) 8,700,000 19,710,480 28,410,480 71,026,200 Conversion in 1993 8,700,000 19,773,980 28,473,980 71,184,950 Conversion in 1994 8,700,000 19,913,588 28,613,588 71,533,970 Conversion in 1995 8,700,000 20,132,898 28,832,898 72,082,245 Conversion in 20042) 8,700,000 20,393,538 29,093,538 72,733,845 5-for-1 split in 2006 43,500,000 101,967,690 145,467,690 72,733,845
1) In 1988 Seco Tools issued a convertible debenture loan in a face amount of SEK 30.6 M. The debentures were subscribed for only by permanent employees in the Swedish part of the Seco Tools Group. The debentures carried a fixed annual interest rate of 9.25 per cent and matured on 30 March 1995. During the period from 1 March 1991 to 15 March 1995, the debentures were convertible to class B shares at a conversion price of SEK 70 each.
2) In 1999 Seco Tools issued a convertible debenture loan in a face amount of SEK 69.6 M. The debentures were subscribed for only by permanent employees in the Swedish part of the Seco Tools Group. The debentures carried interest corresponding to STIBOR less 0.75 percentage points and matured on 30 May 2004. The debentures were convertible during the period from 1 February 2001 to 30 April 2004. Those conversions that took place were carried out during the period from January to April 2004.
0 1 2 3 4 5 6 7 8
2003 2004 2005 2006 2007
SEK
Basic earnings per share Regular dividend
THE SECO TOOLS SHarE
Financial ratios per share, SEK
2007 2006 2005 2004 2003
Basic earnings 6.99 6.00 5.39 3.97 3.01
Diluted earnings 6.99 6.00 5.39 3.93 2.99
Equity 16.54 15.27 15.18 13.98 12.55
Regular dividend 4.201) 3.80 3.40 3.00 2.80
Extra dividend 2.001) 2.20 2.00 2.00 –
Share price at year-end 111.25 112.00 80.00 61.20 55.00
Direct yield2), % 3.8 3.4 4.3 4.9 5.1
P/ E ratio3), times 15.9 18.7 14.8 15.4 18.2
Price/equity ratio, % 673 733 527 438 438
1) According to Board proposal.
2) Regular dividend divided by the share price at year-end.
3) Share price at year-end divided by earnings per share before dilution.
The key financial ratios have been calculated according to the recommendations of the Swedish Financial Accounting Standards Council through the end of 2003, and in compliance with IFRS from 2004 onwards. To obtain comparable figures, the key ratios per share have been restated as if the share split had been carried out at an earlier date.
For definitions of key ratios, see page 89.
Largest shareholders (31 December 2007)
% of no. % of voting of shares power
Sandvik Invest AB 60.4 89.3
Swedbank Robur Fonder 9.2 2.5
Alecta pensionsförsäkring 8.9 2.4
AFA Försäkring 3.2 0.9
AMF Pension och Fonder 2.5 0.7
SEB Fonder & SEB-Trygg Försäkring 1.6 0.4
Capital Group Fonder 1.1 0.3
Fourth National Pension Fund (AP4) 0.9 0.3
Kammarkollegiets fondförvaltning 0.7 0.2
HQ Fonder 0.7 0.2
Other shareholders 10.8 2.8
100.0 100.0
A number of the shareholdings owned by foreign investors are registered in the name of a trustee, which means that the true owners are not publicly re- gistered. The largest foreign investors are therefore not included in the above list unless the size of their shareholdings can be established.
Distribution of shareholdings (31 December 2007)
no. of % of all aggregate % of share average
no. of shares shareholders shareholders holdings capital holding
1 – 500 9,204 77.0 1,458,405 1.0 158
501 – 1, 000 1,148 9.6 951,558 0.6 829
1,001 – 10,000 1,417 11.9 4,209,498 2.9 2,971
10,001 – 100,000 131 1.1 3,582,819 2.5 27,350
100,001 – 55 0.5 135,265,410 93.0 2,459,371
11,955 100.0 145,467,690 100.0 12,168
Share price development including reinvested dividends Share price development
0 50 100 150 200
SIX Industry (eff. return)
SIX Return Index Class B share (incl. dividends) 2007 2006
2005 2004
2003 2002
0 30 60 90 120 150
SX20 Industrials_PI OMX Stockholm PI Class B share
2007 2006
2005 2004
2003 2002
Aktiens utveckling SEK
SEK
Källa:
0 50 100 150 200
SIX Industry (eff. return)
SIX Return Index Class B share (incl. dividends) 2007 2006
2005 2004
2003 2002
0 30 60 90 120 150
Aktiens utveckling SEK
SEK
BuSInESS MISSIOn, VISIOn, TargETS anD STraTEgIES
Business mission and vision
Seco Tools’ business mission is to develop, manufacture and globally market metal cutting products that satisfy customer requirements for quality, service and cost-efficiency. The product portfolio consists of solutions for milling, turning, hole making and holding systems.
Seco Tool’s vision is for the customers to see them as the most dedicated partner in total solutions for metal cutting machining. Seco Tools aim to realise this vision through a personal commitment to maximising the customers’ competitive- ness by offering solutions built on high- performance products and services.
Financial targets
The Group’s financial targets were revised by the Board during the year and are now as follows:
• The overall target is to provide the shareholders with an attractive yield and value growth over time. The dividend payout ratio (regular dividend) should be at least 50 per cent.
• Organic revenue growth should be at least 7 per cent annually over a business cycle.
• Average operating margin over a business cycle should be 20 per cent.
• Average return on capital employed should be least 30 per cent over a business cycle.
• The average net debt/equity ratio should be less than 1.0.
Strategy
Seco Tools actively contributes to improving its customers’ productivity, and thereby also their competitiveness in metal cutting machining. Customer close- ness and a solution-oriented approach are seen as strategic cornerstones together with verifiable and documented improvements in the customers’ total cost of production. Seco Tools values long-term relationships where it is possible to gain a better understanding of the customers’ problems and actively contribute to their development. A comprehensive range of cutting tools is
another central component of Seco Tools’ strategy. In addition to its own end-user sales, Seco Tools optimises its market penetration through long-term partnership with distributors.
Customer benefit
Seco Tools has two main approaches to ensuring superior customer productivity and support. The first is by offering a range of high performance products, and the second is by delivering peripher- al services that allow customers to maximise the full productivity potential of these products.
The peripheral services include analysis software tools that help custom- ers to find the right solution to their various machining needs, to define the cost element in metal cutting machining and to document improvements. Seco Tools offers a high level of expertise and the capacity to develop custom solutions when needed.
The opportunities for productivity gains are good, since the attributes of the cutting tools are often decisive for the productivity performance of the machines in which they are used.
Customer closeness
Closeness to the customers is vital in understanding their business and effectively addressing their needs with the best possible solution. Close contact enables Seco Tools’ to pick up signals about new needs in the market, provid- ing critical input for the Group’s product development. Direct contact with customers is essential for effective use of resources in research and development.
Another aspect of this closeness is for customers to feel that Seco Tools is easy to work with, has a high service level and makes a significant contribution to boosting their productivity. One way to achieve customer closeness is by having a large in-house sales force with a high level of expertise and relationships that can be cemented and deepened over time. Consequently, long-term customer relationships are of key importance for Seco Tools.
Business mission, vision, targets and strategies
Revenue growth
Dividend payout ratio
Return on capital employed
–3 0 3 6 9 12 15
2003 2004 2005 2006 2007
%
0 30 60 90 120 150
2003 2004 2005 2006 2007*
%
Dividend payout ratio (regular dividend) Dividend payout ratio (extra dividend)
Target, dividend payout ratio (regular dividend)
* According to Board proposal
0 10 20 30 40 50
2003 2004 2005 2006 2007
%
Return on capital employed Target
BuSInESS MISSIOn, VISIOn, TargETS anD STraTEgIES
Partnership with distributors Close collaboration with distributors provides good access to and an effective interface with customers where the Group has no direct contact. These include small businesses and markets traditionally dominated by distributors rather than manufacturer direct sales.
Our ambition is to continuously strengthen distributor partnerships, for example through training activities.
Targeting new markets
The Group can increase its growth opportunities by leveraging the potential of geographic markets that offer particularly good potential for growth, primarily in Asia and Eastern Europe.
Growth in these regions is considerably higher than in Western Europe and North America, and is expected to remain so in the foreseeable future.
Product development
Products of a high quality and superior performance are crucial for success in
the market. In each new product generation, Seco Tools must offer customers significant improvements in machining performance. Another priority is ongoing improvement in ease of use.
Part of the product development strat- egy is to continuously streamline the internal processes and accelerate time to market. In a mid-term perspective, the goal is to develop new products at such a pace that 50 per cent of the Group’s revenue will derive from products younger than five years old.
Control over the value added chain The Group strives to control the entire value added chain from purchasing of raw materials, mainly tungsten and other carbides, to delivery of finished tools. This control provides a platform for both product quality and cost-effi- ciency, and ultimately also for the Group’s profitability.
Skills development
The professional expertise of the
employees is crucial in meeting the Group’s ambitious targets. Systematic and continuous learning initiatives are aimed at enhancing both technical and sales-related skills. The conditions for good business continuity are secured through proactive succession planning for key positions throughout the Group.
Through the establishment of continuous improvement programmes in all of the Group’s departments and subsidiaries, the ambition is to focus the organisation on prioritised areas for improvement and promote employee participation in operational development.
Acquisitions
The Group strives primarily for organic growth. However, as a complement to organic growth, Seco Tools continuously evaluates the possibilities to enhance growth in selected market or product areas through partnerships or acquisitions.
SECO TOOLS’ COrpOraTE aCCOunTaBILITY
Seco Tools’ Code of Conduct
Accuracy of records and finance
Seco Tools shall have accurate record keeping consistent with all applicable standards. This applies to each and every detail of the business. All employees are responsible for maintaining accurate books and records to efficiently manage our business.
Business operations
Seco Tools’ products and services shall be marketed and sold fairly and honestly on the basis of their quality, perfor- mance, price, service level and other relevant factors.
Business courtesies
Seco Tools’ employees may not give or accept gifts, favours, entertainment or other inducements unless they:
• are consistent with common business practices,
• are not excessive in value and cannot
reasonably be construed as a bribe or payoff,
• do not violate applicable laws,
• will not embarrass the Company or the employee if publicly disclosed.
Bribery
Seco Tools’ employees shall not, directly or indirectly, offer, promise, request, demand or accept a bribe or other improper benefit in order to obtain or retain business.
Antitrust and competition law Seco Tools shall comply fully and in good faith with the applicable antitrust and competition laws and regulations in the countries where we operate.
Supplier/subcontractor relations Subcontractors will be evaluated and selected on their ability to do the required job competitively and meet the Seco Tools’ Code of Conduct.
Labour
Health and safety
Seco Tools shall provide a safe and healthy working environment and shall take reasonable steps to prevent accidents and injuries.
Workplace violence, including threats, threatening behaviour, harassment, intimidation, assaults and similar conduct, will not be tolerated. Firearms are not permitted at any Seco Tools facility.
Equal opportunity
Seco Tools shall ensure equal employ- ment opportunities for all qualified individuals, without distinction or discrimination due to age, race, colour, national origin, religion, gender, disability or other characteristics protected by applicable law.
Drugs and alcohol
Seco Tools employees are not allowed to distribute, possess, use or work under the
The Code is an expression of the values to be applied in areas such as business ethics, environmental management and working conditions.
“Surveys show that our customers have a high level of confidence in Seco Tools, which is something we are committed to preserving and fostering.”
Seco Tools is committed to increasing its value to customers, employees, share- holders and other stakeholders through the profitable provision of products and services to global markets. At the same time, Seco Tools shall uphold a high level of ethical standards and be a good citizen worldwide.
Seco Tools and its employees shall comply with the laws of all countries in which it operates, as well as the Seco Tools Code of Conduct. Seco Tools shall conduct its business operations in accordance with OECD Guidelines for Multinational Enterprises.
It is the responsibility of all employees to ensure, by seeking advice when appropriate, that they are aware of all relevant laws, practices and agreements.
Seco Tools’ employees at all levels play an important role in Seco Tools’ financial, environmental and social improvement efforts. They shall be properly trained, and they are accountable, within the scope of their responsibilities, for Seco Tools’ sustainable performance.
Implementing the Code of Conduct
In February 2005, the Seco Tools Code of Conduct was adopted by the Board of Directors to apply to the entire Group.
In 2005 the Code was communicated to all managers and employees.
The purpose of Seco Tools’ Code of Conduct is to guide all Seco Tools Group employees in their day-to-day work.
In 2007, the implementation of Seco Tools’ Code of Conduct was followed up
through internal audits throughout the Group. Although no significant shortcom- ings were identified, Seco Tools intends to continuously monitor compliance with the Code and ensure that its contents and meaning clear to everyone affected. The Code of Conduct is a natural part of the Group’s working relationships with suppliers and subcontractors, and it is vital that the entire supply chain embraces the same business ethics contained in the Code. To ensure compliance with this, the company performs regular supplier assessments according to an established plan.
Work on the Code of Conduct continu- ous and dynamic process at Seco Tools.
SECO TOOLS’ COrpOraTE aCCOunTaBILITY influence of drugs or alcohol on any
Seco Tools premises, or in connection with Seco Tools’ business, without local authorisation.
Unlawful harassment
All employees shall treat one another with courtesy, dignity and respect, regardless of gender.
Seco Tools shall not tolerate sexual or other unlawful harassment involving the solicitation of sexual favours, the initiation of sexual advances by one employee toward another or other unwelcome conduct that creates an offensive or intimidating work environment.
Seco Tools’ managers, supervisors and executives shall be alert to the possible presence of unlawful harass- ment in the workplace and shall take appropriate steps to prevent any form of such harassment.
Compensation
Seco Tools shall ensure that:
• wages paid at least meet the legal or industry minimum standards and covers the fundamental needs of the employees,
• information about wages and benefits is communicated clearly and regularly to each employee,
• wages and benefits are rendered in full compliance with all applicable laws,
• labour hire arrangements and apprenticeships are not undertaken to evade the Group’s obligations to its personnel under the applicable laws or under social security legislation and regulations.
Working hours
Seco Tools shall comply with applicable laws and industry standards on working hours.
Forced labour Seco Tools shall:
• guarantee that working hours and working conditions comply with all statutory requirements. All employees shall be treated with respect and no employee shall be subject to corporal punishment or coercion of any type,
• not engage in or support the use of forced labour.
Freedom of association
Seco Tools respects the right of employ- ees to form and join labour unions within the law of the country where they reside.
Child labour
Seco Tools shall neither tolerate the use of child labour when conducting business, nor accept products from suppliers and subcontractors that utilise child labour in their contracting, subcon- tracting or other business arrangements for the manufacture of their products.
Environment
Matters pertaining to the environment, health and safety are an integral part of Seco Tools’ total operations. Continuous improvements are achieved in these areas through management by objec- tives. We believe that the greatest effect is achieved through preventative action.
• Seco Tools adhere to an approach that leads to long-term sustainable develop- ment. Consequently, they strives for high efficiency in the use of energy and natural resources, promote systems for recovery and recycling of materials and work to prevent and minimise contamination.
• Seco Tools strives to offer working conditions that encourage employees to perform effectively, assume responsi- bility and continue to develop in its per- sonal and professional pursuits.
• Seco Tools shall comply with or exceed the environmental requirements set by applicable laws, ordinances and inter - national agreements.
Seco Tools feels that common and environmentally effective requirements and standards should be established at an international level.
Community involvement
Local involvementWherever Seco Tools operates, good rela- tions shall be regarded as fundamental to long-term success. Knowing that each local community is different, Seco Tools’
policy is that every Seco Tools company shall strive to understand and interact constructively with its local community and assist in its development. To meet this policy, Seco Tools encourages its employees to participate in community programmes and initiatives that benefit the people in the community where Seco Tools operates.
Political contributions
Seco Tools will not contribute financially to political parties or politicians.
Seco Tools will not make any contri- bution, directly or indirectly, to any candidate for public office, political parties or other political organisation.
Employees may not be given paid leave for political activity, although unpaid leave may be possible if consis- tent with local policies and laws.
Sponsorship and endowments Seco Tools believes that its most impor- tant contribution to the communities where it operates is to perform its basic business activities as effectively as possible following the principles of the Code of Conduct. Seco Tools’ sponsor- ship and donation initiatives shall be delivered through local business units, focusing on programmes supporting culture, education, sports or other proactive social and humanitarian programmes.
SECO TOOLS’ COrpOraTE aCCOunTaBILITY
Organisation and employees
More employees
The number of employees in the Group increased by a net total of 438 during 2007 and amounted to 4,662 at year-end.
The strategic objective to enhance customer service with more sales staff and technicians and a stronger focus on R&D led to the recruitment of 164 new employees in these areas during the year.
In response to a sharp increase in demand for our products, the Group’s production units were reinforced with 227 new employees.
Management succession and leadership development
Management succession is an essential part of Seco Tools’ business operations.
In the past year, succession plans were formulated and adopted for critical positions in both the Parent Company and all subsidiaries. Development plans have been drawn up for potential replacements to ease the transition into future manage- rial duties. Annual follow-up is carried out in all of the subsidiary boards.
Several targeted training activities for future leaders have been carried out in the Parent Company.
Extensive training activities to support ”The Seco Way”
In 2007 Seco Tools carried out an internal training programme for all employees to promote understanding for and commitment to the strategic plan,
“The Seco Way”.
The programme was carried out in small groups to give the participants opportunity to actively understand and discuss the motives behind the strategy and Seco Tools’ visions.
STEP – Seco Technical Education Programme
To both customers and the company’s own employees with greater knowledge and support to in the area of metal cutting machining, Seco Tools has appointed a Chief Technical Education Manager whose task is to lead and develop the company’s own network of specialists in STEP, Seco Tools’ Technical Education Programme, an initiative
aimed at arranging, developing and following up the technical education programmes that are carried out for employees and customers all over the world. The programmes train produc- tion engineers in the latest tool systems and cutting technologies in order to help them improve productivity in the metalworking processes. In the past two year, more than 15,000 people took part in some type of STEP programme.
Changed production structure
To further enhance Seco Tools’ competi- tiveness, the production structure has been optimised. The production units in both the Czech Republic and India were expanded during the year.
Cemented carbide production in Warren, USA, was wound up in 2006. At mid-year 2008, the remaining activities in Warren will be moved into new premises that are better adapted to the unit’s future operations.
The focus on custom engineered tools (CET) continued during the year with new investments in both fl exible and more high-capacity equipment and the development of software and methods for faster preparation of price quotes.
Continuous improvement
In 2007 all production units drew up individual programmes for implementa- tion of continuous improvements in their respective organisations. A few have worked methodically with this for many years and have come far, while others are still in the starting phase. Increased sharing of knowledge and experience between units is contributing to greater standardisation and the establishment of methods for “best practice”.
Business processes
A project designed to create more harmonised business process in the Group was launched during the year.
The intention is to increase transparency and thereby promote a better under- standing of the entire value chain.
Furthermore, Seco Tools will boost effi ciency by standardising its internal work processes in all parts of the Group.
Age structure Seco Tools AB
Term of employment Seco Tools AB
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1. –24 2. 25–29 3. 30–34 4. 35–39 5. 40–44 6. 45–49 7. 50–54 8. 55–59 9. 60–
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1. 0–2 yrs 2. 3–5 yrs 3. 6–10 yrs 4. 11–15 yrs 5. 16–20 yrs 6. 21–25 yrs 7. >25 yrs 5.
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SECO TOOLS’ COrpOraTE aCCOunTaBILITY
Sickness absence
An effort to reduce sickness absence was started in 2007 with the development of a more clearly defined sickness and rehabilitation process for Seco Tools in Sweden. Preventative measures are being taken to reduce sickness absence, such as activities to encourage physical fitness and voluntary courses for shift workers in association with AFA, together with im - proved follow-up and statistics for all managers with personnel responsibility.
Already in 2007, sickness absence in the Parent Company decreased by about 20 per cent.
An attendance rate of 98 per cent for executives and 95 per cent for staff employed under collective agreements has been set as a long-term target to be reached by 2010.
International social commitments
Seco Tools’ advanced technology and resulting need for skilled personnel contributes to a good regional labour market. One such example comes from the USA, where Seco Tools has been given both awards and grants by the state of Tennessee and Loudon County for its ongoing training of qualified machine
operators. The company also undertakes targeted activities to better meet the needs of the employees in the social area.
Seco Tools’ production unit in India is located outside the city centre of Pune, with its population of 4.5 million.
To assist the employees and reduce traffic and the risk of injuries during travel, the company arranges bus transports to take the employees to and from work. As a further benefit, Seco Tools has an extensive insurance programme for the employees and their family members.
SECO TOOLS’ COrpOraTE aCCOunTaBILITY
Key environmental ratios
2007 2006 2005
Electricity usage in relation to revenue, MWh/SEK M 20.5 23.1 25.8
Total waste per produced tonne, tonne/tonne 2.41 2.56 2.77
Approved transports, % 84 76 68
Total water usage (drinking water and “industrial water”), m3 446,194 443,442 521,042
Environment and quality
The environmental management system globally certi- fied by Seco Tools in 2006 was used in the past year to develop environmental activities and reduce environ- mental impact. Visits were made to all units to monitor and enhance the efficiency of the system. This work will continue in 2008 and, among other things, Seco Tools China will be included in the certification.
ENVIRONMENTAL POLICY FOR SECO TOOLS AB
Sustainable growth
Seco Tools works actively to promote sustainable development, minimise en- vironmental impact, comply with laws and other applicable requirements and pursue continuous improvements and preventive measures in the environmen- tal area. Operations are conducted with consideration to both the environment and human health.
Seco Tools shall:
• Abide by applicable legislation and other relevant demands and work with continuous improvements and preventative measures for environment, health and safety.
• Have a suitable management system for environment, health and safety with long-term objectives and targets that are regularly followed up and renewed.
• Develop workplaces and processes in a way that minimises risks to humans and the environment.
• Continuously evaluate, control and minimise the group’s resource and energy consumption.
• Consider environmental issues when we develop new products and processes and offer our customers products that help them to reduce their consumption of resources.
• Support and, where necessary, demand that our suppliers conform to our environmental requirements.
• Always consider environmental issues in our day-to-day activities and openly communicate with all stakeholders.
• Always openly inform stakeholders about our activities and products.
SECO TOOLS’ COrpOraTE aCCOunTaBILITY
Environmental work
Environmental goals for 2007
• Seco Tools will reduce its overall energy usage (electricity, energy for heating and vehicle fuel) in relation to revenue by 5 per cent annually by the year 2010. The sub-goal for 2007 was a maximum energy usage of 21.9 MWh per SEK M.
• Seco Tools will reduce the volume of waste in relation to produced goods by 3 per cent in 2007, equal to a maxi- mum target of 2.48 tonnes of waste per tonne of goods.
• Seco Tools will continue to improve its handling of chemicals in the Group.
The chemicals included on the observation and restriction lists will be replaced when possible.
• Seco Tools will continue its efforts to reduce environmental impact from Group’s transports, by ensuring that 80 per cent of all companies used to transport products to and from the Group’s central warehouses are certified or work according to ISO14001.
New goals will be set for 2008 based on the results and changes in activities achieved during 2007.
Environmental management Global certification of Seco Tools’
environmental management system has provided a platform for systematic efforts throughout the Group. Efforts to meet the group-wide environmental goals have
led to improved results in several areas.
The goal for energy usage was broad- ened from electricity only to also include heating energy and fuel for company cars.
Monitoring
Environmental performance is monitored through quarterly reviews by the Group Executive Management and through internal and external audits. External audits by Det Norske Veritas are carried out at least once a year at each unit, at which time the unit is visited by one or several persons from a global audit group.
Permits
A new extended permit for production in Fagersta was granted during the year and allows to a 100 per cent increase in
SECO TOOLS’ COrpOraTE aCCOunTaBILITY
powder production, a 33 per cent increase in carbide production and a maintained production level for finished cemented carbide products.
Energy usage
The year’s focus on energy efficiency has been highly successful. Energy usage was reduced from 23.1 to 20.5 MWh/SEK M, equal to a decrease of 11 per cent that widely surpasses the 5 per cent target.
Production adaptations, more efficient heating and ventilation and a changed policy for company cars in Sweden, Germany and England all contributed to more efficient energy usage.
Aside from the positive results from an energy perspective, these efficiency improvements have also reduced CO2 impact on the environment and emis- sions of greenhouse gases.
Waste
The volume of waste per produced tonne of finished goods decreased to 2.41 tonnes, equal to a decrease of 4 per cent.
An increased general awareness about the importance of correct handling and waste costs together with improved handling and more efficient waste treatment are contributing to the good results.
Transports
The result for 2007 was that 84 per cent of the used transport companies are environmentally certified or work according to an environmental manage- ment system equivalent to ISO14001.
Chemical products
The group-wide chemical register is used to study and eliminate possible risks
associated with chemicals. In addition, intensive efforts are underway to prepare the company for chemical legislation under the new REACH directive.
Resources have been created and initiatives to ensure smooth implementa- tion of the directive are proceeding according to plan. In this area, Seco Tools must act as both manufacturer and user of chemical products.
Local environmental work
Local activities are also undertaken to reduce environmental impact. In response to a general drought that arose two years ago, Seco Tools Brazil is taking part in a local water conservation programme. Many parts of India are also struggling with a water shortage and Seco Tools India is active in a pro- gramme for collection of rain water, tree planting programmes and tree adoption programmes to improve the situation.
Occupational health and safety Employee exposure to cobalt was monitored at the units in Fagersta, Sweden, Guanzate, Italy, Sumperk, Czech Republic and Pune, India. In all cases, personal measurements and analyses were carried out to ensure attainment of Seco Tools’ strict requirements. Action has been taken when called for and the results show very low levels of exposure in relation to requirements.
Quality
Seco Tools’ quality policy states an ambition to offer products and services that meet customer expectations. Based on a customer focus and a commitment to total quality, Seco Tools pursues
continuous improvement of processes with the active involvement of employees and suppliers. This is achieved by:
• Defining quality goals that are continuously monitored and reported.
• Setting standards that satisfy customer requirements and consistently meeting norms.
• Continuously evaluating the quality management system and meeting the criteria in ISO 9001.
• Continuously informing and educat- ing the employees to make quality the responsibility of every individual in the company.
Prioritised goals during the year have been:
• to continue monitoring handling times for product returns,
• to launch a group-wide effort to create a uniform process for corrective and preventative measures,
• to draw up rules for standardised handling of product returns, and
• to continue monitoring the produc- tion units’ product returns rate in PPM (parts per million) in relation to the total production volume.
SECO TOOLS’ COrpOraTE aCCOunTaBILITY
rESEarCH anD DEVELOpMEnT
Research and development are essential aspects of Seco Tools’ operations and ambition to offer our customers a comprehensive and modern product range that can deliver high productivity and reliable performance in the latest tool machines. The goal is for half of all the products we sell to have been introduced on the market within the past five years, compared to the current level of just over 40 per cent.
The performance of a cutting tool is affected mainly by improvements in three areas: in the material of which the tool is made, known as the substrate, in the surface coating and in the tool geom- etry, or shape.
In 2007 Seco Tools introduced a number of new carbide grades for turning and milling where the common denominator is a surface coating based on Seco Tools’ innovative DuratomicTM technology. A typical performance enhancement for the introduction of a new product generation, measured in increased machine capacity per edge, is around 20–25 per cent. With the new Duratomic coating technology, enhance- ments of 50–100 per cent are not unusual.
The new grades have been very well received in the market and Seco Tools will accelerate its development of carbide grades in the years ahead.
Organisation
A total of around 190 of the Group’s employees are active in R&D. Although some 75 per cent of the Group’s R&D activities are carried out in the Parent Company, the units outside Sweden are playing an increasingly important role in product development activities.
For example, the R&D unit at Pramet in the Czech Republic serves as a
resource for the Group’s global research and development.
In 2007 a product development centre was also set up at Seco Tools’
facility in Pune, India, to support the expanding production of tuning tool holders and indexable inserts, and will function as a resource for the develop- ment units in Sweden and France.
The ongoing globalisation trend has contributed to a greater need for uniform processes in the Group. In the past year, a standardised project management model and a resource management process were implemented. The goal is to shorten lead times for development projects and further improve delivery precision for new product launches.
2007
The Group’s expenditure on research, product development and quality control in 2007 was equal to approxi- mately 4 per cent of revenue.
The expansion strategy for the Group’s R&D operations has created a strong need to recruit additional staff in our development units. In 2007 the organisation was reinforced with new and highly qualified employees in carbide development, product develop- ment and engineering.
In the past year Seco Tools continued its ambitious focus on new carbide grades. The Duratomic coating technol- ogy was introduced together with the TP2500 turning grade, which is opti- mised for turning of steel. The TP2500 was the first of a whole new generation of turning and milling products. Two additional turning grades were also introduced during the year, TM2000 and TM4000, for machining of stainless steel. In the milling segment, the MP2500 was launched for machining of
research and development
Seco Tools’ R&D operations are undergoing an expansi-
ve phase in which increased globalisation of the Group’s
resources is playing a central role. In the past year Seco
Tools began building up a product development centre
in India as part of its global push.
rESEarCH anD DEVELOpMEnT
steel and the MK1500, MK2000 och MK3000 family for milling of cast iron.
Six of the seven new grades have a coating based on the Duratomic technology, and all have been highly successful in the market.
Some of Seco Tools’ R&D initiatives are directed towards development of machining solutions for different customer segments. The objective is to create solutions that result in dramatical- ly improved productivity for specific materials, components and machining operations. Among other things, in 2007 a new concept for pull broaching with indexable insert technology was installed at customer sites in the turbine manufac- turing industry. The concept has been highly successful and resulted in enhanced productivity in critical operations.
New products in 2007
A number of new disc milling products were introduced and launched with a campaign at the end of the year. Disc milling is an area where Seco Tools has held a forefront position for many years, and is characterised by high cutting
speed and long tool life. Through extensive renewal of the product range with new application areas, cutters with more edges and adapted geometries for a wide range of machining operations in different customer segments, Seco Tools is further advancing its position in this segment. Seco-EPB also introduced a new tool holding programme for disc mills during the year.
For milling in cast iron, Seco Tools launched a new face mill with a full 16 edges per insert, enabling highly cost - effective face milling of components in the automotive and equipment industries, among others.
Seco-Jabro launched the new Mini range of solid carbide end mills with diameters down to 0.1 mm. The market for this type of extremely small carbide tools is showing explosive growth. The customers are found primarily in the mould and die industry and among manufacturers of small mechanical components that are used in applications such as clocks, vehicles, aircraft and medical technology.
The Seco-CaptoTM family of modular tooling systems was further expanded
with a range of indexable insert drills with integrated Seco-Capto connectors.
A new insert series with a newly devel- oped geometry, MF4, for turning of stainless steel was launched in the autumn together with the new TM2000 och TM4000 turning grades featuring DuratomicTM technology.
2008
Seco Tools will retain its strong commit- ment to the development of new grade programmes for both turning and milling. Next in line is a focus on improved productivity in more difficult- to-machine heat resistant materials.
The creation of new milling concepts and solutions for higher performance and improved production economy will be prioritised and Seco Tools will maintain its focus on development of component-adapted machining solutions.
The expansion of product develop- ment activities in India is continuing in pace with market growth and increased production.
