HL Display

HL Display

Annual Report 2006

CONTENT

3 The year in brief 4 This is HL Display 6 Statement by the CEO

8 Business concept, objectives and strategy 11 Business processes Introduction

12 Core process 1 Sales and customer relations

14 Core process 2 Development, launch and product range management 18 Core process 3 Production and deliver y of goods and ser vices 21 Support processes

24 Market

28 Customer case study 30 The share

32 Risk and sensitivity analysis 33 Nine year summary 33 Definitions 34 Directors’ Report

The Group

36 Consolidated income statement 37 Consolidated balance sheet

38 Consolidated statement of changes in equity 38 Consolidated cash flow statement

The Parent Company

39 Parent company’s income statement 40 Parent company’s balance sheet

41 Statement of changes in the parent company’s equity 41 Parent company’s cash flow statement

42 Notes 61 Audit Report

62 The Board’s working practices 63 Board of Directors

64 Senior Executives 65 History

66 Financial Information

The year in brief

THE YEAR IN BRIEF

Net sales increased to MSEK 1,448 (1,285).

Profit before tax was MSEK 92 (62).

Earnings per share after tax amounted to SEK 7.87 (4.59).

Equity per share amounted to SEK 50.10 (44.52) as of 31 December 2006.

Key ratios 2006 2005 2004

Net sales, MSEK 1,448 1,285 1,249

Operating profit, MSEK 107 63 108

Profit before tax, MSEK 92 62 93

Profit after tax, MSEK 62 35 47

Earnings per share, SEK 7.87 4.59 6.15

Operating margin, % 7.4 4.9 8.6

Profit margin, % 6.4 4.8 7.4

Equity/assets, % 44.2 45.0 42.8

Equity per share, SEK 50.10 44.52 42.70

Average number of employees 949 933 967

THIS IS HL DISPLAY

HL Display’s customers

Retail sector companies (food and non-food) and brand manufacturers who supply goods to the retail sector.

Production plants

Sweden (five factories, one jointly owned) UK (one factor y)

China (one factor y)

USA (one factor y, jointly owned)

HL Display’s markets

The company has its own sales companies in 29 countries of Western and Eastern Europe, and Asia. The largest individual markets are found in France, UK and Sweden. Distributors are used in a further 16 countries.

This is HL Display

Austria Belgium

China (Hong Kong) China (Shanghai) Czech Republic France Germany Great Britain Hungar y India Indonesia Latvia Malaysia Netherlands Nor way

Poland Romania Russia Serbia Singapore Slovakia Slovenia Spain South Korea Sweden Switzerland Taiwan Thailand Turkey Ukraine

Retail companies Ahold (incl. ICA) Auchan Carrefour Casino Champion Intermarché Metro Système U Tesco

Wal-Mar t (ASDA)

Brand manufacturers BAT

Danone Colgate Kraft L’Oreal Master foods Nestlé Philip Morris Procter & Gamble Unilever

Some of HL Display’s largest customers Sales Companies

Australia Bulgaria Canada Denmark Estonia Finland Greece Iceland

Ireland Israel Italy Kazakhstan Lithuania New Zealand Por tugal USA Distributors

HL Display leads the international market in the supply of products and solutions for in-store communication and merchandising to the retail sector. The company was founded in 1954 and by the end of 2006 it employed 947 people. HL Display has experienced annual growth of an average of 15.1 percent over the last ten year period and achieved net sales of SEK 1.4 billion in 2006. Since 1993, HL Display has been listed on the OMX Nordic Exchange.

Net sales MSEK

0 300 600 900 1,200 1,500

2006 2005 2004 2003 2002 1,154 1,129

1,249 1,285 1,448

Operating profit MSEK

-20 15 50 85 120

2006 2005 2004 2003 2002

76

-4 108

63

107

THIS IS HL DISPLAY

HL Display’s range of products

In-store communication: products and solutions that ensure that consumers are able to find what they want in the store as well as supplying all the necessar y information for a purchasing decision.

Merchandising: products and solutions that display the goods in the most attrac- tive manner to the consumers.

Category solutions: turnkey solutions for display of goods within specific categories, for example frozen foods.

Benefits of HL Display’s solutions

They display goods in a manner that enables consumers to find all information necessar y, as well as tempting them to buy – central factors for increasing sales levels in stores.

Create more clearly defined in-store communication which means that stores avoid lost sales due to consumers not locating the relevant goods quickly enough.

Streamlines activities in the stores which creates cost savings.

Profit margin %

-1 0 1 2 3 4 5 6 7 8 9 10

2006 2005 2004 2003 2002

6

7

5 6

-1

Profit margin goal 10%

Average number of employees

0 250 500 750 1,000

2006 2005 2004 2003 2002

925

975 967

933 949

The Nordic countries 274

Western Europe 767

Eastern Europe 281

Asia and Australia 94

Nor th America 32

Net sales per region MSEK

STATEMENT BY THE CEO

Positive effects from measures

good example is that we have succeeded in increasing the gross margin to 46.2 percent in spite of significant raw material price increases. In the summer we made the judgment that the measures already taken were not sufficient for us to sustain results in parity with our profitability goal. Consequently we have identified a number of other areas where fur ther measures are necessar y.

In September 2006 we initiated the restructuring of our operations in Germany, which had been unprofitable for several years due to pressure on market prices and high cost levels. Unprofitable customer contracts are being renegotiated and, if acceptable deals can not be reached the contracts will be cancelled. The regional ser vice centre in Dutch Bergen Op Zoom has not been showing satisfactor y profitability as it has been oversized in relation to the actual market situation. This is generally due to the fact that the sales companies in Germany, Holland and Belgium have not developed as planned. Consequently it was restructured in Januar y 2007 and is coordinated with the ser vice centre for Spain and France at Saint Aver tin. In addition, 2007 will see a successive outsourcing of production from our factor y in Falun to selected suppliers.

Importance of growth markets Our presence in growth markets such as Russia and the Asian markets plays an increasingly impor tant role for the Group as a whole. After several years of good levels of sales growth, these markets are now responsible for a larger share of turnover and we assess there are fur ther oppor tuni- ties for continued growth here. This is ver y positive, not least as in the long term this will even out the turnover differences between regions as Western Europe currently contributes the lion’s share. The expansion of these markets will decrease our sensitivity to market developments in individual regions. In addition, this year we have expanded our Asian operations with a sales company in India, a market full of future potential.

Asia has also become increasingly impor- tant to us for other, strategic reasons. Our production plant in China has been expanded Last year, my first as Corporate CEO of

HL Display, was exciting and impor tant in many ways. In the past years great emphasis has been placed on measures to reduce costs and streamline our operations. Now we can see that our hard work has begun to bear fruit. We have noted that our competitive edge is strong, with a growth in sales of 13 percent. We also see the effect on our earnings which have improved by 49 percent.

Even though we are pleased with this positive development we are aware of the challenges that lie ahead. HL Display will retain its position as market leader and will continue to be a company that others in the business look up to. In order to achieve this we must continue to improve in all par ts of our operations.

Cost efficiency is, for several reasons, an impor tant par t of this work. Primarily it strengthens our competitiveness on the market. We must be cost efficient if we are to capture new market shares and keep the ones we already have. Secondly it decreases our sensitivity to sales fluctuations. By being cost efficient we can lower our break-even level which enables us to remain profitable in times with slightly lower sales. Thirdly it is essential in order to achieve the earnings levels expected by our shareholders.

Further measures initiated

I have concentrated this year on strengthening and speeding up the streamlining of the organisation. The measures taken to date have been essential and successful. One

HL Display operates eight production plants.

The factor y in the UK produces acr ylic products.

STATEMENT BY THE CEO

during the year and is beginning to provide us with impor tant advantages as concerns our European competitors. We currently also have a Trading Manager in China who works actively with identifying and organizing activities involving local sub-contractors.

However, our exciting sales development is not only connected to operations in rapidly growing markets. This year has also seen increases in sales on most of our markets in Western and Eastern Europe. We feel that price pressure in our business area is now somewhat less than before. This may partially be dependent on the fact that today’s high raw material prices make it difficult for our competitors to decrease their prices.

Product development – vital competitive advantage

HL Display invests more in product develop- ment than anyone else in the business.

This brings us advantages as concerns our competitors and we are able to create demand from the market by offering new products that meet the needs of the custo- mers. In addition, we are fur ther developing our existing products. For example, using customer needs and quality requirements as a basis, an analysis is made of whether it is possible to make different choices as concerns materials or to rationalise produc- tion. In the end this process means we are able to cut prices which makes our products even more attractive.

New approach to production

Our philosophy and strategy concerning production has changed during the year.

From previously manufacturing the majority of our products in our Swedish factories we have now concentrated Swedish manufac- turing to production methods where cost efficiency is high. We will successively in- crease the amount of outsourced produc- tion, generating considerable savings. We will also review the preconditions for loca- ting more of our own production in low cost countries in order to decrease costs and to avoid high impor t duties in cer tain markets.

This is complemented by continued develop- ment of our Chinese factor y which is now entering a new phase. Initially production there was destined for Asian markets only, now their products will be increasingly sold in Europe too.

We are also working on the establishment of trading agreements within product areas that are well suited to what we have to offer.

One good example of this is the agreement we have concluded with the American

company Trade Fixtures concerning their solutions for sales of goods by weight. We have noticed that the demand for these solutions has increased and currently enjoy sole rights to the Trade Fixtures range on the European market.

Rationalisation of product range a success The work of rationalising our product range has produced effects in a ver y shor t period of time. Our intention has been to phase out unprofitable products and increase the sales shares of our standard products. This creates many advantages for us including longer production series.

As a result we have been able to increase the average order size and average sales per ar ticle as well as sales of standard products. We will speed up this process during 2007 in order to fur ther reinforce these positive effects. However it is impor- tant to point out that this does not mean we are offering less to our customers. To a great extent this concerns decreasing the extremely large number of variations within each product. Simply expressed we are now offering the customer two solutions that answer their needs, instead of five.

Review of logistics

One major activity for the next two-year period will be a total review of our logistics processes in order to fur ther improve cost efficiency and level of ser vice. Currently we mostly have both stock and administrative functions in each countr y. In 2007 we

intend to reorganise the logistics function, probably towards the establishment of regional units handling logistics, stock and administrative functions for a number of sales companies in the region. In Januar y 2007 we employed a Supply Chain Manager who will be responsible for designing and implementing a new logistics function.

Prospects for the future

During the year I have had the oppor tunity to visit HL Display’s subsidiaries around the world in order to learn more about the company. The impression I gained during my travels is that there is optimism and belief in the future at HL Display, and I would like to thank all our employees for their commit- ment and hard work on moving operations for ward towards an even better result.

I can obser ve that the hard work of these past years has strengthened HL Display.

The preconditions for capturing new market shares are in place and our growth should be higher than market growth. For 2007, however, HL Display is not expecting sales growth on a level par with 2006. We will also actively explore oppor tunities to strengthen the company’s offerings and market position through acquisitions. I believe that we are on the right path and that, if we all pull together, our profitability goal of ten percent is within our grasp. Together we will have an exciting 2007!

Stockholm in Januar y 2007

Gérard Dubuy, CEO

BUSINESS CONCEPT, GOALS AND STRATEGIES

Focus on profitable growth

Business concept

HL Display’s business concept is to increase its customers’ profitability by offering the retail sector and its suppliers cost-efficient display systems. Focus is to make the systems adaptive to the customers’ specific needs.

Goals

HL Display’s overall goal is to be a market leading growth company with good profita- bility that provides good levels of value growth for the shareholders. Profitability must be prioritised.

The company’s financial goal is to achieve a profit margin of at least ten percent.

Strategies

With the aim of achieving the Group’s financial goals, HL Display operates according to the strategies listed below.

HL Display will:

– focus on the company’s core processes and products

– be perceived as a natural cooperating par tner by the world’s leading retail companies and their suppliers – focus on design and innovation with

the aim of setting new standards – continuously streamline and adapt the

organisation to the needs and demands of the market

– uphold the company culture and its focus on growth and change – actively explore oppor tunities of

strengthening the company’s offerings and market position through acquisitions.

HL Display focuses on profitable growth, with strong emphasis on profitability. The company creates growth through geographical expansion in pace with its customers’

activities on new markets as well as through innovative product development which creates increased demand from customers. HL Display’s profitability focus is expressed in its activities to decrease both direct costs and operating expenses with the aim of the continuous improvement of operational efficiency.

Datastrip Slimline

is manufactured in a large number of dif ferent designs

and makes it easy to place each price label next to the relevant product.

BUSINESS CONCEPT, GOALS AND STRATEGIES

Comments on Group profit margin trend From the end of the 1990s until 2003, HL Display showed a negative profit margin trend. During the 1990s, HL Display operated a ver y clearly-defined growth strategy and growth was over 30 percent for several years. The organisation was adapted to manage this strong growth with increased fixed costs as a result.

However at the beginning of this centur y, sales growth was considerably lower than previously as a result of a tougher market climate. This affected profitability in a negative direction and culminated in 2003 – the only year in HL Display’s histor y when the company made a loss.

Since then HL Display has made extensive effor ts to cut back on direct costs and operating expenses. The profitability approach has reached ever y corner of operations and the ambition is to continue to be a company showing good levels of growth, but not at the cost of profitability.

HL Display continues its work of fulfilling its financial goals in a sustainable fashion by continuously improving of all par ts of its operations.

Research and development expenses Administrative expenses

Selling expenses Expense distribution MSEK

0 100 200 300 400 500 600

2006 2005 2004 2003 2002

469 493 495

526 561

Profit margin %

-1 0 1 2 3 4 5 6 7 8 9 10

2006 2005 2004 2003 2002

6

7

5 6

-1

Profit margin goal 10%

HL Display makes life easier for store employees with its well-constructed display solutions such as EasyShelf

.

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BUSINESS CONCEPT, GOALS AND STRATEGIES

Follow-up of 2006 and emphasis for 2007 In its 2005 Annual Report, HL Display stated a number of focus areas for 2006. In the table below a follow-up of these, plus the direction for 2007, is given.

Outlook for 2007

In the Nordic countries and in Western Europe, HL Display has its largest markets.

The markets are characterised by limited growth and a high degree of competition. This

is why the last few years market investments have been directed to Eastern Europe and Asia. On these markets the growth rate is high and HL Display’s offer is competitive.

HL Display will actively investigate the possibilities to boost the company’s offer and market position through acquisitions.

Like in latest years, profitability will be prioritised and the financial objective of 10 percent profit margin is within reach.

For 2007 HL Display is not expecting to

see the same sales growth as in 2006.

A detailed forecast of earnings and turn- over for the entire year will be provided together with the 3Q 2007 Quar terly Repor t. Shor t lead times from order to deliver y and an order stock that primarily consists of many, small-scale orders make it difficult to provide a relevant forecast for periods longer than one quarter. The majority of orders during the course of a month are invoiced the month immediately following.

Continued work on evaluating the product range to generate increased efficiency in production and logistics.

Positive effects in the form of incre- ased average order size, increased average sales per ar ticle and incre- ased sales of standard products.

Intensified product range evaluation with the aim of reinforcing the positive effects achieved in 2006. A second phase of product range rationalisation was initiated on Januar y 1, 2007. The measures are expected to have effect on profits in the second quar ter of 2007 at the earliest.

Focus Area for 2006 Result 2006 Focus Area for 2007

Increased intensity in work to limit operating expenses throughout the Group and to guarantee the best possible resource utilisation.

Operating expenses, excluding freight charges and one-off costs, increased by 3.6 percent. Revenue increased by 13 percent (please refer to table on operating expense development).

Continued effor ts to limit operating expenses throughout the Group and to ensure best possible resource utilisation. In addition, HL Display will fur ther increase focus on profitability issues in sales companies that are currently making a loss. The aim is to at least reach break even in these companies in 2007.

To evaluate and improve the efficiency of the sales process and the sales companies.

The establishment of Area Manager positions has brought the sales companies closer to the parent company. Control of sales companies using a key ratio system has been introduced and is continuously followed up.

Continued effor ts to evaluate and streamline the sales process and the sales companies. A new CRM-system is being implemented to improve customer relations and allow cost savings through more efficient routines.

In addition, a Sales Manager has been appointed to fur ther strengthen the execution and follow-up of the sales work.

Continued work to develop production, in terms of both technology and materials.

New methods for production planning have been developed with the aim of full exploitation of unused resources and achieving even utilisation levels. Star t up of production in China.

Continued work with production development concerning technology and materials, as well as relocation and outsourcing oppor tunities.

HL Display will continue to invest in the Chinese factor y in order to increase production capacity.

Fur ther development of EDI solutions both within the company and with end customers.

EDI utilised to an increasing degree.

As a result of the work conducted during recent years, EDI is now a natural par t of the ever yday activities. Fur ther development work is therefore not of strategic impor tance.

To increase the propor tion of direct deliveries from factor y to end customer.

Has not produced desired cost efficiency gains.

HL Display will implement a total review and reorganisation of its logistics function. A Supply Chain Manager was recruited in Januar y 2007.

The Supply Chain Manager will design the new logistics function for implementation during the four th quar ter of 2007.

OCH – one of HL Display’s solutions enables the display of cylindrical products where product information is often given on the lid.

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BUSINESS PROCESSES INTRODUCTION

Customer Core Process 3

Production and deliver y of goods and ser vices

Core Processes

HL Display’s core processes manage the entire chain from purchase to customer cooperation

Support Processes Core Process 2 Development, launch and product range management

Core Process 1 Sales and customer relations

Economy and Finance

IT

Human Resources

Core processes and suppor t processes

HL Display has defined the business processes that manage its core operations as three core processes. These are complemented by three corporate support processes.

In-store and price communications are an impor tant par t of any store. Slimline

datastrips include a wide range of accessories aimed at increasing sales.

HL Display has divided its operations into three, central core processes. Through clear control and follow up of activities within each core process, HL Display will ensure that the right things are done in all par ts of operations.

Core process 1 concerns all activities, planning and operative activities connected with sales and customer relations.

Please read more on pages 12-13.

Core process 2 concerns all activities connected to HL Display’s products and solutions, from product range development and marketing to product range manage- ment and phasing out.

Read more on pages 14-17.

Core process 3 concerns ever ything to do with production, purchasing and logistics.

More information on pages 18-20.

As a complement to this, HL Display runs three processes that suppor t operations in the core processes. These are Economy and Finance, IT and Human Resources.

Read more on pages 21-23.

CORE PROCESS 1 SALES AND CUSTOMER RELATIONS

HL Display’s business model is based on strong local presence and position through its own sales companies on the relevant markets. In spite of the fact that the actors on the food retail market consist of multi- nationals to a considerable extent, a ver y minor share of purchasing of the products and solutions supplied by HL Display is carried out centrally. Local presence and customer contacts are consequently decisive for continued successful sales activities.

Towards increased profitability

HL Display applies central control and follow up of sales company operations in order to support the work of achieving the company’s profitability goal.

All sales companies are allocated clearly defined goals in terms of key ratios that are continuously monitored. Currently sales companies are assessed according to their ability to fulfil goals concerning:

– growth

– gross margins for the three customer segments: food retail, non-food retail and brand manufacturers

– operating expenses in relation to total sales

– profit margin.

In practice this means that the primar y focus of the sales companies is profitability.

Growth remains an impor tant par t of the strategy, however higher sales volumes must not be bought at the cost of profitability.

Area managers plan and control operations In order to suppor t improved coordination and enhance the control of operations, HL Display introduced some changes to the company’s organisation during the first half of the year. The six Area Managers now have full budget and result responsibility for their countries. They are also responsible for operational planning and control with the HL Display’s sales are carried out by its own 30 sales companies in 29 countries

in the Nordic region, Western and Eastern Europe and in Asia. These sales companies are complemented by distributors who work in another 16 countries.

Local presence key to

successful sales activities

Together with international customers, HL Display

adapts products to the dif ferent environments, as

here using acr ylic stands to display glass plates.

CORE PROCESS 1 SALES AND CUSTOMER RELATIONS

Operational emphases for 2006

– To intensify focus on profitable growth in sales companies through clearly stated goals and continuous goal attainment monitoring.

During the year HL Display has formulated goals for its sales companies based on five key ratios which are continuously followed up.

– To increase efficiency in sales through a corporate suppor t system within Customer Relations Management.

A CRM system has been developed during the year aimed at structuring up and improving all phases of work with current and potential customers.

– To establish methods for increasing sales via catalogue and Internet.

The extensive, common product catalogue will be replaced by catalogues adapted to each countr y. This solution has been tested in France, UK and Sweden with encouraging results. In addition, 2006 saw the test launching of a new webstore in UK.

– To strengthen sales focus on core products.

As par t of its focus on core products, during the year HL Display has regained market shares in the shop fitting segment. In addition, special bonus goals have been established for all sales company MDs concerning the sales of Slimline

and EasyShelf

, which are the latest innovations within the datastrip and shelf divider fields.

aim of achieving the profitability goal.

This is complemented by the appointment of a Business Manager with global respon- sibility for the development of the brand manufacturer customer segment – an area where HL Display feels that there is additional potential.

Group systems support sales activities HL Display’s key account managers bear total responsibility for customer relations on the local market, irrespective of whether the activity concerns product sales or more complex projects. HL Display suppor ts its sales companies with tools aimed at the streamlining and improvement of sales activities, including a web-based training course and the introduction of a Group CRM system (Customer Relationship Management) that creates structured routines for all phases of this process.

Catalogue and Internet sales

During the year HL Display has continued to work with HL Direct in order to enable incre- ased sales using the existing organisation.

The primar y tools used in HL Direct are sales via catalogue and Internet. These ser vices are complemented with access to qualified sales staff on the phone so that customers can receive rapid response on matters that would previously have required a visit from a salesperson in the field.

The extensive, common product catalogue will be replaced by country-specific catalogues containing a standard range and cer tain options for each countr y. This solution has been tested in France, UK and Sweden with encouraging results so the new catalogues will be successively introduced onto all markets in 2007.

Sales via Internet is, in principle, virgin territory for HL Display. In the spring of 2006 a new Internet webstore was introduced into UK and the results of this project will form the basis of any fur ther HL Display investment within this field.

HL Display is one of the

leading, world suppliers of price

communications solutions.

CORE PROCESS 2 DEVELOPMENT, LAUNCH AND PRODUCT RANGE MANAGEMENT

HL Display offers…

HL Display offers its customers products for in-store communication and merchandising as well as total solutions for display of entire categories of goods known as categor y solutions.

In-store communication

Within this competence area HL Display offers products that ensure that the consumer is able to find the desired product quickly as well as receives all the necessar y infor- mation for a purchasing decision. By using well organised in-store communication, the stores avoid losing sales because the consu- mers cannot find what they are looking for, or the price of the product, in the store.

Merchandising

Within this competence area HL Display offers products that present goods in the best possible manner to consumers and tempt them to purchase, which is a decisive factor for increasing sales in a store.

HL Display’s products for merchandising also enable cost cutting as work in the store is streamlined. One example of this is the automatic for ward feeding of goods which means that less time is used to keep shelves in good order at the same time as they can be rapidly filled with new products.

Categor y solutions

Within this competence area HL Display offers complete display solutions for entire categories of products such as Frozen Food or Confectionar y. In addition to attractive merchandising and clear presentation of related information, for example any type of environmental or organic labelling, a categor y solution ensures that the store’s planogram is followed. A planogram is a drawing that shows where all the different items are to be placed in each store.

Positioning of offer

HL Display shall be the natural cooperating par tner for retailers as concerns strengthe-

ning the purchasing experience for the consumer. The company differentiates itself from its competitors primarily as concerns:

Innovation – HL Display’s investment in product development has no equal in the business.

Quality – The quality of the products must never need to be questioned.

Competence – With its 50 years of experience, HL Display has built up extensive exper tise as concerns displaying goods in stores.

Customer focus – HL Display’s local market presence creates closeness to the customer and a high level of ser vice.

Rationalisation and differentiation of product range

At the end of 2005, HL Display initiated activities aimed at rationalising, classifying and setting price differentials on the company’s extensive product por tfolio of

Global offer to retailers

Segment

Retail Non-food

Products

Retail Food Category Solutions

Do It Yourself In-store Communication, for example Chilled Food

HL Datalist (shelf-edge strips) and HL Frames (display frames)

Merchandising, for example HL Optimal™ (shelf-divider systems) and HL Optirack™ (product merchandisers)

Confectionar y

Helth & Beauty

Frozen Food

Tobacco Spor ts

Electronics

Drugstores/Beauty shops

HL Display offers a complete range of products and solutions for in-store communication and merchandising. HL Display places great emphasis on managing and developing its range of products in order to improve offerings to existing customers, reach new customers and increase efficiency in production.

HL Display’s extensive product range forms the basis of what the company offers its customers. Customers in the

food retail sector are also offered complete categor y solutions for entire product categories. HL Display’s product

range for the non-food retail sector focuses initially on four segments, and in due course there is good potential to

develop the range to include more and more categor y solutions.

CORE PROCESS 2 DEVELOPMENT, LAUNCH AND PRODUCT RANGE MANAGEMENT

over 100,000 ar ticles. The primar y goal of these measures was to achieve increased efficiency of production through longer production series and to streamline logis- tics flows.

Price differentiation

Initially HL Display concentrated on phasing out products showing low profitability and on decreasing the number of product varia- tions through standardisation of, for example, colour and length. As par t of this process HL Display has introduced a clear price differentiation of products. The company’s products are divided into three groups:

– standard

– modified standard, (for example a standard product in a special colour) – special

The pricing of products follows the degree of specialisation.

Basic and plus product range

In order to strengthen sales of standard products, HL Display has defined a basic range that is to be offered by all sales companies. The requirement for this basic range is that it must contain a complete range of products that are able to meet high levels of demands from customers, irrespective of where they are in the world.

Each sales company can then include additional products in the form of a plus range that suits their par ticular market.

Positive effects

HL Display continuously follow up the measures that has been initiated. Results shows that average order size and average sales per ar ticle have increased. In addition a considerable increase in the share of standard products sold has been obser ved.

HL Display has not lost any sales or any customers as a result of this streamlining Operational emphases for 2006

– To rationalise and differentiate the company’s current, extensive product range.

The work involved with rationalising the range of products has generated positive effects during the year. Both the average order size and average sales per ar ticle have increased. In addition, sales of standard products have increased.

– To utilise par tnership and trading as a method of strengthening product range within product areas that dovetail well into what HL Display has to offer.

During the year HL Display has strengthened its range of products with solutions designed to display sales by weight goods in collaboration with the US company Trade Fixtures.

– To enhance competitive edge of offers through value engineering.

During the year this has become a natural par t of product range development. HL Display has been able to streamline production of several products which eventually means lower prices and more attractive offerings to customers.

The shelftalker plays a key role in the promotion of impulse purchases, which in turn creates increased sales.

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CORE PROCESS 2 DEVELOPMENT, LAUNCH AND PRODUCT RANGE MANAGEMENT

HL Display’s work with the development of its product range is based on three elements:

– product development – value engineering – par tnership and trading.

Product development

HL Display’s product development is organi- sed at two competence centres, one for extrusion and one for injection moulding. In addition there is a marketing unit consisting of product managers at HL Display. These are responsible for identifying and initiating development projects. However the final responsibility for development strategy and decisions concerning new products lies with a Marketing Council which consists of the members of HL Display’s Executive Group among others.

HL Display is concentrating its product development to products manufactured by extrusion or injection moulding – two produc- tion techniques in which HL Display posses- ses leading edge competence. A clear cost focus is integrated into product development.

The ambition is to optimise quality based on the product’s area of application, while a competitive final price is a basic requirement for all new products that are developed.

All development activities commissioned by customers – adapted solutions based on HL Display’s existing products – are carried out by HL Design, a corporate resource located in France. HL Design possesses considerable competence concerning successful customer specific product development.

Value Engineering

Value engineering is a central concept in the work of product range development.

HL Display continuously reviews its product range in order to identify the volume products where the company’s competitive edge must increase. Based on customer needs and quality requirements, an analysis is carried out as to whether, for example, it is possible to make other material choices or to rationalise production. This process enables cost cutting and price reductions, which increases the company’s opportunities to capture additional market shares.

During the year HL Display has launched several new and fur ther developed products including EasyShelf

Lite – an extension of the EasyShelf

solution – and Slimline

shelf edge strips especially adapted to electronic price labels. Three percent of turnover was invested in product develop- ment, the same propor tion as last year.

of its product range. Instead many custo- mers have appreciated the opportunities for shor ter deliver y times and lower prices for standard products.

Next step

Based on the results of these evaluations, HL Display has taken a decision to continue working with its product range, primarily in order to create longer production series in its factories. Consequently increased standardisation within the product group Datastrips will be carried out as variation is most common in this area.

Development of product range

HL Display’s ambition is to lead the market as an actor who continuously develops the business with innovative products that create obvious added value for customers.

Automatic product feeding on shelves promotes both sales and the degree of efficiency in the store.

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CORE PROCESS 2 DEVELOPMENT, LAUNCH AND PRODUCT RANGE MANAGEMENT

Par tnership and supplier cooperation HL Display’s close cooperation with its custo- mers means that the company is able to identify new needs for products and solutions at an early stage. When products are well suited to HL Display’s product range, but fall outside its core competences extrusion and injection moulding, the company’s aim is to supply customers with these products and solutions through par tnerships or through sub-contractors. HL Display is an attractive par tner to these suppliers due to its market presence with sales companies or distributors in 46 countries.

During the year HL Display entered into a partnership agreement with the US company Trade Fixtures concerning their solutions for sales of goods by weight – an area in which demand has increased substantially during

recent years. HL Display owns exclusive rights to their product range on the European market.

Patent and protection of designs HL Display reviewed its patent strategy during the year, not least against the back- ground of the high cost levels associated with patents. The current patent strategy is aimed at protecting high level sales products within the core competences of extrusion and injection moulding. At the end of the year HL Display owned 70 (179) registered patents with 50 (75) patent applications in the pipeline. Six new patents were taken out in 2006. There were 104 (110) patents registered with another 11 (10) applications in the pipeline. Total costs for these activities amounted to MSEK 2 (3) in 2006.

Systems for more rapid product launching Efficient product launching is essential if new products are to impact the market as rapidly as possible. As a rule HL Display’s new products are launched at the same time on all markets. This means that the company must rapidly reach out to its sales companies all around the world with the necessar y information. In order to increase efficiency and impact in this process HL Display has been working on a web-based tool that combines product exper tise with sales training for the product in question.

The main products launched during the year were EasyShelf

Lite, a new shelf divider system where the dividers and fittings can easily be released and adjusted, plus Bulk Bins, a system for sale of goods by weight.

Illustration new products – EasyShelf

Lite

EasyShelf

Lite enables all shelf dividers to be moved sideways which creates time savings when

changing the store’s planogram or when introducing new merchandise onto the shelf. Due to fur ther

development of material and production technology EasyShelf

Lite can be offered at the same

price levels as the more traditional solution based on the Optimal

shelf divider system. Customers

now receive a more innovative and flexible solution.

CORE PROCESS 3 PRODUCTION AND DELIVERY OF GOODS AND SERVICES

HL Display’s production has undergone considerable transformation during the last few years with the aim of continuously improving efficiency. Previously, generally speaking all HL Display’s products and solu- tions were manufactured at the company’s own factories. However, currently HL Display is concentrating its production to the produc- tion methods where the company can show leading edge competence and efficiency.

Consequently cer tain production is sub- contracted out. HL Display still, however, produces the majority of the products sold by the company. Work with the evaluation of production is continuously under way and concerns material and production technology as well as location.

Coordinated production

One major area of activity during the year has been aimed at improving the efficiency of production plants, which has resulted in increased through-flow of production and improved productivity, increased utilisation of resources, lower staffing levels and consequently a narrower, sharper cost structure. Another area of interest has been the coordination of production. The aim has

been to create cost advantages by developing methods for rapid shift of production between the various factories. As a first step, a new production organisation has been launched whose aims include coordinating production service functions independent of production location. Utilisation of the exper t resources available within these service functions, such as production technology, will consequently become more efficient as in the future these exper ts will form a corporate production resource. These measures will become fully operational during 2007.

Expansion in China

The production plant star ted up in Suzhou, Nor thwest of Shanghai, has expanded during the year. Currently there are three production lines operating and another three under construction. The factor y was initially intended to produce shelf edge strips for Asia and Australia. However, during the year HL Display has moved cer tain production processes from Karlskoga and Sundsvall to Suzhou, so that the Chinese factor y is currently also producing for the European market.

Investments

HL Display has previously taken a decision to outsource par t of its production at the Falun plant and specialise operations there to automatic bending and screen printing, two methods in which the factor y currently maintains a good level of efficiency. During the year HL Display took a decision to invest more in these production methods in order to further strengthen their competitive edge.

Injection moulding of shelf dividers in Sundsvall is one of the competence areas in which HL Display is on the leading edge.

During the year a production plant for totally automated manufacture of shelf dividers has been commissioned, which has led to consi- derable streamlining in this production field.

Coordinated production improves utilisation of resources

Operational emphases in 2006

– To concentrate and reinforce production using production methods in which HL Display possesses leading edge competence and efficiency.

This year production investments have only been made in production methods where HL Display already enjoys, or has the oppor tunity to achieve, leading edge efficiency in the market.

– To increase coordination between the company’s production facilities to benefit from economies of scale and achieve increased efficiency and productivity.

During the year the foundation of a new production organisation has been laid with the aim of developing the ability to rapidly move production between factories and benefit from cost advantages.

– To apply outsourcing of production that is considered to lie outside the company’s core production competence.

HL Display took a decision to successively outsource production from its factor y in Falun.

HL Display operates eight production plants of which five are located in Sweden. Each production plant is specialised in one or two production methods.

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CORE PROCESS 3 PRODUCTION AND DELIVERY OF GOODS AND SERVICES

Lead time (in days)

Average lead time from order to deliver y

Production facility Target Result 2006 Result 2005

Sundsvall 9 13 10

Falun 10 11 11

Karlskoga 7 7 n/a

Delivery performance (as a percentage)

Defines the propor tion delivered within the agreed deliver y time

Production facility Target Result 2006 Result 2005

Sundsvall 98.0 95.0 97.5

Falun 96.0 97.0 94.9

Karlskoga 98.0 98.0 n/a

Proportion of complaints (as a percentage)

Refers to the number of complaints in relation to the total number of orders

Production facility Target Result 2006 Result 2005

Sundsvall 0.3 0.5 0.8

Falun 0.6 0.7 1.6

Karlskoga 0.3 0.2 n/a

Yield per machine for the two most important production technologies (as a percentage) Refers to the time that the machine is in production

Extrusion Target Result 2006 Result 2005

Sundsvall 91 81 85

Injection moulding Target Result 2006 Result 2005

Sundsvall 93 90 85

Karlskoga 93 86 n/a

Quality

HL Display operates an ambitious quality programme at its production facilities.

Detailed quality targets are followed up ever y month. There are quality systems at all production facilities structured according to the international quality standard ISO 9001. The plants in Falun, Sundsvall and Karlskoga are currently cer tified according to ISO 9001, and the aim is that in due course all plants will be cer tified.

Extrusion – High Speed

On the High Speed line, shelf edge strips suitable for rapid production are manufactured.

Sundsvall Extrusion

This production method presses melted plastic through a nozzle. The profile of the nozzle forms the cross section of the product. Products are extruded in strips that are then cooled in water baths and cut to the required lengths. Shelf edge strips are examples of products manufactured using this production method.

HL Display production lines Location Method

Extrusion – Flexible

On the Flexible line mature products are made – often in many different varia- tions – and the process is characterised by shor t series and rapid changes.

Sundsvall

Injection moulding

In this production method, melted plastic is injected into a hollow mould. The shape of the mould determines the product’s appearance. Shelf dividers and frames are examples of products manufactured using this method.

Extrusion – Complex

On the Complex line newly developed shelf edge strips are produced as well as strips that combine several materials or functions.

Sundsvall

Screen printing and bending

Screen printing of plastic sheets, which in many cases are further refined through punching or cold/hot bending.

Extrusion – High Manning Rate

In addition to production for Asia and Australia, the factor y manufactures standard ar ticles and labour-intensive products for Europe.

Suzhou (China)

Injection moulding – Dividers

The primar y product is shelf dividers of transparent plastic material that are produced on integrated, robot injection moulding lines.

Sundsvall

Injection moulding – Frames etc.

In the Karlskoga factor y injection moulding of frames and accessories in plastic is carried out.

Screen printing and bending

The major products are screen printing and bending of shelftalkers.

Other production

In Shipley, UK, acr ylic display stands are produced using cold and hot bending. HL Display Pictoria in Falkenberg makes poster frames in metal.

In a joint venture in Lesjöfors (jointly owned with Trion Industries) metal display hooks are manufactured while at Wilkes-Barre, Pennsylvania, USA (also jointly owned with Trion Industries) products are extruded for the US market.

Karlskoga

Falun

CORE PROCESS 3 PRODUCTION AND DELIVERY OF GOODS AND SERVICES

Totally, corporate investments in production plant amounted to MSEK 24 (34) this year of which the majority consisted of tools for extrusion and injection moulding.

Raw materials

During the year HL Display has continued its work with the development of the various plastic materials used in its products as well as qualifying new raw material suppliers for the factories. This may enable both lower costs for raw materials and increased productivity as cer tain materials permit more rapid production processes.

Logistics

Work with streamlining of production plant has been in focus this year which has also included the strategically vital task of mana- ging and developing the product range.

Consequently, the foundations have also

been laid for the fur ther development of the HL Display logistics function, which will be one of the main areas of activity in 2007.

Currently there is, in most cases, one ware- house site per countr y. During the year the trend has been towards the establishment of regional, central warehouses. This is already the case in Singapore which supplies the entire Asian market and in France which, from 2007, will function as a central supplier also for Spain, Germany, Holland and Belgium.

Environmental activities

HL Display’s environmental activities are based on the company’s environmental policy. The work is under taken locally under the leadership of an Environment and Quality Manager at each production plant.

This person initiates and follows up day-to- day environmental activities and individual projects. Two of HL Display’s production plants operates under duty of notification to authorities. In the Falun factory due to the fact that a certain solvent is used for screen printing. However the use of this solvent has decreased radically as water-based UV printing is currently used for practically all screen printing. The other concerns the powder coating facility in Falkenberg.

Environmental certification

HL Display’s largest production plants located in Sundsvall, Karlskoga and Falun, have been cer tified according to ISO 14001.

These factories are responsible for approxi- mately 90 percent of the products manufac- tured by HL Display. The company’s ambi- tion is that all production plants are to gain their ISO 14001 cer tificate.

Waste material

The major part of HL Display’s environmental impact comes from PVC waste from produc- tion. HL Display’s long term aim is that all PVC waste will be recycled. The Swedish factories currently sell around 70 percent of their PVC waste, plus practically all other plastic waste, for recycling. At the Karlskoga plant cer tain material is recycled directly or indirectly in the factor y’s own production process and at the newly star ted produc- tion plant in Suzhou, China in principle all PVC waste material is sold for recycling.

This trend is not only positive from an envi- ronmental perspective but also decreases costs for HL Display. In 2007 the aim is that the extrusion and injection moulding processes will decrease their share of dumped and combustible waste products by 60 percent through the recycling of new fractions of waste products.

Recycled Recycled waste waste in relation Year (tonne) to total waste (%)

2006 926 81

2005 768 73

2004 698 76

2003 599 70

Energy utilisation

HL Display’s operations are electricity inten- sive. In order to decrease energy utilisation a system has been introduced at HL Display’s production plant in Sundsvall to utilise waste heat from machines to heat up the building. This has been successful so the building now only uses waste heat and the use of district heating, which previously amounted to 2,000 MWh annually, has been eliminated. HL Display is examining the oppor tunities to offer waste heat for sale to other businesses.

At the factor y in Suzhou, HL Display has introduced a sealed water system for the water pools used to cool down shelf edge strips after production. This has meant that water can be recycled which has decreased consumption considerably.

Placing dif ferent accessories close to the goods means that brand manufacturers can reinforce their brand.

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SUPPORT PROCESSES

Business projects concern the development projects initiated within the IT field. Speci- fications for these projects maintain a high level and focus to a considerable degree on the benefits they generate for operations including lower costs, more efficient routines and enhanced quality.

One central component of the IT environment is the ERP system Jeeves. Currently 35 of the Group companies are connected to Jeeves and the intention is that, in the long run, all subsidiar y companies will work with a common ERP system. Business suppor t applications such as stock control, e-invoices and Customer Relations Management are also linked to Jeeves.

One important area in 2006 has been the development of a CRM system that is tightly integrated with the Jeeves ERP system. Clear routines have thus been created for all phases of work with the customers which ensures that any customer information available within HL Display can be utilised by ever yone in the Group. In addition a new integration platform has been built up which enables alterations to the system and facili- tates the introduction of new applications.

IT costs amounted to a total of MSEK 35 (35) in 2006.

Economy and Finance

The financial function within HL Display is responsible for four areas: accounting, controlling/MIS, in-house bank/finance activities plus Group accounting and investor relations.

HL Display requires a high quality level of accounting in all group companies.

Consequently the financial functions of the smallest companies have often been out- sourced until they have become large enough to motivate an in-house finance resource.

Currently the emphasis is increasingly on the coordination of accounts and controlling for several countries in regional ser vice centres, following the logistics organisation.

IT

The use of modern information technology is a prioritised area for HL Display, not least as it is an essential tool for the streamlining of both business and in-house processes.

The IT environment at HL Display maintains a high standard in terms of usability, acces- sibility and security.

HL Display’s work within IT primarily consists of three parts: efficient production, active management and business projects.

Efficient production concerns the IT systems currently in use. The company’s goal is to decrease costs for operations and mainte- nance of these systems by 10 percent annually, which is to be achieved via conti- nuous improvements and modifications.

Results for the last five years have been an average of 9 percent per year.

Active management concerns applications called enablers for example databases and mail systems, plus infrastructure. Simply expressed, HL Display will secure maximal business benefit through continuous impro- vements within these areas.

Suppor t processes

Controller function increasingly important The controller function is becoming increa- singly impor tant in pace with geographical expansion. Regional ser vice centres and large-scale individual companies will each be staffed with a regional controller respon- sible for controlling, follow up and MIS. In addition there are controllers with global responsibility who also work with operational development, often as the link between operations and the IT function. Business Process Re-engineering (BPR) is a team whose task is to identify and implement efficient working methods and routines in the Group’s various companies. BPR will also ensure that guidelines for in-house controlling are followed as well as providing suppor t for users during the introduction or development of the business system Jeeves into the subsidiaries.

HL Financial Services (HFS) is HL Display’s in-house bank. HFS bears responsibility for management of currency risk and all corpo- rate financing. HFS is also a ser vice centre for the Swedish production companies as concerns management of accounts receivable including netting, as well as for scanning and e-authorisation of suppliers’ invoices.

In 2006 a procurement of banking ser vices, including an international cash pool, has been carried out. The aim is to concentrate the majority of the corporate financial flows and balances so that it becomes possible to net a deficit in one currency against a sur- plus in another. This advanced solution will decrease the Group’s future financing costs.

Corporate accounting and investor relations

HL Display maintains a high level of ambition

as concerns external repor ting and makes

special effor ts to repor t swiftly without any

decrease in quality. The company’s approach

to the market is to be transparent and

honest. Since 1998, the Group’s financial

position is repor ted to the market on a

monthly basis. HL Display became the

Swedish Listed Company of the Year in

2005, and in the same year its annual

repor t were awarded an honourable

mention in the OMX Nordic Exchange

competition entitled Best Annual Repor t

(smaller company class).

SUPPORT PROCESSES

high levels of expectations on the manager’s role, also achieve high levels as concerns operative and business results. This clearly illustrates the impor tance of good manage- ment at all levels in the company. HL Display intends to fur ther strengthen company management by increasing management suppor t and oppor tunities for fur ther education within the field.

Management planning

HL Display has a stated ambition that management and international positions will primarily be filled via in-house recruit- ment. In order to strengthen its recruit- ment base of future managers, this year HL Display focussed on more systematically identifying and developing the managers who possess the force and potential to take greater responsibility – either within the role they have today or in a new managerial position. This process will be complemented by the “fast track positions” currently avai- lable within HL Display. The individuals who are recruited to these positions should possess the capacity to move up into new levels within the company.

Employees

Employees who wish, and are able, to in- fluence operations in order to achieve even better results are essential if HL Display is to achieve its goals. Offering employees good conditions of employment and oppor- tunities for continuous development is central to stimulate motivation and commit- ment at all levels of the company.

Importance of good management The management of the company plays a decisive role for how employees perceive their working situation and the results achieved in each company. The results of HL Display’s employee satisfaction survey – HL Dialog – shows that personal leadership is more strongly linked to motivation, loyalty and per formance than any other factor.

Managers are expected to communicate and gain acceptance for goals and supply employees with clear feedback as well as acting as the driving force in continuous activities to change and improve operations.

The managers who respond to the company’s

Average number of employees

0 250 500 750 1,000

2006 2005 2004 2003 2002

925

975 967

933 949

Number of years employed %

>24 years 1 20-24 years 2 15-19 years 4 10-14 years 18 5-9 years 30

<5 years 44

SUPPORT PROCESSES

Web-based training

HL Display’s intranet is the primar y imple- ment for in-house training as operations are spread over a large number of countries.

Employees are offered training concerning HL Display’s operations plus more specific professional inputs, primarily different types of sales training. Via intranet, employees have been able to test their levels of English.

Results show that there is a need for training in this field and HL Display is currently evaluating a number of training methods that will be offered to the employees.

Preventive health care – lower sick leave rates

HL Display has undertaken long-term, health promotion activities with the aim of preven- ting ill health at an early stage. Activities include offering employees regular health profiles followed up by health advice and personal development plans.

A long term health project was star ted up at the company’s largest production plant in Sundsvall, Sweden this year. The aim was to radically decrease sick leave by offering training programmes on nutrition and exer-

cise and by carr ying out fitness tests and health profiles accompanied by individual development plans. Approximately 80 per- cent of the staff have chosen to par ticipate in the project and results to date have been encouraging. Sick leave rates have already decreased by around 1.5 percentage points.

This year HL Display has also intensified its work with the rehabilitation of employees on long-term sick leave. These activities are carried out together with occupational health care and the National Social Insurance Office and have resulted in long-term sick leave decreasing by one third. Costs for preventive health care amounted to MSEK 2.0 (1.2) in 2006.

Facts

On 31 December 2006, there were 947 (914) employees within the company. During the year the average number of employees was 949 (933) and staff turnover was 7.6 (14.6) percent. The workforce consists of 37 percent women and 63 percent men.

40 percent of the company’s employees work within sales and marketing, 42 percent with production and warehousing

and the remainder with management, administration and product development.

45 percent are employed in Sweden while 31 percent of employees have a university level education, 53 percent upper secondary level and 16 percent secondar y level.

Value added per employee amounted to KSEK 453 (510) in 2006. Investment in staff training during the year cost MSEK 1.9 (2.1), which is the equivalent of SEK 1,933 (2,237) per employee.

Health risks within HL Display are minor and primarily related to production.

Preventive measures are taken in an effor t to provide secure workplaces with good working environments. In 2006 a total of 15 (10) incidents were reported, all were minor. There have been no deaths due to workplace accident in the histor y of HL Display.

Target fulfilment HL Display’s ambitious aims create a result- oriented corporate culture.

Targets are set high, and create positive challenges for the company and its employees. Day-to-day activities are characterised by an insistent striving towards target fulfilment.

HL Display’s fundamental values

Trust and respect HL Display also emphasises the impor tance of open, honest dialogue within the company. Showing trust in all employees and an atti- tude that ever yone is doing their best for the company combined with a stated policy of maintaining and developing a good, honest business ethic.

Drive

Problems must be solved where and when they arise.

Personal drive is encour- aged. The basic idea is that ever yone must have the competence and the ability to deal independently with their daily tasks. This is in line with the company’s entrepreneurial heritage.

Commitment

Successful managers lead by example by showing commitment in day-to-day activities, while at the same time retaining an overall view of the business. The ability to set a good example is an impor tant element of daily management.

Non-prestigious The company’s employees are non-prestigious.

Results are more important than job titles, and the company’s heroes are those involved in day-to-day activities.

Employee categories No. of persons

Production 316

Administration and management 118 Warehouse 85

Product development 49 Sales and marketing 379 Age distribution

0 50 100 150 200 250 300 350 400

60- 51-60 41-50 31-40 21-30 -20

7 306

376

191

60

9

Value added per employee KSEK

0 100 200 300 400 500 600

2006 2005 2004 2003 2002

463 399

514 510

453