• No results found

Annual Report 2007/08

N/A
N/A
Protected

Academic year: 2022

Share "Annual Report 2007/08"

Copied!
60
0
0

Loading.... (view fulltext now)

Full text

(1)

Annual Report 2007/08

(2)

– Communications 20

The Lagercrantz Share 22

Several year overview 26

Financial Reports and Audit Report 28

Corporate Governance 55

Board of Directors and Auditors 57

Management 58 Addresses 59

Financial Reports and Audit Report

Administration Report 28

Proposed Allocation of Earnings 31

Income Statement 32

Balance Sheet 33

Changes in Shareholders’ Equity 35

Cash Flow Statement 36

Notes 37

Audit Report 54

CALENDAR

Coverphoto: Brian Hørup

Photo: Magnus Fond och Magnus Skoglöf Translation: Ole Böök

Taurus Kommunikation / Jernström Offset, Stockholm 2008

file notice of their desire to attend to the Company’s head office under address Lagercrantz Group AB (publ), Box , se-  Stockholm, by telephone +--  , fax +--  , or by e-mail to [email protected] not later than at : p.m., Wednesday,  August .

Such notice must contain the following information: sharehold- er’s name, personal registration number (organisation number), address, telephone and number of shares represented and the number of any assisting counsel.

Shareholders whose shares are registered in the name of a nominee must, in order to exercise their rights at the Annual General Meeting, temporarily register their shares in their own name. Such re-registration must be completed not later than

 August . Request for such re-registration must be made to the custodian a few banking days before Monday,  August

 for the registration to take place in time.

14 August 2008 Interim report for the period

 April – June .

1 September 2008 Annual Meeting for the /

financial year.

11 November 2008 Interim report for the period

 April – September .

10 February 2009 Interim report for the period

 April – December .

13 May 2009 Year-end report for the period

 April  – March .

Published information is available at www.lagercrantz.com

This report is a translation of the Swedish language Annual Report. In the event of any discrepancies between this document and the Swedish original, the latter shall govern.

Cover: The bridge on Danish minesweeper m/s Hirsholm, which is equipped with an integrated system for navigation and manoeuvring – Electronic Chart Display and Information System (ECDIS). Information from a number of units is presented in aggregated form on the displays delivered by Lagercrantz company ISIC. The vessel was commissioned in the summer of 2008.

(3)

Lagercrantz Group in Brief

Lagercrantz Group is a technology-trading group in electronics, electrics, communication and adjacent areas. The Group oper- ates in a decentralised mode, with value-creating sales close to its customers in several expansive niches. The business is organised in three divisions:

Electronics markets specialised products in industrial wire- less communication and embedded electronic systems for customers’ products.

Mechatronics sells electric and electro-mechanical compo- nents and offers customised production of cable harnesses.

Communications offers products, systems and services in digital image transmission/technical security and access and distributes software.

Lagercrantz works with a decentralised management model pur- suant to which decisions are made by the subsidiaries close to customers and suppliers, and where businessmanship is an im- portant competitive advantage.

Lagercrantz creates value by offerin3g advanced technical and business skills combined with products from world-leading manufacturers and proprietary products. Through Lagercrantz, the customer gets the best possible solution for performance, im- mediate availability and total cost. Customers are mostly indus- trial companies.

Lagercrantz is active in eight countries in northern Europe and in China. The Group has revenue of approximately SEK 2.2 billion and has 800 employees. The Company’s shares are listed on OMX Nordic Exchange since 2001.

Net revenue by division

Electronics 36%

Mechatronics 28%

Communications 36%

Net revenue by country

Sweden 38%

Denmark 33%

Finland 10%

Norway 9%

Germany 5%

Other 5%

Net revenue by product category

Customised products 57%

Own production 31%

Standard components 9%

Service and consulting 3%

Operating income by division

Electronics 27%

Mechatronics 36%

Communications 37%

(4)

MSEK 2 500

2 000

1 500

1 000

500

0

Net revenue and operating profit

150 MSEK

120

90

60

30

0 2003/04 2004/05 2005/06 2006/07 2007/08

Net revenue Operating profit

MSEK 600

500

400

300

200

100

Quarterly data 2007/08 and 2006/07

50 MSEK

40

30

20

10

0 Q1 Q2 Q3 Q4 Net revenue 2007/08 Operating profit 2007/08 Net revenue 2006/07 Operating profit 2006/07

EARNINGS GROWTH

Lagercrantz Group’s focus on raising earnings led to an earnings increase during 2007/08 to MSEK 131 (99). The operating margin was strengthened to 6 percent during the year (5.0) All divisions increased their earnings and margins during 2007/08. Profit after finance items increased to MSEK 121 (90), an increase of 34 percent, which means that Lager- crantz Group again reached its goal of earnings growth of not less than 15 percent.

IMPROVED PROFITABILITY

The Group’s return on equity increased to 21 per- cent, from 16 percent, which signifies a clear step to achieving also the other of the two financial goals, that of a return on equity of 25 percent.

ACQUISITIONS

During the year Lagercrantz continued to make acquisitions. Direktronik AB was acquired with a closing at the beginning of the 2007/08 financial year. Two more acquisitions were made during the year: System Solution in Norway strengthens the Norwegian electronics business and CAD Kompag- niet in Denmark broadens the Group’s offer in the CAD software field. The CAD Kompagniet closing took place in April of 2008.

Net revenue increased by 10 percent to MSEK 2,172 (1,974) Operating profit increased by 32

percent to MSEK 131 (99)

The operating margin increased to 6.0 percent (5.0)

Income after taxes increased to MSEK 91 (65)

The return on equity increased to 21 percent (16)

Earnings per share increased to SEK 3.92 (2.75)

A dividend of SEK 1.50 is proposed (1.25)

Three acquisitions were made

during the year

(5)

MSEK 50

40

30

20

10

0

Earnings performance

10 %

8

6

4

2

0 2005/06 2006/07 2007/08

Operating profit Operating margin

% 25

20

15

10

5

0

Return on equity

2005/06 2006/07 2007/08

STRONG CASH FLOW

Cash flow from operations increased during 2007/08 to MSEK 120 (76) thanks to improvements in earnings and working capital.

INCREASED REVENUE

Revenue grew during the year by 10 percent to MSEK 2,172 (1,974). Contributing to the increase was acquisitions by about 6 percent and compa- rable units by 4 percent. All divisions increased their revenue during the year.

DIVIDEND AND REPURCHASE OF SHARES A total of 1,200,000 class B shares were repur- chased during the year for MSEK 37. The Board of Directors has proposed to the Annual General Meeting 2008 a renewed repurchase mandate, and redemption of a portion of the repurchased shares.

The Board of Directors has also proposed a dividend of SEK 1.50 (1.25) per share.

Key financial indicators 2007/08 2006/07

Net revenue, MSEK 2,172 1,974

Operating profit, MSEK 131 99

Operating margin, % 6.0 5.0

Profit after finance items, MSEK 121 90

Profit after taxes, MSEK 91 65

Equity ratio, % 44 39

Earnings per share, SEK (based on the average number of shares outstanding) 3.92 2.75

Number of employees at end of period 763 751

Return on equity, % 21 16

Dividend, SEK (proposed dividend for 2007/08) 1.50 1.25

(6)

The 2007/08 operating year was a third year of solidly improved results. Earnings after finance items increased to MSEK 121, which can be compared to MSEK 90 for the year before and MSEK 55 two years ago. Including the last quarter of the year, we have now have twelve consecutive quarters behind us with im- proved results compared to the equivalent period one year earlier.

Earnings per share for the operating year increased by 43 percent to SEK 3.92 (2.75). One of the Group’s financial goals, that of earnings growth of at least 15 percent per year, has thus been sur- passed over the past several years. For the second financial goal, that of a return on equity of 25 percent, a clearly positive trend was shown and we reached the 21-percent level for the full year (16). Here we have a way to go, but the increase shows that we are on the right track to achieving this goal as well.

THREE COMPARABLY SIZED DIVISIONS

It is particularly gratifying to note that the improvements come from all of our divisions. Lagercrantz today has three evenly sized divisions, with some 25 profit centres in nine countries. This plat- form was strengthened in several ways during the year.

Electronics recorded the perhaps most distinct earnings im- provement. Operating profit increased by 65 percent to MSEK 38 and the operating margin rose to 4.9 percent (3.1). This is the result of our strategy with niche focus and higher value added.

Within the division we are directing more attention to the

expansive niches of embedded electronics and industrial wireless communication. This was manifested during the year in comple- mentary acquisitions with an IT orientation and electronics in health care in Norway and the venture in Poland with our own products and design services.

Mechatronics’ operating profit increased by 43 percent to MSEK 50, equivalent to an operating margin of 8.3 percent (6.5). Here it was especially the business in Elpress, acquired in June 2006 that showed a positive development. New positions have been worked up with important customers and we established the company dur- ing the year on the Chinese market. Also our Danish and Finnish operations in customised cable harnesses performed well.

Communications increased its operating profit by 19 percent to MSEK 51, with a slightly improved operating margin of 6.5 percent. In the division it was particularly the Access sub- area that showed clear improvements. Change of suppliers, corpo- rate restructuring in Sweden and newly acquired units (K&K in Finland and Direktronik in Sweden) all lie behind the improve- ments. In the Software sub-area excellent revenue growth contin- ued to be recorded. In the division’s third sub-area, Digital Image Transmission/Technical Security, earnings declined during the year, however, which was a disappointment. The reason is that major projects have not evolved as planned and measures for im- proved control and organisational adjustments have therefore been implemented.

It is particularly gratifying to note that the

improvements

come from all of

our divisions.

(7)

ACQUISITIONS

During the year we have also advanced our positions when it comes to acquisitions. This is an important element of our growth strategy and during the past two years Lagercrantz has made a number of acquisitions with good results. Ideas for acqui- sition targets frequently originate among our subsidiaries and we always have a number of processes ongoing aimed at acquiring new companies. We are now continuing with those ambitions and during 2007/08 we strengthened our central organisation with additional acquisition competence.

STRONG POSITIONS IN A GROWING NUMBER OF NICHES During 2007/08 Lagercrantz Group’s efforts to reach additional market niches came to fruition. Compared to the situation be- fore, sales are now more evenly distributed over a larger number of customer segments and with a more even balance among the various market channels. This improves our risk diversification and contributes to stabilising the growth rate.

MANAGEMENT BY OBJECTVE AND DECENTRALISATION Overall, I am convinced that our organisational model with man- agement by objective and decentralised decision-making generates good results. Strategies are based on each individual profit centre’s local customer and market situation and the implementation is greatly influenced by our many leaders and associates.

I would like to extend a special thanks to all associates in the Group for their fantastic engagement and for their many excel- lent efforts during the year.

FUTURE

Recent unrest in world financial markets has increased the uncer- tainty regarding the direction of the European industrial econo- my. However, we see no immediate signs of a more broadly based downturn in demand. We therefore continue to work with a fo- cus on building strong market positions in niches. The platform that has been built in Lagercrantz Group, with three profitable divisions, a well-functioning strategy and diversification in terms of business ideas, customer groups and markets is a good founda- tion for handling uncertain economic times.

Stockholm, 25 June 2008

Jörgen Wigh President and CEO

Strengthened by the suc-

cess, we now continue

building with sustained

focus on margins and

growth, organically

as well as via

acquisitions.

(8)

Lagercrantz Group’s business concept is – within well-defined niches and in partnership with customers and suppliers – to offer value-creating technical solutions in electronics, electricity, com- munication and adjacent areas. Lagercrantz deals in customised products, standard components, services, software and systems in those defined technology areas. The value added created by Lagercrantz gives the Group a place as an integral part of custom- ers’ product development and day-to-day production, where cus- tomers’ are offered a high degree of competence, availability and service. For Lagercrantz Group’s suppliers this business model means a partnership with a company with efficient marketing activities based on extensive knowledge of the local market and strong customer relationships.

VISION

Lagercrantz Group’s vision is to be a leader in value-creating technology trade with market-leading positions in several expan- sive niches. Lagercrantz Group shall consolidate its position as a profitable and stable growth company by continuing to develop existing businesses in the Group and by acquiring more com- panies with strong positions in well-defined niches. The vision encompasses three basic concepts: leading, value-creating and market-leading positions.

Leading means that, over time, the Group must live up to three basic requirements: growth, profitability and development.

The first two requirements make up the Group’s financial goals.

The third requirement, development, means that we must create positive changes based on new technology or new solutions in the niches where we conduct business, we must lead the sector’s development and develop the organisation of our own business.

Value-creating means that Lagercrantz Group in everything we do we add value to the goods and services offered to the mar- ket. By nurturing Lagercrantz Group’s collective experience, technical and business knowledge and board contact surface, added value is created for those customers who choose to buy from Lagercrantz Group. This will be achieved by development of new solution based on new products and technologies, by of- fering design and adaptation to customers’ specific needs, and by adding services, support and training.

Market-leading positions in several expansive niches are also a basic maxim. Historically, Lagercrantz Group has succeeded best in businesses that have had a significant role in a niche. That role offers excellent opportunities for sustained profitability and

for challenge by working with the foremost technology suppliers as well as the most demanding customers. A strong position in a well-defined area also means that competent staff can be recruit- ed and retained. That is an important factor for securing leader- ship over the longer term.

Lagercrantz Group typically defines a niche as a market with a total value of MSEK 200–1,000. A market-leading position means being number one or two in terms of market shares in the niche.

GOALS

Lagercrantz Group’s financial goals are:

Earnings growth of 15 percent per year over an economic cycle, measured based on profit after net finance items.

Return on equity of not less than 25 percent.

This means that earnings will double over a five-year period.

Internally, for each profit centre, the goals are expressed in terms of requirement for growth, profitability and development. The requirement for profitability means that the return on working capital in a business unit must be at least 45 percent. Other goals are set before each year in connection with the drawing-up of business plans performed by each subsidiary. The goals are con- tinually followed up during the year in order to allow for quick response as needed. For the last two years the Group has been working with clear internal benchmarking in such a way that each subsidiary can measure the outcome for one’s own unit rela- tive to other companies in the Group.

The Group has worked with a clear focus on improving the margins in existing businesses, and to add to earnings and reve- nue by acquisitions. This has led to a situation where Lagercrantz Group has exceeded its goal for earnings growth in 2007/08. The return on equity increased by five percentage points during the year, to 21 percent.

STRATEGY

In order to achieve these goals for earnings growth and profitabil- ity, Lagercrantz Group works with six main strategies.

Decentralisation and management by objective A strong corporate culture

Businessmanship Strong positions in niches Increased value added Acquisitions

(9)

A number of training activities were arranged during the year, among them courses in value-based selling for experienced sales representatives in the Group.

When Lagercrantz Group in its financial statements for 2007/08 reports twelve consecutive quarters with improved earnings com- pared to the corresponding period a year earlier, a major part of the explanation lies in a consistent application of these strategies. They were established following the strategy work during 2004–2005.

DECENTRALISATION AND MANAGEMENT BY OBJECTIVE Lagercrantz Group has about 25 operating subsidiaries, each of which operates as an individual profit centre with its own identi- ty, its own goals and under its own responsibility. In this way the mission-critical decisions are made close to customers and mar- ket. It is here that the knowledge about customers needs is the greatest. This also creates short decision-making paths and pro- motes a high degree of participation.

The subsidiaries are managed by objective, goals that are long- term based on the Group’s three main requirements, for growth, profitability and development. Business plans are drawn up each year for every company with quarterly goals for earnings and how much capital is tied up in the business. Plans are followed up on a regular basis and action is taken as needed.

STRONG CORPORATE CULTURE

Lagercrantz Group grows a strong corporate culture, which trac- es its origin in the way of working and the approach to business that is characteristic of a successful technology trading company.

There is rich lode of collective experience in the Group and this is systematically exploited and disseminated in the form of courses and training, but also by encouraging engagement and team play between associates in different parts of the Group.

(10)

Willingness to change – the ability to grasp new things and to adapt to the market.

BUSINESSMANSHIP

Businessmanship is something very basic for Lagercrantz Group and distinguishes all work that is done. This concept includes con- tributing knowledge and acting in such a way that added value is created for the customer – by refining the products of others or by offering our own products. Businessmanship means having a holistic perspective and the ability to recognise new business op- portunities and future needs in the marketplace. It also means working close to your customers and to create good sustainable re- lationships on a long-term basis based on high ethics and honesty.

Lagercrantz is a value-creating partner for buyers of technology.

STRONG MARKET POSITIONS IN NICHES

Lagercrantz Group’s subsidiaries strive to achieve a strong market position in their niche. A niche consists of a well-defined tech- nology area, customer segment or geographic area with a total market value that is normally in the range of MSEK 200–1,000.

This means working on a defined market with considerable pos- sibilities of impacting business terms and conditions. Proximity to the customers, high technical competence and a focused method of working make it possible for us to create sustainable competitive advantages, even in relation to the largest interna- tional players. For Lagercrantz Group, having a leading position means to be number one or two in each respective niche.

enhanced by phasing out standard components and replacing them with products with higher value-added for the customer.

New products and services are also increasingly being offered.

The development is in the direction of areas which are technical- ly complicated, or open the doors for a unique offer.

ACQUISITIONS

Lagercrantz Group’s goal for earnings growth will be realised in part by organic growth and in part by acquisitions. The ac- quired companies strengthen the market position in existing areas. Acquisitions are also made in order to enter new and in- teresting areas. It is crucial that acquired companies have a well- tested business model and earnings capacity, great competency among its leaders and associates and good growth opportunities.

Expansion in the technology areas where Lagercrantz Group is already established are made all over northern Europe. For other areas, which are new to Lagercrantz Group, acquisitions will in the first instance be made in the Nordic Region.

STRATEGIES FOR GROWTH, PROFITABILITY AND DEVELOPMENT

Lagercrantz Group’s aggregate strategies generate earnings growth and profitability. Decentralisation and management by objec- tive creates power to grow. The corporate culture gives rise to an organisation that understands and makes use of relationships in an engaged manner. Strong market positions attract the foremost technology suppliers and the most competent associates. Increased value added means greater ability to get better prices and a higher margin. Growth by acquisition contributes to the striving for in- creased value added, vitalised knowledge and new ideas.

(11)

Acquisitions are an important part of Lagercrantz Group’s growth strategy. The strategic group of possible acquisition tar- gets was broadened during the 2005/06 operating year in the in- terest of raising the rate of growth. That decision opened the way for growing into new technology areas, and set a long-term strat- egy of acquiring three to five companies per year.

PROCESS

Interesting complementary acquisitions are identified by the subsidiaries, whereas larger acquisitions are processed by the management of Lagercrantz Group. The capacity to make acqui- sitions was enhanced during the year as two officers are engaged in parallel with acquisition issues together with the subsidiar- ies. Making successful acquisitions requires a process to identify, evaluate and consummate corporate acquisitions. Lagercrantz Group works with a well-structured process that consists of five phases:

Listing of potential target companies based on different strategic perspectives.

Contact with company and owners, clarifying idea, prerequi- sites, purpose and common grounds.

Analysis of market and company, drawing up a business plan and negotiating the terms.

Final negotiations, quality assurance, establishing an integration plan and contract of sale.

Integration of control and reporting and internal information.

The subsidiaries in the Group have a very important function, es- pecially in the evaluation and contact phase thanks to their local market knowledge and an increasing number of potential target companies are identified via Lagercrantz Group’s subsidiaries.

TARGET COMPANIES

Businesses that Lagercrantz Group looks for are often entrepre- neur-led companies. It is then important that the seller feels that the company ends up in the right environment and continues to have good opportunities for development.

Lagercrantz Group offers a stable and financially strong plat- form in a decentralised organisation with a large measure of freedom and a clear responsibility where the company retains its name, location and organisation.

ACTIVITIES DURING THE YEAR

The results of Lagercrantz Group’s work with acquisitions dur- ing the 2007/08 operating year are that three companies have been acquired: Direktronik in Sweden, System Solution in Norway and CAD Kompagniet, which closed on 1 April 2008.

Discussions conducted during the year have also ended with

decisions not to carry out acquisitions. In some of these cases the seller’s price expectations were high in the good business cli- mate, which was the case during most of 2007. It is important for Lagercrantz to take the initiative when it comes to acquisition discussions, but also to be able to abstain when prerequisites are not deemed to be right.

OUTLOOK

Lagercrantz Group today sees good prospects for making ac- quisitions going forward. We look for companies with a proven earnings record and good management. The geographic area is foremost the Nordic Region and the northern parts of Europe.

Target companies will have a niche orientation and a strong mar- ket position within this niche. Lagercrantz Group’s contribution in the form of competence and development opportunities make it possible for good companies to continue and become even better.

Acquisitions

CASE

Direktronik

Direktronik AB is a value-adding importer and reseller of hard- ware for data and network com-

munication. The company’s business idea is to offer a niched range of products, combined with high tech- nological competence and good service. The com- pany’s efforts are aimed at Swedish companies and distributors. Since Lagercrantz acquired Direktron- ik, the company’s revenue has increased by more than 20 percent and margins have been strengthened. The main reason for this is the successful work with prod- uct line development and selling focus that the former owners now engage in in their capacity of senior man- agers of the company. Plans for Nordic expansion have also been formed recently.

System Solution

System Solution in Norway was acquired by Acte AS during the year and is now a new business area in Acte. System Solutions has a niched product line of IT products aimed at the health care industry in Norway.

With this acquisition opportunities are created for beginning to cultivate this customer segment with a broader product line.

CAD Kompagniet A/S in Denmark is a consultancy business in Computer-Aided Design. The company is a part of the CAD software business in division Com- munications from 2008/09. This acquisition further strengthens Lagercrantz Group’s market position and at the same time the company is afforded better op- portunities to expand.

CASE

CAD Kompagniet

(12)

Lagercrantz Group is a technology trading group active in the market created around the classic manufacturing industry in northern Europe. Lagercrantz Group works exclusively with sales to other companies, so-called business-to-business.

Lagercrantz Group is made up of some 25 units that work with a clear niche focus, which means focus on a limited market, about MSEK 200–1,000 in size, where the individual company can achieve a market position as number one or two.

End customers for Lagercrantz Group’s products are found primarily in electrical power generation and distribution, elec- tronics, transportation and telecommunication. As the service sector in the Nordic Region and northern Europe grows ever larger, Lagercrantz Group’s sales to the sector have increased and now constitute a growing proportion of net revenue.

DRIVING FORCES

The major driving forces affecting Lagercrantz Group’s custom- ers and thus demand on Lagercrantz Group’s products comprise the constantly growing demand for reliable energy, the ongoing globalisation of trade and the growth of new markets, especially in Asia. These driving forces are major contributors to the strong development of the world economy for the fourth consecutive year, with global growth of the gross national product by about 5 percent. This growth in the world economy raises the living standard as well as demand for the products of manufacturing industry.

Investments in infrastructure to meet the global demand for

electricity in a phase of growth, primarily linked to the economic growth in China, India and other parts of Asia. Energy compa- nies around the world need to build new power grids and im- prove the existing ones to raise capacity.

The growing volume of trade and global competition forces manufacturing industry to become more productive, and focus has become aimed at procurement functions and line processes, among other.

The emergence of new, large markets in Asia has led to a situa- tion where a growing portion of all expansion investment tends to be made in these countries to meet the strong demand thus created.

TYPES OF BUSINESSES IN TECHNOLOGY TRADE

There are two main business models on the technical markets:

Direct sales from manufacturer to end user and sales via some kind of partner. Only a small number of global companies can reach out to all their end customers via their own channels. Large companies often choose to act on their own on a few key mar- kets, while they seek a strong local partner on other markets. For smaller manufacturing companies, partnerships with local sales companies is often the only way to reach out to their customers.

Lagercrantz Group is a technology trading company with strong ties to its customers as well as its suppliers. The location in the supply chain is motivated by the fact that Lagercrantz Group can offer technical and business knowledge, problem-solving, localisation, combinations and systems, as well as training and

STRONG MARKET POSITIONS IN NICHES

MECHATRONICS Area Market position

Cable harnesses Market-leading manufacturer of customised cable harnesses

in certain segments.

Electric connection Market-leading manufacturer systems manufacturer for the electric network electric operators

in the Nordic Region.

COMMUNICATIONS Area Market position

Video conferencing Market-leading solutions seller of remote meeting solutions

in Sweden.

CCTV/ Leading systems integrator in Technical security infra-structure CCTV and in technical security solutions for high security objects.

CAD Sole distributor in Denmark and Norway of a world-leading solution for design software.

ELECTRONICS

Area Market position

Embedded systems Leading manufacturer of marine PCs and a leading value-adding distributor of industrial PCs for installation.

Wireless industrial Market-leading distributor communication of GSM modules in the

Nordic Region and Poland.

(13)

service. For the buyer the technology trading company is the lo- cal link that makes world-leading technology available on a small market. For manufacturers it is a way out to

small markets and ensures qualified counselling, service and af- ter-market activities.

The subsidiaries in Lagercrantz Group are mostly active in trade on a geographically limited market. This is an important el- ement of Lagercrantz Group’s strategy, whereby the companies can operate with extensive local market knowledge and can create long-term customer relationships. The local aspect of Lagercrantz Group’s model is demonstrated by the fact that an average of 80 percent of the individual company’s sales are in its own country.

Trading in different forms constitutes the largest part of the Group’s sales, or just under 60 percent. The trading companies are represented in divisions Electronics and Communications in particular. Trading comprises hardware as well as software for customers in several market areas and includes sales of everything from individual components to various sub-systems for integra- tion in the products manufactured by the customers.

Some companies in the Group work with an export perspec- tive. These are mostly companies with their own products that sell on a world market, either themselves via subsidiaries, or with the help of partners. Approximately 15 percent of the Group’s revenue is sales in this form, especially in divisions Mechatronics and Electronics. The ambition is to increase this portion of sales.

Niche production makes up just over 10 percent of consolidated revenue and means that the companies manufacture special so- lutions for account of the customer. This type of selling is done mostly in division Mechatronics in conjunction with production of cable harnesses.

Approximately 10 percent of the Group’s revenue is derived from systems integration where the companies in Lagercrantz Group undertake to deliver a complete solution, often with af- ter-market service. This type of sales is common in an area within division Communications in particular.

THE SUPPLY CHAIN

Lagercrantz Group works with value-adding technology trade.

That is why it is important for the companies in the Group to make the value-creation clearly visible to the customer. One aspect hereof is to work as close to the end customer as possible. Today about 35 percent of consolidated sales go directly to end custom- ers. An equal proportion, or just over 35 percent of sales, goes via selling partners and resellers to end customers. Examples of such partners are installation companies, distributors and wholesalers.

About 15 percent of consolidated sales go to contract manufac- turers. Another important customer group is systems integrators, who account for just over 5 percent of the Group’s sales.

No individual customer accounts for more than about 5 per- cent of the Group’s sales. Even for individual subsidiaries, the

Lagercrantz Group’s over-riding strategy is to establish strong market positions in well-defined niches and in close contact with the customers offer products with high value added.

(14)

Lagercrantz has a well balanced diversification in a number of different customer segments and an equilibrium between different types of businesses.

(15)

dependency on the largest customers is limited. On average, a subsidiary’s 10 largest customers account for about 65 percent of that company’s sales. Via its subsidiaries, Lagercrantz Group has leading market positions in a number of areas.

CHANGING PURCHASING PATTERNS

Important trends among Lagercrantz Group’s customers that affect conditions for the Group are shorter lead times (time- to-market), outsourcing of certain functions and moving out production. The first two of these trends can be said to consti- tute positive factors, while moving out constitutes a threat to Lagercrantz Group’s local sales.

Shorter time-to-market and outsourcing mean that the cus- tomers to a greater extent need to work with partners for a part of the work previously done internally. This opens opportunities for a strong technology trade company in the development phase as well as later in a product’s life cycle. For the customer this means greater security since the customer can buy well-tested solutions where focus can be placed on adaptation to the customer’s spe- cific product. The customer can free up resources for marketing work and the entire supply chain is rendered more efficient.

COMPETITION

Lagercrantz Group is active on niche markets and competition is different between them depending on products, volumes and geographic scope. In general, it can be said that in technology trade there is often many alternative products and players on each market. Small local players who represent foreign manufac- turers dominate on the Nordic markets. They possess a high level of knowledge about their products that may be on a par with the expertise in Lagercrantz Group. Several of the global manufac- turers have their own sales organisations in the Nordic Region and can offer good service and technical competence. There are also a number of major wholesale companies with a broad prod-

uct line and who distribute large volumes. Among these, special- ist knowledge about individual products is not as pronounced.

CURRENCIES

A majority of the Group’s sales and purchases are made in curren- cies other than Swedish kronor. The largest transaction currency is euro, which accounts for about 35 percent of sales and pur- chases. The Danish krona, the exchange rate of which is linked to euro, accounts for about 25 percent of sales and 15 percent of purchases. The American dollar is the third largest currency with about 10 percent of sales and purchases.

Major changes in recent years in the exchange rates, especial- ly for the American dollar, have prompted more and more cus- tomers to choose to work with the euro as transaction currency.

Lagercrantz works actively in trying to minimise the risk that emanates from exchange rate fluctuations by pricing in purchas- ing currency and by using currency clauses. Refer also to Note 41 on risk management.

Revenue by business type

Trade, hardware 43%

Trade, software 15%

Proprietary products 15%

Niche production 12%

Systems integration 9%

Service 4%

Other 2%

Revenue by market channel

Distributors / resellers 38%

Direct to end customer 35%

Contract manufacturers 16%

Systems integrators 6%

Other 5%

Revenue by market segment

Power generation and electricity distribution 18%

Electronics 15%

Construction 13%

Transportation 12%

Telecommunication 11%

Security 9%

IT 5%

Other 17%

(16)

Division Electronics

Division Electronics offers predominantly customised electronics in the niches industrial wireless communica- tion and embedded systems. Customers are manufacturing companies, marine industry, medical technology, automation, telecommunication and other industry with stringent demands. The division has operations in Denmark, Finland, Norway, Switzerland, Great Britain, Sweden, Germany, Poland and China.

Electronics offers a line of products from world-leading manu- facturers as well as proprietary products. The companies in the division offer cutting-edge knowledge in how these special com- ponents can be combined into systems that strengthen custom- ers’ offers. Electronics can reduce the customer’s time-to-market by designing and delivering solutions for important functions in a newly developed product. Many of Electronics’ customers pose stringent demands, often in situations where they are subject to certification and regulatory oversight, such as in the case of navi- gation equipment for vessels and medical/technical equipment used in health care.

2007/08 OPERATIONS

Electronics recorded a clear improvement in terms of operat- ing profit, which increased by 65 percent, as well as operating margin, which increased to 4.9 percent from 3.1 percent. This is the result of consistent efforts towards increased value creation and focus on selected market niches. Sales developed during the year in the direction of increased project sales. This has meant a changed sales process with greater opportunities for value cre-

ation. During the year the sales organisation has therefore been developed and the sales technique was refined with focus on mar- ket knowledge and customer benefit.

The division has made inroads into new geographic markets in the Baltic States. Marketing work and sales were started during the year with bases in Finland and Poland. Sourcing services were developed at the division’s office in China, in part to meet the de- mands from all of Lagercrantz Group’s businesses.

BUSINESS DEVELOPMENT

In Norway the small company System Solution was acquired.

This means an entry into a new niche that includes IT solutions for digitalisation and computerisation of health care. Over the longer term opportunities are also created to cultivate this cus- tomer segment with a broader offering.

Increased value added is a part of Lagercrantz Group’s overall strategy and in division Electronics that part has been subject to focus in the business development work. Higher value added is sought in several different ways, in part by adapting the product line, in part by increasing the technical knowledge of the sales staff.

Increased value added is a part of Lagercrantz Group’s overall strategy and in division Electronics that part has been subject to focus in the business development work.

(17)

Th is is also accomplished by bringing selling to the forefront as an integrated part of the customers’ product development. In the joint eff orts to fi nd the best solution, Electronics can suggest so- lutions of product combinations that are already developed and well-tried. Both sellers and buyers have much to gain from such an approach to selling and purchasing and it cements long-term relationships. As an element of this development the divisions in Electronics began to establish a separate competence centre with specialists in product development. Th e centre is located in Poland and works with customisation and with developing the division’s own products. Customers can thereby be off ered solu- tions without the big expenses and lengthy development periods often associated with unique hardware.

MARKET AND STRATEGY

Electronics is active in the niche markets for industrial wireless communication and embedded systems. In wireless communica- tion, Electronics is a leader in areas such as distribution of GSM modules. In embedded systems the division commands ad- vanced positions in a number of areas, including marine PCs.

Th e customer base is broadened as technology becomes suf- fi ciently aff ordable and this also creates opportunities for new applications of the established technology and promotes the de- velopment of new technology.

Th e strategy as far as Electronics is concerned is aimed at mov- ing the division’s position in the supply chain to areas with high- er specialist knowledge and unique products, and to increase the proportion of proprietary products off ered.

TRENDS AND PROSPECTS

New markets and customer groups are developed as the technol- ogy becomes more available at reasonable cost. Health care and energy are examples of sectors where Electronics sees new appli- cation areas emerge.

Th e development of world trade places new demands on the electronics manufacturers. What are needed are above all shorter development periods from concept to fi nished product for the market. Th is generates growing demand for well-tried tech- nical solutions in vital areas such as communication between machines (M2M), network communication and positioning equipment. New markets are being developed for complete modules that can be applied directly in manufacturing of a new electronics product, or be further developed in co-operation with the customer.

New applications are constantly being developed in the elec- tronics industry and the underlying need for industrial commu- nication and embedded systems is believed to continue to grow.

Division Electronics 2007/08 2006/07 2005/06

Net revenue, MSEK 778 751 745

Operating profi t, MSEK 38 23 22

Operating margin, % 4.9 3.1 3.0

CASE

World-class marine radar

Danish company Terma’s surveillance radar, Scanter 4100, is built with the latest technology and is able to meet high requirements for perfor- mance and cost-effi ciency. Th e British navy has chosen to install the model on its vessels with the motivation: If there is anything out there, we must be able to see it – no matter what! Th at requirement includes movements and vessels in the air as well as on the surface of the sea. One of the major diffi culties has been to design radar with high performance at a suffi ciently low price to allow the authorities to install many ves- sels within the framework of their appropriations. Terma’s products are built to withstand extreme conditions and to work without interruption in situations where human lives and large economic values are at stake.

Lagercrantz company ISIC delivers a robust marine PC to Terma.

Revenue by business type

Trading 70%

Proprietary products 17%

Systems integration 4%

Special production 3%

Other 6%

(18)

Division Mechatronics

Mechatronics markets systems and products in selected niches. Customers are found in industry, power gen- eration and electricity distribution with high requirements for quality, proximity and support. Mechatronics conducts business in Denmark, Finland, Sweden, Germany and China in three areas: Production of customised cable harnesses and adjacent products and services, production and marketing of electrical connection sys- tems, and dealing in mechanical and electro-mechanical products and electronic products.

Mechatronics’ offer is aimed at two main customer categories.

Dominating is Nordic manufacturing industry, especially in power generation, trains and railway, heavy vehicles and machin- ery, and in telecommunication. The second category is electri- cal network owners and electric power distribution. The specially adapted cable harnesses and electrical connection systems that the division deliver must be able to live up to the stringent re- quirements of customers with respect to quality and length of life. Trade in Mechatronics comprises proprietary products and complementary products from leading manufacturers. The main focus is on close customer contacts and giving customers the best possible technical advice and to offer short delivery times.

2007/08 OPERATIONS

Mechatronics recorded a positive development compared to the year before. Net revenue as well as operating profit increased, by 12 percent and 43 percent, respectively. The growth in earnings can therefore be attributed primarily to the focused efforts

to strengthen margins. The operating margin rose to 8.3 percent, from 6.5 percent.

In Finland two businesses were combined during the year with a view to improving efficiency and capacity utilisation in the or- ganisation. In the trading operations in Sweden work to strength- en market positions in the established niches further continued successfully. The cable harness operations in Sweden continued ac- tively to broaden the customer base in the interest of risk diversifi- cation and to reduce seasonal variations. Capacity utilisation in the Danish operations was good during the year.

Subsidiary Elpress has established itself in China. The offer will initially be aimed at existing customers in the Nordic Region with operations in China. A broadening in the direction of lo- cal players in the same segment has begun. Also in other parts of the world export ventures aimed at selected segments continued successfully.

Mechatronics’ offer has been com- plemented in order to develop the business to assuming greater re- sponsibility in prioritised niches.

(19)

BUSINESS DEVELOPMENT

During the year Mechatronics worked on strengthening, improv- ing and streamlining its production apparatus. In some areas the initiative was taken for low-cost production outside the Nordic countries, primarily in eastern Europe. A partner network has been created and manufacturing has commenced of some of the division’s products. Mechatronics expressed ambition is to be ac- tive throughout the supply chain and assume responsibility for quality, management, control and materials.

Mechatronics’ offer has been complemented in order to devel- op the business in the direction of assuming greater responsibili- ty in prioritised niches. With more complex deliveries, consisting of several products assembled in accordance with customer de- mands, Mechatronics’ technical knowledge and broad prod- uct line does itself justice and the value added can be enhanced further. Mechatronics therefore strengthened its marketing and support organisations during the year.

Elpress has an advanced high voltage laboratory with highly competent staffing. New knowledge generated is incorporated in proprietary products and transferred to customers in the form of lectures and development in several parts of the world.

MARKET AND STRATEGY

Mechatronics is active on local markets in the Nordic countries, and here the market’s performance during 2007/08 continued to be strong with good demand. The important sectors manufac- turing industry, electric power distribution and generation con- tributed to maintaining a high level of production. The global climate issue and market demands for secure electric power dis- tribution to the vital functions of society were driving forces be- hind this demand.

It is an expressed strategy to find distinct niches and to utilise the advantages this provides to the fullest. This includes devel- oping specialist knowledge that the circle of customers can take advantage of.

Division Mechatronics 2007/08 2006/07 2005/06

Net revenue, MSEK 604 541 331

Operating profit, MSEK 50 35 15

Operating margin, % 8.3 6.5 4.5

TRENDS AND PROSPECTS

Customers strive to refine the production technique and to streamline and improve the processes for materials procure- ment. The competence in the procurement functions has been strengthened and procurement has been given higher priority in the work of corporate managements. The purchasing pattern is increasingly in the direction of industrial “lean-think” and the question posed by customers is:

– How much can you increase our efficiency this year?

Mechatronics responds by offering the best balance between per- formance, delivery time and total cost.

Together with customers, Mechatronics has increasingly iden- tified the functions in customer products that Mechatronics can deliver in a package – sub-system. This development entails in- creased value add.

CASE

Demands for secure power supply

Society’s demands for security in electrical distribution increases as a re- sult of the effects from extreme weather conditions. Extensive new con- struction is under way, at the same time as older above-ground power lines are being dug down below earth’s surface to be protected from the weather, and the quality requirements on the electrical connections at the plants and installations have increased markedly. The big trans- formers in the power supply networks requires strong connections.

For a comparatively small portion of the total investment cost, a strong and safe connection can be secured using the electrical con- nection systems Mechatronics’ company Elpress offers. The system encompasses delivery of cable terminals and compression tools that provide a mechanically and electrically strong union with a long life.

Revenue by business type

Special production 39%

Proprietary products 30%

Trading 27%

Services 4%

(20)

The access area was what contribut- ed most to the strong performance.

Division Communications

Communications offers products, systems and services in the areas of digital image transmission/technical se- curity, access products and software. The division’s eight companies offer their solutions to the market based on being value-creating distributors and systems integrators. A growing portion of the division’s revenue is comprised of different forms of services. The division’s companies are active in Sweden, Denmark, Norway and Finland.

The division is a market leader in several areas, including vid- eo conferencing solutions in Sweden and CAD software in Denmark and Norway. The division also has a strong position in camera-based surveillance systems and other products for tech- nical security, and in access products for telecom and broadband networks and data security.

2007/08 OPERATIONS

Net revenue increased by 16 percent and operating profit im- proved by 19 percent during the year. The operating margin also rose slightly and reached 6.5 percent (6.3).

The access area was what contributed most to the strong per- formance. Successes in the area’s Finnish operations, the during the year acquired company Direktronik and a successful restruc- turing of the area’s Swedish operations in IT/Telecom yield- ed results in the form of earnings as well as operating margin improvement.

The software area showed a strong development in terms of revenue. A contributing factor was a broadening of the CAD software offering to new areas.

In the area of digital image transmission/technical security re- structuring was begun in one of the businesses because sever- al major projects failed to develop according to plan. Measures taken included strengthening the company’s installation capacity and aftermarket offer. Other parts of the digital image transmis- sion/technical security business generated a stronger result, but overall earnings performance in this area was lower than last year.

BUSINESS DEVELOPMENT

Direktronik AB is part of the division since the beginning of the year. The company was very active in the area of product devel- opment and this created strong earnings growth during the year.

In the field of technical security adjustments were made to the organisation whereby the focus of the business will increasingly be on project sales and aftermarket, whereas installation will be performed with the help of partners.

In the access area a continued adverse development was re- corded in the area of IT security. Here the product line was modified during the year as well as the offer in efforts to find ad- ditional niches in which to be active.

(21)

CAD Kompagniet was acquired during the year and the closing took place 1 April 2008. The division has thus broadened its offer in the area of CAD solutions to include consulting.

MARKET AND STRATEGY

The market for the division’s operations saw a positive develop- ment in most cases during 2007/08. In digital image transmis- sion/technical security, software and most areas in access products growth was seen in the market niches where the division is ac- tive. The market is expected to show future growth thanks to the streamlining created by effective communication. A strong driving force is the growing exchange of information, which drives the rate of investment in IT/Telecom infrastructure. Another driving force is the trend in the direction of a more closely monitored society in the form of security and camera systems.

Irrespective of business, Lagercrantz Group has chosen a clear niche strategy with its companies, either aimed at a certain type of customer or in the form of product segmentation. The busi- ness is local in all cases, with extensive customer and market knowledge. In digital image transmission/technical security the business are niched towards larger, more complex customers/

projects where the division’s technical competence and capabil- ity of offering a total package are of great value to the customer.

In the area of software the division has a clear niche orientation towards CAD software. This has led to major success thanks to a strong underlying market development and a clearly market- leading position. This can now be used to broaden the busi- ness, in part into the field of consulting in the area. In the access area the division focuses on niche products for telecom opera- tors needed for infrastructure expansion. This area also includes niched IT products and marine communications solutions.

TRENDS AND PROSPECTS

There are possibilities in several areas to strengthen the role in the supply chain, in part through in-house-developed concepts/

solutions and in part through a growing proportion of services.

This work, together with acquisitions, will be the most impor- tant factors for future growth in the division. In addition hereto, a broadening of the product line and increased sales of propri- etary products are another way for the division to strengthen its market position.

During the coming year the refinement work in the access busi- ness will continue. Additional focus will be placed on increasing sales to certain customer groups in video conferencing. During the year we are also expecting several major projects in infrastruc- ture and technical security will reach the procurement stage and this is believed to have a positive effect on the division’s business.

The integration of CAD Kompagniet will also be an important endeavour during the year.

Division Communications 2007/08 2006/07 2005/06

Net revenue, MSEK 790 682 532

Operating profit, MSEK 51 43 28

Operating margin, % 6.5 6.3 5.3

CASE

Video protects the environment

During all of 2007 the customer Sveaskog has used the Smart Meeting video service instead of letting employees travel long distances between offices for meetings. With video meeting rooms at four of their offices in Sweden, Sveaskog saves many travel days and reduces its environmental impact. For many this means less stressful work, and freeing up valuable time that can be put to better use.

Smart Meeting is a service for video meetings developed by STV. It includes a staffed help-desk that prepares each individual meeting, and provides any immediate assistance needed during a meeting. The ser- vices also includes all technology needed in a meeting room and which is required for secure communication via telephone and the internet. STV is a part of Lagercrantz Group’s division Communications.

Revenue by business type

Trading 70%

Systems integration 20%

Services 8%

Proprietary products 2%

(22)

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 1 500

1 000

500

0 Market price performance and trading volume 2007/08

SEK 45

40

35

30

25

20

15

Number of shares traded (in thousands)

Lagercrantz Group B OMX Stockholm PI Carnegie Small Cap index cause of a downward trend during the second half of the year. The closing share price 31 March 2008 was SEK 28.80. The broad stock market index, OMX Stockholm Price Index, fell by 22 percent over the same period and the Carnegie Small Cap Index, which reflects the overall development for smaller companies, fell by 19 percent.

Lagercrantz, with a market capitalisation of approximately MSEK 650 at the end of March 2008, is included in the Small Cap segment for companies with a market capitalisation below EUR 100 million.

PROPOSAL TO THE 2008 ANNUAL GENERAL MEETING The dividend proposed by the Board of Directors for the 2007/08 financial year is SEK 1.50 (1.25) per share. This is equivalent to a to- tal dividend payment of MSEK 34 (30).

The Board of Directors is also proposing cancellation of re- purchased class B shares over and above the number of shares to be used to cover the Company’s commitment under incentive programmes, and a renewed mandate for the Board of Directors to repurchase up to 10 percent of the shares outstanding in the Company. Repurchases shall be made via the stock exchange. The mandate is proposed to include the option of using shares held in treasury as payment for acquisitions, or to sell shares in other ways than via the stock exchange to finance acquisitions, and to cover the Company’s obligation under incentive programmes.

percent (40). The average rate of turnover in the Small Cap seg- ment during 2007 was 74 percent. The number of transactions per day in the Lagercrantz share was 19 (15) per trading day.

SHARE CAPITAL

As of 31 March 2008 the share capital amounted to MSEK 48.8, divided into 1,095,998 class A shares and 23,318,234 class B shares.

Each share has a quotient value of SEK 2. Class A shares entitle their holders to ten votes, while class B shares entitle their holders to one vote. Both classes of shares entitle their holders to the same rights with respect to the Company’s assets and earnings. The Articles of Incorporation allow for conversion of class A shares to class B shares. No shares were converted during the year.

REPURHASE OF OWN SHARES

The 2007 Annual Meeting resolved to authorize the Board of Directors to repurchase shares. During the year 1,200,000 class B shares were repurchased. Lagercrantz Group’s total holding of shares in treasury was 1,936,423 class B shares, equivalent to 7.9 percent of the number of shares outstanding and 5.6 percent of the votes in Lagercrantz. 515,000 of the repurchased shares are intended to fulfil the Company’s commitment under outstand- ing option programmes (2006 and 2007 awards), where the re- demption price is SEK 36.00 and SEK 44.40, respectively, per

(23)

call option. The average acquisition price for repurchased shares is SEK 28.25 per share.

INCENTIVE PROGRAMME

Over the past several years an incentive programme has been in- troduced for managers and members of senior management in the Group. The purpose of the programme is to raise the mo- tivation and create participation for managers and members of senior management regarding opportunity and risk in the Company’s development. The purpose is also to motivate manag- ers and members of senior management to continued employ- ment in the Group. The 2006 Annual General Meeting passed a resolution for the programme, which is a recurring three-year programme based on call options for repurchased class B shares.

The total number of outstanding call options issued under the programme may at no time exceed 3 percent of the total number of shares outstanding (class A as well as class B shares). The 2006 Annual General Meeting resolved to award 255,000 call options and the 2007 Annual General Meeting resolved to award 260,000 call options. Both programmes were fully subscribed. Each op- tion gives its holder the right to purchase one share at a redemp- tion price of SEK 36.00 (2006 programme) and SEK 44.40 (2007 programme), respectively. The options can be exercised between 20 September and 20 December 2009 (2006 programme) and 21 September 2010 and 21 December 2010 (2007 programme).

OWNERS

During the financial year Nordea fonder and Carnegie fonder became large owners of Lagercrantz Group. Anders Börjesson and Tom Hedelius are the Company’s largest owners with 11.9 and 11.2 percent of the votes, respectively. Foreign ownership in- creased during the year, from 12.8 percent to 26.7 percent. The number of shareholders changed marginally during the year and as of 31 March 2008 Lagercrantz Group had 3,614 shareholders.

INFORMATION

Lagercrantz Group informs about important events in the Company by publishing press releases. The Company also pro- vides financial information in the form of quarterly reports. Press releases and quarterly reports are available at the Company’s website. The Company also offers interested parties to subscribe to press releases via e-mail.

The Annual Report is printed and distributed to all sharehold- ers. The interim reports are not distributed in printed form.The following analysts follow Lagercrantz Group:

Lars Hallström, Handelsbanken Capital Markets Johan Isaksson, Remium

Henrik Alveskog, Redeye Christian Hellman, Kaupthing

References

Related documents

We recommend to the annual meeting of shareholders that the income statements and balance sheets of the parent company and the group be adopted, that the profit of the parent

We recommend to the annual meeting of shareholders that the income statements and balance sheets of the parent company and the group be adopted, that the profit of the parent

We recommend to the Annual Meeting of shareholders that the income statements and balance sheets of the Parent Company and the Group be adopted, that the profit of the Parent

We recommend to the annual meeting of shareholders that the income statements and balance sheets of the Parent Company and the Group be adopted, that the profit of the Parent Company

We recommend to the annual meeting of shareholders that the income statements and balance sheets of the parent company and the group be adopted, that the profit of the parent

We recommend to the annual meeting of shareholders that the income statements and balance sheets of the parent company and the group be adopted, that the profit of the parent

We recommend to the annual meeting of shareholders that the income statements and balance sheets of the parent company and the group be adopted, that the profit of the parent company

We recommend to the annual meeting of shareholders that the income statements and balance sheets of the parent company and the group be adopted, that the profit of the parent