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Lagercrantz Group

Annual Report 2005/2006

Lagercrantz

Group

Lagercrantz Group AB (publ) Box 3508, 103 69 Stockholm SWEDEN

Visitors’ address Torsgatan 2 Tel +46 8 700 66 70 Fax +46 8 28 18 05

www.lagercrantz.com SE 5562824556

Lage rc ra n tz G ro u p A n n u al R ep o rt 20 05 /2 00 6

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Lagercrantz Group in Brief Lagercrantz Group is a technology trading group in electronics, electrics, communication and adjacent areas. The Group operates in a decentralised mode with value-creating sales close to its customers in several expansive niches.

The business is organised in three divisions: Division Electronics is primarily involved in marketing solutions in wireless industrial communication and embedded systems. Division Mechatronics offers electric and electro-mechanical components as well as production of cable harnesses and electric connection systems. Division Communications provides solutions in digital image transmission/

technical security, design software and access products. Customers are primarily manufacturing companies.

Lagercrantz is today active in eight countries in Northern Europe and in Hong Kong.

This report contains “forward-looking statements”. Such statements reflect management’s current expectations with respect to certain future events and potential financial performance. Although the Company believes that the expectations reflected in such forward looking statements are reasonable, no assurance can be given that such expectations will prove to have been correct. Such statements are subject to risk and uncertainties and such future events and financial performance could differ materially from those set out in the forward looking statements as a result of, among other factors, (i) changes in economic, market and competitive conditions, (ii) success of business and operating initiatives, (iii) changes in the regulatory environment and other government actions, (iv) fluctuations in exchange rates and (v) business risk management. This report does not imply that the company has undertaken to revise these forward-looking statements, beyond what is required under the company’s registration contract with the Stockholm Stock Exchange if and when circumstances arise that will lead to changes compared to the date when these statements were provided.

This document is essentially a translation of the Swedish language version. In the event of any discrepancies between the translation and the original Swedish document, the latter shall be deemed correct.

Contents

The Year in Brief 1

President’s Statement 2

The Lagercrantz Share 4

Vision, Business Concept, Objectives

and Strategies 6

Organisation 8

Division Electronics 10

Case Acte Embedded 12

Case Acte Polen 12

Division Mechatronics 13

Case Elfac 15

Case Enkom 15

Division Communications 16

Case Betech Data 19

Case Lagercrantz Communication 19

Case ISG Systems 20

Case STV Video Data 20 Employees, Quality and Environment 21 Acquisition Strategy and

Acquisition Process 23

FINANCIAL REPORTING

Financial Development in Brief 26

Administration Report 28

Allocation of Earnings 30

Risks and Risk Management 31

Income Statement 32

Balance sheet 33

Changes in Shareholders’ Equity 35

Cash Flow Statement 36

Notes 37

Audit Report 58

Corporate Governance 59

Board of Directors 61

Management 62

General Meeting 2006 63

Calendar 63

Addresses 64

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n Special products and systems n Standard components n In-house production n Service and consulting

Consolidated revenues by product category

The Year in Brief

n The financial year was a turning- point for the Group with

significantly improved earnings.

n Net revenues increased by 6 percent to MSEK 1,608 (1,518).

n Operating income increased to MSEK 57 (4).

n Income after taxes increased to MSEK 39 (5).

n Earnings per share amounted to SEK 1.63 (0.21).

n Cash flow from operations amounted to MSEK 86 (36).

n Jörgen Wigh took over as new President on 1 February 2006.

Events after 2005/2006

n In order to clarify the business orientation, the Group is since 1 April 2006 divided into three divisions: Electronics, Mechatronics and Communications.

n Nordic Alarm AB was acquired and is a part of the Group from April 2006.

n The Elpress Group was acquired with closing taking place 1 June 2006.

Operating income by division, %

Revenue by division, %

Net revenues and operating income

MSEK

1. Electronics 34%

2. Mechatronics 23%

3. Communications 43%

Pro forma according to new Group structure

1. Sweden, 34%

2. Denmark, 33%

3. Norway, 12%

3. Finland, 10%

4. Norway, 12%

5. Germany, 5%

6. Other, 6%

Consolidated revenues by country, %

MSEK

Net revenues Operating income

Quarterly data 2005/2006

MSEK MSEK

Net revenues Operating income

1. Electronics 46%

2. Mechatronics 21%

3. Communications 33%

Pro forma according to new Group structure

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JÖRGEN WIGH President & CEO

THE YEAR IN BRIEF

The financial year ending 3 March 2006 was a turning- point for the Group, with a significantly improved level of earnings. All divisions and business areas improved their results and overall, the Group achieved income after financial items of MSEK 55, as compared with MSEK − the year before.

There are several explanations to the improvement.

n We increased decentralisation, especially in divi- sion Electronics, which led to clearer accountability with higher gross margins and greater focus on profit- ability as a consequence.

n Through streamlining we lowered our costs on an annual basis by approximately MSEK 20.

n We strengthened the orientation towards more value-adding products and services.

n We focused to a greater extent on growth niches, where we can gain market-leading positions.

n We capitalised on an improved market situation, which meant increased demand in several of our areas.

n We lowered our working capital during the year from MSEK 237 to MSEK 220. Cash flow from current operations amounted to MSEK 86.

The year means that we now believe that we have a more stable platform, with basic profitability and a strong balance sheet. The return on equity was just over

0 percent, as compared with .3 percent the year before and the equity ratio stood at 52 percent (5).

REFINED VISION, BUSINESS CONCEPT AND STRATEGIES

Behind the improvements is a strategy that the Group adopted during 2004. Briefly, the strategy entails focus on profitability, growth and higher value added in a number of well defined niches and, as a means for this organisa- tional form, an organisational platform with pronounced decentralisation and management by objective.

During winter/spring 2006 we developed this strate- gy further. Our vision for the future is to create a group that is “A leader in value-creating technology trade with market-leading positions in several expansive niches.”

We believe firmly in building strong market posi- tions. By working in niches we are in a market where we have an impact and which the really big players have limited interest in. By being number one or two, we will always be a player to count on. We can affect the business terms, the customers appreciate us for having the best and most cost-efficient solutions. We can build unique competence and attract the best associates and we can develop the best technology and attract the best suppliers. Taken together, this creates excellent oppor- tunities for growth and profitability.

A turning-point for Lagercrantz Group. Our result improved sharply during the year. We are now focusing on continued decentralisation and management by objective, thereby building on the positive trend, in part by improving profitability, in part by sharper focus on growth.

President’s Statement

Born 1965.

Hired 1 February 2006.

Previous experience Executive Vice President management positions in the Bergman & Beving Group between 1998–2001, from which Lagercrantz Group was spun off in 2001. Jörgen also has experience from the venture capital industry, from McKinsey & Co and he comes most recently from PriceGain − a con- sulting firm in Pricing and Revenue Management.

Education Bachelor of Science (Econ.) from the Stockholm School of Economics.

Shares owned: 7,500 class B shares.

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The idea, with strong market positions in niches, is applicable to many technology areas. Lagercrantz Group has previously chosen to concentrate on electronics and communication. But we have seized on opportunities in adjacent areas, such as electrics, electro-mechanics and technical security. We therefore choose to change our business concept to: “Within well defined niches, and in partnership with customers and suppliers, Lagercrantz Group offers value-creating technical solutions in elec- tronics, electrics, communication and adjacent areas.”

CLEARER ORGANISATION

From  April 2006, we clarify the business orienta- tion in three divisions: Electronics, Mechatronics and Communication. The objective in Electronics, to move away from standard components under con- stant pricing pressure and products with low value added, is paying off and we are increasingly focusing on more interesting areas, such as Embedded Systems and Wireless Industrial Communication. Growth and value added are significantly higher in these areas.

Solutions are more customer oriented in shorter series and with more locally dependent end market custom- ers. We are always on the lookout for niches where we can build strong market positions and in areas such as GSM modules for wireless industrial communication and marine industry PC application we dare say that we have a market-leading position today.

Division Mechatronics now includes Acte Supply, a subsidiary which was previously a part of Electronics.

Business volume is thus added to that division, which over the years has been a stable profit generator. Today we have a market-leading position in the division for customised cable harnesses in the Nordic Region, and with the addition of Acte Supply there are opportuni- ties for building a strong position also in adjacent niche components in electricity and electro-mechanics, pas- sive components and connectors. It is because of this broader orientation that we have chosen to change the division’s name from the previous Production Services.

Also included from  June 2006 is the exciting new acquisition Elpress. Historically, this company has gen- erated good profits and it will likely add another MSEK

80 in business volume, with a leading position in the niche of connection technology for electric transmis- sion in the Nordic Region.

Division Communications has three orientations:

digital image transmission/technical security, design soft- ware and access. In the first of these areas, we have strong positions in video conferencing solutions in Sweden, and in infrastructural CCTV. Also included from April 2006 is the interesting newly acquired company Nordic Alarm.

This company has a strong position as a systems integra- tor for security solutions for high-security objects, such as prisons and jails. In design software, we are the distribu- tor in Denmark and Norway of the leading software solu- tion in CAD. In access, Lagercrantz Group is the leader in niched access products for telecom and broadband networks and data security.

In this new structure we will now continue the trend of decentralisation and management by objective, in part by improving profitability further, and in part through increased focus on growth.

MORE ACQUISITIONS

An important element of our growth strategy is to grow through acquisitions. During the transformation period in which Lagercrantz Group has found itself, it has for obvious reasons not been possible to make the number of acquisitions we had hoped for. With improved basic profitability we are now in a position to enter a more expansive phase, where our ambition is to increase the pace of acquisitions. We have seen samples of this dur- ing the spring of 2006 with several processes under way and the above mentioned acquisitions completed.

Opportunities for finding good acquisition candidates are now also increasing as we are broadening the search area. We may previously have been a little too strictly ori- ented towards narrow strategic areas. Now that we want to grow in electronics, electrics, communication and adjacent areas, we are gradually opening the way for grow- ing into new technology areas. It is important to combine strategic orientation with an opportunistic approach and business acumen so that the acquisitions also in the short term contribute to increased earnings per share.

In order to both increase the number of acquisitions and to secure the quality thereof, we are applying an increasingly structured process to identify, acquire and integrate compa- nies. The process is described in greater detail on page 23.

PROSPECTS FOR THE 2006/2007 FINANCIAL YEAR Given the action taken, the Group’s margins have reached a more acceptable level. During 2006/2007 we will be focusing on further raising profitability. At the same time we will also increasingly address the growth issues, with increased focus on acquisitions. With these actions we look forward to the future and the coming year with confidence.

Finally, I would like to take the opportunity to thank all co-workers and leaders. It is thanks to you that we have succeeded with this year’s turn-around.

June, 2006 Jörgen Wigh

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The Lagercrantz class B share is listed on the O-list of Stockholmsbörsen (the Stockholm Stock Exchange) since 3 September 200.

The Lagercrantz share had a strong development during the year and rose by 54 percent, from SEK 9.50 on  April 2005 to SEK 30.0 on 3 March 2006. The stock market as a whole, OMX Stockholm, also performed well and rose by 4 percent during the same period. Carnegie Small Cap index, which tracks the development of smaller listed companies, rose by 5 percent during the period. The high- est price for the Lagercrantz share during the financial year was SEK 3.50, recorded in March 2006. The lowest price for the share was SEK 7.50 during May 2005.

DIVIDEND

The dividend proposed by the Board of Directors for the 2005/2006 financial year is SEK .00 (0.75) per share. This is equivalent to a total dividend payment of MSEK 24 (8).

TRADING IN THE SHARE ON THE STOCK EXCHANGE

Lagercrantz appointed Remium to act as market maker during the year in an effort to improve liquidity in the Lagercrantz share. The number of shares traded during 2005/06 doubled to 5.6 million shares (7.7), equivalent to MSEK 377 (50). The rate of turnover for the average number of class B shares outstanding was 67 percent (3) on an annual basis. The average rate of turnover on the O-list of Stockholmsbörsen during the 2005 calendar year was 87 percent (82). The number of transactions per day in the Lagercrantz share increased compared to the preceding year from 9 to 27 transactions per day.

SHARE CAPITAL

As of 3 March 2006 the share capital amounted to MSEK 48.8, divided into ,097,342 class A shares and 23,36,890 class B shares. Each share has a quotient value of SEK 2.

The share capital and the number of shares outstand- ing decreased during the year after the Annual General Meeting’s resolution to cancel ,500,000 class B shares pre- viously repurchased by Lagercrantz. 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 hold-

ers to the same rights with respect to the Company’s assets and earnings. The Articles of Incorporation allow for con- version of class A shares to class B shares. No class A shares were converted to class B shares during the financial year.

REPURCHASE OF SHARES

Based on the resolution of the Annual General Meeting to repurchase shares, a total of 400,000 class B shares were repurchased during November 2005. Lagercrantz Group’s total holding of own shares in treasury thereafter amounts to 736,423 class B shares, equivalent to 3.0 percent of the total number of shares outstanding and 2. percent of the votes. The average acquisition price for repurchased shares amounts to SEK 23.2 per share.

The Board of Directors will propose to the Annual Meeting to be held in August 2006 that the mandate to repurchase shares will be renewed. Under the proposed man- date, the Board of Directors would be authorised to purchase own shares to such an extent that the Company’s total hold- ing of shares held in treasury at no time exceeds ten percent of the shares outstanding in the Company. Repurchases shall be made via Stockholmsbörsen. The mandate is proposed to include the option of using shares held in treasury as pay- ment for acquisitions and to sell shares in other ways than via the stock exchange to finance acquisitions.

INCENTIVE PROGRAM

There are no outstanding share based or option based incentive programs in Lagercrantz Group. The Board of Directors will propose to the Annual Meeting to be held in August 2006 that an incentive program be introduced.

OWNERS

During the financial year Skandia Liv, Länsförsäkringar Fonder and Nordea became major new owners in Lagercrantz Group. AMF Pension, which previously was the Company’s fifth largest shareholder, reduced its holding. Anders Börjesson and Tom Hedelius are the Company’s largest owners with .5 percent and 0.8 percent of the votes, respectively. Foreign ownership increased dur- ing the year, from 2.7 percent to 7.2 percent. The number of shareholders changed only marginally during the year; as of 3 March 2006 Lagercrantz had 4,0 shareholders.

The Lagercrantz share rose by 54 during the year

The

Lagercrantz share

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Serie A Serie B

Event Change Number Proportion of Number Proportion Change Number Proportion of Number Proportion number of shares share of votes of votes, % number of shares share capital, % of votes of votes, %

Opening balance 1,840,286 7 18,402,860 41 26,023,946 93 26,023,946 59

2001/2002 Conversion of class A

shares to class B shares –725,464 1,114,822 4 11,148,220 29 +725,464 26,749,410 96 26,749,410 71

2002/2003 Conversion of class A

shares to class B shares –8,320 1,106,502 4 11,065,020 29 +8,320 26,757,730 96 26,757,730 71

2003/2004 Cancellation of

repurchased shares 1,106,502 4 11,065,020 31 –1,950,000 24,807,730 96 24,807,730 69

2003/2004 Conversion of class A

shares to class B shares –4,692 1,101,810 4 11,018,100 31 +4,692 24,812,422 96 24,812,422 69

2004/2005 Conversion of class A

shares to class B shares –4,468 1,097,342 4 10,973,420 31 +4,468 24,816,890 96 24,816,890 69

2005/2006 Cancellation of

repurchased shares 1,097,342 4 10,973,420 32 –1,500,000 23,316,890 96 23,316,890 68

Evolution of share capital

Holding Number of shareholders Stake (%) Votes (%)

1–500 2,291 2.0 1.4

501–1,000 734 2.7 1.9

1,001–10,000 931 12.9 10.6

10,001–50,000 98 8.9 7.3

50,001–100,000 13 3.6 2.6

100,001– 34 69.8 76.2

Total 31/3/2006 4,101 100.0 100.0

Size classes

Number of shareholders Stake (%) Votes (%)

Legal entities 409 59.9 44.2

Individuals 3,692 40.1 55.8

Total 31/3/2006 4,101 100.0 100.0

of whom Swedish residents 3,968 89.8 92.8

Holding by category

Shareholder Number of class A shares B shares Stake, % Votes, %

Anders Börjesson and family 377,982 65,000 1.9 11.5

Tom Hedelius and family 362,982 5,400 1.6 10.8

Roburs Fonder 3,332,907 14.1 9.9

Pär Stenberg 229,152 929,422 4.9 9.6

Skandia Liv 2,318,241 9.8 6.9

Brita Säve 30,000 973,982 4.2 3.8

Länsförsäkringar Fonder 1,187,000 5.0 3.5

Nordea Bank Finland 1,006,700 4.3 3.0

SEB Fonder 1,000,000 4.2 3.0

Johan Rapp 576,349 2.4 1.7

Didner & Gerge Aktiefond 465,600 2.0 1.4

AB Traction 429,000 1.8 1.3

Stiftelsen för kunskaps- och

kompetensutveckling 400,000 1.7 1.2

Kronprissessan Margaretas Minnesfond 17,476 150,000 0.7 1.0

Gustavus Capital 298,500 1.3 0.9

AMF Pension 280,000 1.2 0.8

Banco Fonder 255,000 1.1 0.8

Torsten Fardell. estate 15,000 100,000 0.5 0.7

Nordea Invest Nordic Small Cap 243,600 1.0 0.7

Total, 19 largest owners 1,032,592 14,016,701 63.6 72.5

Total, other owners 64,750 8,563,766 36.4 27.5

Total, not incl. shares held in treasury 1,097,342 22,580,467 100.0 100.0 Lagercrantz Group (shares held in treasury) 736,423

Total 1,097,342 23,316,890

Ownership structure, largest owners in Lagercrantz Group 31/3/2006 Key financial indicators

2005 / 06 2004/05

Earnings per share, SEK 1.63 0.21

Price earnings ratio 18.5 92.9

Dividend*, SEK 1.00 0.75

Dividend yield*, % 3.3 3.8

Most recent market price, SEK 30.10 19.50 Weighted number of shares

outstandingafter

repurchases (’000) 23,923 24,078 Number of shares

outstanding after

repurchases (’000) 23,678 24,078

* As proposed by the Board of Directors.

Price performance

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VISION

Lagercrantz shall be a leader in value-creating technology trade with market-leading positions in several expansive niches.

The vision is the lodestar for the direction in which all action in the Group should strive. The vision was reformulated during the year by adding key elements such as value-creation and market leadership in niches.

BUSINESS CONCEPT

Within well defined niches, and in partnership with customers and suppliers, Lagercrantz Group offers value-creating technical solutions in electronics, electrics, communication and adjacent areas.

The business concept was complemented during the year with “electrics” and “adjacent areas” in order to clarify the Lagercrantz Group’s vision is also applicable to areas other than electronics and communication.

This also reflects Lagercrantz Group’s current orienta- tion and the endeavour to further broaden operations in the future.

OBJECTIVES

By leading in the Lagercrantz’ vision, is meant that the Group in its different business units will live up to three basic requirements: Growth, Profitability and Development.

n By growth is meant earnings growt. The goal is a growth of income after financial items of at least

5 percent per year.

n By profitability is meant a return on equity. The ambition is that this will amount to 25 procent over a business cycle. For every established business unit this means that the return on working capital shall amount to at least 45 percent.

n By development is meant to constantly conduct positive changes with a view to achieving the requirements for growth and profitability.

STRATEGIES

To achieve these goals, the Group works with five main strategies:

Decentralised business responsibility The subsidiaries have a great deal of freedom. They are expected to formulate their own strategies based on local conditions to achieve the requirements with respect to growth, profitability and development.

Decisions are thus made where knowledge about the customers, the products and the producers is the great- est. An effective decision-making process offers good opportunities for flexible adaptation to customer needs.

The subsidiaries operate under their own names and are distinguished by strong entrepreneurial spirit, where personal involvement is encouraged. The decen- tralised organisation is also an important advantage in connection with acquisitions, as the acquired compa- nies are afforded opportunities of further developing organisation and offers with the security that belonging to a larger group brings.

Value-creation and market leadership. The vision was complemented during the year with key elements such as value-creation and market leadership in niches.

Vision, Business Concept, Objectives and Strategies

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Strong positions in niches

Electronics and communication and areas adjacent thereto constitute a large market with many players.

Opportunities of achieving good profitability in this market are significantly enhanced by creating strong market positions in niches.

Lagercrantz Group has strong market positions in a number of such niches. Examples are that the Group is the leader in Sweden in equipment for video confer- encing, in Sweden and Denmark in customised cable harnesses, in the Nordic Region in GSM modules for industrial communication, and has a strong position in marine PCs.

A market-leading position renders appreciation from customers by way of the best and most cost-effec- tive solutions, appreciation from employees thanks to the most advanced technology and the most demand- ing customers, as well as appreciation from producers thanks to access to the market and the right customers.

In all, this generates good opportunities for profitabil- ity and growth.

Increased value added

The companies in the Group co-operate with technology- leading producers. Around these products we tailor systems or solutions based on customer needs. The high technology content demands high technical competence, but also deep understanding of custom- er needs. Lagercrantz Group is thus a value-creating link between producer and customer.

The Group strives to move upward in the sup- ply chain, to deliver even higher value added to the customers. This is accomplished through a change in the product mix in the direction of increased value added with design-in, assembled products, solutions, services and in-house products. This means that Lagercrantz Group advances its position to becoming a seller of solutions in many types of businesses. The Group’s products and services are also increasingly being delivered directly to end customers and not via middlemen.

Growth creation

Lagercrantz shall expand both organically and through acquisitions. Organic growth means that the subsidiary on a on-going basis will develop its business, thereby growing with existing customers and actively cultivat- ing the market to get new customers in selected areas.

In certain cases this means increasing market shares, while in others it involves capitalizing on good market growth. Varying requirements are placed on the strate- gies and orientation of subsidiaries.

Acquisitions are en important part of Lagercrantz’

growth strategy. Acquisitions can strengthen the mar- ket position in attractive niches. Acquisitions may also be made to gain entry into new, expansive niches. In both cases it is critically important that the acquired company has well-established customer relationships and a well-tried business model. Lagercrantz’ ambition is to increase the rate of acquisitions. See Acquisition Strategy and Acquisition Process on page 23 for further details.

Develop customer relationships

Through long-standing relationships Lagercrantz Group has created a great deal of trust among its cus- tomers though competence and business flair. This means that the customer relationships often have the character of partnerships, which makes it possible to enter into the customer’s development process at an early stage, thereby enabling Lagercrantz to offer tai- lor-made solutions.

Lagercrantz Group conducts sales at several levels of the customers’ organisations. As the emphasis increas- ingly shifts towards solutions and proprietary products, sales increasingly get the character of idea sales aimed at customers’ corporate management.

Coming in early in the customer’s development process has several advantages. It is an effective way of creating long-term customer relationships and of lay- ing a foundation for future sales. It also opens oppor- tunities for giving advice about how products and serv- ices can increase the customer’s competitiveness. n

Focus on profitability and growth in the companies’ business plans

The Group is distinguished by strong profitabil- ity focus. This permeates and also affects the strategies formulated by individual subsidiaries ahead of each financial year in their business planning work. A company with low profit- ability relative to the Group’s requirements has as its main task to improve profitability, particularly by increasing its earnings. When acceptable profitability has been achieved, the next step will be to work more with its working capital in order to further improve its profitabil- ity, while retaining its margins. The next step for the company will be to focus on growth while retaining profitability.

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ELECTRONICS

Division Electronics has been given a clearer orienta- tion in the direction of wireless industrial communica- tion and embedded systems. The companies in the division offer products, systems, components and services in these areas. Sharp focus and continued emphasis on value-creation will mean a more forceful offer to customers as well as suppliers and will increase opportunities of building market-leading positions. In areas such as GSM modules for wireless industrial com- munication and marine industry PC applications, the division already commands leading positions.

Effective as of  April 2006, Acte Supply in Sweden, active in product area passive electronic components, electro-mechanics and connectors, was transferred to division Mechatronics.

MECHATRONICS

Division Mechatronics, name-changed from Production Services, has received a broader orienta- tion as the Swedish company Acte Supply has been moved from Electronics, and by the acquisition of the Elpress group. Acte Supply’s orientation is trade in electro-mechanical and passive components and connectors. Volume has thus been added to the divi- sion and it now has a greater element of trading as a complement to the existing production and trading operations. The division has a market-leading position

for customised cable harnesses in the Nordic Region and with Acte Supply there are now opportunities for building a strong position also for adjacent niche components in the electrical and electro-mechani- cal fields, in passive components and connectors.

Elpress, that is included in the Group as of  June 2006, is a producer of electric connection systems with a market-leading position in the Nordic Region.

COMMUNICATIONS

The previous four business areas Digital Image Transmission, HeathComm, Communication and Software have been organised in division Communications. The division has three orienta- tions: digital image transmission/technical security, access and design software. In the first area the division has strong positions in video conferencing solutions in Sweden and in infrastructure CCTV.

Nordic Alarm, which was acquired during the year and is a part of the Group since April 2006, has a strong position as systems integrator of technical security solutions for high security objects. In design software the division is distributor in Denmark and Norway of the leading software solution in CAD. In access, the division is a leader in niched access prod- ucts, telecom and broadband networks and data security. n

A decentralised organisation. In the Group, there are over 20 subsidiaries active in niches. The organisation is distinguished by a high degree of decentralisation and local business responsibility. From 1 April 2006, the subsidiaries are organised in three divisions: Electronics, Mechatronics and Communications.

Organisation

Financial year 2005/06 pro forma based on new Group structure Net Operating Operating

MSEK revenues income margin

Electronics 746 22 2.9%

Mechatronics 330 15 4.5%

Communications 532 28 5.3%

Parent company/eliminations –8

GROUP TOTAL 1,608 57 3.5%

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DIVISION

Electronics

DIVISION

Mechatronics

DIVISION

Communications Lagercrantz Group

Supply AB Embedded Technology AB

AS A/S

Oy

Sp. z o.o.

Components Ltd

Wireless AB

ISIC A/S

Lagercrantz Asia Co Ltd.

The division is a value-creating distributor of niche components and systems in electronics. Sales are based on customised solutions where compo- nents are designed into the customers’ products.

The division focuses on two product areas: Wire- less industrial communication (M2M) – where the division among other things is a market-leading distributor of GSM modules in northern Europe – and Embedded systems where the division, among other things, is one of the leaders in sales of industrial and marine PCs.

(Från och med 1 juni 2006)

(Från och med april 2006)

Norge

Sverige The division manufactures cable harnesses and

kindred products for customers in the electrics in- dustry and some other manufacturing industries.

Products are tailor-made to meet customers’ high demands. The division is also a leading manufac- turer in Sweden and Denmark.

The division also deals in electro-mechanical and passive components, connectors and electri- cal components. Operations are conducted in Sweden and Finland.

Since 1 June 2006 the division is also a leading producer of electrical connection systems for the Nordic market through the acquisition of the Elpress group. In this area the division has also scored significant export successes through sales to transformer, train system and wind power equipment manufacturers.

The division offers products and systems in the areas of digital image transmission/technical security, access products and software, either as a value-creating distributor or as a complete sup- plier of solutions. The division is a market leader in sales of video conferencing solutions in Sweden and is a market-leading distributor of CAD software in Denmark and Norway. The division has a strong position in camera-based surveillance systems and other products for technical security, and in access products for telecom and broad- band networks and data security. Operations are conducted in Sweden, Denmark and Norway.

The division was formed 1 April 2006 by coordinating the four business areas: Digital Im- age Transmission, HeathComm, Communication and Software.

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10

46%

The division is a value-creating distributor of niche components and systems in electronics. Sales are based on customised solutions where components are designed into the customers’ products. The division is focused on two product areas: Wireless industrial com- munication (M2M) − where the division, among other things, is a market-leading distributor of GSM modules in northern Europe − and Embedded systems where the division, among other things, is one of the leaders in sales of industrial and marine PC’s.

Effective as of  April 2006, subsidiary Acte Supply, active in product area passive electronic components, electro-mechanics and connectors was transferred to division Mechatronics. Since this company rep- resents a large portion of the Group’s sales in this area, this product area is described under division Mechatronics.

MARKETS AND CUSTOMERS

The division is established in the Nordic countries, Poland, the United Kingdom, Germany, Switzerland and Hong Kong. The focus of operations in each respective product area in the different countries depends on local conditions and demand. Aside from the main product areas, some companies in the divi- sion are successful in selling products in the areas of passive electronic components, electro-mechanics and connectors.

In product area Wireless industrial communication, the division has an overall strong market position. In

certain niches, such as sales of GSM modules, the mar- ket share is estimated to be 30 percent. Such a strong market position has been attained because the division represents market-leading producers and has created a customer-adapted offer. In product area Embedded Systems the division is gradually strengthening its market shares in a fragmented market, and already has strong positions in niches, such as certain types of industrial computers. The division’s offer in this area includes everything from micro-controllers to com- plete industrial computers.

The division advanced its positions during the year by developing a more advanced offer, in part with a larger proportion of assembled products and a higher degree of solution sales. This is more customised solu- tions in shorter series and with more locally dependent end customer markets. The division is also increasingly co-operating with partners to offer complete solutions with hardware as well as software.

Customers are found in telecommunication, medi- cal technology, data and industrial marine electronics.

Major customers include BB Electronics, Enermet, Enics, Furono, Hadelandprodukter, IDEA, Kitron, Partnertech, Polar, Scanfil, Tetra Pak and Thrane & Thrane.

The division co-operates with a large number of leading producers such as Advantech, Atmel, AVX, Epson, M-Systems, Murata, Oki, Renesas, Siemens, Tyco and Wavecom.

The main competitors are local and regional niche players, but also broad international companies.

Successful transformation work. Earnings improved sharply and order bookings increased during the second half of the year.

Division Electronics

2005/06 2004/05

Net revenues, MSEK 854 853

Operating income, MSEK 22 –36

Operating margin, % 2.6 neg

Part of Group revenues 2005/06 (pro forma)

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2005/2006 OPERATING YEAR

Net revenues amounted to MSEK 854 (853). The operat- ing result improved to MSEK 22 (−36).

Sales decreased during the first half of the year, largely because if a change in product mix in the direction of a shrinking proportion of component sales where the division’s value-adding is low. The ongoing transformation work in the division resulted in an increase in order bookings during the second half of the year.

The sharp improvement in earnings was due to successful cost-containment action, but also to the fact that changes in the product mix led to improved margins. Overall efficiency in the operations was also improved as a result of increased decentralisation and product specialisation. The preceding year was affected by one-time costs in the amount of approximately MSEK 34.

The division strengthened its market position in M2M market during the year and confirmed its position as the leader in northern Europe. Growth was good in Embedded Systems as well in areas such as single card computers, industrial PCs and marine PCs.

ORGANISATION

Work continued during the year to further strengthen decentralisation in operations. This led to more prod- uct and customer specialisation. In some parts of the division this meant a transition to a new type of sales organisation with clearer customer focus rather than product focus.

As a step in the decentralisation process the Swedish electronics business was divided into three companies, one for each product area, whereupon subsidiary Acte Supply, active in product area passive electronic components, electro-mechanics and connectors, was moved to division Mechatronics effective as of  April 2006. Pro forma revenues in division Electronics tak- ing this change into account amounted to MSEK 746 and operating income was MSEK 22.

TRENDS AND FUTURE

Ambitions are to achieve continued improvements of profitability in combination with growth. This will be accomplished through orientation in the direction of growth areas such as Wireless industrial communica- tion and Embedded Systems and skewing the product line in the direction of more complete products.

Components will continue to be marketed in the area of passive electronic components, electro-mechanics and connectors in countries where the requirement for building strong market positions has been fulfilled.

Market prospects are deemed to be favourable in the division’s future main areas.

The market for wireless industrial communication is expected to continue growing rapidly. The growth being driven by the different metering market seg- ments: electrics, gas, heating and water, as well as secu- rity, fleet management and general industry.

The ambition is to continue building on the strong position in sales of GSM modules to kindred technol- ogy areas, such as Bluetooth, W-LAN and Wimax, but also to offer complete products and services as well as developing the sensor and GPS technology areas.

The market for embedded systems is expected to grow in the next several years. Growth is driven in part by new applications being added and as more products, machines and processes are controlled by built-in computers.

The ambition is to gradually move the emphasis in the direction of advanced and complete products.

The strategy for the technology area can be divided into two parts, first to become one of the leaders in Embedded Systems in the Nordic Region, and second to be one of the leaders in the global niche of marine industrial computers. The leading position in the Nordic Region will be achieved as the Company in each respective country develops and broadens operations with more products. In marine industrial computers, resources have been expended on the development of a new modular PC system. This product program will be rolled out during the 2006/07 financial year. n

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PCs monitor cardiac patients

Acte Embedded’s customer Ortivus has devel- oped CoroNet – a modern cardiac monitoring system that enable hospitals to meet the need for greater patient monitoring flexibility in car- diac nursing. Acte Embedded has in cooperation with Ortivus adapted a panel PC, both in hard- ware and software, to meet the demands and requirements of a medical environment when it comes to noise and communication interface.

The system allows the patient to move more freely between bed rest and being ambulatory, thus removing the need to change the monitor- ing system. n

Case

Acte Embedded

Remote reading controls gas delivery

Acte Poland together with its partner Aiut, deliver equipment for remote reading of levels in LP-gas tanks at petrol stations to British Petroleum, BP, in Poland. Information is transmitted from radio transmitters in the LP-gas tanks to GSM modules and from there into the system that controls LP- gas deliveries to the stations.

Remote reading has made it possible for BP to automate fully a previously ineffective process with daily reporting. Since a large volume of pre- cise data is now easily accessible, opportunities for analysis are also enhanced. The change is also appreciated by petrol station personnel, who no

longer have to take manual measurements of the content in the LP-gas tanks.

Plans are to install the equipment at additional petrol stations in Poland. In addition hereto, there is considerable potential for remote read- ing of LP-gas tanks in industry and to monitor LP-gas consumption in buildings. n

Case

Acte Polen

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13

21%

The division manufactures cable harnesses and kindred products for customers in the electric and electronics industry and in some other manufactur- ing industry. Products are tailor-made to meet high customer requirements. The division is a leading manufacturer in the Nordic Region with operations in Sweden, Denmark and Finland. The division is also a leading producer of electrical systems through the organisation of the Elpress Group during the 2006/07 financial year.

The division is also active as a dealer in electric components. In addition, the trading operation was augmented from  April 2006 when Acte Supply, active in the area of passive electronic components, electro- mechanics and connectors, was transferred from divi- sion Electronics to Mechatronics. Trading operations now therefore exist in Sweden as well as Finland.

MARKETS AND CUSTOMERS

The division’s competence in manufacture of cable har- ness products spans a broad spectrum, everything from very simple to extremely complex units, from optic fibre to heavy process cable harnesses. The products are adapted to customers’ needs and are manufactured to order. Production is highly flexible, which results in short lead times for the customers. Strong local ties, proximity to the customer and efficient production are important key words for the operations.

The larger and more complex cable harnesses are manufactured at the division’s own production plants in Sweden, Denmark and Finland. As a complement to in-house production, the division has co-operation agreements with partners in low-cost countries for manufacture of products in large volumes.

Products include cable harnesses for robots, wind turbine generators, trains and vending machines.

The division has strong market positions in Sweden and Denmark, while operations in Finland are somewhat more niche-oriented. Among the cus- tomers are different companies in the ABB group, Bombardier, Crisplant, FKI Logistex, Helkama Forste and Vestas.

Among competitors are Teknoprod and Rimaster in Sweden, Ledkon in Denmark and Jotwire in Finland.

A number of international companies are also estab- lished in the Nordic Region.

The division commands a strong local position with its trading operations in the electricity area in Finland.

In Sweden the division has a strong market posi- tion in passive electronic components and connectors, and is in the process of building a position in electro- mechanics. The division is the leader in connectors in Sweden with products from the largest supplier in this product area.

The divisions trading operations customers are found in manufacturing industry in the Nordic

Leader in the Nordic Region. The orientation of the division is broadened as cable harness production is complemented by trading operations in electronic components as well as electrical connection systems.

Division Mechatronics

2005/06 2004/05

Net revenues, MSEK 222 205

Operating income, MSEK 15 15

Operating margin, % 6.8 7.3

The numbers refer to division Production Services for 2005/06 and 2004/05.

Part of Group revenues 2005/06 (pro forma)

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Region and include ABB, Ascom Tateco, PartnerTech and Teknoprod. Important suppliers are Panduit and Tyco.

2005/2006 OPERATING YEAR

Net revenues increased to MSEK 222 (205). Operating income was MSEK 5 (5).

Demand for cable harness products was strong dur- ing the first half of the year, but declined during the latter part of the year due to lower order bookings. In order to adjust operations to this change, cost contain- ment action was implemented, which succeeded to compensate for lower demand during the latter part of the year.

Trading operations in Finland continued to be suc- cessful. A modest decline in sales to electric component wholesalers was offset by increased demand from the industrial sector. Demand was stable in the areas of passive electronic components, electro-mechanics and connectors.

ORGANISATION

Effective as of  April 2006, subsidiary Acte Supply, active in product area passive electronic components, electro-mechanics and connectors was transferred from division Electronics to Mechatronics to symbolise a broader orientation for the division.

The division’s revenues, pro forma, taking this change into account, were MSEK 330 and operating income was MSEK 5.

The Elpress Group

The Elpress Group, consisting of the parent com- pany Elpress AB, with subsidiaries Elpress A/S in Denmark and Elpress GmbH in Germany, is part of the division from  April 2006. Elpress is a leading producer of electric connection systems. Products are aimed primarily at market segments with high requirements for performance and service level.

The company has a market-leading position in the

Nordic Region and is growing on the export side with focus on, among other things, manufactur- ers of transformers, train systems and wind power generators. Interesting growth opportunities exist in expansion of the electric grid underway in Sweden.

The export potential, where Elpress is following its customers in a number of expansive areas, is also very interesting. There is also a for the industry very strong brand name. Elpress is estimated to have revenues of just over MSEK 80 during calendar 2006 with income after financial items at the MSEK 6 level before acquisition costs.

TRENDS AND FUTURE

The market in product area cable harness production is expected to grow during the current year, in part through continued strong interest from Nordic com- panies to outsource parts of their production. Some of this outsourcing will be to countries in Eastern Europe and Asia. But at the same time there is a need to place technically advanced production with a high degree of flexibility. Geographic proximity is often also an advantage.

Slightly lower revenues are expected during the early part of the 2006/07 financial year compared to 2005/2006 for comparable units. Major new orders have been captured by the division, which is expected to lead to higher sales during the second half of the financial year.

The intention is to grow by offering more complete solutions to existing customers, for example by having the division deliver different types of units in conjunc- tion with cable harnesses.

After the reorganisation, the division has trading operations in Sweden and Finland. The market for electric and electro-mechanical components is expect- ed to be stable in these markets during the current year.

The aim is to continue development of the product line in the direction of higher technology content and more clearly defined niches. n

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High efficiency gives competitive advantage

Efficient production is an important success factor for division Mechatronics. A number of so-called lean projects were carried out during the year in the division to further improve and streamline operations.

One example is subsidiary Elfac in Denmark, which as one of ten selected Danish companies participated in a EU-financed project aimed at optimising work processes in administration as well as production.

Results were very good. In one case the time consumed for a production process was short-

ened by more than 25 percent, largely by reduc- ing transportation time and time for unpacking and packing.

To continuously improve efficiency is an impor- tant competitive advantage as it benefits the cus- tomer, among else through shorter lead times. n

Case Elfac

Jointing sleeve solved splicing problem

A sensitive link in a large electrical motor is the point where the copper profile used as wind- ing material is to be connected to a cable. ABB Electrical Machines in Helsinki, who manufac- tures very large electrical motors for marine use, was looking for a very high quality connection.

Together with Elpress, Enkom suggested a solution where the winding material is pre- crimped and compressed and then connected to the cable.

Elpress has developed and tested this method together with other ABB companies. In connec- tion with the first deliveries, Enkom and Elpress offered customer training on the new crimping tools.

The result was highly successful: Not a single quality complaint has been received since the new method was introduced. n

Case Enkom

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16

33%

The division offers products and systems in the areas of digital image transmission/technical security, access products and software, either as a value-creating dis- tributor, or as a complete supplier of solutions. The division is the market-leader in sales of video confer- encing solutions in Sweden and a market-leading dis- tributor of CAD software in Denmark and Norway. The division has a strong position in camera-based surveil- lance systems and other products for technical security, and in access products for telecom and broadband net- works and data security. Operations exist in Sweden, Denmark and Norway.

The division was formed  April 2006 by co- ordinating the four business areas: Digital Image Transmission, Software, HeathComm and Communication.

MARKETS AND CUSTOMERS

Digital Image Transmission/Technical security In camera-based surveillance systems operations are aimed at three distinct niches: infrastructure (e.g.

traffic surveillance), security (e.g. at airports) and process control (e.g. camera surveillance of cranes).

In infrastructure, the division has a market-lead- ing position with solutions installed in places such as Götatunneln in Gothenburg, Södra Länken and Norrortsleden in Stockholm. In security, the focus is on major individual security projects where cam- eras are an important element. The process control niche had its break-through during the year with a major installation of advanced camera systems on

port cranes. Among suppliers are Axis, Sony and VisioWave.

Customers for surveillance systems are major com- panies and government agencies, such as the Swedish Road Administration and the Swedish Civil Aviation Administration.

The division is the leader in Sweden in equipment for video conferencing, with approximately 40 percent of the market. There is rapid technical development in the area towards more advanced solutions, allowing faster video transmission and more meeting partici- pants. Here the division works close to the leading suppliers, Tandberg and Polycom. Operator services are also offered under the SmartMeeting brand name.

These services allow connection of a large number of participants for video meetings. This service is also available for regular telephony. A new web meeting service was introduced during the year in co-operation with Microsoft.

Video conferencing customers include public authorities, companies and major organisations with a large internal communication need.

Nordic Alarm was acquired during the year. Nordic Alarm is one of the market leaders in technical secu- rity in Sweden, with a very strong position in, among other things, integrated security solutions for prisons, nuclear power plants, banks, etc. The company is a part of the Group since April 2006.

Competitors in camera surveillance are often local niche companies. In video conferencing there are competitors such as Impact, Telia, Ementor and

Market leader in several areas. The aim is to further build and strengthen the market positions.

Division

Communications

Part of Group revenues 2005/06 (pro forma)

33%

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Videokonferensbolaget. In operator services Telia is a major player.

In technical security the competitors are for instance Bravida Säkerhet, Bewator and Securitas.

Access

The division delivers hardware-based security solutions for networks and has a strong market position in Sweden and Norway. The product mix covers the entire spectrum and includes firewalls, cryptography and VPN to secure information against hacking and sabotage, but also to achieve the best possible operating security. The division is also active in developing and selling communication products for vessels. The tailor-made systems give ship passengers access to telephony via satellite or GSM.

Customers for security products include banks, authorities and major organisations where protec- tion against intrusion is critical. Sales are via a broad network of resellers. In the communications area, customers include cruise companies and telecom operators.

Suppliers are leading manufacturers such as Juniper, Vados and Barracuda.

Competitors in the security area are Nordic as well as local niche distributors and major international pro- ducers with local distribution organisations.

Operations also include IP telephony and equip- ment for communication over copper, fibre and radio networks, converters between different com- munication platforms, integrated telephone and data networks, or Ethernet/IP networks. Solutions are developed in close co-operation with the customers.

Operations also include sale of testing instruments for network capacity. The division acts both as a value-

creating distributor and as a seller of solutions, depend- ing on channel.

Customers for communication equipment include operators, manufacturers and resellers in telephone and data communication, such as TeliaSonera, Song, Telenor, Eltel, Dotcom, Ericsson and ABB. The divi- sion is one of the leading players in this area on the Swedish market. Competitors are local niche distribu- tors and larger international producers with local dis- tribution organisations.

Design software

The product area is a value-creating distributor spe- cialised in products for design and development, so- called CAD software. The software is a complete system for design and planning of designs at, among other, construction and industrial companies. Drawings can be transmitted digitally to manufacturers and cus- tomers the world over, which saves time in develop- ment and production. The most important supplier is the world-leading software company Autodesk.

The division has a very strong market position in this area, based on high internal efficiency, good relation- ships with distributors and Autodesk’s world-leading products.

Customers are mainly found in the construction and industrial sectors. Sales are via specialised resellers in Denmark and Norway. Competitors are local niche distributors of software.

2005/2006 OPERATING YEAR

During the 2005/2006 operating year operations were conducted in the present division Communications in four business areas as follows:

2005/06 2004/05 Net revenues, MSEK

Business area Digital Image Transmission 120 95

Business area HeathComm 100 74

Business area Communication 64 60

Business area Software 248 174

TOTAL* 532 403

Operating result, MSEK

Business area Digital Image Transmission 8 2

Business area HeathComm 1 –4

Business area Communication 2 –5

Business area Software 17 14

TOTAL* 28 7

Operating margin, %

Business area Digital Image Transmission 6.7 2.1

Business area HeathComm 1.0 neg

Business area Communication 3.1 neg

Business area Software 6.9 8.9

TOTAL* 5.3 1.7

*Comparative data for 2004/05 do not include companies sold.

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DIGITAL IMAGE TRANSMISSION

Net revenues amounted to MSEK 20 (95), which was an increase of 26 percent. Operating income increased to MSEK 8 (2).

The increase in revenues was due to a combination of a strong development of the market, especially for video conferencing equipment, and the fact that the business area successfully developed its product offer, in part in the direction of greater service con- tent. Effective as of  April 2006 STV Video Data was merged with the acquired video conferencing company Frontyard Communications. The integration of the two companies contributed to strengthening the busi- ness area’s market position.

In camera-based surveillance systems, a break- though transaction in cameras for port cranes stood out.

HEATHCOMM

Net revenues amounted to MSEK 00 (74), which was an increase by 35 percent. The operating result amount- ed to MSEK  (−4).

New products in the security area were launched during the year, which strengthened operations, which still are marked by low margins for several of the agen- cies, however. The area for communication for vessels scored successes.

COMMUNICATION

Net revenues amounted to MSEK 64 (60) and the operating result was MSEK 2 (−5). The improvement in results is explained mainly by cost reductions. Demand in the business area’s market was largely unchanged compared to the preceding year.

SOFTWARE

Net revenues amounted to MSEK 248 (74), which was an increase by 43 percent. Operating income was MSEK 7 (4).

Sales of CAD software continued to increase sharply in both Denmark and Norway. The increase was due in part to the fact that Autodesk released a number of

new products especially adapted to various customer categories, and the business area was successful in mar- keting them.

Earnings showed a positive development even though the margin was affected by capital expenditure in the form of marketing and sales initiatives.

TRENDS AND FUTURE

Division Communications’ objective is to build and strengthen its positions in the various markets, orga- nically as well as through acquisitions.

In digital image transmission/technical security the ambition is to grow in video conferencing, primarily organically. The market is expected to continue grow- ing, in part because customers want to reduce travel costs by replacing travel virtual meetings, for example video conferencing. The Swedish market for technical security and camera surveillance systems is expected to grow by 5−20 percent annually for several years going forward. Growth in camera surveillance is driven by, among other things, the technology shift from analog to digital transmission of images. For many customer technical security offers a considerably more cost-effec- tive solution than traditional surveillance by guards.

In access, demand for security solutions is expected to continue to be strong. However, the market is marked by severe competition and low margins. The ambition is to strengthen growth and profitability by broadening product offerings. Good growth is expected in the communications area, in satellite as well as GSM communication. The market for commu- nication over data and telephone networks is expected to continue to be stable. In certain niches there is good growth potential, however. On such interesting niche is IP telephony.

Design software is expected to show continued growth based on, among other things, continued initiatives in development of new products from co- operation partner Autodesk. This area is expected to show continued growth during the 2006/07 financial year with good profitability. n

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References

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