CEO’s reviewAn Eventful YearFrom investment trustto an operating industrial groupNow as we put 2007 behind us, itis an eventful and in many ways anexciting year that we are to reporton. The Board announced in Januarythat priority would be given to thedevelopment and growth ofIndustrial Operations rather thanManagement of Securities. That setus off on the road away from aninvestment trust and back to afocused industrial enterprise. Duringthe year, we reviewed the capitalstructure, started divestment of theEquities Portfolio, and expanded theIndustrial Opera tions division; thesewere some of the steps during theyear towards a focused industrialenterprise. As I now write this commentthe tax authority has just notified<strong>Geveko</strong> that the company nowhas operating status.Divestment of Equities PortfolioGoing ahead with this change ofstrategy meant that <strong>Geveko</strong>’s portfolioof listed equities would have to bedivested. This process began just atthe time the Swedish stock marketbegan to turn down after rising forfour years and ended up with a negativeperformance in 2007. Beforeprices collapsed in the late autumnwe completed the sale of some twothirdsof the Equities Portfolio. Bymaking use of a variety of optionsolutions many of the holdings werehedged at prices prevailing duringthe first half of 2007. Despite thesemeasures, we found ourselves havingto report a loss on the Equities Port -folio. The remaining holdings in theportfolio will be retained pendingrecovery on the stock market.Growth viaacquisition in Central EuropeFor Industrial Operations, the yeargot off to a promising start with ahealthy order intake and an earlystart to the road-marking season,particularly in Northern Europe. Thebusiness in Norway and Swedendeveloped very well as did exports to4
CEO’s reviewCentral Europe. Major acquisitionswere carried out in Poland andSlovakia and the equity stake in ourHungarian company was raised viathe acquisition of the HungarianNational Road Administration’sminority interest in the company.Adverse factors during the year werethe difficult weather conditionsduring the summer, especially inGreat Britain, and the municipalreform process in Denmark, as resultof which the Danish contractingmarket fell by 20%. The road-markingindustry’s dependence on goodweather is a challenge for the future,namely to succeed in developingproducts or application methods or acombination of the two that makesthe activities less dependent on theweather. We can estimate that overthe past few years the annual shortfallin the result owing to poorweather conditions during thesummer season amounted to aroundSKr 20-30 million.The European market for horizontalroad markings is worth someSKr 10 billion per year and theindustry has a highly fragmentedstructure. Although <strong>Geveko</strong> is themarket leader it only has a 10% marketshare. The next largest companyin the industry is only half as large as<strong>Geveko</strong>. The structure of the industryin many ways reflects the market,which is also fragmented with differentprocurement practices, qualityrequirements and certification systems.National rules have governedthe industry, and still do so.We can expect to see a higherdegree of industrialisation within theindustry, more efficient processesand probably a process of consolidationthat will lead to fewer and largerplayers. This is the background tothe decision to continue to developIndustrial Operations and strengthenour position as a market leader withinthe road-marking sector inEurope. <strong>Geveko</strong> is well placed toplay an active role in the necessaryrestructuring of the industry byvirtue of its position as marketleader, broad geographical coverage,long experience and technicalexpertise, as well as its strong financialposition after the sale of theEquities Portfolio.Moreover, <strong>Geveko</strong> has a verypromising market position on all therapidly expanding markets in CentralEurope, namely Poland, Slovakia, theCzech Republic, Hungary andRomania. Together with the Ukraine,these markets have around 140 millioninhabitants. They also have aconsiderable need for investments inimproving their infrastructure forreasons of road safety. Since the1970s the number of traffic relateddeaths in Sweden has fallen by 65%whilst the number of vehicles on theroads has almost doubled. In manycountries in Central and EasternEurope traffic fatalities are very high.In Poland more than 5,000 peoplewere killed in traffic accidents in2007, and in the Ukraine the numberof deaths on the roads increased byaround 30% to 9,500. The nationalroad safety targets that these countrieshave set require immenseinvestments to improve the infrastructure.Major infrastructure projects,mainly to be financed by the EuropeanInvestment Bank and the EU’s structuralfunds, have been planned andare expected to continue until 2015in Central and Eastern Europe.<strong>Geveko</strong>’s aim is to create a networkof competitive contracting companiesfrom the Baltic Sea in the north tothe Black Sea in the south, wheretransport corridors of motorwaystandard are under construction andshall link up Western Europe withCentral and Eastern Europe.Business planwith many challenges<strong>Geveko</strong>’s Board has adopted a businessplan for the coming three years.One target is to achieve an operatingmargin of 8%. The ambition is togrow, both organically and via acquisition,and raise profitability at thesame time. The organic growth isplanned to take place partly on newmarkets where we see considerabledevelopment potential, and partly bylaunching new products, such asPremark ® , whose sales have beenrising by 20-25% a year during thelast few years. The main challenge isto improve profitability. We intend tocontinue as a highly decentralisedcompany with decision-makingauthority close to the customer, butat the same time to harmonise andstandardise processes and workingpractices. Economies of scale andsynergies within the contractingactivities as well as material production,gives us an edge when it comesto improving profitability. Our productionstructure has been designedfor industrial activities that for a longtime have been concentrated inNorthwest Europe. Countries inCentral Europe now account formore than one-third of the company’sinvoiced sales. The production structurenow needs to be adapted tohandle the growing business in therest of Europe.The business plan does involvechallenges and will require patience,dedication and flexibility. The changesbeing made in the structure, workingpractices and the organisation willproduce results, but the process willtake a few years.I am convinced that the chosenstrategy is the right direction to bemoving and I look forward to beingable to report on good progress in2008. As for the past year, I wouldlike to express thanks to the company’sshareholders and business partnersand to all our employees whosegreat dedication and loyalty havecontributed to the progress of theGroup.Göteborg, Sweden, March 2008Hans LjungkvistManaging director and Group CEO5
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