US impacts on Elmo's profits

The Elmo Leather Group claim to be the world's largest manufacturers of exclusive furniture leather and one of the six largest suppliers of leather to the automotive industry. Group sales fell in the January-June 2002 period by US$11.4 million to $44.6 million ($58 million). The profit after financial items rose by $2.3 million to $2 million but the sales volume of finished leather declined to 1.7 million sq m (2.1 million). The change in profit, sales and volumes can be mainly explained by the group's production site in the US shutting down in December 2001. A significantly improved result is predicted for financial year 2002. The company develop, manufacture, market and sell Elmo Leather in over 30 markets throughout the world. About 90% of sales are to markets outside of Sweden. Around 45% of the sales volumes are for furniture leather while 55% is for leather for the automotive industry. Marketing activities are conducted independently and via independent agents. Production in the US was shut down last December. As of 2001/2002, the group's production has been focused on sites in Svenljunga, Sweden, and Svendborg on Fyn in Demark. The European market accounted for 78% (63%) of total group sales, North America 19% (26%) and the rest of the world 3% (11%). The significant profit improvement is mainly derived from shutting down the production site in the US, which has meant lower depreciation, reduced interest costs and increased margins. The profit has also been positively affected by exchange rate gains equivalent to $805,406 by redeeming a loan of US$7.5 million. The Swedish Krona has strengthened against the US$, CA$ and GB£ over the period, but weakened against the NOK. Around 20% of the group's sales have been in US$ and CA$. Market trends The markets for furniture and automotive leather have been exposed to stiff competition and weak profitability for many years. A consolidation process is taking place in the sector, with several suppliers in the US and Europe being forced to close down or reconstruct their operations. The market for automotive leather in Europe is dominated by a handful of large suppliers, while the market for furniture leather is more fragmented, with smaller tanneries. Compared with the first half of 2001, the European and US leather markets have seen continually weak demand for furniture leather, while the demand for automotive leather has improved over the period. The amount of leather being used in car interiors is constantly increasing. Uncertainty in the US economy remains, and this is why the North American furniture leather market continues to be in the doldrums. The financial situation in Europe, and Germany in particular, has caused a slow-down in the demand for residential furniture leather as well as for contract furniture leather. This has negatively affected demand in neighbouring countries because production depends on a strong demand from the German market. After last year's extreme price rises for raw hides, prices fell towards the end of 2001 to more normal levels. The recovery has unfortunately not been stable and raw hide prices have fluctuated significantly. In all, this means that the price of raw hides has risen by 6-8% during the first six months. Elmo Leather expect a significant improvement in results for the current year. The profit after net financial items is expected to be very healthy in 2002, although the historically excellent result of 2000 will not be achieved. The Elmo Leather Group consists of the parent company, Elmo Leather AB of Svenljunga, and two wholly-owned subsidiaries, Elmo Leather AS of Denmark and Elmo Leather Inc in the USA. The parent company is owned by investors in Nordic Capital (52%), investors in Nordico Invest (47%) and jointly by Den Danske Bank, Sydbank and Unibank (1%).