The Elmo Leather Group saw sales decrease in 2003 by 5% to SEK 771.1 million (815.6). Sales volumes dropped by 0.3 million sq m to 2.9 million sq m of finished leather (3.2) due to weak demand for furniture leather in North America and Europe and the phasing out of production in Denmark in the second half of 2003. Increased average prices did not fully compensate for the reduced volumes.

The result after net financial items fell to SEK -16.0 million (13.1). The decline is mainly due to the results being burdened with a non-recurring cost affecting comparability of SEK 27.8 million for the closing down of production at the Danish subsidiary. Other factors causing the decline were decreased sales volumes and an exchange gain equivalent to SEK 7.7 million for payment of loans worth US$ 7.5 million, which was charged to 2002’s results. The strengthening of the Swedish krona reduced the profit by SEK 11.6 million compared to the 2002 exchange rates.

The Swedish krona strengthened against the dollar, the euro and a number of other currencies over the year.

The markets for furniture and automotive leather have been exposed to stiff competition and weak profitability for several 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. A key factor causing the production cutbacks and rationalisation measures in the Western European leather industry is the rapid growth of tanneries in the Far East, particularly China, in recent years, especially for articles in the budget and mid-price range segments. The Chinese furniture industry is increasingly exporting furniture to both the US and Europe. This low-price import is exacerbating price competition among European and American leather suppliers, primarily manufacturers competing on the market for less exclusive leather articles.

In 2003, the leather market experienced continued weak demand for furniture leather, while orders for automotive leather remained on a par with last year. The amount of leather used for car interiors is continually increasing. Despite a slight recovery of the US economy in late 2003, the furniture leather market remains weak.

The economic situation in Germany has gradually decreased demand for leather in residential furniture and public environments. This has badly affected demand in the surrounding countries since producers there are dependent on a strong demand from the German market.

The market for raw hides remained relatively stable in 2003. Since access to raw hides was good in 2003, the prices fluctuated less compared to last year.

The Elmo Leather Group are the world’s largest manufacturers of exclusive furniture leather and one of the six biggest suppliers of leather to the automotive industry. The company develop, manufacture, market and sell Elmo leather in over 40 markets worldwide. Just over 95% of sales are to markets outside Sweden. In 2003, production at the company’s wholly-owned subsidiary in Denmark was terminated. In 2003, Elmo Leather was certified according to ISO/TS 16949, the international automotive industry’s new global quality standard for subcontractors.

Since the end of the financial year, Elmofrost, a newly designed furniture leather article, was launched in January 2004. In February 2004, production started at the company’s new leather cutting plant in Wismar on the Baltic coast of Germany. Also in February, the Environmental Testing Delegation authorised Elmo Leather to build a new treatment plant for wastewater in Svenljunga, and awarded the company permission to expand their production capacity in Svenljunga to 4.5 million sq m. of finished leather per year. The Group’s leather production has now been concentrated at the parent company’s facilities in Svenljunga, where capacity utilisation is expected to be high during the current year.

Since the autumn of 2003, the international market has shown several signs of recovery, which has already been seen in the US. Provided the European economies also improve, either on their own strength or aided by the positive US trend, demand should improve, particularly for furniture leather.

The Group’s net debt is significantly lower than a year ago. In view of these combined events, the board has a cautious optimism for 2004. If no drastic changes occur on the raw hide market, Elmo Leather’s underlying operations and the group’s profits after net financial items should improve significantly in 2004.

Elmo Leather consists of the parent company, Elmo Leather AB in Svenljunga, and three wholly-owned subsidiaries, Elmo Leather A/S in Denmark, Elmo Leather Inc. in the US and Elmo Trim GmbH in Germany. The parent company is owned by investors in Nordic Capital (52%), investors in Accent Equity Partners (formerly Nordico) (47%) and jointly by Den Danske Bank, Sydbank and Unibank (1%).