ANNUAL REPORT 2004 LEGO GROUP ĐIỂM CAO

Annual Report 2004
LEGO Group

The LEGO Group through three generations

1932: Ole Kirk Christiansen founds a toy factory – under 1934: The LEGO name first appears – a combi-
the motto “Only the best is good enough” nation of the Danish words LEG GODT (meaning
“play well”)
1935: The company manufactures
its first wooden construction toy 1949: The first plastic blocks
“Automatic Binding Bricks” are marketed
1955: Godtfred Kirk Christiansen, develops
LEGO System of Play in the process creating 1958: The LEGO brick is patented – with internal
tubes as the interlocking component
a new play platform
1960: After a fire in the wooden-toy warehouse,
1958: Ole Kirk Christiansen dies, and Godtfred Kirk production is concentrated on the LEGO System
Christiansen becomes the Company’s CEO (plastic LEGO bricks)

1962: The LEGO wheel is invented

1968: LEGOLAND family theme park opens in Billund 1966: The first LEGO train – with rails and motor –
rolls off the production line
1973: Kjeld Kirk Kristiansen, Godtfred’s son,
is appointed Managing Director of the new 1969: Big bricks for small hands – LEGO DUPLO –
are launched
Swiss production companies
1977: Kjeld Kirk Kristiansen returns to Billund and joins
1978: “System in a System” – Kjeld Kirk Kristiansen’s the management company, INTERLEGO A/S
development model splits production into product
ranges and lines. It is the start of an intensive period 1978: Launch of the Minifigure

of product development 1979: Kjeld Kirk Kristiansen becomes President
and CEO
1978: The LEGO Technic product line is developed 1986: Launch of LEGO TECHNIC Computer Control.
to challenge the experienced LEGO builder A result of the partnership with Media Lab at the Mas-
sachusetts Institute of Technology, Boston
1980: The Institutional Department is built up to
handle the Company’s relations with children’s and 1993: Children’s clothing manufactured under
educational institutions – LEGO Dacta was the name licence by clothing company Kabooki
in 1989, changing later to LEGO Educational Division
1996: LEGOLAND Windsor opens
1989: Dr. Seymour Papert, MIT, Boston, appointed
“LEGO Professor of Learning Research”

1995: Godtfred Kirk Christiansen dies
– a few days after his 75th birthday

1996: www.LEGO.com website is set up 1998: LEGO Mindstorms – the intelligent LEGO
brick, robot technology and the LEGO building
1998: Global robot competition, system are integrated
FIRST LEGO League, is announced
1999: The Company’s first film licence deal is sig-
1999: LEGOLAND California opens ned with Lucasfilm – resulting in LEGO StarWars™

2002: LEGO Learning Institute organises 2001: BIONICLE creates a new toy category:
and communicates knowledge of play and learning “Constraction”, combining construction toys and
action themes.
2002: LEGO Brand Stores are
launched to get closer to the consumer 2002: LEGOLAND Günzburg opens

2004: Kjeld Kirk Kristiansen retires as President 2003: Clikits – launch of a new design system
and CEO, handing over the position for girls

to Jørgen Vig Knudstorp, after having
initiated the action plan that is to return

the company to value creation.

Financial Highlights - LEGO Group

[ mDKK ] 2004 2003 2002 2001 2000

Income Statement: 6,704 7,196 10,116 9,475 8,379
Revenue (6,601) (8,257) (9,248) (8,554) (9,000)
Expenses
Profit/(loss) before special items, financial 103 (1,061) 868 921 (621)
(723) (172) – – –
income and expenses and tax (502) (283) –
Impairment of fixed assets (1,122) (1,516) (122) (191)
Restructuring expenses (115) 868 799 (812)
Operating profit/(loss) (1,237) 18 (251) (278) (280)
Financial income and expenses (1,473) (1,498) 617 521 (1,092)
Profit/(loss) before tax (458) (953) 348 420 (788)
Profit/(loss) on continuing activities (1,931) (22) (54) (75)
Profit/(loss) on discontinuing activities 18 326 366 (863)
Net profit/(loss) for the year (935)
13,072
Balance Sheet: 5,657 10,049 12,560 14,093 –
Assets relating to continuing activities 2,432 – – –
Assets relating to discontinuing activities 8,089 13,072

Total assets 2,948 10,049 12,560 14,093 5,699
Equity (incl. minority interests) 4,892 6,478 6,225
Provisions and debt relating to 4,731 7,373
5,157 6,082 7,868
continuing activities 410 –
Provisions and debt relating to – – –
(286)
discontinuing activities
1,186
Cash Flow Statement: 774 944 1,853 1,227 (139)
Cash flows from operating activities (1,374)
Investment in property, 457 709 1,264 1,478
(9.7)
plant and equipment (29) (560) (1,003) 870 (9.4)
Cash flows from financing activities (15.2)
Total cash flows 538 (215) (290) 771 43.6
43.6
Financial ratios (in %)
6,570
Operating margin (continuing activities) (16.7) (21.1) 8.6 8.4
1,328
Net profit margin (continuing activities) (22.0) (13.2) 3.4 4.4

Return on equity (ROE) (46.3) (16.7) 4.6 6.8

Equity ratio 36.4 48.7 51.6 44.2

Equity ratio (incl. subordinate loan capital) 46.3 48.7 51.6 44.2

Employees:

Average number of employees (full time),

continuing activities 5,569 6,542 6,659 6,474

Average number of employees (full time),

discontinuing activities 1,725 1,756 1,657 1,184

Financial ratios have been calculated in accordance with the “Guidelines and Financial Ratios 2005”
issued by the Danish Society of Financial Analysts.

DEFINITIONS:

OPERATING MARGIN (EBIT MARGIN): Profit before financials and tax (EBIT) x 100
Revenue

NET PROFIT MARGIN: Net profit for the year x 100
Revenue

RETURN ON EQUITY (ROE): Net profit for the year x 100
Average equity

In addition the following are presented:

EQUITY RATIO: Equity (incl. minority interests) x 100
Total liabilities and equity, end of year

EQUITY RATIO INCL. Equity (incl. minority interests) + subordinated loan x 100
SUBORDINATED LOAN Total liabilities and equity, end of year

REVENUE [ mDKK ] OPERATING PROFIT/(LOSS)
11,000 [ mDKK ]

10,000 800
400
9,000
0
8,000 (400)
(800)
7,000 (1,200)
(1,600) 2000 2001 2002 2003 2004
6,000 2000 2001 2002 2003 2004

TOTAL ASSETS [ mDKK ] EQUITY RATIO INCL.

15,000 SUBORDINATED LOAN CAPITAL
14,000 54%
13,000 52%
12,000 50%
11.000 48%
10,000 46%
9,000 44%
8,000 42%
40%
7,000 38%
2000 2001 2002 2003 2004
2000 2001 2002 2003 2004

I N V E ST M E N T I N P R O P E RT Y, FREE CASH FLOW BEFORE

FINANCING ACTIVITIES
PLANT, AND EQUIPMENT [ mDKK ] [ mDKK ]

1,600 1,000

1,400

500

1,200

1,000 0

800

600 (500)

400

(1,000)

200

0 (1,500) 2000 2001 2002 2003 2004
2000 2001 2002 2003 2004

CONTENTS

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

REPORT 2004
REVIEW OF MARKET & RESULTS 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

The market. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Revenue and profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
STRATEGY AND ACTION PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Set clear direction for the LEGO Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Restore competitiveness by focusing on customers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Reduce the level of risk by rightsizing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
EXPECTATIONS FOR 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ORGANISATIONAL STRUCTURE AND LEADERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Market areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Leadership Team. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
THE BRAND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Ongoing dialogue with LEGO fans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
FIRST LEGO League & Mindstorms Competitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
LEGO Club. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Launch of www.LEGOfactory.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Adult LEGO fans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
LEGO VisionLab. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
LEGO Learning Institute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
EMPLOYEES AND CORPORATE CULTURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Feedback from employees – Pulse 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Employee & culture policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Improved Performance Management Programme (PMP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Developing talent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Redundancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Work environment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
CORPORATE RESPONSIBILITY OF THE LEGO GROUP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

LEGO Group quality assurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Choice of materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Environmental obligations and action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
LEGO Group Code of Conduct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Charity work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

ACCOUNTS:
Risk factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

Commercial risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Financial risks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Financial report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Accounting Policies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Management’s Statement on the Annual Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Auditors’ Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Income Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Cash Flow Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

4 | ANNUAL REPORT 2004

INTRODUCTION ■

New Direction for the LEGO Group

In 2004 the LEGO Group had to take radi- million in 2003, while total revenues in meant cutting production and operating
cal new steps to tackle its most serious 2004 were DKK 7,934 million against DKK costs by DKK 1,523 million – a 20% reduc-
financial crisis to date. 8,428 million in 2003 (including the LEGO- tion of their 2003 level. It also meant
LAND Parks). reducing the workforce by approximately

In recent years the toy industry – and in 1,000 people.
consequence the LEGO Group – has wit- Faced with this unfavourable market
nessed crucial changes in business development, the LEGO Group launched The profit/loss of the play materials busi-
terms and market conditions. There has an Action Plan early in the year, emphasis- ness before special items, financial
been consolidation in the retail sector, ing three main themes: income and expenses and tax was signif-
and major grocery chains have expand- icantly improved to a profit of DKK 103 mil-
ed at the expense of traditional toy stores. • Set clear direction for the LEGO Group lion compared to a loss of DKK 1,061 mil-
General economic pressure on consu- and fundamentally change the way we lion in 2003.
mer demand combined with a squeeze do business.
on the toy market specifically driven by Restructuring expenses were DKK 502
consumer electronics caused a decline • Restore competitiveness by focusing million and impairment were DKK 723 mil-
in sales of traditional toys. In addition, the on customers, in particular their profit- lion on fixed assets relating to the play
majority of competitors are sourcing their ability. materials business.
products in low cost countries such as
China. The overall effect of these factors • Reduce the level of risk by right sizing This implies that the profit/loss for the play
has been intense price competition with our activities, cost base and assets to materials business totals to a loss of DKK
pressure on profit margins – in a declin- a lower revenue base. 1,473 million against a loss of DKK 953 mil-
ing market. lion in 2003.
As part of the Action Plan it has been
The LEGO Group therefore has to funda- decided to sell off the LEGOLAND Parks The loss on discontinuing activities was
mentally change the way it does business to improve liquidity and establish a more DKK 458 million including DKK 528 million
if it is to survive as an independent, Dan- solid financial base for the company. impairment of LEGOLAND Park activities.
ish family-owned group and again Thus, the Parks are not regarded as part The profit before impairment of the dis-
become a financially well-founded, value of the continuing activities of the LEGO continuing activities is DKK 70 million
creating business. That is the objective – Group. Consequently, in the Annual report against DKK 18 million in 2003.
and as a consequence a fundamental the result, assets and liabilities are stated
change in strategy has been decided. as discontinuing activities. The net profit/loss for the LEGO Group
The change of direction means that was a loss of DKK 1,931 million against a
efforts are again being concentrated on The Action Plan involved substantial cost loss of DKK 935 million in 2003.
the Group’s classic, core products – reductions and efficiency measures in

LEGO bricks – and on the values that the play materials (toys) business, which
have been built around the LEGO brand together with the reduced activity level
over the years.

The global toy market was again in 2004
in decline, and the LEGO Group – in spite
of maintaining its share of the market –
felt the negative effects of lower sales on
almost all markets; in particular driven by
a significant weakening of key currencies
against the Danish krone, and reduction
in retail inventories of LEGO products.

The Group’s toy revenues in 2004 were
DKK 6,704 million compared with DKK 7,196

ANNUAL REPORT 2004 | 5

■ INTRODUCTION

The regrettable workforce redundancies, in implementing the Action Plan. When up in LEGO Educational Centres, and
the significant impairment of fixed assets the Plan had been formulated and start- LEGO Mindstorms based global robot
and the non-recurring expenses reflect ed its implementation, Kjeld Kirk Kristian- competitions, such as FIRST LEGO
the focus of the Action Plan but also have sen chose to retire from the post of Presi- League, experienced an increase in the
a significant negative effect on the result. dent and CEO, which he had held for 25 number of participants, now totalling
years. This marked a generational shift in more than 100,000 children.
In keeping with the new direction and the management of the LEGO Group.
greater focus on the way of doing busi- Kjeld Kirk Kristiansen has played a deci- The Group will continue in 2005 to work
ness, the LEGO Group modified its com- sive role in the growth and development for an enhancement of its competitive-
munication strategy, placing greater of the LEGO Group over a period of many ness and profitability. Supported by

emphasis on communicating openly and years, and at the same time he has been these new initiatives, the Group expects
timely with all stakeholders – reporting a pivotal figure for the culture and work- revenues in 2005 similar to 2004 and a
both future strategic direction and the force of the company. We are very con- profit before special items and tax in the
Group’s interim results. scious of honouring this heritage in the region of DKK 200 million.
effort to a sustainable LEGO Group.
One of the first steps towards greater The year under review was one in which
transparency was the 2004 change in In spite of the question marks over the the Group launched the Action Plan,
ownership of the Group’s companies. Group’s business situation, LEGO made extensive reductions, and worked
LEGO Holding A/S is now the parent of employees met the challenge and made on improving relations with retailers and
both the Danish and the Swiss parts of a great effort during the year. It is in large consumers.
the Group. At the same time the share part thanks to them that a renewed LEGO
capital of LEGO Holding has been Group is beginning to take shape. In 2005 the aim is to achieve results not
increased. The change means that the merely by reducing costs but by substan-
LEGO Group now coincides exactly with Despite the challenges facing the Group, tially improving our market position.
the LEGO Holding Group, and the group the year has confirmed the continued rel-
will in future be known as the LEGO evance of LEGO products in the toy mar- The following pages give an account of
Group instead of the LEGO Company. To ket. The timeless product idea, the developments within the LEGO Group in
enable comparison previous years’ fig- uniquely coherent construction system, 2004 and of its objective and planned
ures have been restated in the 2004 creates fun, engaging and creative devel- initiatives
Annual Report to match the new group opmental play. During the year, this has
structure. been emphasised by growing support to
the many LEGO activities for play-oriented
Early in the year, Kjeld Kirk Kristiansen children and adults. The LEGO Club now
resumed responsibility for day-to-day has a membership of more than 2.3 mil-
management and was instrumental in lion children aged 6-12 years. In Korea
developing the changes of direction and approximately 50,000 children are signed

Billund, March 2005 Jørgen Vig Knudstorp,
LEGO Group CEO
Mads Øvlisen,

Chairman

6 | ANNUAL REPORT 2004

REPORT 2004 / MARKET & RESULTS 2004 ■

Report 2004

Market & Results 2004 el of risk in a market which is character- Jørgen Vig Knudstorp
ised by here-today-gone-tomorrow
The market fads, which shorten the market life Jørgen Vig Knudstorp joined the LEGO
In 2004, the global market for traditional cycle of products. At the same time, toy Group in September 2001. From May 2002
toys once again was under pressure, sales are very seasonal, as much as he headed the LEGO Group’s strategy
and in most countries the profile for 50% occurring during the last three department. From April to November 2003
total sales was either flat or in decline. months of the year. he was acting Chief Financial Officer, and in
In contrast, the market for electronic November 2003 he became Senior Vice
toys – video consoles and computer Revenue and profit President and joined senior management,
games – enjoyed a minor increase. The The LEGO Group’s profit/loss before Global Management Team (now LG-LT), with
most serious threat, however, is that special items, financial income and responsibility for Corporate Affairs.
children are losing interest in traditional expenses and tax in 2004 was a con-
toys at a younger age, and that other siderable improvement on the corre- CV
products in the consumer-electronics sponding figure for 2003. The profit/loss 2004 - : CEO
sector – such as mobile phones and for 2004 was a profit of DKK 103 million 2003 - 2004: Senior Vice President, Corpo-
MP3 music players – are replacing toys compared with a loss of DKK 1,061 mil-
to an increasing extent. lion in 2003. The improvement stems rate Affairs, LEGO Group.
from the fact that by reducing many of 2003 - 2003: Vice President, Strategic Devel-
The market is also affected by its activities and implementing efficien-
increased competition at the retail level. cies, the Group was able to cut its opment, LEGO Group.
Medium-sized toy retail chains are find- costs by DKK 1,523 million equal to 20% 2002 - 2003: Senior Director, Global Strate-
ing it more difficult to compete with compared with 2003.

very large chains. At the same time gic Development & Alliance
major grocery chains are accounting In spite of this improvement, however, Management, LEGO Group.
for a rising proportion of toy sales, often the profit/loss before special items, 2001 - 2002: Director, Strategic Develop-
on discount terms. Demands are made financial income and expenses and tax ment, LEGO Group.
upon toy manufacturers for shorter remains unsatisfactory. This is mainly 1998 - 2000: Consultant, McKinsey & Co.
delivery times, lower stocks at the retail- due to the declining sales develop-
er, more exclusivity products, higher ment. Revenue in 2004 was DKK 6,704 Age: 35 years.
profit margins and increased market- million against DKK 7,196 million in 2003.
ing activity. The consequence has Qualifications: BA (econ.) and Ph.D.
been sustained pressure on prices The weaker value of the US dollar and
and a further diminishing of gross mar- related Asian currencies caused reve- Family: Married to Vanessa Knudstorp.
gins. Furthermore, more and more toy- nue to decline by 3 percentage points Children – Sebastian 4 years, Filippa 3 years,
makers are manufacturing the majority in 2004, equal to a decrease of DKK 200 Zacharias 1 year. Lives in Århus..
of their products in China, thereby low- million.
ering production costs.
The decline in revenue was exacerbat-
The declining market means that reve- ed by a general tendency among retail-
nues can be increased only by captur- ers towards inventory reduction. This
ing a larger market share. This intensi- was driven by the desire for greater
fies competition, and increases the lev- retail efficiency, and also reflected the

ANNUAL REPORT 2004 | 7

■ REPORT 2004

DUPLO Castle developed expectation of a continued decline in The Action Plan has three main themes:
in 9 months sales of traditional toys. The retail • Set clear direction for the LEGO
chains minimised their inventories of
Previously, it could take anything up to 24 LEGO products during the peak sea- Group and fundamentally change
months from the birth of an idea to the son. The LEGO Group enjoyed satisfac- the way we do business.

day the finished LEGO product stood on tory sales from retailers to the consu- • Restore competitiveness by focus-
the retailer’s shelves. That’s far too long in mer in the 2004 peak season – in local ing on customers, in particular their
today’s rapidly changing toy market. The currencies, similar to sales in 2003, profitability.
LEGO Group has therefore set itself the which ensured preservation of market • Reduce the level of risk by right siz-
target of a maximum of 12 months for share. Thus, the effect is that invento- ing our activities, cost base and
developing individual new products. ries of LEGO products held by retailers assets to a lower revenue base.
at the beginning of 2005 were healthier
The first product to pass through the than in recent years. Set clear direction for
shortened pipeline is DUPLO Castle, the LEGO Group and fundamentally
which was launched on October 1, 2004. Strategy change the way we do business
Development took a mere nine months – and Action Plan The aim of the business agenda is to
with parallel processes and rapid deci- become a value creating company.
sions helping to reduce the lead time. The profit/loss before tax for 2003 was a This requires fundamental improve-
loss of DKK 1,498 million. Part of the rea- ments in the efficiency of the Group’s
son was an unforeseen negative devel- operation and processes – for exam-
opment in the toy markets combined ple, in product development and in the
with loss of market shares in certain supply chain. Thanks to the Action Plan,
key markets – causing global sales to there has been a change in the
fall by 29% below their 2002 level. Company’s communication strategy,
with more transparent and early infor-
In response to the Group’s financial mation to all stakeholders on both the
result and continued unsatisfactory Group’s future strategic direction and
sales situation, the Corporate Manage- its current results.
ment in consultation with the Board Clearly defined targets for individual
decided to launch a new Action Plan, employees and transparent and early
which was announced in March 2004. follow-up systems are being developed
The plan lays down a major switch in with the aim of giving the LEGO Group’s
direction, requiring the LEGO Group to company and leadership culture a
concentrate its efforts in the future on more result-oriented profile.
its basic, classic and universal product

idea: LEGO bricks, and on the values Restore competitiveness
that have been built around the LEGO by focusing on customers,
brand. in particular their profitability
The LEGO Group must recapture its
The objective of the Action Plan is to position as one of the retail trade’s key
return the LEGO Group to profitability toy suppliers. This will require an ongo-
and financial stability and at the same ing understanding of the conditions
time to keep the Group in the private and profitability of the retail trade and of
ownership of the Kirk Kristiansen family. consumer preferences. The Group has
adjusted its products, prices and prod-
uct-development processes in re-
sponse to feedback from retailers and
consumers. This will result in, for exam-

8 | ANNUAL REPORT 2004

REPORT 2004 / STRATEGY AND ACTION PLAN ■

ple, a halving of the product-develop- Group’s assets. Asset values have also LEGO production shuts down
ment time, which makes the organisa- been reduced through a process of in Lättich
tion more responsive to the changing disposal.
needs of the market. In addition, the At the end of March 2004 the LEGO Group
Group is working to reduce its lead In 2004 fixed assets were impaired by a ceased production at its Lättich plant in Swit-
times and inventories. total of DKK 1,251 million, of which DKK zerland after 30 years. At the time of its clo-
528 million related to discontinuing sure, the plant employed 137 people in its
The product range must be in keeping activities. The impairment was spread moulding shop. 25 employees were trans-
with the core idea of the brand. This across several asset categories, includ- ferred and integrated in production at Willisau
means sharpened focus on such clas- ing buildings, production capacity and and Steinhausen, and 12 took early retirement.
sic product lines as LEGO DUPLO, LEGOLAND Parks. Moreover, the Group The remaining employees were given assis-
LEGO Make & Create, the classic play ceased using its own aircraft on tance in seeking new jobs.

themes (e.g., LEGO City), and LEGO December 31, 2004. Company aircraft
Technic. Development projects which will be disposed during 2005. After closure of the Lättich plant, 350 people
are not directly associated with the are now employed by LEGO Switzerland at
LEGO Group’s core business – for These asset impairments were neces- Willisau and Steinhausen.
instance, electronic games – have sary mainly on account of surplus
been transferred to licensed partners. capacity in several areas. Revenues of
toys have fallen by more than 25% in
The LEGO Group’s own analyses indi- recent years, and in the same period
cate that in 2004 it has been able to production efficiency has been
maintain its share of the market in the increased. As business during this peri-
Americas and Europe in spite of od had been expected to grow by 8-
increased competition in a stagnant 10% a year, the Group found itself with
market. Feedback from the retail trade surplus production capacity.
also shows that the turnaround which
the Group started in 2004 – with its A number of activities have also been
greater emphasis on the customer – transferred or centralised. For example,
has been remarkable. But there is still computer games and film production
room for improvement and a need to have been contracted out and as has
concentrate effort on meeting the the sale of educational products in
expectations of retailers. Europe. Hereby, substantial cuts in Gro-
up costs have been made, and the tar-
Reduce the level of risk by right get of reducing total costs by DKK 700
sizing our activities, cost base and million with full effect in 2005 was
assets to a lower revenue base already achieved in 2004. This has led
The tool for minimising risk will be to to a reduction in the work force by
trim LEGO Group activity and cost approximately 1,000 employees.
base to match lower revenues and to
the expectation that the future growth In 2004 the LEGO Group opened a fur-
rate will be moderate. The Group had ther nine Brand Retail stores, bringing
more production capacity than it need- the total number to 33 worldwide. The

ed – due to slow growth in the toy mar- stores are primarily located in the USA,
ket and the productivity improvements supporting the Group’s strategy of
achieved by the LEGO Group in recent broadening public awareness of the
years. It was therefore decided to make LEGO brand. At the same time the
substantial impairments in some of the stores are an important sales platform

ANNUAL REPORT 2004 | 9

■ REPORT 2004

Royal couple visited Billund in a market which is becoming increas- scale. A new ownership structure can
ingly less specialised and subject to inject the future investment needed to
Thousands of children and adults were on retail consolidation. Over the years, the renew the infrastructure (including
hand to greet Crown Prince Frederik and Group has tested a variety of retail con- hotels, etc.) and create other synergy
Crown Princess Mary of Denmark, when cepts, locations and product portfolios benefits.
the couple made an official visit to LEGO- in order to identify the most relevant
LAND Billund in September 2004. The roy- combination. It has now developed a In 2004 the LEGO Group disposed a
al couple – who were married in May 2004 formula for a small chain of retail stores. holding of nominal DKK 5 million “A”
– had a special task to perform: officially The retail concept has been well shares in KOMPAN A/S. The remaining
inaugurating a model of their own home, received by consumers, and in 2004 it shares will be disposed in 2005. KOM-
Fredensborg Castle with its Kancellihuset won an international design, marketing PAN A/S is no longer included in the
wing. and property-development award. The consolidated accounts but classified
Prince Frederik and Princesss Mary were LEGO Group, however, intends accu- as discontinuing activities.
presented with two small LEGO figures of mulating further experience in the con-
themselves – which they have opted to struction and operation of these outlets During 2004 the LEGO Group reduced
place near the door of the Kancellihuset before engaging in further major invest- its total assets from DKK 10,049 million
leading to the garden. ment. It is estimated that it will take 1-2 to DKK 8,089 million, of which DKK 2,432
Nine model designers spent 3,000 hours years to fine-tune the concept. million relate to discontinuing activities
researching, drawing and building the which are expected to be disposed in
large model of the castle – the equivalent The year under review saw visitor num- 2005.

of one person working for two years. The bers rise at LEGOLAND Parks. The
model is built to a scale of 1:20 and increase of 140,000 was almost 3% Expectations for 2005
required a total of 369,000 LEGO bricks. above the previous year’s total. The
number of season tickets sold rose The Action Plan launched in 2004 will
sharply; more than 350,000 visitors to also have a significant effect on 2005. In
LEGOLAND Parks are now season-tick- general terms, the plan will produce a
et holders. LEGOLAND Parks improved smaller, but financially stronger and
their activities markedly compared with more streamlined Group, ready to deal
the previous year, and across the four with a low-growth industry and product
Parks it was gratifying to see visitor sat- category. The Group’s main effort will
isfaction continuing to rise – and from a be in the field of classic construction
very high base point. The profit/loss of toys, which represent its core business.
the LEGOLAND Parks was a profit after
tax of DKK 20 million against a profit The LEGO Group expects revenues in
after tax in 2003 of DKK 27 million. 2005 similar to 2004 and profits before
special items and tax in the region of
LEGOLAND Parks are expected to be DKK 200 million.
sold off during 2005. The Parks are cap-
ital-intensive, and a disposal of them Organisational structure
will release liquidity, and reduce the and leadership
LEGO Group’s fixed expenses in sup-
port of a sustainable core business Kjeld Kirk Kristiansen, majority share-
(play materials/construction toys). The holder of the LEGO Group, took over
market for family theme parks is cur- day-to-day management of the Group
rently undergoing a process of consoli-
dation due to increased competition
and the need to realise economies of

10 | ANNUAL REPORT 2004

REPORT 2004 / EXPECTATIONS FOR 2005 - ORGANISATIONAL STRUCTURE AND LEADERSHIP - THE BRAND ■

in January 2004, since when he has Group Leadership Team – in addition to Big LEGO show in the Netherlands
been responsible for putting the Com- CEO Jørgen Vig Knudstorp and CFO
pany on a new course. Jesper Ovesen – is made up of Henrik LEGO World was held in the Netherlands in
Poulsen, Senior Vice President (Europe- autumn for the fourth consecutive year. This
When the Action Plan was firmly in an & Emerging Markets); Søren Torp five-day LEGO activity, building and competi-
place and the key changes implement- Laursen, Senior Vice President (Ameri- tion event is a joint venture by LEGO Benelux
ed, Kjeld Kirk Kristiansen announced cas, Australia, New Zealand, Direct-to- and several external partners, including the
his intention of retiring as President and Consumer); Mads Nipper, Senior Vice Dutch fan club, Bouwsteen.
CEO of the Company after 25 years in President (Global Innovation & Market- In the 17,000-m2 event centre children and
the post. In October 2004 the Board ing); and Lars Altemark, Senior Vice adults were able to try out LEGO Sports, a
appointed a new leadership team – President (Global Supply Chain). Mads CLIKITS Corner for girls, Knights’ Kingdom,
Corporate Management – comprising Ryder, Senior Vice President, LEGO- LEGO Pirates, assorted building activities and
Jørgen Vig Knudstorp as President and LAND Parks, reports directly to Corpo- much more besides. The Fox Kids TV Channel
CEO and Jesper Ovesen as Chief rate Management. arranged musical entertainment with popular
Financial Officer. bands.
The brand A record number of 40,000 visitors paid to
Mads Øvlisen remains Chairman of the attend LEGO World.
Board, with Kjeld Kirk Kristiansen as The right to use the LEGO brand
Vice Chairman. remains one of the Group’s most
important “intangible assets”. Intending
Market areas to consolidate and protect the brand
The Group’s organisation was restruc- and re-establishing a sustainable level
tured in October. The new organisation of business, the Corporate Manage-
is designed to have a more customer- ment and Board of the LEGO Group
focused and simplified structure. have opted to sharpen the focus on
the core idea behind the brand.
In sales, there are now only two market
areas: European & Emerging Markets The products that are based on the

(EEM) and the Americas (AMS). Markets core idea are classic product lines: for
which were previously grouped under example, LEGO QUATRO/DUPLO, LEGO
Asia Pacific now report to European & Make & Create, the classic play themes,
Emerging Markets, while Australia and such as LEGO City, LEGO Technic and
New Zealand have been organised LEGO MINDSTORMS. The Group will
under the Americas. work for the creation of a better bal-
ance between these classic product
Direct-to-Consumer, which is the lines and story-based products such
Group’s Brand Retail store chain, and as BIONICLE, LEGO Star Wars™ and
Shop@Home, the internet and mail- LEGO Harry Potter™ with the aim of
order outlet, also report to the leader- recapturing market shares which the
ship of the Americas organisation. Group has lost in recent years.

Leadership Team Products
The new organisational structure There were new-product launches and
creates a simplified leadership team, relaunches of existing products in 2004.
which now consists of Corporate Man- The most notable examples include:
agement and the heads of four depart-
ments, a total of six people. The LEGO

ANNUAL REPORT 2004 | 11

■ REPORT 2004

LEGO DUPLO brand is back QUATRO to retailers increased by approximately
QUATRO was launched during the year 15% compared to the previous year.
In 2004 the familiar DUPLO rabbit returned for children aged 1-3 years. QUATRO This product range is now on sale on
to the front of LEGO sets for the youngest. bricks are eight times the size of most of the markets, i.e. USA and North
Since 2002 these sets had been market- DUPLO bricks and are designed to give and Central Europe.
ed as LEGO EXPLORE, which did not win the very young child its first experience

the favour of consumers. The LEGO of building. The two systems comple- Spider-Man™ 2
Group therefore took the logical step at ment each other. and Harry Potter™ 3
the end of 2003 and launched the prod- The LEGO Group holds the rights to
uct portfolio for 2004 under its earlier DUPLO manufacture construction toys tying in
name: LEGO DUPLO. The LEGO Group relaunched the with several successful cinema
Feedback from consumers and retailers DUPLO brand in 2004. LEGO DUPLO sequels. Two of these were premiered
was that LEGO EXPLORE had made it dif- products were previously very popular in 2004 – Spider-Man™ 2 and Harry
ficult for consumers to find the products purchases for the youngest children Potter™ 3, and both contributed posi-
they knew and liked. As a result, the LEGO but in 2002 they were replaced by a tively to the annual result.
Group’s three building systems for the new child-development system – LEGO
youngest users – LEGO BABY, QUATRO EXPLORE. Unfortunately, the new BIONICLE
and DUPLO – will now share a marketing system never really caught on with con- Once again, BIONICLE has proved our
platform. The reintroduction of the DUPLO sumers – and the LEGO Group lost a biggest-selling product. The second
brand was one of the first examples of the substantial portion of its sales of prod- BIONICLE DVD appeared in autumn
LEGO Group’s objective of responding ucts for the “pre-school” child. The and, like the first film, was well received.
quickly to signals from the market. relaunch of DUPLO products has been
warmly welcomed by both retailers and FERRARI
consumers. In February, the LEGO Group
announced a new partnership with Fer-
Make & Create rari. A number of LEGO Ferrari products
The classic Make & Create line sold were launched during the year, all
well in 2004, which confirms the deci- based on Ferrari’s Formula 1 racing
sion to increase emphasis on the core cars. The products are part of both the
idea. LEGO Racers and LEGO DUPLO series
and have generated very encouraging
KNIGHTS’ KINGDOM sales figures. In 2005 the Formula 1 rac-
The KNIGHTS’ KINGDOM range of prod- ers will be joined by a number of prod-
ucts came to the market in 2004. It is ucts based on Ferrari’s street cars.
based on a classic castle-and-knight
theme and, in common with BIONICLE, Ongoing dialogue with LEGO fans

creates its own universe, with an inte- Day-to-day contact and interaction with
gral story – and its own Internet web- fans and consumers throughout the
site. One of the products in this range, world continue to be an important ave-
Castle of Morcia, was among the 10 nue for ensuring that products appeal
LEGO bestsellers in 2004. to consumers. The Group therefore
engages in many initiatives which
CLIKITS boost and stimulate the creativity and
CLIKITS, a product for girls, which is a imagination of children and adults –
creative construction toy with jewellery often in collaboration with LEGO fans.
etc., continued the success it has Examples are FIRST LEGO League,
enjoyed since its launch in 2003. Sales LEGO Club and www.LEGOfactory.com.

12 | ANNUAL REPORT 2004

REPORT 2004 / THE BRAND ■

FIRST LEGO League via a website and a members’ maga- Knights’ Kingdom
& Mindstorms Competitions zine. The magazine is published in Eng- on the shelves in 200
In 2004, the LEGO Group continued its lish, German, French and Japanese
work on the so-called FIRST LEGO approximately six times a year. Through In early 2004 the LEGO Group launched
League competitions. FIRST LEGO the LEGO Club, members can share Knights’ Kingdom, based on the classic
League is a robotics competition for pictures of their favourite building work knights-in-shining-armour theme. The core tar-
children and young people between and draw inspiration for future play. get group for this product is boys aged 5-7
the ages of 9 and 16 years, who com- years. Boys who love action – and who are fas-
pete in teams in several disciplines. In September a new club was cinated by the physical play that the products
Competitions are run in conjunction launched in the USA: LEGO BrickMas- encourage.
with the American non-profit organisa- ter. On a subscription basis members
tion FIRST (For Inspiration and Recogni- have access to a number of activities. The product comprises two lines: Action Fig-
tion of Science and Technology). ures and Play Themes. The two lines have dif-
Through projects run by the children Launch of ferent qualities, which supplement each other.

themselves, competitions foster a www.LEGOfactory.com Play Themes provide building satisfaction, the
child’s interest in and propensity for sci- In November 2004 the LEGO Group Action Figures tend more to feature fast-mov-
ence and mathematical/technical sub- launched a new website: www.LEGO- ing play.
jects. factory.com. Children and other building
enthusiasts visiting the site are invited to
In 2004 FIRST LEGO League competi- design LEGO models and take part in
tions were held in 20 different countries competitions for LEGO prizes. The idea
– including newcomers Japan, South behind the website is to develop the
Africa, Switzerland, Mexico, Israel and Group’s contacts with LEGO fans of all
Turkey. The number of participating ages. If children are looking for advice
children has increased by more than or ideas, they can see inspirational
30% since 2003 – to a total of 55,000 in material at the site posted by LEGO
2004, made up of 6,000 teams. As a designers and adult LEGO fans.
new venture, a series of pilot competi-
tions was conducted in the USA aimed Visitors can build 3-D LEGO models
at children in the younger age group of using a special software application,
6-9 years. LEGO Digital Designer (LDD) and join
the LEGO Factory competition. Every
A number of robot competitions were week, new winners are selected. On top
held in Asia based on LEGO Mind- of receiving LEGO products, they auto-
storms – by World Robotic Organisa- matically compete for the certification
tion (WRO) and Robocup. In these com- of “professional LEGO Factory design-
petitions, more than 6,000 teams partic- er”, which entitles them to have their
ipated in 2004, which means that the model mass produced and sold in
total number of children, participating Shop@Home on www.LEGO.COM. The
in Mindstorms-based competitions 10 final winners will receive a 5% royalty
(including FIRST LEGO League) was on each set sold.
more than 100,000 in 2004. The first version of LDD appeared a
year ago on www.LEGO.com. The pro-
LEGO Club gramme can be downloaded free of

The LEGO Club is for children aged 6- charge. So far, more than 700,000 con-
12 years. In 2004 it had 2.3 million mem- sumers throughout the world have
bers. It communicates with members downloaded LDD.

ANNUAL REPORT 2004 | 13

■ REPORT 2004

LEGO educational centres Adult LEGO fans a number of international conferences,
open in Asia A growing number of adult LEGO round tables and workshop sessions
enthusiasts have begun setting up on children, play and learning.
In 2004 the LEGO Educational Division groups to discuss their LEGO hobby.
opened two new educational centres for They call themselves “AFOLs” – “Adult Employees and
children aged 3-6 years – one in Singa- Fans of LEGO”. Over a period of years, corporate culture
pore, the other in Japan. LED opened its the LEGO Group has actively devel-
first centres in Asia back in 2001, and oped relations with many “AFOL” Employees of the LEGO Group have
today there are 150 LEGO education cen- groups, who have their own websites, seen the Company enter a period of
tres located throughout Korea, Japan, organise public events, and take part in crisis in 2004, while experiencing
Australia and Singapore. In Korea alone, LEGO development projects. In Janu- increased demand for individual perfor-
nearly 50,000 children take part in a LEGO ary 2005 the LEGO Group announced mance and simultaneous cost savings,
Educational Centre programme. its “LEGO Ambassador” programme for some of these leading to redundancies.
AFOLs worldwide. The purpose of this The uncertainty surrounding these cir-
LEGO bricks are acclaimed in Asia for programme is to expand mutually use- cumstances has imposed a great strain
their great learning value, and at LED cen- ful relations between the LEGO Group on employees – whose active help in
tres children can develop their skills in and its loyal, talented and committed achieving sustainable development for
creative problem-solving and communi- consumers. the Group is more important than ever.
cation. A specially-trained teacher takes So communication between the Lead-
small classes of 5-10 children. A “course” LEGO VisionLab ership Team and employees has been
lasts 48 hours, and course materials have LEGO VisionLab was set up in 2003 strengthened with a view to establishing
currently been developed for three-, four- with the aim of developing and com- a clear direction and to promoting a

and five-year-olds. Children attend the municating future scenarios as a basis business understanding throughout the
educational centres in the afternoon, after for product and concept development. organisation.
regular school or kindergarten. In October 2004 VisionLab submitted
its second generation of future scenar- In May 2004 the Leadership Team set
In the new centres, LED is responsible for ios and a trend overview. The Group will up a Stakeholder Relations function as
the design of the centre, the curriculum, take steps to integrate existing scenar- part of the organisation People, Culture
educational materials, training the instruc- io findings in its product development & Corporate Communication (PCC).
tors and supplying the LEGO products. in 2005. The department discontinued This reflected the Leadership’s wish to
The investment and operation of each its operations at the end of 2004. maintain the LEGO Group’s commit-
centre are handled by a number of exter- ment to the environment, society and a
nal partners. LEGO Learning Institute range of interest groups – and generally
The LEGO Learning Institute is the to live up to its social responsibility as a
LEGO Group’s research unit respon- corporate entity. A definite ethical stand-
sible for collecting knowledge of play, point and a strong social commitment
learning and creativity in modern soci- form the link between the values of the
ety. The Institute was set up in 2001, and LEGO Group throughout its history and
accumulates and communicates the urgent demand for a healthy bot-
knowledge for product development, tom line. PCC comprises two former
marketing and communication purpos- departments: Corporate Communica-
es internally within the Group, i.e. tions and Human Resources.
through a “Whole Child Development
Guide” that covers children’s develop- Feedback from employees
ment through the age of 0-8 years. Dur- – Pulse 2004
ing the year the LEGO Learning Insti- The annual employee survey – Pulse –
tute also supplied speakers to address

14 | ANNUAL REPORT 2004

REPORT 2004 / EMPLOYEES AND CORPORATE CULTURE ■

was conducted in late 2003 and early tegic direction and focuses priorities in Greater dialogue between leaders
2004. The survey examines employees’ the current crisis situation. As the LEGO and employees
commitment to, satisfaction with and Group’s 2004 result was negative,
understanding of the Group’s direction bonuses were not paid to employees Dialogue was a keyword for the LEGO Group
and the Leadership’s communication. unless they were directly engaged in throughout 2004. In an era when the Company
Pulse plays an important role as a sales. has undergone many changes, it has been
means of dialogue between the Lead- important to provide employees with the full
ership and employees. Developing talent perspective. With this in mind, the Leadership
During 2004 the LEGO Group stepped Team held a number of so-called “town hall”
Employee & culture policy up its efforts to develop its internal tal- meetings globally across the Group. The
The LEGO Group wants to attract and ents. Ongoing and targeted develop- Leadership Team has met employees at more
keep the best employees. To this end, a ment of potential leadership talent is than 45 meetings in support of the imple-
new policy was drawn up in 2004 necessary in order to motivate and mented Action Plan and to give employees an
explaining the Group’s position and retain high-potential employees and to opportunity to ask and obtain answers to any
promises to and expectations of its ensure continuity and consistency in questions they might have.
employees. The policy underlines the the leadership of the Group.
LEGO Group’s desire to create a cul- Dialogue and transparency are also reflected
ture in which employees and leaders The Group’s talent programme com- in the Group’s intranet communication.
work together to achieve economic prises “senior talents” (leaders with the Employees can follow daily reports on the
results – all the while ensuring that the potential in the longer term of joining Group’s sales and supply performance. As
Group’s traditional respect for high ethi- the Leadership Team) and “business- something new, employees are able to “chat”
cal standards is upheld. During the unit talents” (employees and leaders with their leaders on the intranet at certain
course of 2005 this new policy will pro- with general leadership potential). By fixed times. Another innovation enables
vide a basis for reviewing other staff the end of 2004 a total of 16 senior tal- employees to comment on or ask questions
policies. ents and 67 business-unit talents were of particular individuals concerning all news
engaged in the talent programme. stories published on the intranet.
Improved Performance
Management Programme (PMP) Redundancies
The LEGO Group introduced its Perfor- The LEGO Group laid off a large num-
mance Management Programme ber of employees in 2004. All redundant

(PMP) in 2000. Under PMP, employees employees were offered assistance
(individually or in teams) agree with their through an outplacement scheme.
immediate manager a breakdown of Close to 300 employees accepted the
the Group’s strategies into clear individ- offer of the scheme, which both sup-
ual targets for the critical tasks. ports the individual in dealing with his
or her future situation and provides
In 2004, the programme was modified assistance with job applications.
to give greater reward to individual
results, and a clear link was established Work environment
between individual Key Performance The health and safety of its employees
Indicators (KPIs) and the Group’s overall has always been an area of special
objectives. PMP may be regarded as a concern for the LEGO Group, and
management tool specifically devel- efforts are constantly being made to
oped to help the LEGO Group achieve secure uniform working conditions at
its stated goals by way of a focused, all locations. In 2001, the Danish Labour
measurable and effective process. The Inspection Service introduced a spe-
programme supports the chosen stra- cial effort aimed at workplace acci-

ANNUAL REPORT 2004 | 15

■ REPORT 2004

LEGO bricks most popular toy dents reported by large companies. A high general standard of toy manufac-
in 20th century report issued in December 2004 by the ture in regard to both child safety and
In a poll in Britain during the year, LEGO Danish Working Environment Council environmental protection. It is therefore
bricks were acclaimed the most popular and Danish Working Environment the Group’s policy always to use the
toy of the past 100 years. The Internet poll Authority showed that through a pro- most updated research and informa-
was organised by the Museum of Child- gramme of targeted measures the tion, and constantly endeavour to use
hood in London, which wanted to discov- LEGO Group had been able to reduce materials that balance safety, environ-
er which toy people thought they just had the number of workplace accidents by ment and product quality.

to have. 75% during the period 1997-2004.
The LEGO Group continues to work Under the Group’s ongoing quality
LEGO products were a convincing winner towards global implementation of the assurance programme, all activities
with 31% of the vote. Computer games health and safety management system, from product development to distribu-
came in second with 14%, and teddy OHSAS 18001. Activities in Billund were tion are subject to a system of quality
bears were in third place. The result of the certified in 2003, and implementation in assurance and certificated under
on-line survey was announced at the the rest of the world will be finalised by DS/EN ISO9001:2000. In addition, revi-
opening of a large exhibition, Must-Have the end of 2006. sions were made in 2004 to the Group’s
Toys, in October 2004. Quality Assurance manual, which pro-
Corporate responsibility vides guidelines for the relevant
of the LEGO Group employee categories, who are involved
in the work with LEGO products.
In 2003 the LEGO Group became the
first toy manufacturer to join the UN Choice of materials
Global Compact. This UN initiative Toys sold by the LEGO Group meet
reflects the Company’s desire to live up the official requirements of all national
to its social responsibility in the field of and international authorities in the
human rights, environment and labour field. Furthermore, the Group has its
standards. own internal rule that products must
satisfy the expectations of quality and
In 2004, Kjeld Kirk Kristiansen, majority safety that consumers may reasonably
shareholder and the then President have – with an allowance for pattern of
and CEO of the LEGO Group, took part play and foreseeable abuse of the
in a Global Compact Leaders Summit product.
in New York to demonstrate the LEGO
Group’s continued support for the obli- The LEGO Group does everything it
gations implied by the principles of the can to avoid the use of softeners
Global Compact. (phthalates) in all its products. The
Group takes as its basic starting point
A plan has been drawn up for imple- the most stringent legislation in this

menting the principles of the Global field for products for children aged 0-3
Compact within the organisation years, and has opted to let its products
(www.LEGO.com is regularly updated for the other age groups comply with
with details of the Group’s action in a the same stringent quality standard. As
Global Compact context). a result, LEGO play material contains
no phthalates beyond what may be
LEGO Group quality assurance present as a minimum background
The LEGO Group strives to maintain a contamination which does not exceed
current legislative standards – the

16 | ANNUAL REPORT 2004

REPORT 2004 / CORPORATE RESPONSIBILITY OF THE LEGO GROUP ■

equivalent of “measurement uncer- In 2004 the LEGO Group began devel- 54,000 copy products
tainty” in the single product. oping a system for registering additives. destroyed in Finland
The purpose of the system is to ensure
In view of the fact that no research continuous registration and monitoring In November 2004 a total of 54,514 boxes con-
proves or indicates that a child’s health of the use of additives in the Group’s taining illegal copies of LEGO products were
and safety are compromised by PVC, processes and products. The actual destroyed at Kymenlaakson Jäte Oy waste-
the LEGO Group has decided to system was ready by the end of the plant in Finland. The huge shipment of repli-
accept the use of PVC in certain limited year. It is expected to be implemented ca toys was seized by the Finnish customs
areas of the product range where PVC and personnel trained in its use during authorities while it was in transit from China to
is regarded as the safest and highest the second quarter of 2005. Russia.
quality material. This includes electric
wires, decorative paints and a selected The LEGO Group continues to work The 10.5 tons of copy products were slavish
few other categories. LEGO bricks, oth- towards global implementation of the imitations of LEGO elements - and vastly infe-
er building elements and LEGO pack- environmental management system rior in quality to LEGO Group products. There
aging contain no PVC. ISO 14001. Development of the manage- was a genuine risk that the bricks would have
ment system commenced in 2004, and broken in children's hands.

All materials and substances and their final implementation will occur in 2006.
environmental and health effects are It was the largest consignment of LEGO copy
subject to constant reassessment, and LEGO Group Code of Conduct products ever confiscated by the customs
all materials are in compliance with the In 1997 the LEGO Group drew up a authorities.
LEGO Group’s product-safety policy series of guidelines on the behaviour
which – at the very minimum – con- expected of the Group and its suppli-
forms to current legislation. ers in relation to child labour, compen-
sation, working hours, discrimination,
All of the Group’s toy products carry the etc.
European Union CE symbol. The sym-
bol indicates that LEGO Group prod- The standard laid down in the LEGO
ucts comply with the EU Toy Directive. Group’s Code of Conduct is in several
Products manufactured for the Ameri- respects higher than the general stan-
can market must satisfy the Code of dards applying in many supplier coun-
Federal Regulation and ASTM standard tries. During 2004 the Code of Conduct
F963. Thanks to these very high quality was revised, and an appendix was add-
standards, 2004 was another year in ed on child labour. The appendix was
which no request was made upon the formulated in consultation with Save
LEGO Group to recall toys on account the Children Denmark, and reflects the
of product safety. approach of the LEGO Group to child
labour.
Environmental obligations
and action In 2004 a total of 92 audit visits were
It remains LEGO Group policy that envi- made to the premises of LEGO Group
ronmental considerations must be tak- suppliers. 16 of these were follow-up
en into account in all relevant process- audits to ensure continued progress in
es – and continuous efforts should be areas where improvements had been
made to minimise any environmental requested. All suppliers have undertak-
impact caused by the Group’s activ- en to optimise areas in which the audi-
ities. tors highlight a need for change or an

improvement in conditions.

ANNUAL REPORT 2004 | 17

■ REPORT 2004

Naturally, the LEGO Group’s Code of Charity work
Conduct is not confined only to suppli- During the year the LEGO Group con-
ers; the Group itself complies internally tinued to work closely with the charity
and runs audits conducted by a third organisation Save the Children Den-
party every second year. The first inter- mark in upholding the LEGO Group’s
nal audits were held in December 2004 social responsibility in general and its
in Billund (Denmark) and Kladno (Czech social attentiveness to children and
Republic). their development in particular. Collab-
oration with Save the Children Denmark
As a further important measure, all has existed since 2000 and involves
employees in the Group’s Purchasing both economic support and product
Department received information on donations –including assistance follow-
the content and importance of the ing the tsunami disaster in Asia. (More
revised Code of Conduct in 2004 to information on specific projects can be
ensure the broadest possible knowl- found at www.LEGO.com.) In addition,
edge and understanding of the stan- LEGO Denmark continues to donate
dard that the LEGO Group demands of products to charity organisations,
its suppliers and partners. children’s wards in hospitals, and insti-
tutions in support of families with child-
ren.

18 | ANNUAL REPORT 2004