Prospectus concerning the listing of shares in HEXPOL AB (publ)

Transcription

1 Prospectus concerning the listing of shares in HEXPOL AB (publ)

2 This prospectus has been prepared in connection with the application by the Board of Directors of HEXPOL AB (publ) to have the Company s Class B shares listed on the OMX Nordic Exchange. Unless otherwise specified, the terms HEXPOL, the HEXPOL Group, the Group, or the Company refer to HEXPOL AB (publ), Corp. Reg. No , and its wholly owned subsidiaries, or a particular subsidiary, depending on context. HEXPOL AB refers to the Parent Company. Unless otherwise specified, the term Hexagon refers to Hexagon AB (publ), Corp. Reg. No , and its wholly owned subsidiaries, or a particular subsidiary, depending on context. Hexagon AB refers to the Parent Company. The terms OMX Nordic Exchange or the Nordic Exchange refer to OMX Nordic Exchange in Stockholm. In this prospectus, statements regarding future prospects are made by the Board of Directors of HEXPOL AB and are based on current market conditions. Although such statements have been well processed, readers should be aware that they, and all other estimates of the future, are associated with uncertainty. For an overview of risk factors, refer to pages Apart from what is specified in the auditors statement on pages , or what is expressly stated, no information in this prospectus has been examined or audited by the Company s auditors. This prospectus is subject to Swedish law. Disputes relating to the prospectus, or associated legal conditions, shall be determined exclusively by a Swedish court. The prospectus has been approved and registered by the Swedish Financial Supervisory Authority pursuant to the provisions of Chapter 2, Sections 25 and 26 of the Financial Instruments Trading Act (1991:980). This prospectus is available on HEXPOL s website Hexagon s website and on Swedbank s website The information in this prospectus is a translation of the text in the Swedish-language prospectus and, accordingly, corresponds in all material respects with the original Swedish document. In the event of any contradictions between the texts contained in this document and the text in the Swedish-language prospectus, the latter shall prevail.

3 Contents Summary... 5 Risk factors Background and reasons Terms, conditions and instructions CEO s statement Strategic direction Group structure History HEXPOL Compounding Business area HEXPOL Engineered Products Business area HEXPOL Gaskets Product area HEXPOL Wheels Product area HEXPOL Profiles Product area Trends and future outlook Personnel Environmental care creates business value Condensed financial information for 2005-Q1 2008, including comments on the financial trend Other financial information Share and shareholders Legal issues and supplementary information Relationship between HEXPOL and HEXAGON Tax considerations in Sweden Interim Report, January 1 March 31, Historical financial statements ( ) Auditors report concerning the restated historical financial statements Board of Directors, senior executives and auditors Corporate governance Articles of Association Addresses to all companies Important information First day of trading on OMX Nordic Exchange... 9 June 2008 ISIN code... SE Ticker on OMX Nordic Exchange... HPOL B Trading lot shares Website... Financial calendar Interim report January-June August 2008 Interim report January-September October 2008 Year-end report for February 2009 HEXPOL 3

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5 Summary This summary should be regarded only as an introduction to and a summary of the other parts of this prospectus. The prospectus has been prepared in connection with the listing of HEXPOL AB s Class B shares on the OMX Nordic Exchange Stockholm. Each decision to invest in HEXPOL should be based on an evaluation of the prospectus in its entirety, and not just on this summary. A person may be held responsible for information that is included or lacking in the summary, or a translation of it, only if the summary or the translation is misleading, erroneous or irreconcilable in relation to other parts of the prospectus. Note that a person who files claims in a court with reference to information in this prospectus may be forced to bear the costs for translation of the prospectus. Background and reasons Hexagon AB s shareholders resolved at Hexagon s Annual General Meeting on 5 May 2008 that all of the shares in HEXPOL would be transferred to the shareholders of Hexagon in the form of a dividend. The intention is that Class B HEXPOL shares will be listed on the OMX Nordic Exchange Stockholm, with 9 June 2008 as the first day of trading. The reason for the separate market listing is that HEXPOL has reached a size and profitability that makes its operations attractive as an independently listed company. HEXPOL has the necessary resources in terms of management, administration, operational control and business development, and is thus ready to continue to develop as an independent company. By so doing, HEXPOL will be able to capitalize on opportunities for continued robust growth via the establishment of new and acquisitions of existing operations in accordance with an adapted growth strategy, with an organization and capital structure that supports this growth. The Board of Directors of Hexagon is of the opinion that, over the long term, the value for Hexagon s shareholders will increase through a spin-off of these operations and a distribution of HEXPOL shares. In addition, a separate market listing of HEXPOL will make it possible for both current and new shareholders to choose to invest directly in HEXPOL. The Group in brief HEXPOL is one of the world s leading polymer groups with strong global market positions that enable it to offer innovative solutions and products based on advanced rubber compounds (Compounding), gaskets for plate heat exchangers (PHE Gaskets) and wheels made of polyurethane, plastic and rubber materials for forklifts and castor wheel applications (Wheels). The Group is organized in two business areas: HEXPOL Compounding and HEXPOL Engineered Products, and has production units in nine countries. The business areas operate in separate market segments. Despite this, HEXPOL utilizes distinct synergies in the areas of technology, purchasing and production. Customers outside Sweden account for about 90 percent of invoiced sales, and seven of the Group s 15 production units are situated in expansive regions of Asia, Mexico and Eastern Europe. HEXPOL 5

6 The total number of employees is approximately 2,300, mainly employed in Asia, the US and Sweden. Most of the production units are relatively new and all plants are well-invested. The technology level is high and far-reaching production and technological coordination generates cost effectiveness, high and consistent quality and opportunities to smoothly relocate production between the various units. President and CEO Georg Brunstam CFO / IR Anders Lyrheden HEXPOL Compounding HEXPOL Engineered Products Operations and market To develop long-term profitability and sustainable competiveness, HEXPOL has focused its operations on markets that offer opportunities to capture leading positions. HEXPOL Compounding NAFTA Tracy Garrison HEXPOL Compounding Europe/Asia Ralph Wolkener HEXPOL Gaskets Lars-Åke Bylander HEXPOL Wheels Peter Kruk Customers of the HEXPOL Compounding business area are mainly system suppliers to the global automotive industry. The customers comprise international companies that subject suppliers to stringent demands in terms of quality and delivery reliability. The automotive industry, which is a very large user of rubber components, is characterized by rapid expansion, particularly in the regions where HEXPOL has its plants, thus creating favourable growth potential. HEXPOL Compounding Technology Carsten Rüter The operation s sales in 2007, distributed among the two business areas and geographically, were as follows: HEXPOL Engineered Products 28% HEXPOL Profiles Lars-Åke Bylander HEXPOL Compounding 72 % OEM manufacturers of plate heat exchangers comprise the largest customer group of the HEXPOL Engineered Products business area. Supported by growing interest in energy efficiency, the market for plate heat exchangers is characterized by strong growth and, in turn, strong demand for the products offered by the HEXPOL Gaskets product area. Since HEXPOL s customers include all major manufacturers of plate heat exchangers, the Group has a strong position from which to capitalize on the robust growth in this product segment. The largest customers of the HEXPOL Wheels product area consist of companies in the segment comprising manufacturers of materials-handling equipment. As a result of the increased volume of materials handling throughout the world, these customers are showing strong growth. HEXPOL Wheels is favourably positioned with products including high-quality wheels for forklift trucks and castor wheel applications. HEXPOL Profiles is one of the leading manufacturers of Europe 67 % NAFTA 30 % The operation s production (sales value) in 2007 was distributed as follows geographically: Emerging markets (China, Sri Lanka, Czech Republic, Mexico) 27 % Asia 3 % Other markets 73 % 6 HEXPOL

7 extruded profiles in the Scandinavian market. What all of the areas of business have in common is the importance of cutting-edge expertise related to polymer materials, applications know-how in the groups business areas and cost-efficient production operation. polymer products. HEXPOL shall be the most preferred partner for customers in key industries, such as the automotive and construction industries, the energy sector and the materials-handling industry, based on its offering of innovative and specialized polymer products and solutions. Competitors HEXPOL s principal competitors are Excel Polymers and AirBoss in North America and the German company Kraiburg in Europe (Compounding), the British TRP Group with business in Great Britain, Dubai and Romania (Gaskets), the German family-owned companies Räder-Vogel and Wicke in Europe, and the also family-owned Thombert in North America plus the Chinese caster wheels manufacturer Hong Xing Castors (Wheels) and the Swedish company Trelleborg (Profiles). History HEXPOL has its origins in Svenska Gummifabriks AB, a Swedish industrial company established near the end of the 19th century in Gislaved, Sweden. This segment of the once highly diversified Gislaved Group with operations focused on rubber compounding and technical products was acquired by Hexagon in The operations have since been developed through investments in product development and acquisitions of complementary companies, most recently GoldKey in the US, which was acquired in the autumn of In addition, proprietary production units have been constructed in China and Mexico and production capacity in Sri Lanka has been increased sharply. Vision The vision is to be market leader, ranking number one or two in selected technological or geographical segments, to be able to generate growth and shareholder value. Business concept The business concept is to operate as a product and application specialist in a limited number of selected niche areas for the development and production of Strategy To achieve sustainable profitability and competitiveness, five operating strategies are applied: Product development through in-depth and broad polymer and applications expertise The most cost-effective company in the industry Efficient supply management that generates volume and technological benefits Management skills through competent and experienced teams Speed management through short and fast decision-making procedures In addition to the operating strategies outlined above, the Group also pursues a strategy to achieve continued growth, both organically and through acquisitions. Financial objectives The Board of Directors has established the following financial objectives over a business cycle: The aim is that the organic sales growth will be at least 7-10 percent annually and that the operating margin will be at least 8-10 percent. Dividend policy HEXPOL s profit trend and equity/assets ratio determine the size of the dividend. HEXPOL s dividend policy is that percent of after-tax net profit for the year will be distributed as a dividend to HEXPOL s shareholders, on condition that the Company s equity/assets ratio is regarded as satisfactory. Success factors Since 2000, Group operations have expanded from annual sales of 482 MSEK to slightly more than 3,100 MSEK on an annual basis, with operating margins that in most cases are much better than those of comparable companies. The operating margin HEXPOL 7

8 in 2007 exceeded 11 percent. Cash flow has been strong despite the rapid growth and, when combined with approved credit lines, provides the Group with a strong financial base for continued growth and expansion. This favourable trend is the result of deep and comprehensive product development skills, costeffective production plants and successful company acquisitions. The Group is also positioned strongly in segments characterized by healthy growth. The corporate culture is strong, with skilled and experienced employees led by experienced management teams with short and speedy decision-making routes. Trends and future outlook HEXPOL operates in markets where short and longterm growth, both geographically and in terms of applications, is considered favourable for both the HEXPOL Group and its customers. Three markets that offer particularly promising growth potential are the energy sector, the automotive industry and the materials-handling industry, areas where HEXPOL s customers are key suppliers in various sub-segments. The Group has also recently established units in such interesting growth markets as China and Mexico, which provides competitive advantages in the form of lower production costs and continued growth opportunities. These factors, combined with a continued acquisition-oriented focus, provide the Group with a strong platform for sustaining its favourable development. Risks HEXPOL is an international Group and is thus exposed to a number of different risks when conducting its daily operations. The greatest risks include the general market trend, the competitive situation, the future price trend, customer relations, the ability to retain and recruit key personnel, financial risks and the additional risks that are presented under the Risk factors heading. There are also risks that are not known to the Company or that the Company currently regards as insignificant and that could have an adverse impact on the Company s operations. For an overview of risk factors, reference is made to pages The Board of Directors composition, Group Management and auditors The Board of Directors of HEXPOL AB consists of Melker Schörling (Chairman of the Board), Maths O. Sundqvist, Alf Göransson, Malin Persson, Ulrik Svensson, Jan-Anders E. Månson and Georg Brunstam. Group Management consists of Georg Brunstam (CEO), Anders Lyrheden, Lars-Åke Bylander, Tracy Garrison, Peter Kruk, Carsten Rüter and Ralph Wolkener. All members of Group Management and the Board of Directors have well-documented industrial experience. The Company s auditor is Ernst & Young AB, with Ingvar Ganestam as auditor-in-charge, and Stefan Engdahl, Ernst & Young AB. For additional information concerning the members of the Board, Group Management and the Company s auditors, reference is made to pages Major shareholders Immediately after the distribution of the shares in HEXPOL, the ownership structure of the Company will be identical to that of Hexagon (apart from share fractions). The number of shareholders in Hexagon on 30 April 2008 was approximately 10,000, of whom the largest were Melker Schörling AB, Maths O. Sundqvist, through companies, and Swedbank Robur Fonder, which jointly accounted for nearly 45 percent of the capital and approximately 60 percent of the voting rights. For additional information concerning the ownership structure, reference is made to pages HEXPOL

9 Financial overview The financial statements of the HEXPOL Group based on its operational appearance are presented below: Amounts in MSEK Q * Q * 2007 ** 2006 ** 2005 ** Condensed income statements Sales Operating expenses Operating profit Financial items Profit before tax Tax Net profit for the period Condensed balance sheets *** Total assets Intangible fixed assets Tangible fixed assets Financial fixed assets Current assets Shareholders equity Long-term liabilities Current liabilities Condensed cash flow statements Cash flow from operational activities Investments in intangible fixed assets Investments in tangible fixed assets Acquisitions of subsidiaries Cash flow from financing activities Change in cash and cash equivalents Cash and cash equivalents at period-end Key figures Net sales growth (%)... 29,8 3,2 9,7 12,8 36,6 Operating margin (%)... 9,7 10,5 11,2 8,2 11,6 Profit per share (SEK)... 1,88 1,66 7,01 4,44 6,10 * Figures have not been audited or examined. ** Audited figures. *** Following the most recent balance-sheet date, financing has been changed. For the current level of indebtedness, reference is made to page 73. Definitions: Net sales growth Percentage change in net sales compared with corresponding to period in the preceding year. Operating margin Operating profit divided by net sales. Profit per share Net profit for the year divided by the number of shares after the listing. HEXPOL 9

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11 Risk factors Ownership of shares is subject to risk. A number of factors currently affect and could affect the operations conducted by the HEXPOL Group in either a positive or negative direction. The risks that exist concern conditions that are directly connected to HEXPOL and ones that lack a specific connection to HEXPOL but which still affect the industry in which HEXPOL is active. Here follows a brief and general overview of certain risk factors that, according to HEXPOL s Board of Directors, could be of importance to the Company s future development or an investment in the HEXPOL share. The greatest risks include the general market trend, the competitive situation, the future price trend, customer relations, the ability to retain and recruit key personnel and financial risks. The risk factors are described without any internal ranking and the account does not claim to be exhaustive. This means that there could be additional risks that could be of greater of lesser importance to HEXPOL s operations. In addition to the risk factors specified below and other risks that pertain, the reader should also carefully consider other information in this prospectus. Industry and market risks The HEXPOL Group engages in worldwide operations that are dependent on both the general economic and political situation in the world and conditions that are unique for a certain country or region. Risk management within the Group is determined by established policies and procedures that are revised continuously by the Board of Directors. The Parent Company s Board has overall responsibility for identifying, following up and managing risks. Impact of the economy As is the case for almost all business operations, the general economic climate affects the investment inclination and investment ability of HEXPOL s existing and potential customers. Accordingly, a weak economic trend in all or parts of the world could result in lower-than-expected market growth. Developments in HEXPOL s customer segments constitute one of the principal risks related to the business environment. This results in stringent demands in terms of understanding of the current and future requirements, demands and wishes of both direct and end customers. To reduce the risk of economic impact, HEXPOL engages in close cooperation with customers, conducts comprehensive business intelligence work and continuously reviews its selected strategies. Although HEXPOL s operations have a wide geographic spread, and otherwise an extensive customer base, HEXPOL s sales and operations are exposed to a potential risk of being adversely affected by a weak economic trend. Competition and price pressure HEXPOL s operations are conducted in sectors subject to competition and are thus affected by, for example, severe price pressures, which in turn drive demand for cost-effective solutions. Competing companies with operations in Asia and other low-cost regions may, through improvements of their technology and HEXPOL 11

12 production expertise, come to produce at low cost and compete with HEXPOL s products. HEXPOL s future competitive capacity is dependent on its ability to utilize the Company s leading-edge knowledge with respect to rubber compounds and rubber and plastic products and to transform this knowledge into attractive products and customized solutions at competitive prices. To ensure the Company s competitiveness, investments will be required to maintain the Group s prominent position in the area of product development. While constantly striving to adapt to changes in the competitive situation, HEXPOL may also be forced to implement costly restructuring measures to be able to retain the Company s market position and profitability. Strategic and operational risks HEXPOL s business is dependent on a number of factors, each of which may significantly affect the Group s profits both positively and negatively. Technical and market development Portions of HEXPOL s operations are conducted in industries subject to price pressure and rapid technical and material developments. To reduce these risks, HEXPOL s ability to compete in this market environment by developing new products that offer improved functionality while reducing costs for new and existing products is of great importance. Being able to attract the right competence for research, product development, marketing and sales is critical for success. Costs of raw materials and energy In recent years, trends in many raw materials markets have resulted in higher purchasing prices for raw materials that are important for HEXPOL. To counter continued increases in raw materials prices and increased energy costs, HEXPOL devotes considerable effort to increasing production efficiency, developing more cost-effective processes and passing on price increases to customers. Given the competitive market situation, however, there is a risk that HEXPOL cannot increase prices enough to fully offset the increased costs, thus resulting in reduced margins. Suppliers HEXPOL s products consist of raw materials and goods from several different suppliers. To be able to manufacture, sell and deliver products, HEXPOL is dependent on external supplies meeting agreed requirements with respect to quantity, quality and delivery time, for example. Incorrect, delayed or missing deliveries from a company supplier may in turn mean that HEXPOL s deliveries are delayed, deficient or incorrect, which could result in reduced sales and a negative impact on the Group s profits. In HEXPOL s assessment, the Company is not dependent on any single supplier, meaning that interruption of deliveries would not result in any long-term consequences for HEXPOL s operations. No single supplier accounts for more than 12 percent of the Group s purchases, and all major suppliers are further replaceable. Customers HEXPOL s operations are conducted in a large number of geographic markets with many customer categories. No single customer accounts for more than 10 percent of the Group s total sales. HEXPOL is thus not dependent on any single customer and therefore has a favourable risk spread in this respect. The largest single group of customers are system suppliers to the automotive industry. For HEXPOL this customer group may imply certain risks. A decline or a weak trend in the automotive industry may have a negative effect on HEXPOL s business. In the Company s assessment, however, the division of the automotive industry in different segments in combination with the industry s geographic diversity entails a more limited overall risk exposure than what the volume collective sales to the automotive industry might give the impression of. Political risks HEXPOL s operations in Sri Lanka may be affected by the ongoing armed conflict. HEXPOL follows developments in Sri Lanka continuously and has developed an action plan to be able to counter the risks that an unstable political development in 12 HEXPOL

13 Sri Lanka may entail for HEXPOL s operations in the country. Key personnel HEXPOL s future success is in large part dependent on its ability to recruit, retain and develop qualified leaders and other key persons. Being an attractive employer is thus an important success factor. If key persons leave the Company and appropriate successors cannot be recruited, this may have a negative effect on the Company s operations. Legal risks Through its global operations, HEXPOL is affected by a number of laws, directives, regulations, agreements and guidelines, including many that relate to the environment, health, safety, trade restrictions, competition legislation and currency regulation. Legislation and regulation To counter the legal risks, HEXPOL closely monitors the rules and regulations applying in each market and works to quickly adapt its operations to identified future changes in this area. However, changes in legislation, customs regulations and other obstacles to trade, price and currency controls and other government guidelines in the countries in which HEXPOL operates may limit the Group s operations. Health, safety and the environment In HEXPOL s assessment, operations are conducted in all significant respects in compliance with applicable laws and regulations regarding health, safety and the environment. A number of companies within the Group conduct operations that are subject to permits or reporting obligations according to local environmental legislation. These operations are thus under the supervision of due authorities. HEXPOL strives to continuously ensure that all material permits are obtained and that all material applicable reporting obligations are fulfilled. Changes in legislation and regulation by the authorities entailing tougher requirements and changes in terms relating to health, safety and the environment or a trend toward more stringent application of laws and regulations by the authorities may require further investments and result in increased costs and other obligations for the companies within the Group that are subject to such regulation. Changes in legislation and official regulations may also prevent or limit HEXPOL s operations. Tax risks HEXPOL conducts its operations through companies in a number of countries. Its business, including transactions between Group companies, is conducted in accordance with the Company s interpretation of prevailing tax legislation, tax agreements and regulations in the various countries and tax authorities in question. The Company has obtained advice in these matters from independent tax advisors. However, it cannot be generally ruled out that the Company s interpretation of applicable laws, tax agreements and regulations or their interpretation or administrative application by the authorities is deemed incorrect or that such rules may change, possibly with retroactive effect. HEXPOL s tax situation may change through decisions by the relevant authorities. Disputes HEXPOL is occasionally involved in disputes in the course of its normal business operations. Major and complicated disputes may be costly and demanding in terms of time and resources and could interfere with the normal business operations. Neither can it be ruled out that the result of such disputes could have a negative impact on HEXPOL s profits and financial position. Intellectual property rights HEXPOL has entered into an agreement with Hexagon regarding continued use of the name Hexagon in combination with the word Polymers in the names of certain subsidiaries within the HEXPOL Group. If certain events specified in the agreement occur, including changes in control over HEXPOL or changes in HEXPOL s area of operations, HEXPOL is obligated to ensure that the use of the Hexagon name is discontinued prematurely. This could result in a tempo- HEXPOL 13

14 rary negative effect for HEXPOL until new company names for the subsidiaries in question are established in the market. Under a licensing agreement with Bayer AG, HEXPOL is entitled to use the Vulkollan brand and logotype in connection with wheel manufacturing and marketing within HEXPOL Wheels. The licensing agreement is valid for periods of one year at a time and can be terminated following three-month notice. Termination of the licensing agreement by Bayer would have an adverse impact, since Vulkollan wheels currently account for a large portion of the subsidiary Stellana AB s sales. HEXPOL sells products under several well-known brands. It is of great commercial importance for the Group that these brands can be protected against unauthorized use by competitors and that the goodwill associated with the brands can be maintained. To meet market requirements, HEXPOL must continuously develop new technical solutions and applications. To guarantee a return on the resources that HEXPOL invests in research and development, it is of the utmost importance that such new technology can be protected against unauthorized use by competitors. It is not certain that applications for protection of patents, brands and other intellectual property rights will be granted or, if they are granted, that they will provide satisfactory protection that cannot be circumvented by competitors. Neither is there any guarantee that HEXPOL will not be considered to infringe on other companies intellectual property rights or that HEXPOL s rights will not be questioned or contested by others. In addition, HEXPOL s competitors may develop or acquire intellectual property rights that may prove to be essential for portions of HEXPOL s operations. Furthermore, HEXPOL depends on know-how that falls outside the realm of protectable intellectual property rights. It cannot be ruled out that competitors may develop the corresponding know-how or that HEXPOL will not succeed in protecting its expertise effectively. If it should prove to be the case that HEXPOL s operations are considered to infringe on another party s valid intellectual property rights or entail impermissible use of another party s business secrets, it cannot be ruled out that the resulting claims may have a negative effect on HEXPOL s profits and financial position. Financial risks In its capacity as a net borrower and through its extensive operations outside Sweden, HEXPOL is exposed to various financial risks. The Group s financial policy provides guidelines for financial exposure and how these risks are to be managed within the Group. The financial policy is established each year by the Board of Directors. HEXPOL s financial operations are centralized in the Group s internal bank, which is responsible for coordinating currency and interest exposure. The internal bank is also responsible for the Group s external and internal financing. Centralization results in significant economies of scale, lower financing costs and better control and management of the Group s financial risks. The internal bank does not have any mandate to conduct commercial trading with currency or interest instruments. Credit risk at the customer level is managed by the relevant subsidiary. Currency risk In its operations, HEXPOL is exposed to various financial risks, of which the currency risk is the dominant one. Currency fluctuations affect HEXPOL s profits in part when sales and purchases take place in different currencies (transaction exposure) and in part when the income statements and balance sheets of foreign subsidiaries are translated to Swedish kronor, SEK (translation exposure). HEXPOL s net flows in foreign currency amounted to about 362 MSEK in Contracted currency flows are hedged in their entirety. Expected flows in excess of contracted flows are hedged by between 40 and 75 percent with a horizon of twelve months. The Group s translation exposure is managed 14 HEXPOL

15 through currency hedging via loans or forward contracts in the currency of the net asset. Interest risk HEXPOL is also affected by interest rate fluctuation. Changes in interest rates affect the Group s net interest income and/or cash flow. Based on the average interest-rate period in the Group s total loan portfolio at 31 December 2007, a simultaneous change of one percent in all of HEXPOL s loan currencies would have an effect on full-year profit of about 10 MSEK before tax. This is also deemed to reflect the situation for the current year. Credit risk The financial risks to which HEXPOL is exposed also include credit risks, meaning the risk that a customer or other business party will not be able to settle his obligations to HEXPOL. There is no significant concentration of credit risks, either geographically or to any given customer segment. Acquisitions and financing of acquisitions HEXPOL has long worked with an active acquisition strategy, resulting in a number of successful acquisitions. Strategic acquisitions will also be a part of the growth strategy in the future. It cannot be guaranteed, however, that HEXPOL will be able to find suitable acquisition targets nor can it be guaranteed that the necessary financing for future acquisition targets can be obtained on terms that are acceptable for the Company. This may result in reduced or declining growth for HEXPOL. The completion of acquisitions also entails risks. In addition to the Company-specific risks, the acquired company s relations with customers, suppliers and key persons may be affected negatively. There is also a risk that integration processes may prove more costly or take more time than estimated and that anticipated synergies in whole or in part fail to materialize. Future capital requirements In the assessment of HEXPOL s Board of Directors, the Group s future financial position is favourable, and its operations generate strong cash flow under normal market conditions. If the Group s development deviates from what is anticipated, it cannot, however, be ruled out that a situation may arise in the future in which new capital must be raised. There is no guarantee that HEXPOL will be able to raise the necessary capital on terms that are favourable for the Company. In this respect, also the general market conditions for raising capital are of considerable importance. Equity market risks Share price performance Prior to the distribution of HEXPOL, no trading has occurred in the HEXPOL share. Although an application has been submitted for a listing of HEXPOL s B share on the OMX Nordic Exchange Stockholm, no guarantees can be made regarding the share s liquidity. Neither are there any guarantees that the share price will perform positively. Factors affecting the share price include variations in the Company s profits and financial position, changes in the stockmarket s expectations regarding future profits, supply and demand for the shares, developments in the Company s market segments and general economic trends. This means that the price at which the share trades will vary and that, even if HEXPOL s business develops positively, investors may risk incurring a loss of capital when the shares are sold. Cost base as an independent listed company Prior to the distribution of the shares in HEXPOL, the Company is a wholly owned subsidiary of the listed company Hexagon AB. HEXPOL thus has a limited history on which the Group can be assessed and has not previously had any direct responsibility for corporate governance, financial reporting and the publication requirements to which listed companies are subject. As a listed company, HEXPOL may be affected by increased costs for which the Company has not previously been directly responsible. This increase is estimated at between 3 and 5 MSEK. HEXPOL 15

16 Future dividends Future dividends will be proposed by HEXPOL s Board of Directors. In its assessment, the Board of Directors will take into consideration several factors, including business development, profits, cash flow, financial position and expansion plans. See also the section Dividend policy on page 28. There are risks that may affect the Company s profits negatively, and there are no guarantees that HEXPOL will be able to generate profits that permit a dividend to the shareholders during each fiscal year in the future. 16 HEXPOL

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19 Background and reasons The shareholders of Hexagon resolved at the Annual General Meeting of Hexagon on 5 May 2008 to distribute all of the shares of HEXPOL to the shareholders of Hexagon in the form of a dividend. The intention is that the Class B HEXPOL shares will be listed on the OMX Nordic Exchange Stockholm, with 9 June 2008 as the first day of trading. A separate listing of HEXPOL is a natural step in the development of the operations of Hexagon and HEXPOL. During recent years, HEXPOL has evolved from a local Nordic player to a rapidly growing group of companies with global manufacturing and global customers. The Company is currently a world leader in advanced rubber compounds and gaskets for plate heat exchangers, and is also one of the leading players in the global market for the manufacture of polyurethane, plastic and rubber wheels. The reason for a separate listing of the polymer operations is that HEXPOL has reached a size and level of profitability that makes the business attractive as an independently listed company. The spin-off will enable the management and Board of Directors of both Hexagon and HEXPOL to capitalize on the operational and strategic opportunities that arise in each company, including increased potential to continue to grow via the establishment of new operations and the acquisition of companies. HEXPOL has sufficient resources in terms of management, administration, operational control and business development, and is thus ready to continue to develop as an independent company. As an independent company, HEXPOL can apply a focused and well-adapted growth strategy, with an organization and capital structure that supports this growth. In the opinion of the Board of Directors of Hexagon, the long-term value for the shareholders will increase through a spin-off of the operation and the distribution of the shares in HEXPOL. A separate market listing of HEXPOL will further enable both current and new shareholders to choose to invest directly in HEXPOL. The Board of Directors of HEXPOL, headquartered in Malmö, is responsible for the information in this prospectus. Assurance is hereby given that all reasonable precautions have been taken to ensure that the information in this prospectus, to the best of the knowledge of the Board of Directors of HEXPOL, complies with actual conditions and that nothing has been omitted that could impact its meaning. Malmö, 22 May 2008 HEXPOL AB (publ) Board of Directors HEXPOL 19

20 Terms, conditions and instructions Resolution regarding distribution The Annual General Meeting of Hexagon AB (publ) on 5 May 2008 resolved in accordance with the Board of Directors proposal to distribute all of the shares in the wholly owned subsidiary HEXPOL AB (publ) to the Hexagon shareholders. The intention is that the shares in HEXPOL will be distributed, in accordance with the Lex ASEA rules, to the Hexagon shareholders in proportion to their current shareholding in Hexagon. For each multiple of ten class A or class B shares, one share of the corresponding class of HEXPOL shares will be received. If holdings of class B shares are not equally divisible by ten, fractions of a share will be received. Such fractions of HEXPOL shares will be combined into complete HEXPOL shares, which will then be sold on the OMX Nordic Exchange under the auspices of Swedbank. Settlement amounts, with no deductions for brokerage, will be paid via VPC. Examples: HEXAGON SHARE 100 Hexagon shares HEXAGON SHARE 5,000 Hexagon shares HEXPOL SHARE 10 HEXPOL shares HEXPOL SHARE 500 HEXPOL shares SVERIGES RIKSBANK RIKSBANK RIKSBANK HEXAGON SHARE HEXPOL SHARE SVERIGES 343 Hexagon shares 34 HEXPOL shares A cash amount corresponding to the sales proceeds for 0.3 HEXPOL shares HEXAGON SHARE SVERIGES SVERIGES SVERIGES RIKSBANK RIKSBANK RIKSBANK RIKSBANK RIKSBANK 8 Hexagon shares A cash amount corresponding to the sales proceeds for 0.8 HEXPOL shares 20 HEXPOL

21 Record date The record date at VPC for determining the shareholders that will be entitled to receive HEXPOL shares is 5 June The final day of trading in Hexagon shares including rights to the distribution of HEXPOL shares is 2 June The shares in Hexagon will be traded ex-rights to HEXPOL shares as of 3 June Receipt of shares Those persons who on the record date are registered in the share register of shareholders in Hexagon maintained by VPC will receive HEXPOL shares without having to take any action. On the day after the record date, the HEXPOL shares will be available in the shareholders VP accounts (or in the VP accounts belonging to those that in some other manner are entitled to distribution). Subsequently, VPC will send a VP notice stating the number of shares that are registered in the recipient s VP account. Nominee-registered shareholdings Shareholders whose holdings in Hexagon are nomineeregistered by a bank or other nominee will receive no issue report. Instead, notification will be sent in accordance with the directions of the respective nominee. Listing The Board of Directors of HEXPOL has applied for a listing of the Company s class B share on the OMX Nordic Exchange Stockholm. The first day of trading is expected to be 9 June The ISIN code for Class B HEXPOL shares is SE The Company s ticker on the OMX Nordic Exchange Stockholm will be HPOL B. HEXPOL does not intend to apply for a listing of the HEXPOL share on any other exchange or marketplace. Nor does the Company intend to register the shares under the United States Securities Act of 1933 or any other foreign equivalent, or take any actions that would subject HEXPOL to the reporting requirements of the SEC (United States Securities and Exchange Commission). Right to dividends The HEXPOL shares carry entitlement to dividends as of the 2008 financial year. Payment of any dividend will be executed by VPC or, if the shares are nomineeregistered, in accordance with the procedures of the particular nominee. Advisor In connection with the distribution and listing of HEXPOL shares, Swedbank Markets is serving as the issuer agent and financial advisor to Hexagon and HEXPOL. Important dates 2 June 2008 Final day of trading in Hexagon shares including rights to the distribution of HEXPOL shares 3 June 2008 Hexagon shares traded ex-rights to HEXPOL shares 5 June 2008 Record date for receipt of HEXPOL shares 5 June 2008 Publication of listing prospectus 9 June 2008 Estimated date for the listing of class B HEXPOL shares on OMX Nordic Exchange Stockholm HEXPOL 21

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23 CEO s statement Very strong growth with good profitability HEXPOL is one of the world s leading polymer Groups with strong global market positions in advanced rubber compounds (Compounding), gaskets for plate heat exchangers (PHE Gaskets) and wheels made of polyurethane, plastic and rubber materials for forklifts and castor wheel applications (Wheels). The operations are organized in two business areas HEXPOL Compounding and HEXPOL Engineered Products. With our global presence, we have strong positions in these areas. Our customers are mainly system suppliers to the global automotive industry and OEM manufacturers of plate heat exchangers and forklift trucks. HEXPOL is the new name of Hexagon s former Hexagon Polymers business area. The operations originated as the Technical Products Division of Svenska Gummifabriks AB in Gislaved, which created the core of a niche-based growth strategy in polymer products. Growth has been very strong under Hexagon s ownership, which started in Sales in 1997 amounted to 350 MSEK; 10 years later, sales had risen to 2,730 MSEK and, based on the annualized effect of the GoldKey acquisition, sales totalled about 3,100 MSEK. Growth has been achieved with a sustained strong cash flow. The Group s plants are well-invested with high technological standards. New expansion-oriented investments in China and Mexico have been completed and will generate growth with a lower level of investments in the years ahead. Business expansion has been achieved through organic growth and successful acquisitions. From our start as a Swedish business, we have developed into a global polymer group with 90 percent of sales invoiced outside Sweden. We have production operations today in nine countries, including emerging markets such as China, Sri Lanka, Mexico and the Czech Republic. Seven of our 15 production companies, or nearly 50 percent, are situated in these countries. Our presence for global OEM manufacturers is strong. Expansion and profitability The operations have expanded sharply during recent years, with operating margins that in most cases are higher than many of our competitors. Our operating margin in 2007 exceeded 11 percent. Our largest acquisitions in Compounding have been GFD (Germany) in 2002, Thona Group (the US, Belgium, Czech Republic and Canada) in 2004 and GoldKey (USA) in To create a global platform for wheel operations (Wheels), the wheels activities of Trostel (USA) were acquired in Background to the listing HEXPOL has now reached a size, position and level of profitability that make the business attractive on its own merits. Accordingly, the Annual General Meeting of Hexagon AB has resolved to distribute the shares in HEXPOL and has applied for a listing of the Company s Class B shares on the OMX Nordic Exchange, effective June 9, The listing will support HEXPOL s continued growth, both organically and through acquisitions. Strategy Our goal is to achieve continued rapid growth with healthy profitability, based on a strategy of strong organic growth and continued acquisitions in the polymer segment. HEXPOL 23

24 We have large global customers in growth markets such as the automotive industry, plate heat exchangers and materials handling products. quarter of 2008 showed continued strong sales growth, +30 percent, and a continued increase in profits. We will continue to expand our Compounding operations in emerging markets such as China, Mexico, eastern and central Europe. Our customers in the automotive industry are growing strongly in these markets, and we are well equipped to meet their demand. We also have a strong position and business growth based on Japanese and Korean systems and OEM manufacturers in NAFTA 1, Asia and Eastern Europe. Our strategy is based on comprehensive and broad polymer and applications expertise. For example, unique proprietary formulas that we offer our customers through technical cooperation agreements account for 80 percent of Compounding s sales in Europe. During recent years, we have invested strongly in PHE Gaskets to meet the segment s strong demand. The next stage in our expansion is the new production plant in China, which will be placed in operation gradually during the latter part of Future Our strategy for achieving favourable profitable growth through strong global positions in growth industries is based on highly skilled personnel and a powerful corporate culture. Our affiliation with Hexagon has provided us with healthy growth and a profitability-oriented culture based on competence and a flexible and rapid organization. I am convinced that this base and this heritage are a solid foundation for continued success and an exciting journey on our own two feet. Welcome as shareholders in HEXPOL AB! Georg Brunstam President and CEO The strategy within Wheels is also based on the offering of global deliveries to major OEM customers. In addition to operations in Europe and the US, we also started production in China during Our strong brands provide a solid base for our future positioning in the marketplace. Results We had a successful year in We strengthened our global positions through the acquisition of GoldKey and production start-ups at new plants in China (Compounding and Wheels) and Mexico (Compounding). We increased our sales by 10 percent and operating profit improved by nearly 49 percent. We are also off to a good start in The first 1 North American Free Trade Agreement Canada, Mexico, USA. 24 HEXPOL

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26 Vision The Company s vision is to be a market leader, ranking number one or two in each selected technological or geographical segments, to be able to generate growth and shareholder value. Business concept The business concept is to operate as a product and application specialist in a limited number of selected niche areas for the development and production of polymer products. HEXPOL shall be the most preferred partner for customers in key industries, such as the automotive and construction industries, the energy sector and the materialshandling industry, based on its offering of innovative and specialized polymer products and solutions. 26 HEXPOL

27 Strategic direction HEXPOL is one of the world s leading polymer groups with strong positions in markets for rubber compounds (Compounding), gaskets for plate heat exchangers (PHE Gaskets) and wheels made of polyurethane, plastic and rubber materials for forklifts and castor wheel applications (Wheels). Customers are mainly system suppliers to the global automotive industry and OEM manufacturers of plate heat exchangers and forklifts. The Group is organized in two business areas, HEXPOL Compounding and HEXPOL Engineered Products, and has production operations in nine countries. Markets outside Sweden account for a full 90 percent of total invoiced sales and seven of the manufacturing units are located in expansive regions of Asia, Mexico and Eastern Europe. The number of employees is approximately 2,300, most of whom are active in Asia, the US and Sweden. Most of the plants are relatively new and all of them are well invested. The level of technology is high and far-reaching production and technological coordination results in cost-effectiveness, high and uniform quality and the ability to smoothly relocate production among the units. Operational strategy To be able to sustain its long-term profitability and sustainable competitiveness, HEXPOL attaches great importance to the competitiveness of each individual business line. In order to attain the vision, the following five operational strategies are applied: 1. Product development The Group possess in-depth and broad polymer and applications expertise. Within the HEXPOL Compounding business area, for example, 80 percent of the products marketed in Europe are based on unique proprietarily developed formulas and the Group offers its customers technological cooperation for the products continued development. Product development is conducted at each production unit and the HEXPOL Compounding business area has a corporate technology department in Belgium. In total, approximately 5 percent of HEXPOL Compounding s employees work in the field of development work and many of them are highly qualified chemists and technicians. 2. Most cost-effective company in the industry Well-invested plants characterized by a high level of technology and broad-based expertise in a flat and cost-effective organization facilitate success and progress. 3. Efficient supply management The Group continuously focuses on finding costeffective supply solutions that enable the exploitation of benefits resulting from high volume and advanced technologies. Close cooperation with customers through local presence also provides opportunities for effective solutions. 4. Superior management expertise Skilled and experienced management teams based on global coordination and continuous exchanges of experiences enables all the units to be adapted to best practice in the Group and the industry. 5. Speed Management Short and fast decision-making processes and timeeffective implementation enhance competitiveness and boost the organization s capacity. HEXPOL 27

28 Growth strategy Over the years, HEXPOL has expanded robustly on the basis of healthy organic growth and strategic acquisitions. The same orientation will be pursued in the future. Organic growth The Group s principal markets and customers are showing favourable growth. One example is the market for plate heat exchangers, which is undergoing very strong growth driven by the quest for energy savings and in which HEXPOL supplies key components to all major OEM manufacturers. Another example is the automotive industry, which is growing robustly in Asia, Mexico and Eastern Europe. In these areas, HEXPOL has established state-of-the-art facilities for satisfying the technological and demand requirements of customers. The strategy continues to be to capitalize on the opportunities that arise when manufacturers of rubber compounds have to decide whether to switch to outsourcing or continue with their in-house compounding operations, with the resulting investment and renovation requirements. The materials-handling industry is also growing globally, as a result of sharply increasing volumes of cargo, which entails increased demand for forklifts and thus increased demand for HEXPOL s products in the form of wheels. Brands HEXPOL markets its products via a number of well-established brands. For example, the Gislaved Gummi brand is well-known and highly reputed far beyond the borders of Sweden. In addition, GoldKey, Stellana and Elastomeric are recognized brands in their respective product areas and geographical markets. Financial objectives The Board of Directors has established the following financial objectives over a business cycle: The aim is that the organic sales growth will be at least 7-10 percent annually and that the operating margin will be at least 8-10 percent. Dividend policy HEXPOL s profit trend and equity/assets ratio determine the size of the dividend. HEXPOL s dividend policy is that percent of after-tax net profit for the year will be distributed as a dividend to HEXPOL s shareholders, on condition that the Company s equity/assets ratio is regarded as satisfactory. HEXPOL s acquisition strategy The Group s strategy is to continue to acquire companies in the polymer field, primarily within current business areas but including a broadening of application areas and geography. Potential acquisition targets are monitored continuously in accordance with a distinct acquisition model, whereby interesting targets are analyzed on the basis of a series of strategic parameters. The Group has a strong cash flow and a healthy financial position which, together with committed lines of credit, generate the financial preparedness required for acquisitions. 28 HEXPOL

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31 Group structure The Group is divided into two business areas, Compounding and Engineered Products, and four product areas, Compounding, Gaskets, Wheels and Profiles. The organization is adapted to ensure rapid decision-making processes, characterized by distinct and decentralized responsibility. The operational structure is presented below: President and CEO Georg Brunstam CFO / IR Anders Lyrheden HEXPOL Compounding HEXPOL Engineered Products HEXPOL Compounding NAFTA Tracy Garrison HEXPOL Gaskets Lars-Åke Bylander HEXPOL Compounding Europe/Asia Ralph Wolkener HEXPOL Wheels Peter Kruk HEXPOL Compounding Technology Carsten Rüter HEXPOL Profiles Lars-Åke Bylander HEXPOL 31

32 Legal structure Shareholding Country HEXPOL AB Sweden Gislaved Gummi AB 100% Sweden Megufo AB 50% Sweden Stellana AB 100% Sweden Elastomeric Engineering Company Ltd 99,6% 1 Sri Lanka Elastomeric Technologies Ltd 100% Sri Lanka Elastomeric Tools & Dies Ltd 100% 2 Sri Lanka Hexagon Polymers Compounding HQ Sprl 100% Belgium Hexagon Polymers Compounding Sprl 100% Belgium Hexagon Polymers Compounding s.r.o 100% Czech Republic Thona Canada BV 100% Netherlands Hexagon Polymers Compounding ULC 100% Canada Hexagon Polymers Compounding Inc. 100% North Carolina, USA Stellana U.S. Inc. 100% Wisconsin, USA Hexagon Polymers Compounding GmbH 100% Germany GoldKey Processing, Inc. 100% Ohio, USA Hexagon Polymers Compounding (Qingdao) Co, Ltd 100% China Hexagon Polymers Gaskets (Qingdao) Co, Ltd 100% China Stellana (Qingdao) Co, Ltd 100% China Hexagon Polymers Compounding SA de CV 100% Mexico 1 Gislaved Gummi AB holds 200 shares included in this ownership. The remaining 0.4 percent of the shares are held by external parties. 2 Elastomeric Technologies Ltd. holds 69.6 percent and Elastomeric Engineering Company Ltd. holds 30.4 percent of the shares. The operation s sales in 2007, distributed among the two business areas and geographically, were as follows: HEXPOL Engineered Products 28% NAFTA 30 % Asia 3 % HEXPOL Compounding 72 % Europe 67 % The operation s production (sales value) in 2007 was distributed as follows geographically: Emerging markets (China, Sri Lanka, Czech Republic, Mexico) 27 % Other markets 73 % 32 HEXPOL

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34 The brothers Carl and Wilhelm Gislow formed Svenska Gummifabriks AB in The principal phases in the development into the current HEXPOL have been: 1893 The Gislow brothers form a rubber factory in Gislaved 1966 A new factory for Technical Rubber is built 1990 The Technical Rubber division becomes Gislaved Gummi AB 1991 Production of gaskets for plate heat exchangers is acquired 1994 Hexagon AB acquires the Company 1995 Stellana AB in Laxå is acquired 1998 Elastomeric Engineering Co. Ltd. in Sri Lanka is acquired 2002 GFD Technology GmbH in Germany is acquired 2004 Thona Group of Belgium, with operations in Belgium, Czech Republic, Canada and the US, is acquired 2005 Trostel SEG of the US is acquired 2007 Establishment of three new plants for rubber compounds, wheels and gaskets in China and a new plant for rubber compounds in Mexico 2007 GoldKey Processing Ltd of the US is acquired 34 HEXPOL

35 History HEXPOL has its origins in Svenska Gummifabriks AB, a Swedish industrial company established near the end of the 19th century in Gislaved, Sweden. The strategy has resulted in the Group showing robust growth in recent years, both organically and via acquisitions, as shown in the diagram below. This segment of the once highly diversified Gislaved Group with operations focused on rubber compounding and technical products was acquired by Hexagon in The operations have since been developed through investments in product development and acquisitions of complementary companies. By far the largest and principal single step in the development was the acquisition of Thona Group in Contribution to sales made by acquisitions in the past ten years, MSEK (Month of acquisition in parentheses) GoldKey (September 2007) Trostel (September 2005) Thona Group (May 2004) GFD (July 2002) Elastomeric (July 1998) HEXPOL Acquired units are shown in a different colour, representing consolidated sales during the year of acquisition and following year. HEXPOL 35

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37 Business area HEXPOL Compounding HEXPOL Compounding is one of the world s leading companies in the development and production of advanced, high-quality rubber compounds, and is one of only a few truly global companies in the industry. through effective organizations in a safe environment characterized by continuous improvements. This is made possible by well-trained and highly skilled employees who are proud of their work and do their utmost to satisfy our customers. HEXPOL Compounding offers customers advanced rubber compounds and world-class services. Longterm growth, which is an overall goal, is achieved Market Customers of the HEXPOL Compounding business area comprise rubber product manufacturers who Business area s share of the Group Net sales Operating profit Number of employees 72 % 31 % 63 % Key figures Sales, MSEK Operating profit, MSEK Operating margin, % 10,0 8,0 11,2 Average number of employees Sales and operating profit, MSEK Operating margin % % 10 10% 88% % 44% 22% % Sales Operating profit For comments on profit trends see pages HEXPOL 37

38 place high demands on performance and global delivery capabilities. The largest market segment is the automotive industry, followed by building and construction. Other key segments include cable, water management, pharmaceutical, energy and oil industries. The automotive industry currently accounts for 68 percent of sales invoiced by HEXPOL Compounding. A modern passenger car contains hundreds of rubber components and a luxury car, for example, contains more than 50 metres of sealing profile. For many car manufacturers, particularly in the premium segment, high-quality sealing systems represent a key component. The sealing system often influences the endcustomer s quality impressions in the form of quiet performance. HEXPOL Compounding is one of the leading suppliers of synthetic rubber compounds in this area. All major manufacturers in the automotive industry and their system suppliers are global companies. These factors favour HEXPOL Compounding, which focuses on global delivery capabilities for the market s best products, with identical quality regardless of the production unit. The global automotive market is growing rapidly. The number of light vehicles manufactured in the next few years is expected to increase sharply, mainly due to greater demand from emerging markets such as China and India. According to statistics from CSM 1, approximately 68 million new light vehicles were manufactured during Weak production growth is expected in North America in the next few years, following a decline in light vehicle production this year. This will be offset primarily by markets in Southern Asia, China and South America, where strong growth is expected in the next few years. According to forecasts by CSM, global production of light vehicles in 2012 is projected at about 84 million new units, corresponding to an average annual increase of slightly more than 4 percent. transferring parts of their production to low-cost countries and new, more expansive markets such as Eastern Europe, China, India and Mexico. For suppliers, this trend is creating demands from customers to follow their example and offer production in these new markets. As a result of these trends, HEXPOL Compounding has established units in Mexico and China. Operations were already established in the Czech Republic, where the business area has one of its largest production plants, which supplies the markets in Central and Eastern Europe. In addition to the business expansion outlined above, Japanese and Korean automotive manufacturers are also increasing their global and regional production operations. HEXPOL Compounding has positioned itself favourably to meet these market changes. Technology and products General definition of rubber compounds Rubber compounds are semi-finished products and can be seen as homogenous mixtures of different ingredients that have been defined in a specific formulation or recipe. These ingredients, or raw materials, can be subdivided into the following categories: polymers, fillers, plasticizers, accelerators, cross-linking agents and many other special products. Only the right composition and a perfect mixing process result into optimum properties of the final product. Rubber compounds leaving the HEXPOL Compounding production facilities will be further processed by their customers via processes such as extrusion, injection molding or compression molding in order to reach the part s final shape. Finally, continuous or discontinuous vulcanization will provide to the rubber part its typical elastic behavior. Production process The production sites of HEXPOL Compounding feature some of the most advanced processing lines At the same time, the industry is undergoing extensive changes. Many manufacturers are gradually 1 CSM Worldwide CSM Global Production Summary, 1Q HEXPOL

39 Process for production of rubber compounds Raw material storage Chemical additives Mixing Rolling mill Unstrained strip Strained strip Pellets Quality control Shipping HEXPOL 39

40 found in an industry that, otherwise, has not traditionally been considered particularly sophisticated in terms of technology. The plants are equipped with an impressing quality assurance concept, covering data gathering of raw materials, mixing parameters and final control. The entire production process is fully computerized in order to assure efficiency and quality. Raw material and preparation After a quality assurance inspection, the various raw materials are stored in large silos, tanks or a warehouse. Mixing in an internal mixer is a so-called batch process and, as a result, all ingredients must be prepared in accordance with the weight specified in the recipe. Plasticizers, carbon black and fillers are weighed automatically, while polymers and chemicals must be weighed manually. All of the different weighing stages are monitored by an IT system to ensure maximum accuracy in the weighing process and full-lot traceability. Mixing The constantly increasing demands on material properties require, besides proper development of formulations, an excellent manufacturing process. Indeed, both recipe and mixing process have a major impact on the product quality. Therefore HEXPOL Compounding R&D people design them according to application, used ingredients and quality requirements. All weighed ingredients are mixed together in the internal mixer, which is the heart of a mixing room. The mixing steps are computer-controlled in order to guarantee batch uniformity. When mixed to a perfect degree of dispersion, the rubber compound is dropped onto an open mill. Downstream equipment The open mill itself has 3 major functions: - further homogenization of the rubber compound, - very efficient cooling of the compound, and - conversion uninterrupted downstream processing Especially for the sealing systems applications, the production plants are facing high requirements for defect free surface finish. In order to meet these expectations, HEXPOL Compounding puts a lot of efforts into developing the most modern way of straining rubber compounds in an online process. With the installed advanced technology of strainerextruders, online pelletizing units and gearpumps, the plants can easily adapt their process to customers' requirements. With the help of this advanced technology, HEXPOL Compounding can offer a large variety of rubber compounds in different product forms, such as endless strained or unstrained strips, and rubber pellets. Packaging depends on customer needs. Various possibilities are offered: recyclable or disposable packaging for strips, or bags for rubber pellets, as known from the plastics industry. Quality inspection and transport In an intensive approval procedure, modern IT systems in combination with state-of-the-art test instruments are used for the quality inspection. Only after a 100% compliance to requirements, rubber compounds will be released for shipment, together with full quality certificates and shipping documents. Research and development The foundation for HEXPOL Compounding s position as a world leader in rubber compounding has always been its commitment to excellence in compounding development. Through the recruiting and training of top rubber technologists, HEXPOL Compounding has built an international team of developers (approximately 5% of total employees) who use the latest in communication tools to share knowledge. HEXPOL Compounding takes an integrated approach to recipe and mixing process development, which takes into consideration customers' processes, technical specifications, cost effectiveness, and the latest in raw materials. 40 HEXPOL

41 As a major force in rubber compounding, HEXPOL Compounding, - provides an unmatched portfolio of high quality compounds for many rubber applications in various industries; - combines expertise in materials formulations with advanced technical production methods and technical service capability; - provides solutions based on different polymer types, such as EPDM, SBR, (H)NBR, NR, CPE, AEM, ACM, FKM and many others. Quality All HEXPOL Compounding plants have implemented a quality management system focused on customer satisfaction and continuous improvement. They are committed to deliver customers with high-quality products that meet their expectations, delivered on time, at the best possible price and service. Through close monitoring of process performance, all members of the personnel are committed to improve the performance and effectiveness of the quality management system with the goal to achieve the highest level of product and service quality. Highly automated production processes store relevant data from each process step including raw material data, mixing parameters and final control of products. These data are available online and used to control process and product performance. Each plant is equipped with a production control laboratory performing extensive testing. In combining the physical, mechanical, rheological and analytical testing capabilities of the laboratories at the various subsidiaries, HEXPOL Compounding has the ability to perform a large spectrum of test methods necessary to fulfill the test demands of the various business areas where its compounds are used. Engineering By focusing exclusively on compounding, HEXPOL Compounding has taken a leading role in mixing innovation, introducing a high degree of automation. As a result of standardization the same state-ofthe-art equipment can be found in most HEXPOL Compounding plants. In cooperation with leading machinery suppliers and with the production facilities that provide feedback from daily operations, HEXPOL Compounding s engineering department is continuously striving towards the improvement of the processing lines. The engineers experience and knowhow guarantee most advanced equipment designed to needs and technological leadership on the long term. Business model Production is primarily order-based and focused on a limited number of raw materials. The important rubber compound formulas are often developed in close cooperation with customers and unique expertise is required to achieve optimal production results. For example, about 80 percent of the compounds used in Europe today are based on HEXPOL s own recipes. In most cases, the recipes are HEXPOL s property. Since the raw materials are largely oil-based and exposed to sharp price fluctuation, pricing is renegotiated several times every year. Sales take place mainly through HEXPOL s own sales force. The concept Think Global, Act Local accurately describes how HEXPOL Compounding functions. Strategy Focus on innovation and cost effectiveness HEXPOL Compounding s business is focused on production and sales of high-quality products that are developed in close cooperation with demanding customers. The Company consciously aims to develop products that lower its customers total production costs. Further growth in existing and new markets HEXPOL Compounding is positioned favourably to capitalize on changes in market dynamics. High-quality products for demanding applications The automotive and construction industries are HEXPOL 41

42 HEXPOL Compounding s primary customer segments. Customers in the automotive industry are not the automotive manufacturers themselves, but rather large system suppliers to the manufacturers (Tier 1). However, it is essential that these system suppliers meet the automotive industry s very high demands. Close relations with strong customers Growth is further boosted by cooperation with customers operating in expansive markets such as the automotive market, which is enjoying overall expansion. However, it is also important to serve as a supplier to automotive manufacturers that are increasing their market shares. HEXPOL Compounding has a well-conceived customer structure, including substantial deliveries to expansive Japanese and Korean manufacturers. Continuous improvements HEXPOL Compounding works continuously to improve the processes used within the organization. One example is the internal benchmarking of production data, which creates a strong drive towards best practice. Organization HEXPOL Compounding s operations are divided geographically into three regions comprising Europe, NAFTA and Asia, and include nine production plants. Sales in Europe and Asia are managed from Belgium, while sales in NAFTA are coordinated from the US. The head office provides service to the production units and assumes global responsibility for: - research and development (coordination between production plants and new materials and products), - global customer agreements (global solutions in all parts of the world), - global supply agreements (strategic supplier choices, price negotiations), - engineering (design equipment to needs), - information and communication technology (critical software, information databases). - quality systems (best practices, continued improvement) - training All production units are structured as separate companies with complete organizational functions for sales, product development and production, but they also operate in close cooperation with each other in all areas. Services to major customers are also coordinated globally with Key Account Managers. Operating units All HEXPOL Compounding plants maintain worldclass standards, and several units are completely new. The plants are also similar in terms of technological capabilities. Standard technologies facilitate servicing and upgrading, optimize the people s knowledge and experience and easily allow produc- Unit Location No. of employees Area, m 2 Production capacity HPC Belgium Eupen, Belgium tonnes HPC Sweden Gislaved, Sweden tonnes HPC Germany Hückelhoven, Germany tonnes HPC China Qingdao, China tonnes HPC Czech Republic Unicov, Czech Republic tonnes HPC Mexico Aguascalientes, Mexico tonnes HPC North Carolina Statesville, North Carolina, USA tonnes GoldKey Middlefield, Ohio, USA tonnes HPC Canada Magog, Canada tonnes Total tonnes 42 HEXPOL

43 Eupen, Belgium Hückelhoven, Germany Gislaved, Sweden Unicov, Czech Republic Magog, Canada Aguascalientes, Mexico Middlefield, Ohio, USA Statesville, North Carolina, USA Qingdao, China tion to be moved between units. Each plant s geographic proximity to its customers completes the picture of a modern, professional compounder. Recently acquired GoldKey Processing in Middlefield, Ohio, USA, specializes in advanced elastomeric applications outside the automotive industry, including applications for the aerospace, pharmaceutical packaging and textile industries. As a result, Gold- Key complements the Group s other units. The Group s rapidly growing unit in the Czech Republic is favourably positioned to meet market demand from Central and Eastern Europe. HEXPOL started operations at a new plant in Mexico during the autumn of Some production equipment from the plant in Canada was transferred to the new unit. The plant got off to a good start and production is increasing steadily. HEXPOL s new plant in China was placed in operation during the summer of The purpose of the investment was to offer deliveries to existing customers with operations in China. With these operations as a base, the Group also plans to start cultivating local customers. The establishment of the operations has proceeded as planned. Total production capacity for all Group units amounts to approximately 191,000 tonnes of rubber compounds annually. HEXPOL 43

44 Competition There are only a few large manufacturers of rubber compounds with global operations, including Excel Polymers, which is owned by a private equity company, in the US, Mexico and China, the Canadian listed AirBoss in North America and the German familyowned Kraiburg in Europe and China. There are also many, smaller manufacturers that operate locally. The competition within rubber compounds consists partly of customers with proprietary operations in rubber compounds. However, due to cost and processtechnology considerations, there is a general trend whereby small and midsize rubber companies are facing growing difficulties in maintaining proprietary production of rubber compounds, opting instead to outsource a growing percentage of their operations to HEXPOL Compounding production plants. HEXPOL Compounding s potential to offer a global concept and cost-effective production of rubber compounds is highly competitive, compared with local and regional competitors or the in-house production operations of customers. Success factors With operations in Europe, NAFTA and Asia, HEXPOL Compounding is a truly global player in the market for rubber compounds. This is a strength since customers often have business activities in several regions worldwide and recognize the advantages of dealing with a global supplier that is also represented in close proximity to many of its customers local production units. Other success factors include standardized production equipment, internally developed and modern equipment standards, and R&D expertise shared between employees in virtually all parts of the world. HEXPOL Compounding also has a centralized purchasing organization that generates volume and technology benefits. Overall, this enables the Company to develop economically viable solutions for special applications and to guarantee full technical service to its customers. Future outlook HEXPOL Compounding aims to strengthen its leading global market position as a developer and supplier of high-quality rubber compounds to demanding customers, such as the automotive industry. The Company s strategy also focuses on increased sales in other demanding application areas, such as the cable, water management, pharmaceuticals, energy and petroleum industries. Currently, one of the challenges facing the Group is to handle the raw material environment by developing more cost-effective solutions or adjusting market prices. HEXPOL Compounding is well-positioned for continued growth, both from a geographical and application viewpoint. 44 HEXPOL

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47 Business area HEXPOL Engineered Products Supported by comprehensive expertise in polymers and the production of rubber, plastic and polyurethane products, HEXPOL Engineered Products has captured a position as one of the world s leading suppliers of sophisticated products such as gaskets for plate heat exchangers and wheels for the truck industry. HEXPOL Engineered Products has a long history as a manufacturer of rubber components. Based on compounds produced in-house, the Group manufactures finished rubber components through various production methods such as extrusion and compression, transfer and injection moulding. Business area s share of the Group Net sales Operating profit Number of employees 28 % 37 % 69 % Key figures Sales, MSEK Operating profit, MSEK Operating margin, % 14,2 8,8 12,5 Average number of employees Sales and operating profit, MSEK Operating margin % % 14 14% % % 88% 66% % 22% 00% Sales Operating profit For comments on profit trends see pages HEXPOL 47

48 Organization The business area is divided into three product areas: Gaskets, Wheels and Profiles. The business area is managed from the Group s head office in Malmö, with the Gaskets and Profiles products areas managed from Gislaved and the Wheels product area from Laxå. The product areas are relatively differentiated and more detailed descriptions of each are presented in the following section of this prospectus. Strategy The business strategy of Engineered Products focuses intently on niche sectors that offer potential for the business area to become one of the leading players. The strategy is also formulated specifically to refrain from product segments where HEXPOL Engineered Products might run the risk of competing with its customers within rubber compounds. Brands HEXPOL Engineered Products meets the customers under a number of well-established brands. Gislaved Gummi is a well-known and respected brand in the entire global market for Gaskets. The Stellana brand is also used internationally within Wheels, while operations in Sri Lanka work under the Elastomeric brand. Success factors The Group s comprehensive skills in materials development and production technology provide the foundation for the business area s competitiveness and focus on high-quality products. All production units include test laboratories. Global presence through units in Europe, NAFTA and Asia represents a strength factor in efforts to cultivate internationally active customers. In addition to local market presence, the units in Sri Lanka and China provide access to competitive production in terms of cost, since this type of production is more labour-intensive than the operations of HEXPOL Compounding. HEXPOL Engineered Products concentrates on the production of niched quality products, with a strong focus on logistics, which creates competitive advantages. 48 HEXPOL

49 developing nations. HEXPOL Gaskets is currently a supplier to all major OEM manufacturers of plate heat exchangers. The global market is dominated by about ten major manufacturers. In addition, rapid progress is now being made in China, where a number of manufacturers are established. The aftermarket is believed to account for about onefourth of today s total market. Technology and products The largest part of the product area sales comes from gaskets for plate heat exchangers. The gaskets are manufactured through compression and injection moulding. Product area HEXPOL Gaskets HEXPOL Gaskets is one of the world s leading supplier of rubber gaskets for plate heat exchangers and other applications. The gaskets are produced in various sizes ranging from a few decimetres in length to more than three metres. HEXPOL Gaskets focuses on high material performance and precise gasket fit, which are key factors when customers choose the Company s products. Market The market for HEXPOL Gaskets consists mainly of manufacturers of plate heat exchangers. The market is expansive, as the widespread interest in energy savings and environmental issues are driving demand for products manufactured by the product area s customers. Particularly strong growth has been noted in gaskets for plate heat exchangers for the market segment comprising bio-fuels, oil and gas. During recent years, HEXPOL Gaskets has benefitted from the continued expansion of ethanol production units in the US and Brazil. Since the industry is relatively new and energyintensive, the need for new plate heat exchangers is considerable. Strong growth also characterizes the segments comprising air conditioning and district heating, driven in part by higher living standards in Meticulous demands for product quality present a challenge for manufacturers of gaskets for plate heat exchangers. An inferior gasket can incur very substantial costs for the customer if the finished heat exchanger has to be dismantled to replace the faulty gasket. Accordingly, HEXPOL Gaskets devotes highly determined efforts to constantly improving the quality systems that control production. The product area is certified in accordance with ISO 9000/ Development work conducted in close cooperation with customers also helps to quickly identify and correct potential problem areas. All process parameters that are critical for product quality and performance are also controlled through technical coordination, and the gaskets are identical regardless of production unit. Lead time from order booking to series deliveries are minimized through proprietary production of moulds for gasket manufacturing in Sri Lanka. Business model and strategy The constituent rubber compounds needed for the product area s manufacturing operations are purchased internally within the Group and refined to create products that are sold to OEM manufacturers. Lowvolume products, which are characterized by a high level of customer adaptations, account a small percentage of total sales. The short series items are produced directly to customer order. Production planning for volume products is based on customer forecasts, which minimizes inventory costs, and deliveries are HEXPOL 49

50 The gasket a central and vital part of the plate heat exchanger The principle for a plate heat exchanger (PHE) is to transfer heat. A plate heat exchanger consists of thin, stamped plates comprising corrosion-resistant material, mainly stainless steel and titanium. The entire package of plates is compressed between two solid frames equipped with long bolts. Gaskets between the plates separate the flow so that one liquid flows in the even plates, while the other liquid passes through the odd plates. The gaskets eliminate any risk that the liquids will be mixed together (see illustration above). Plate heat exchangers are compact heat exchangers that offer much higher degrees of efficiency than tube heat exchangers. This means the required surface for a plate heat exchanger corresponds to about 25 percent of the surface area required for a tube heat exchanger. A gasket-based plate heat exchanger has the advantage over brazed or welded units in that they can be separated. This is extremely important in connection with food applications, but also in terms of achieving a continuously high degree of efficiency, since coatings develop over time in a heat exchanger s flow channels. HEXPOL has been manufacturing gaskets for plate heat exchangers since The Company s core skills related to gaskets comprise materials development, production processes, logistics and marketing. HEXPOL Gaskets has worked in very close cooperation with most of the world s leading producers of heat exchangers since the mid-1970s, with particular emphasis on the development of new materials that provide the gaskets with significantly higher performance standards. As a result of such cooperation, HEXPOL and the manufacturers of plate heat exchangers are able to define the need for greater performance that enables the manufacturers to reach a broader market and formulate uniform requirement specifications. Accordingly, HEXPOL Gasket s mission is to develop new materials to meet the defined requirements for gaskets. The materials always undergo accelerated tests in laboratory environments that are often complemented by field tests before the materials are approved. The development of new materials is a lengthy process that often extends over several years before approval for series production is granted. HEXPOL owns exclusively all of the recipe formulations that have been developed, and the customer has no knowledge of them. made directly from warehouses. Through Internetbased solutions, customers are able to access inventory balance figures, which provide increased opportunities to plan their proprietary production. Gaskets are produced in large volumes in Sri Lanka, while gaskets in smaller volumes and advanced material qualities are produced in Sweden. Organization The product area s management team is situated in Gislaved, which also serves as the base of global sales management activities. Sales personnel have been recruited to work at the Group unit in Qingdao, which cultivates sales in the Chinese market. Deliveries to other markets in Asia are managed directly 50 HEXPOL

51 from the plant in Gislaved, or the plant in Sri Lanka. All other gaskets manufactured in Sri Lanka are shipped first to the central warehouse in Gislaved before distribution to customers, along with gaskets produced in Gislaved. Operating units HEXPOL Gaskets has two gasket production units in operation today, one in Gislaved, Sweden, and the other in Sri Lanka. Due to the need for additional production capacity and closer proximity to major customers, a third production plant has been built in China. The new unit will be placed in operation gradually during the latter part of All production units are equipped with modern production machinery, which meets the requirements for rational and cost-effective production. Gislaved, Sweden Bokundara, Sri Lanka Qingdao, Chiina Unit Location Number of employees Area, m 2 Gislaved Gaskets Gislaved, Sweden Elastomeric Gaskets Bokundara, Sri Lanka HPG China Qingdao, China Total HEXPOL 51

52 China has been the fastest growing market for plate heat exchangers for the past several years. Today, many of the product area s customers are already established there and receive their gasket supplies from HEXPOL Gaskets in Gislaved. The current trend indicates that even more existing customers will establish proprietary production in China. Domestic production of plate heat exchangers in China is growing rapidly, but the gaskets are often low-performance products. Through the establishment of proprietary operations in China, HEXPOL Gaskets will narrow the gap to existing customers with their own production in the country, but also gain much better access to the domestic market. For customers that place high demands on product quality, the establishment of operations by HEXPOL Gaskets will provide a welcome alternative to the present domestic production. From a geographical perspective, the plant in China is situated in a central location that provides access to most domestic manufacturers of plate heat exchangers. During 2008, HEXPOL Gaskets will also establish a functional laboratory in China to provide on-site examples of the quality differences between different gasket producers. An initial contract was signed in the spring of 2008 for deliveries of gaskets to one of the largest domestic manufacturers of plate heat exchangers in China. Competition In addition to HEXPOL Gaskets, the product segment includes only a few major suppliers, the most prominent of which is the family-owned TRP in Great Britain, Dubai and Romania. Some OEM manufacturers of plate heat exchangers also have proprietary gasket production operations. In this context, the HEXPOL Group s collective compounding and polymer expertise is a critical competitive advantage. Future outlook The market for the product area is now in a highly expansive phase, which provides scope for favourable growth. Global energy demand is increasing steadily and, combined with the growing interest in environment-friendly solutions, the need for energy-effective technologies is creating strong demand for heat exchangers. With its innovative products and flexible production structure, HEXPOL is positioned favourably as a supplier to the most successful players. The Group s position provides favourable potential to indirectly increase its market share through growth in parallel with customers, both in existing markets and completely new markets. A priority, however, is to balance this business growth with increased sales to a larger number of customers in order to avoid excessive dependence on a few customers. Increased globalization is another factor driving demand for plate heat exchangers. As globalization proceeds, the number of marine cargo transports is also increasing, which is enhancing demand for ocean-going vessels equipped with a large number of plate heat exchangers to cool engines, and to provide onboard comfort (heating/air conditioning). It is extremely important that customers understand the significance of the powerful technological skills offered by suppliers of polymer products, and that they regard HEXPOL Gaskets as the leader in this area. This applies in particular to new emerging markets such as China, Russia and Brazil. These markets include large numbers of small local manufacturers of heat exchangers that may become acquisition targets of larger global players. It is important that HEXPOL Gaskets is already a supplier to the companies that may be acquired, or the natural choice as a new supplier following an acquisition. The success of HEXPOL Gaskets in achieving its goals is totally dependent on efforts to maintain the very high quality it offers customers in terms of delivery reliability and product quality. The HEXPOL Group s vision of being a market leader in areas where it conducts business operations also creates an internal focus that enhances the achievement of these goals. 52 HEXPOL

53 a large number of locally active companies in all parts of the world. The operations of HEXPOL Wheels are conducted mainly in the following four areas: Product area HEXPOL Wheels HEXPOL Wheels is a leading player in the global market for wheels made of polyurethane, plastic and rubber. The largest customers in this product area are producers of electric trucks and forklifts as well as castor wheel manufacturers. The business area also produces different types of special wheels for other applications, including wheels for tracked vehicles, wheels that tolerate high temperatures in baking ovens and wheels for conveyor belts. The wheels are produced in Sweden, the US, Sri Lanka and China. Market Most customers are manufacturers of trucks and castor wheels. A consolidation process is now in progress in the expansive lifting truck market, which is dominated by a handful of major players. Global sales of new trucks during 2006 amounted to 825,000 units divided between counterbalanced trucks and electric warehouse trucks. The secondary market comprising spare parts and new wheels is critical in terms of size. The market for warehouse trucks is dominated mainly by Western European and North American manufacturers, although several of these companies are owned by Japanese business interests. The market for castor wheels is not characterized by the same degree of consolidation and, in addition to a limited number of major players, includes Polyurethane wheels and solid tyres for forklifts HEXPOL Wheels is one of the three largest manufacturers of cast polyurethane wheels for warehouse trucks in Europe. HEXPOL Wheels is one of the four largest manufacturers in NAFTA. In the segment comprising solid tyres for counterbalanced trucks, HEXPOL Wheels is a minor player focused on the aftermarket. Thermoplastic wheels for hand pallet trucks HEXPOL Wheels is the leading supplier of plastic and polyurethane wheels for hand pallet trucks in Europe and NAFTA. An ongoing trend reflects the transfer of production of hand pallet trucks to Asia (primarily China) and, during 2007, HEXPOL established production operations in Qingdao, China. Castor wheels HEXPOL Wheels is the market leader in Europe for natural rubber castor wheels. HEXPOL Wheels also has a strong position in the segment comprising thermoplastic and polyurethane castor wheels. This market, however, is more fragmented than the market for warehouse trucks. Other With its comprehensive know-how in polymer materials, HEXPOL Wheels is also a niche supplier of various other products, including track pads for tracked-wheel tractors and sealing strip for windows. Technology and products HEXPOL Wheels offers customers a broad product palette of wheels in several different materials with different properties, such as polyurethane, natural rubber, thermoplastic and thermosets. HEXPOL 53

54 By combining first-class raw materials with continuous supervision of the entire production process, extremely high-quality products are produced. Modern injection moulds and a high degree of automation provide efficient production that yields competitive moulding machines products. Five types of products are produced by Wheels: Polyurethane wheels Thermoplastic wheels Rubber wheels and tyres Solid rubber tyres Various special products comprising the materials presented above The choice of materials is based on the desired, specific properties. Examples include strength and durability, temperature sensitivity, surface friction and driving comfort for the truck operator, as well as contradictory preferences that must be considered in relation to each other when choosing the optimal blend. Depending on the intended purpose of the wheel, widely varying demands can be imposed. For warehouse trucks, Vulkollan is the market-leading polyurethane material in Europe. It is highly durable and able to tolerate high load factors without losing its shape. The Vulkollan brand is owned by Bayer Material Science, and rights to use the materials are licensed to a number of approved manufacturers, including HEXPOL Wheels, which has produced Vulkollan wheels since the early 1960s. Today, HEXPOL Wheels is one of the leading producers of Vulkollan wheels for industrial truck manufacturers. HEXPOL Wheels laboratory is equipped with a testing device that provides the business area with a leading position in the development of new wheels. The test simulates how a truck is driven and is used to test various wheel properties. The equipment enables HEXPOL Wheels to actively support the development of wheels for new truck models. Truck wheels are normally equipped with metal hubs, which are purchased from external suppliers, mainly in Eastern Europe but also in China. Hub priming, or painting, which secures adhesion between the hub and the polyurethane, is an important stage in the production of wheels with metal hubs. Vulkollan wheels for trucks and high-load castor wheel applications. Solid rubber wheels for counterbalanced trucks provide driving comfort for the operators and good surface friction. Castor wheels for shopping carts with rubber tread on plastic hubs. Thermoplastic wheels with polyurethane roller conveyors for hand pallet trucks. Rubber tyres for castor wheels. 54

55 Business model and strategy In its capacity as a product specialist, HEXPOL Wheels business concept is to develop, manufacture and market wheels for transport and material-handling applications. The business model includes the goal of serving as a natural choice mainly for large manufacturers of trucks and offering competitive products for replacing used wheels on existing trucks. HEXPOL Wheels has many years of experience in the industry and of cooperating with key customers. As opposed to most of its competitors, HEXPOL Wheels has a global presence that enhances the Company s value as a cooperation partner in the expansion plans of its customers. The establishment of a production plant in China was made in part to support a multiyear agreement with a customer who also wanted HEXPOL to serve as its supplier in the Chinese market. With these operations as the base, the domestic Chinese market can now be cultivated locally. Organization HEXPOL Wheels consists of four units and is managed from Laxå, Sweden. Most marketing operations are conducted regionally, with Stellana in Sweden assuming responsibility for Europe while the NAFTA market is managed by the unit in the US and Elastomeric Wheels in Sri Lanka manages marketing operations in Asia. The Chinese market is cultivated from the unit in China. Operating units HEXPOL Wheels has four operating units: Laxå in Sweden, Lake Geneva in WI, USA, Horana in Sri Lanka and Qingdao in China. Stellana Sweden situated in Laxå, Sweden, is a major player in the global market for wheels for electric trucks and fork lift trucks. A comprehensive test data bank has been developed through many years of experience in designing wheels, and the Company also has a sophisticated wheels laboratory. Supported by the laboratory, HEXPOL Wheels is a leader in the development of new truck models and is able to optimize all properties of the truck wheels. Cast polyurethane (including Vulkollan) and polyamide wheels are produced in Laxå, as well as limited volumes of rubber and thermoplastic wheels. Stellana US in Lake Geneva, Wisconsin, USA, is a major supplier of cast polyurethane wheels and tyres for electric trucks and general industrial applications. During recent years, Stellana US has attracted attention in the US through several new product launches, including Smoothy. Elastomeric Wheels situated in Horana, Sri Lanka, manufactures and delivers rubber wheels for castor wheels and solid rubber tyres throughout the world. The plant encompasses the entire spectrum of machinery for the production of cast rubber products, including internal mixers and form-moulding machines for the production of complete wheels with thermoplastic hubs. Construction of the Stellana China production plant started toward the end of 2006 and operations were initiated during the third quarter of The plant is equipped for series production of thermoplastic polyamide wheels. In the future, the plant will also be equipped to produce polyurethane wheels. At the present time, the unit has not been assigned any global product responsibility, operating instead within Stellana Sweden s area of business. Unit Location Number of employees Area, m 2 Stellana Sweden Laxå, Sweden Stellana US Lake Geneva, Wisconsin, USA Elastomeric Wheels Horana, Sri Lanka Stellana China Qingdao, China Total HEXPOL 55

56 Lake Geneva, Wisconsin, USA Laxå, Sweden Horana, Sri Lanka Qingdao, China Competition HEXPOL Wheels is one of the world s largest players in the product segment comprising wheels. There are about 10 major manufacturers of polyurethane wheels in the world, including HEXPOL Wheels. The Company s main competitors are the German family-owned Räder-Vogel and Wicke in Europe, the latter having a caster wheels factory in China and the family-owned Thombert in North America. Other competitors consist mainly of locally active, family-owned companies. The relatively fragmented market offers opportunities for continued growth through acquisitions. HEXPOL Wheels is the market leader in Europe for natural-rubber castor wheels, and competes mainly with a number of low-cost manufacturers in China, the largest of which is Hong Xing Castors. Future outlook HEXPOL Wheels sees good potential for business growth. Efforts to increase volumes have the highest priority and this will be achieved through increased market shares and growth in the underlying market. These efforts will be made possible by continued growth in global trade, which is creating increased demand for materials handling and, in turn, greater demand for the Group s products and equipment for the materials-handling industry. 56 HEXPOL

57 Product area HEXPOL Profiles The product area comprises the niche operations conducted by HEXPOL Profiles, which produces extruded products in the form of thin-walled profiles primarily for customers in the Scandinavian market. Market The market consists mainly of Scandinavian manufacturers of products for the construction industry and other engineering industries. Technology and products The niche market segment for HEXPOL Profiles comprises thin-walled, rubber and silicone profiles manufactured through a modern extrusion process to meet customer-specific requirements. Production also includes spliced sealing rings for the ventilation industry. Products manufactured by HEXPOL Profiles are characterized by high quality standards that are verified continuously in the production process. HEXPOL Profiles concentrates mainly on customers that require larger volumes. Business model and strategy The rubber compounds used in the extrusion process are purchased internally within the HEXPOL Group. HEXPOL Profiles shall be perceived by the market as a cost-effective manufacturer that creates added value through quality, competence and delivery reliability. Competitive advantages are also created through HEXPOL s unique materials expertise, which provides cost and performance advantages. HEXPOL Profiles offers its customers individually customized logistics solutions ranging from traditional customer order-controlled production to solutions whereby HEXPOL Profiles replenishes customer inventories. Organization Operations are concentrated in Gislaved where the business area has a proprietary organizational structure for the entire production flow and sales. Overall business management is shared with other operations in Gislaved, however. Operating units The operations are conducted in close affiliation with compounding operations in Gislaved. Competition The Scandinavian market for profiles is dominated by Trelleborg, but a number of major international manufacturers are also active in the product segment. HEXPOL Profiles is positioned as Number 2 in the Scandinavian market. Future outlook A small number of major customers account for a significant percentage of the product area s sales, which presents a serious challenge to expand the operations. Since the competition comes mainly from much larger players, considerable importance must also be assigned to continuous development of productivity and quality. Unit Location Number of employees Area, m 2 Gislaved Profiles Gislaved, Sweden Total HEXPOL 57

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59 Trends and future outlook This section contains forward-looking statements based on evaluations and calculations by the Board of Directors and executive management. HEXPOL s true profits may deviate from forecasts presented in this section due to a large number of factors, including but not restricted to risks presented in the section Risk factors on pages HEXPOL is active in global markets believed to offer long and short-term growth potential for the HEXPOL Group and its customers. Three sectors of particular prominence are the energy, automotive and materials-handling industries. The need for energy-effective solutions is increasing constantly in the expanding energy sector. This growth is creating demand for modern heat exchangers for which HEXPOL s products comprise important components. In large parts of the world, with particular emphasis on rapid-growth markets in Eastern Europe, China and India, the need for and sales of passenger cars is increasing steadily, creating opportunities for HEXPOL as a strategic partner. HEXPOL has strong, long-term business relations with most of the global systems suppliers, and the Group s products are used by most global OEM manufacturers. Through modern production units in all major markets, particularly with new units in the aforementioned emerging markets, the Group is also favourably positioned for growth. The ongoing globalization of world trade is creating strong growth in materials and cargo handling, and the Group s products are already used in the highly expansive materials-handling industry. Overall, these factors provide HEXPOL with favourable growth opportunities over the short and long term. HEXPOL has noted very strong growth for a number of years, with good margins by industry standards. The Company has strong global market positions with well-known brands. To meet the growing demand from customers, the Group has invested in its production plants and new production capacity. HEXPOL also recently established units in such interesting emerging markets as China and Mexico, which provide the Company with distinct competitive advantages and greater flexibility. The Group s executive management and management teams within the respective business areas are highly experienced, and HEXPOL s Board of Directors has comprehensive industrial and financial experience. Executive management and the Board of Directors are presented on pages These factors, combined with a continued acquisitionoriented focus, whereby acquired companies are successfully integrated into the Group, provide HEXPOL with a strong platform for continued favourable development. HEXPOL 59

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61 Personnel The competency and experience of employees are critical factors for the successful pursuit and realization of the goals of the daily operations. To achieve successful research and development, corporate culture plays an important role. It involves ensuring the right outlook and attitude. As an individual, you have to dare to fail in order to succeed. It is management s task to create a positive working climate in a true entrepreneurial spirit that will encourage creativity and innovation. HEXPOL encourages participation and strives to involve all employees in improvement work and also aims at a non-bureaucratic culture with rapid decision routes. Key ratios Number of employees Average number of employees Number of countries 9 8 Employees outside Sweden,% Personnel costs, MSEK Geographic distribution of employees 2007, Average number Sweden Belgium Czech Germany Mexico Canada USA China Sri Lanka Republic Geographic trend of the proportion of employees 6060% % 5050% % 4040% % 3030% % 2020% % 1010% % 0% 0% Asia Europe NAFTA Proportion men and women Average number of employees % % % % % % % % % % 0 % Men Women HEXPOL 61

62 Global Group with local presence HEXPOL s management philosophy is based on professionalism and trust. In order to achieve increased profitability and the financial objectives, good leadership and motivated employees are essential. HEXPOL represents a dynamic workplace with employees worldwide. In the management groups for HEXPOL s business and product areas, more than 10 nationalities are represented. For a global company like HEXPOL, local competency is necessary and crucial to the success of a specific geographic market. For HEXPOL, diversity is about mutual respect. The corporate culture also embraces professionalism, competency, ambition, loyalty and creativity. It is management s task to create a positive working climate in a true entrepreneurial spirit to encourage innovation. The average number of employees at HEXPOL in 2007 was 2,120, including five in the Parent Company. The number of employees within the Group at the end of 2007 totalled 2,327. The proportion of employees outside Sweden was 83 percent and the proportion of women was 13 percent. Recruitment and competency development HEXPOL s employees work in research and development, marketing, sales, administration and production. The high level of technology requires qualified and highly educated employees. As a result of HEXPOL s conviction concerning the importance of true local presence in the geographic market, recruitment occurs primarily locally. HEXPOL s employees have the right to form and join trade unions and are entitled to collective negotiations. Employees also have full insight and right of codetermination in accordance with regulations in national legislation. Within HEXPOL, professional competency development is connected to the individual s situation. Senior executives undergo individual manager development programs. To further utilize the Group s collective competency, HEXPOL works in a focused and systematic manner with networks between the companies and across business area borders. Researchers and engineers from operations worldwide meet regularly to discuss Group-wide research and development projects. Another example is the annual management conference at which the Group s top executives gather to get to know each other s operations and markets better. Equality and work environment HEXPOL s work environment shall be stimulating and developmental. Naturally, it shall also fulfil existing legal requirements. No employee shall be discriminated due to gender, religion, disability, sexual preference, nationality, political view or social or ethnic origin. Measures to ensure employees health and safety are driven based on local conditions and regulations. HEXPOL s work on improving the work environment is conducted in cooperation between employer, employees and the trade union organizations. Remuneration Since the right person could be crucial to HEXPOL s success in a business segment or a geographic market, market-based and competitive remuneration are vital to HEXPOL. Variable remuneration connected to the profit trend that can be influenced by the individual is paid in parts of the Group. Personnel costs for 2007 amounted to 410 MSEK. 62 HEXPOL

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65 Environmental care creates business value HEXPOL s fundamental principle is that the activities shall not harm the environment or have a negative impact on human health. During previous years progress has been made concerning a number of environmental issues. HEXPOL is, how-ever, convinced that society s and it s own ambitions concerning continual improvement will increase. As a result of it s environmental work HEXPOL also see s business opportunities. Focus on the significant environmental aspects Direct and indirect environmental impacts are the results of HEXPOL s operations, at 15 plants in 9 countries. Examples of direct environmental aspects are energy consumption, use of fossil raw materials, handling of hazardous chemicals, emission of pollutants and greenhouse gases to the atmosphere, and generation of waste. The activities of suppliers, transport of raw materials and finished products, and the use of our products, are examples of indirect environmental aspects. Important occupational health and safety aspects are, for example, exposure to dust, hazardous chemicals and noise, heavy lifting, repetitive work, and workplace accidents. In the Environmental Policy HEXPOL highlights areas of special importance for the company to work further with. Continual improvement Since several years, the different manufacturing sites have managed environmental issues. Important driving forces are environmental legislation, possibilities to more efficient use of resources and energy, image issues, increasing awareness among managers and employees concerning environment, health and safety, and increasing environmental requirements from customers. In the latter case, requirements presented by the automotive industry are of special importance. Here are some examples of what the company has achieved in the environmental field during recent years: In the HEXPOL Compounding Business Area several of the plants were recently constructed. Irrespective of where on Earth this took place, most appropriate techniques were applied. This includes, for example, energy recovery, filtration of outlet process emissions, reduction of water consumption, and efficient management of waste. In HEXPOL Compounding there are ongoing efforts to reduce the use of chemical substances that are hazardous to the environment and human health. Examples are the reduced use of zinc oxide, the phasing out of lead compounds, the introduction of nitrosoamine free curing systems, the replacement of highly aromatic process oils (HA oils) with paraffine oils, and that certain phtalates (DOP) are on their way to be substituted. Many activities have been implemented to manage waste products. One example is the reuse of waste rubber in certain product groups. Environmental legislation In the countries where HEXPOL operates the manufacturing plants are subject to environmental, health and safety legislation. In Sweden the operations are subject to licences according to the Environmental Protection Act. Monitoring programmes and inspections are implemented to ensure compliance with HEXPOL 65

66 environmental licences. The environmental performance of the Swedish plants is annually reported to the supervising authorities. At the plant in Gislaved there is one open environmental licence condition concerning emissions of curing fumes. It is not known if the final conditions may result in installation of emission abatement equipment. The plants in Czech Republic, Belgium, Germany, Canada, the US, Mexico, Sri Lanka and China are subject to integrated environmental licences, or specific licences for different environmental aspects. It is not expected that ongoing or future applications for environmental licenses will result in specific measures. Concerning occupational health and safety HEXPOL continually works to reduce the number of workplace accidents, to minimise the exposure to dust and chemicals, and to reduce noise at workplaces. At a number of plants, industrial hygiene activities include frequent health surveys and workplace monitoring programmes. Environmental risks Requirements on precautionary environmental measures and to restore damaged environments may cause substantial costs for a company. In this area, clean-up of contaminated land, and the management of asbestos related problems, are well know examples. HEXPOL has conducted an overall risk assessment concerning the occurrence of any contaminated land and the presence of asbestos containing materials. HEXPOL is not aware of contaminated land at any of the premises that are owned by HEXPOL. Several of the plants are recently constructed at land ( greenfield ) where no polluting activities have occurred in the past. Underground storage tanks are not present, and there are no records of spills, leakage, or accidents with oils, solvents or chemicals. As a part of the due diligence process during acquisition of companies, environmental audits have been carried out. Based on the present level of knowledge the risk REACH legislation In EU the REACH legislation concerning chemical products is now under implementation. Gradually it will cause significant impact on companies that handles chemical products. The basic idea of the new legislation is that hazards with chemicals should be identified as early as possible. The industry has therefore been given the responsibility to provide information concerning hazardous and risks. In HEXPOL it is primarily the HEXPOL Compounding Business Area that is affected by REACH. HEXPOL has therefore allocated resources to analyse the consequences of REACH and to implement relevant measures. As a first step HEXPOL ensures that all chemicals that are used in it s compounds, are included in the ongoing preregistration process. HEXPOL Compounding has therefore contacted all its suppliers of chemicals and asked each supplier to affirm that the specified chemicals will be registered for the use in rubber products. 66

67 for contamination of soil and groundwater at the new plants is assessed as low. At the older plant the risk is assessed as low/medium. Note: Intrusive soil and groundwater sampling has not been carried out at any of the premises. Concerning asbestos containing materials the probability is very low that such materials are present at the new plants. At some of the older plants asbestos surveys have been carried out showing no presence of asbestos. Concerning the remaining older plants it is assumed that asbestos is not at all present, or present only in limited quantities, in buildings and installations. HEXPOL considers the probability that asbestos containing materials are present in HEXPOL s facilities as low. Business opportunities HEXPOL s judgement is that the awareness in society concerning environmental care and sustainable development will remain high in society. By being resource efficient and proactive HEXPOL will further reduce its environmental impact and strengthen the Group s image and economic performance. In addition to that HEXPOL anticipates that the increasing environmental requirements will be beneficial for the sales of a number of HEXPOL s products. Here are some examples: The build-up in the US and Brazil of capacity for production of ethanol for vehicles has been very beneficial for HEXPOL. Also in the area of district heating there is a strong development. In such equipments, HEXPOL s gaskets are key components. These are good examples where environmental care and business opportunities walk hand in hand. You need commitment, systematic methods and a long-term perspective to achieve results concerning sustainable development. Such prerequisites are present among HEXPOL s management and employees. By implementing environmental management systems HEXPOL gets a useful and credible tool in the daily work. HEXPOL is convinced that environmental care creates business value. Since a long time ago HEXPOL complies with the requirements from the automotive industry that rubber and other polymers must be free from certain hazardous chemicals. HEXPOL is therefore well prepared to meet similar requirements from other industrial sectors, for example, the construction industry. Interest in energy savings and climate change issues is high and in the Product Area Gaskets the market for plate heat exchangers is very expansive. HEXPOL

68 Condensed financial information for 2005-Q1 2008, including comments on the financial trend Amounts in MSEK Q * Q * 2007 ** 2006 ** 2005 ** Condensed income statement Net sales Operating expenses Operating profit Financial items Profit before tax Tax Net profit Condensed balance sheet *** Total assets Intangible fixed assets Tangible fixed assets Financial fixed assets Current assets Shareholders equity Long-term liabilities Current liabilities Condensed cash-flow statement Cash flow from operations Investments in intangible fixed assets Investments in tangible fixed assets Acquisition of subsidiaries Cash flow from financing activities Change in cash and cash equivalents Cash and cash equivalents at the end of the period Key data Average shareholders equity Average capital employed Profit margin before tax (%)... 8,3 9,5 9,3 6,7 10,5 Return on shareholders equity, (%)... 19,7 19,2 19,5 13,4 19,6 Return on capital employed, (%)... 15,1 16,4 15,1 12,1 16,8 Net sales growth (%)... 29,8 3,2 9,7 12,8 36,6 Operating margin (%)... 9,7 10,5 11,2 8,2 11,6 Profit per share (SEK)... 1,88 1,66 7,01 4,44 6,10 68 HEXPOL

69 Amounts in MSEK Q * Q * 2007 ** 2006 ** 2005 ** Capital structure Debt/equity ratio (%)... 1,1 0,8 1,1 0,8 0,8 Equity/assets ratio (%)... 35,7 44,1 36,7 43,6 44,0 Employees Average number of employees Number of employees at the end of the period Sales per employee... 0,37 0,31 1,29 1,29 1,30 * Non revised or audited figures ** Audited figures. *** Financing changed after the most recent closing date. For current indebtedness, refer to page 73. Definitions: Return on equity Net profit as a percentage of average shareholders equity. Return on capital employed Operating profit plus financial income as a percentage of average capital employed. Net sales growth Change as a percentage of net sales compared with the year-earlier period. Sales per employee Sales divided by the average number of employees. Operating margin Operating profit divided by net sales. Debt/equity ratio Interest-bearing liabilities less cash and cash equivalents divided by shareholders equity at the end of the period. Equity/assets ratio Shareholders equity as a percentage of total assets at the end of the period. Capital employed Total assets less non-interestbearing liabilities. Profit margin before tax Profit after financial items as a percentage of net sales. Profit per share Net profit divided by the number of shares after the listing. Comments on the financial trend A summary of comments on the HEXPOL Group s financial trend during the past three years is presented below. Although sales show no distinct seasonal variations, it is influenced by the manner in which the number of working days is distributed throughout the year. Q compared with Q Consolidated sales increased during the first quarter 2008 by 30 percent to 852 MSEK (656). Currency effects were a negative 18 MSEK, primarily due to a weakening of USD. Operating profit increased by 20 percent to 83 MSEK (69), corresponding to an operating margin of 9.7 percent (10.5). Costs for the new plants started up in China and Mexico within the HEXPOL Compounding business area were charged against profit for the quarter. Without these units, the operating margin was 10.4 percent (10.8). In the HEXPOL Compounding business area, sales increased by 41 percent to 648 MSEK (460) and operating profit increased 28 percent to 55 MSEK (43). Volumes were generally strong during the first quarter, particularly in Europe, at the same time as newly acquired GoldKey contributed strongly. The HEXPOL Engineered Products business area increased its sales by 4 percent to 204 MSEK (196). Operating profit amounted to 28 MSEK (26), up 8 percent. The trend within the business area was positive, with continued favourable growth in Gaskets. In Asia, the positive trend in Sri Lanka continued HEXPOL 69

70 and the new plants in China for the Wheels product area and the HEXPOL Compounding business area are now gradually increasing production. Raw materials prices continued to increase during the first quarter. The impact on profits was marginal, however, as a result of extensive measures that included revised material formulas, changed suppliers and price increases. Consolidated operating cashflow increased during the first quarter and was a positive 56 MSEK (-19). The strong cash flow was achieved through reduced working capital, profit improvements and a lower rate of investment. The Group s net financial items during the first quarter amounted to an expense of 12 MSEK (expense: 7). The Company s production plant has a capacity of 40,000 tonnes per year. GoldKey s head office is located in Middlefield, Ohio, the US. The Company has approximately 160 employees. Since September 2007, GoldKey is included in the HEXPOL Compounding business area. The Group s operating cash flow increased, due to the improved results during 2007, by 67 percent to 92 MSEK (55). The Group s net financial items during 2007 amounted to an expense of 50 MSEK (expense: 39). Profit before tax increased to 255 MSEK (166). Profit after tax increased by 58 percent to 186 MSEK (118). For further information, reference is made to the section Interim report January-March 2008, on page compared with 2006 The Group s sales increased by 10 percent to MSEK (2 488) during Acquired units during the year accounted for 148 MSEK of sales. Sales for the comparable Group 1 increased by 94 MSEK. Operating profit increased by 49 percent to 305 MSEK (205), corresponding to an operating margin of 11.2 percent (8.2). The sharp improvement was mainly attributable to improved margins within the HEXPOL Engineered Products business area. The average number of employees in 2007 was (1 933). The increase in the number of employees occurred through the acquisition of GoldKey and the newly started units in China and Mexico. During 2007, capacity was good in most of the production plants and, combined with increased productivity, contributed to improved margins. On 1 September 2007, HEXPOL acquired the US custom rubber compound company, GoldKey Processing Ltd. GoldKey produces rubber compounds for industrial operations as well as the automotive, building, pharmaceutical and aircraft industries. Analysis Compared with 2006, currency effects had a negative impact on sales of 68.6 MSEK or 2.5 percent. The devaluation of the US dollar had by far the greatest impact. However, profit were positively affected by exchange-rate fluctuations amounting to 2.8 MSEK. The trend of the Sri Lankan rupee was the primary reason for the positive effect. Raw material prices continued to rise during 2007, although at a somewhat reduced rate than in the preceding year. However, price increases gathered momentum during the latter part of the year, although the Company was better at offsetting price increases by reformulating formulas, productivity improvements and by passing on cost increases to customers compared with 2005 Consolidated sales increased by 13 percent to MSEK (2 205). Sales for the comparable Group increased by 219 MSEK. Operating profit amounted to 205 MSEK (255), corresponding to an operating margin of 8.2 percent (11.6). The average number of employees during 2006 was (1 691). The increase was primarily due to 1 Information about a comparable Group compare the Group excluding companies acquired during the year with full-year figures for the corresponding Group in the preceding year. Companies acquired during a year in progress are included for the entire year, when comparisons are made with following year. 70 HEXPOL

71 increased staffing in Sri Lanka. In the HEXPOL Compounding business area, the production plant in Canada was affected by declining demand for rubber compounds for sealing systems for automotive applications during the year, due to a decline in parts of the North American automotive industry. In 2006, the North American automotive industry moved portions of its operations to Mexico, which is why HEXPOL Compounding hastened the establishment of its production plant in Mexico. The Group s operating cash flow was reduced during 2006 followed by a weakened result of 18 percent during 2006 to 55 MSEK (68) as a consequence of the decling profit level. The Group s net interest items amounted to an expense of 39 MSEK (expense: 23). Profit before tax amounted to 166 MSEK (232). Profit after tax amounted to 118 MSEK (162). Analysis Currency effects had a negative impact of 4.0 MSEK on sales compared with However, profit were positively impacted by exchange rate fluctuations in an amount of 3.3 MSEK. The Company s negative net flow of Sri Lankan rupees, which weakened in 2006, was the primary reason for the positive effect. The operating margin in 2006 decreased due to the extremely high prices for raw materials. Above all, price increases and capacity shortages in the production of oil-based raw materials such as carbon black and EPDM had a negative impact on operations. In order to minimize the negative effects of the raw material price increases as far as possible, the Company focused on enhancing the efficiency of production, developing more cost-effective compound formulas and transferring cost increases to customers compared with 2004 During 2005, sales increased by 37 percent to MSEK (1 615). Units acquired during the year accounted for 32 MSEK of sales. Sales for the comparable Group increased by 246 MSEK. Operating profit increased to 255 MSEK (199), corresponding to an operating margin of 12 percent (12). The average number of employees during 2005 was (1 542) and the increase was primarily attributable to employees from the Thona acquisition in 2004 impacting the full year in On 1 September 2005, the Company acquired the wheel division of Trostel SEG in Lake Geneva, Wisconsin, USA. This acquisition resulted in the HEXPOL Wheels product area establishing itself in NAFTA with proprietary production, primarily within the wheel segment for indoor trucks. The acquisition led to an annual sales increase of approximately 100 MSEK. The new company in the US was Stellana U.S. Inc. In November, the fourth mixing line was put into operation in the Czech Republic, which entailed a capacity increase from 24,000 to 32,000 tonnes of rubber compounds per year. The Group s operating cash flow decreased during the year, mainly due to increased working capital, by 22 percent to 68 MSEK (87). The Group s net interest items during 2005 amounted to an expense of 23 MSEK (expense: 21). Profit before tax amounted to 232 MSEK (178). Profit after tax amounted to 162 MSEK (124). Analysis Currency effects had a positive impact of 49.1 MSEK or 2.3 percent on sales compared with Profits were positively impacted by exchange rate fluctuations, which affected profit by 8.6 MSEK. A strong CAD and EURO offset the effects of a stronger Sri Lankan rupee. The reason for the unusual strengthening of the rupee was the inflow of foreign currencies into Sri Lanka due to tsunami contributions. During the first half of 2005, raw material prices were stable, during the second half, primarily prices of natural rubber rose strongly, which affected the profitability of rubber wheels manufactured in Sri Lanka. HEXPOL 71

72 Other financial information Investments During 2005, investments mainly comprised investments in Gaskets and Wheels (18.7 MSEK). A new mixer in the Czech Republic was another significant investment (9.4 MSEK). During 2006, major investments were made in greenfield facilities, primarily in China (68.9 MSEK). Investments were also made in Gaskets (15 MSEK). During 2007, major investments were also made in green-field facilities in China and Mexico (103 MSEK). Investments were also made in Gaskets (23 MSEK). During 2007 the largest investment was the acquisition of GoldKey. The investments are, in all significant respects, debt financed. Fixed assets Significant fixed assets comprise all production units including corresponding machinery. Decisions from permit authorities are among the primary environmental factors that could influence the use of fixed assets. Intangible fixed assets refer primarily to goodwill from acquisitions of subsidiaries. Political measures Among the political measures that could directly or indirectly affect HEXPOL s operations, the agreements with tax authorities that have been entered into in Asia deserve special mention. These govern the tax rate paid by the company, but since they are limited in terms of time the tax rate in this region could be raised in the future. This applies, for example, to the subsidiaries in Sri Lanka, where an agreement concerning tax relief expired on 1 April 2008 and another agreement may be expected to expire on 1 April In China, recent legislative amendments could result in a deterioration in the tax situation for the Chinese subsidiaries. Cash flow As a Group, HEXPOL has a historically strong cash flow despite strong investments in recent years. Credit agreements Hexagon is responsible for financing until the listing date, at which time HEXPOL will change to an external structure. To guarantee financing of the working capital requirements and ensure financial preparedness for future development, committed lines of credit totalling SEK 1.7 billion have been secured from a number of banks. The lines of credit extend for five years and all loans will carry a variable interest rate. The terms of the line of credit include stipulations that HEXPOL must fulfil certain covenants concerning the Group s net borrowing in relation to operating profit before depreciation, amortization and impairment (EBITDA). The credit agreement also contains a customary provision that entitles the lender to require the borrower to repay the loan prematurely in the event of a change of control. HEXPOL s Board of Directors believes that a total credit framework of SEK 1.7 billion is sufficient to cover the Group s working capital requirements for a minimum of 12 months. This analysis also stipulates that the positive annual cash flow may be used for debt amortization if deemed necessary. On the facing page, information is provided about the Group s net indebtedness as per 31 March For means of comparison, the corresponding figures are presented including the effects of the adjustment of financing that has subsequently occurred ahead of the distribution of the HEXPOL shares. 72 HEXPOL

73 Shareholders equity and indebtedness Adjusted 2 Total current liabilities Against guarantee Against collateral (negative clause 3 ) Unsecured credit Total long-term liabilities (excluding the current portion of long-term liabilities) Against guarantee Against collateral (negative clause 3 ) Unsecured credit Total shareholders equity Share capital Reserve fund Other reserves Total Net indebtedness Adjusted 2 Cash and cash equivalents Total liquidity Current receivables Current bank liabilities Current portion of long-term liabilities Other current liabilities Total current liabilities Net current indebtedness Long-term bank loans Issued bonds Other long-term loans Long-term indebtedness Net indebtedness Indirect indebtedness and contingent liabilities (guarantee for bank loan Megufo AB) Non revised or audited figures. 2 Adjusted for the changes in financial structure after the balance sheet date. In order to achieve the targeted net debt ratio of three times EBITDA, calculated on the last twelve month period, a dividend was paid out to the parent company and inter-company loans were replaced with bank debt. 3 No company in the Group is entitled to pledge assets as collateral for other borrowing. 4 Excluding non-interestbearing items. HEXPOL 73

74

75 Share and shareholders Share capital HEXPOL AB s share capital amounts to SEK, represented by 26,551,977 shares, of which 1,181,250 Class A shares and 25,370,727 Class B shares. According to the Articles of Association, the maximum share capital is 160,000,000 SEK and the maximum number of shares 80 million. The shares par value is 2 SEK and all the shares are fully paid. Information about the HEXPOL share The ISIN code for the Company s Class B share is SE The ticker on OMX Nordic Exchange Stockholm will be HPOL B and the trading lot will be 100 shares. The Company s Class A shares are not listed. The HEXPOL shares have been issued in accordance with Swedish law and owners rights connected with the shares can only change in accordance with the legal proceedings stated in the Swedish Companies Act (2005:551). At a General Meeting, each Class A share in HEXPOL carries 10 votes and each Class B share one vote. Each shareholder who is entitled to vote, may vote for their full number of shares without restriction. Each share provides equal rights to dividends and to any surplus after liquidation. The share is not the object of any restrictions pertaining to transfer rights. According to the Swedish Companies Act (2005:551), shareholders have preferential rights to subscription of new shares, warrants and convertible debentures, but these preferential rights may be disapplied following a resolution by a General Meeting. The shares are not the object of any offers made as a result of mandatory bid obligations, redemption rights or redemption obligations. There have not been any public takeover bids pertaining to the Company s shares during the current or preceding financial year. CSD registration The Company and its shares are registered with the electronic securities system known as the VP system, with VPC as the central securities administrator and clearing organization (VPC AB, Box 7822, SE Stockholm). Shareholders are not provided with any physical share certificates; instead, transactions with shares occur electronically through registration in the VP system by authorized banks and other securities administrators. Shares are registered by person and denominated in the Swedish currency, SEK. Ownership structure Hexagon s ownership structure and distribution in terms of size on 30 April 2008, based on information from VPC, is presented on the following page. Following the spin-off, the ownership structure and distribution for HEXPOL will reflect the equivalent in Hexagon with the adjustment that ten Hexagon shares correspond to one HEXPOL share. HEXPOL 75

76 Ownership structure in Hexagon Class A shares Class B shares Capital, % Votes, % Melker Schörling AB ,4 45,4 Maths O Sundqvist through companies ,1 10,8 Swedbank Robur Fonder ,2 4,4 AFA Försäkring ,4 3,8 Columbia Wanger Asset Management ,1 2,9 Handelsbanken Fonder ,6 1,2 Handelsbanken ,6 1,1 Andra AP-fonden ,5 1,1 AMF Pensionsförsäkrings AB ,5 1,0 JP Morgan ,3 0,9 Simon Bonnier ,2 0,9 Fidelity Fonder ,2 0,8 Didner & Gerge Aktiefond ,1 0,8 SEB Investment Management ,1 0,8 Mellon Omnibus ,1 0,8 Ola Rollén ,0 0,7 AMF Pension Fonder ,0 0,7 Fjärde AP-fonden ,7 0,5 Tredje AP-fonden ,7 0,5 Gamla Livförsäkringsaktiebolaget ,5 0,4 Total, 20 largest owners ,4 80,7 Total, others ,6 19,3 Total number of shares ,0 100,0 Source: Direct and nominee-registered holdings at VPC on 30 April 2008 owner-grouped. Number of shares per shareholder Number of owners Number of Class A shares Number of Class B shares Total Source: Direct and nominee-registered registered holdings at VPC on 30 April HEXPOL

77 Dividend Resolutions concerning the payment of dividend are made by the General Meeting. Dividends are normally paid in a cash amount per share through VPC, but may also pertain to other than cash (distribution in kind). Entitlement to dividends is reserved for those who are registered as owners in the VPC share register on the record day established by the General Meeting. Such a record day must not occur later than the day prior to the next Annual General Meeting. If the shareholder cannot be reached through VPC, the shareholder will retain his claim on HEXPOL for the dividend, which is restricted only through limitation rules. In the event of limitation, the dividend amount shall accrue to HEXPOL. There are no restrictions or particular procedures according to the Swedish Companies Act or HEXPOL s Articles of Association pertaining to dividends to shareholders residing outside Sweden. With the exception of possible limitations from banking and clearing systems, payment occurs in the same manner as for shareholders residing in Sweden. However, shareholders who are not fiscally domiciled in Sweden are normally subject to a Swedish withholding tax; also refer to Tax consideration in Sweden on page 87. Share capital development Year Transaction Change in Total Par value Total Total share capital, share capital, per share, number of number SEK SEK SEK Class A shares Class B shares 1967 Formation New issue Split 500: Bonus issue Between 30 April 2008 and dividend, the number of Class B shares in Hexagon AB is increased through exercise of options to HEXPOL 77

78 78 HEXPOL

79 Legal issues and supplementary information Significant agreements Within HEXPOL the following agreements are of material importance. Customer and supplier agreements HEXPOL enters into a number of agreements with customers and suppliers as part of its ongoing business operations. All of these agreements are normal for companies of this size and with an operational focus such as HEXPOL s. No single customer or supplier is crucial to the Company s operations; nor is the Group dependent on a single agreement, although each individual customer is naturally important. All of the Group s key suppliers are replaceable. However, losing certain customers or replacing certain suppliers could have a tangible effect on profits or expenses. Licensing agreement with Bayer In accordance with a licensing agreement with Bayer AG, HEXPOL is entitled to use the Vulkollan brand and logotype in connection with wheel manufacturing and marketing within HEXPOL Wheels. The licensing agreement with Bayer is valid for periods of one year at a time and can be terminated following three-month notice. Acquisition agreement pertaining to GoldKey In 2007, HEXPOL carried out a major acquisition with the purchase of GoldKey Processing Inc. in Ohio, USA. GoldKey Processing Inc. manufactures rubber compounds for industrial operations and the automobile, construction, pharmaceutical and aviation industries. In 2007, the Company had annual sales of approximately 75 MUSD and about 160 employees. The acquisition strengthened HEXPOL s market position in the US, while the operation contributed new product groups, knowledge and expertise in new materials technology. Separation agreement with Hexagon HEXPOL and Hexagon have entered into a separation agreement to regulate certain conditions related to the distribution and listing of HEXPOL. For more information, refer to the section Relationship between HEXPOL and Hexagon on page 83. With the exception of these agreements, HEXPOL deems that no individual agreement is of material significance. Intellectual property rights The Vulkollan brand is owned by Bayer AG and the right to use the brand is licensed to a number of approved manufacturers, including HEXPOL. Apart from HEXPOL s brands, HEXPOL does not hold and is not permitted to utilize or permit other parties to utilize any other significant intellectual property rights. HEXPOL s protection of intellectual property rights is monitored continuously and supplemented when necessary. Insurance HEXPOL deems the insurance cover for its operations to be adequate. Until the dividend distribution, HEXPOL will be covered by the Hexagon Group s insurance agreement, HEXPOL s insurance agreement and the Group companies own local insurance, respectively. For the period after the dividend distribution, HEXPOL holds an insurance agreement that offers the same coverage as the Hexagon Group s insurance agreement and the Group companies will have their own local insurance as previously. HEXPOL 79

80 Shareholder agreements The Board of Directors of HEXPOL is not aware of any shareholder agreements or any other agreements between prospective shareholders in HEXPOL pertaining to joint control over the Company. Disputes In a few cases, disputes have arisen in connection with the Company s operating activities; however, these disputes were not of material significance to the Group. HEXPOL is not involved, and has not been involved in the past 12 months, in any legal proceedings or arbitration procedures that could have a significant effect on the Company s or the Group s financial position or profitability. The Board of Directors of HEXPOL is not aware of any factors that could result in any such proceeding with a scope that would be significant for HEXPOL or the Group. Board of Directors and senior executives For information about HEXPOL s Board of Directors and senior executives, refer to pages All Board members are elected until the 2009 Annual General Meeting. Transactions with related parties No Board member or senior executive at HEXPOL is participating or has participated directly or indirectly in any business transaction with the Company that is or has been of an unusual nature or subject to unusual terms. Nor has HEXPOL granted loans or guarantees to or entered into sureties for the benefit of a Board member or a senior executive at HEXPOL. Persons with reporting obligations Besides the members of HEXPOL s Board of Directors and senior executives, no individual holds 10 per cent or more of the capital or votes in HEXPOL or is subject to reporting obligations in accordance with prevailing insider regulations. Registration and form of association HEXPOL s corporate registration number is The Company was formed in Sweden on 1 February 1967 and was registered at the Swedish Companies Registration Office (then the Patent and Registration Office) on 8 March The Company s form of association, a public limited company, is regulated by the Swedish Companies Act (2005:551). The Company s registered office is located in the municipality of Malmö, Skåne County. Head office The Company s head office is located at Skeppsbron 3, SE Malmö. The telephone number of the head office is +46 (0) History of registered corporate names The Company has held the following registered corporate names: Corporate name Date from HEXPOL AB 23 April 2008 Hexagon Polymers Aktiebolag 13 May 2003 Örechrona Aktiebolag 18 January 1994 NKA Industri i Landskrona Aktiebolag 8 April 1992 Hexagon Aktiebolag 3 April 1991 Munksjö Bruk Aktiebolag 15 March 1983 Aktiebolaget Nybro Wellkartong 8 March 1967 Available documents The following documents are available at HEXPOL, Skeppsbron 3, SE Malmö, and on the Group s website, Articles of Association for HEXPOL HEXPOL AB s annual reports and audit reports for financial years 2005, 2006 and HEXPOL

81 HEXPOL 81

82 82 HEXPOL

83 Relationship between HEXPOL and HEXAGON This section describes the relationship between the HEXPOL Group and the Hexagon Group, including how this relationship will be affected by the distribution and listing of the shares in HEXPOL. After the distribution and listing, HEXPOL will operate as a separate company that is independent of Hexagon. Restructuring of the Group Prior to the listing, the legal structure of HEXPOL has been changed only through an intra-group transfer of the German subsidiary Hexagon Polymers Compounding GmbH from Hexagon Metrology GmbH to HEXPOL. HEXPOL deems that the acquisition occurred at market price. Separation agreement HEXPOL and Hexagon have entered into a separation agreement to regulate certain conditions related to the distribution and listing of HEXPOL. The separation agreement regulates such areas as liability for events that occur before and after the separation, settlement of intra-group loans in connection with the separation, handling of tax and insurance issues attributable to the period before the separation and HEXPOL s continued use of the Hexagon Polymers corporate name within the HEXPOL Group. In accordance with the separation agreement, HEXPOL and Hexagon, as a general rule, are to indemnify one another from any obligations and losses related to their respective operations. The parties are to work to ensure that any problems that arise due to the separation can be solved through cooperation and mutual understanding. During a two-year period, the parties are to refrain from recruiting certain key employees from one another. Previously, HEXPOL primarily financed its operations using its own funds and loans via the Hexagon Group. After the separation, HEXPOL will instead utilize an external structure. For further information, refer to Credit agreements in the section Other financial information on page 72. HEXPOL was previously covered by the Hexagon Group s general insurance package. This relationship is terminated since HEXPOL will no longer belong to the Hexagon Group. Instead, HEXPOL has negotiated its own Group-wide corporate insurance. For further information, refer to Insurance in the section Legal issues and supplementary information on page 79. The separation agreement also contains regulations that aim to guarantee continuous insurance coverage for HEXPOL in terms of claims attributable to the period before the separation. Within the HEXPOL Group, the name Hexagon is used in combination with the word Polymers in the names of certain subsidiaries. In accordance with the separation agreement, HEXPOL undertakes to ensure that the use of the Hexagon name within the HEXPOL Group is terminated not later than three years after the separation. During this three-year period, Hexagon s consent will be required to expand the current use of the Hexagon name. Hexagon, for its part, undertakes not to use or give another party permission to use the combination of words Hexagon Polymers during the same period. If certain events specified in the agreement should occur, such as a change of control over HEXPOL or if HEXPOL changes its area of operations, HEXPOL is liable for ensuring that the use of the Hexagon name is terminated in advance. HEXPOL 83

84 An agreement is in effect between HEXPOL and Hexagon concerning Hexagon s obligation to provide certain management positions relating to areas such as financing structures, external communications, coordination of tax and legal advisory services and personnel administration to HEXPOL. This agreement will expire in connection with the separation, at which time HEXPOL will handle these issues itself. 84 HEXPOL

85 HEXPOL 85

86

87 Tax considerations in Sweden Below follows a summary of certain Swedish tax provisions that apply in conjunction with Hexagon s distribution and listing of class B HEXPOL shares for shareholders who have an unlimited tax liability in Sweden, unless otherwise stated below. The summary is based on prevailing legislation and is intended as general information only. The summary below does not cover situations where the shares in Hexagon or HEXPOL are held for business purposes or as current assets in business operations or by a partnership. Special rules apply for certain categories of tax payers. The tax implications for each shareholder depend in part on the shareholder s specific circumstances. Accordingly, each shareholder should consult a tax advisor as to the tax consequences relating to his or her particular circumstances, including the applicability and effect of foreign rules and tax treaties. Summary The distribution of HEXPOL shares is intended to be made under the Lex ASEA provisions and will thus not result in any immediate taxation. The tax basis of the shares in Hexagon giving entitlement to the distribution shall be allocated between these shares and the HEXPOL shares received. Taxation upon the distribution of HEXPOL shares According to confirmation from the Swedish Tax Agency, the distribution of HEXPOL shares is exempted from taxation in Sweden under the Lex ASEA provisions. The tax basis of the shares in Hexagon providing entitlement to the distribution shall be allocated between these shares and the HEXPOL shares received. The allocation of the tax basis will be based on the change in value of the shares in Hexagon due to the distribution of the HEXPOL shares. Hexagon will request general guidelines from the Swedish Tax Agency on the allocation of the tax basis. Information regarding the guidelines will be published as soon as possible on the websites of Hexagon, HEXPOL and the Swedish Tax Agency. Taxation upon the disposal of shares and fractions of shares in HEXPOL Capital gains taxation is triggered upon the disposal of HEXPOL shares received. The same applies to shareholders who receive fractions of HEXPOL shares that are sold on their behalf. The capital gain or capital loss on quoted shares is computed as the difference between the sales proceeds, after deduction for sales costs, and the tax basis (acquisition cost). The acquisition cost of the HEXPOL shares received through the distribution is to be determined on the basis of the general guidelines that the Swedish Tax Agency will render. The acquisition cost for every fraction of a share should equal the corresponding part of the acquisition cost of one HEXPOL share, as determined pursuant to the Swedish Tax Agency s guidelines. When the capital gain or the capital loss is computed, the tax basis of all shares of the same series and type in HEXPOL are computed collectively under the average method. Since the class B HEXPOL shares will be quoted, the tax basis may alternatively be determined to be 20 percent of the net sales revenue under the standard method. For individuals, a capital gain is normally taxed in the capital income category at a rate of 30 percent. A capital loss on quoted shares may be fully offset against taxable capital gains in the same year on shares and other quoted securities that are taxed as shares except for units in HEXPOL 87

88 Swedish investment funds that only contain Swedish receivables (Sw: räntefonder). A capital loss that cannot be offset will be deductible from other income from capital at 70 percent. Should an overall deficit arise in the capital income category, a reduction from municipal and national income tax as well as from real estate tax and municipal real estate charge is granted. A tax reduction of 30 percent is provided for deficits that do not exceed SEK 100,000 and of 21 percent for any remaining part. Deficits cannot be carried forward to later fiscal years. For limited liability companies, capital gains on shares that are not deemed to be held for business purposes are taxed as income from business operations at a rate of 28 percent. Capital losses on such shares are normally only deductible against taxable capital gains on shares and other securities that are taxed as shares. Such a capital loss may also, if certain conditions are fulfilled, be offset against capital gains on shares and securities that are taxed as shares in companies within the same group, provided that group contributions are permitted among the companies. Capital losses that have not been utilized within a certain year may be carried forward and be offset against eligible capital gains on shares and securities that are taxed as shares in subsequent fiscal years without limitation in time. Taxation of dividends from HEXPOL Dividends from HEXPOL are taxed in the capital income category for individuals at a rate of 30 percent and as income from business operations at a rate of 28 percent for limited liability companies. For individuals resident in Sweden, a preliminary tax of 30 percent is withheld. The preliminary tax is generally withheld by VPC or, for nominee-registered shares, by the nominee. Net wealth tax The Wealth Tax Act was abolished as of income year Taxation of shareholders with a limited tax liability in Sweden For shareholders who have a limited tax liability in Sweden and who receive dividends from Swedish limited companies, Swedish withholding tax is generally payable. However, the distribution of HEXPOL shares is exempt from Swedish withholding tax under the Lex ASEA provisions. The distribution may, however, entail tax consequences in the shareholder s country of residence. For shareholders who have a limited tax liability in Sweden, Swedish withholding tax will normally be payable on dividends received from HEXPOL. The tax rate is 30 percent but is generally reduced under tax treaties that Sweden has concluded with other countries for the avoidance of double taxation. Most of Sweden s tax treaties enable a reduction of the Swedish tax to the tax rate stipulated in the treaty immediately on the dividend-payment date, if requisite details of the domicile of the person entitled to the dividend are known. However, such immediate reduction is not stipulated in Sweden s tax treaty with Switzerland. In Sweden, the withholding tax is normally withheld by VPC or, for nominee-registered shares, by the nominee. In cases where the 30 percent tax on dividends is withheld in connection with payment to a person who is entitled to be taxed at a lower rate, or if the withholding tax has otherwise been withheld in an excessive amount, a refund may be requested from the Swedish Tax Agency prior to the end of the fifth calendar year following the dividend distribution. Shareholders who have a limited tax liability in Sweden and who are not carrying out business operations from a fixed place or a permanent establishment in Sweden are generally exempt from capital gains taxation in Sweden on the disposal of shares. However, shareholders may be liable for tax in their countries of residence. According to a special tax provision, however, individuals who have a limited tax liability in Sweden may be subject to capital gains taxation in Sweden in connection with the disposal of Swedish shares or fractions of such shares, if such an individual has been resident or lived permanently in Sweden at any time during the calendar year of the sale or the ten calendar years immediately preceding the year of the sale. In several cases, this rule has been limited by tax treaties that Sweden has concluded with other countries. Tax considerations for shareholders resident in Switzerland 1 Due to the secondary listing of the Hexagon B-share at SWX Swiss Exchange, Hexagon has applied for a tax ruling in the Canton of St.Gallen where Hexagon s subsidiary Leica Geosystems is located. For the purpose of 88 HEXPOL

89 cantonal/communal income taxes of the Canton of St.Gallen applicable to residents of the Canton of St.Gallen, the stock dividend is treated as follows: The nominal value of the HEXPOL shares (2 SEK) is treated as taxable income. The difference between the fair market value and the nominal value is exempt from income taxes. This exemption from income tax is granted in a tax ruling by the cantonal tax authority in St.Gallen. With respect to other cantons than St.Gallen, it is uncertain whether other cantons take the same view as the Canton of St.Gallen. It cannot be excluded that some cantons may fully tax the stock. Shareholders resident in other cantons may ask their cantonal tax authority to grant them the same tax treatment of the distribution of HEXPOL as the tax authority of St.Gallen by referring to the tax ruling granted by the tax authority of St.Gallen. through a fixed place of business or a permanent estab - lishment located in Switzerland, as a rule, the tax treatment follows the accounting treatment, i.e. taxable income may be realized if and to the extent that the shareholder recognizes income in its books kept in accordance with Swiss accounting principles. The above is not intended to be tax advice. Each shareholder must obtain their own tax advice applicable to their specific tax situation. 1 This information is specific for this English language prospectus and is consequently not included in the Swedish language prospectus. For direct federal tax purposes, no tax ruling was obtained from the responsible tax authority. According to the information received from the cantonal tax administration of St.Gallen, it must be expected that, for direct federal tax purposes, the stock dividend distributed to the shareholders of Hexagon may be characterized, notwithstanding the Swedish tax treatment, as a fully taxable dividend in the hands of Swiss resident shareholders holding the shares as part of their private assets. However, Hexagon is in new discussions with the federal tax authority and as soon as Hexagon has more information on the outcome of obtaining a tax ruling, more information will be available on Hexagon s website With respect to Swiss resident shareholders holding the shares as part of a business, or non-swiss resident persons holding the shares HEXPOL

90 Interim report, January March 2008 First quarter Continued strong growth and increased profit Net sales increased by 30 percent to 852 MSEK (656) Operating profit increased by 20 percent to 83 MSEK (69) Profit after tax rose 14 percent to 50 MSEK (44) Profit per share after tax advanced 13 percent to 1.88 SEK (1.66) Operating cash flow was strong and amounted to 56 MSEK (-19) Decision was taken on 2 April to change Hexagon Polymers AB s name to HEXPOL AB Decision was taken at the Annual General Meeting of Hexagon AB on 5 May to distribute all shares in HEXPOL AB to the shareholders of Hexagon AB (publ) Listing on the OMX Nordic Exchange Stockholm is planned to take place on 9 June 2008 President s comments The year 2008 started well for HEXPOL. Sales increased by 30 percent during the first quarter to 852 MSEK (656). This, despite lower activity in the US automotive industry and construction sector and an increasing concern for a general economic downturn in our major markets. Volumes and capacity utilization were nevertheless high in most of our operations. Operating profit rose 20 percent to 83 (69) MSEK. Growth was particularly strong in business area HEXPOL Compounding, where sales growth of a full 41 percent was noted. The recently acquired company GoldKey made a favourable contribution, together with continued high volumes in Europe and the start-up of new plants in China and Mexico. Business area HEXPOL Engineered Products also showed a positive trend with healthy growth, especially in product area Gaskets. Working capital was also managed well, and cash flow from operations was strong. Georg Brunstam, President and CEO, HEXPOL AB Net sales and profit during the first quarter HEXPOL Group Consolidated sales increased during the first quarter by 30 percent to 852 MSEK (656). Acquired units accounted for 122 MSEK of sales. Currency effects were a negative 18 MSEK, primarily due to a weakening of USD. Operating profit increased by 20 percent to 83 MSEK (69), corresponding to an operating margin of 9.7 percent (10.5). Costs for the new plants started up in China and Mexico within business area HEXPOL Compounding have burdened the operating profit and operating margin for the quarter. Without these units, the operating margin was 10.4 percent (10.8). In business area HEXPOL Compounding, sales increased by 41 percent to 648 MSEK (460). Operating profit increased 28 percent to 55 MSEK. Volumes were generally strong during the first quarter, particularly in Europe. 90 HEXPOL

91 Jan March Jan March Jan Dec Key figures Net sales, MSEK Operating profit, MSEK Operating margin, %... 9,7 10,5 11,2 Profit before tax, MSEK Profit after tax, MSEK Profit per share, SEK... 1,88 1,66 7,01 Operating cash flow, MSEK Equity/assets ratio, %... 35,7 44,1 36,7 Return on capital employed, %... 15,1 16,4 15,1 Business area HEXPOL Engineered Products increased its sales by 4 percent to 204 MSEK (196). Operating profit amounted to 28 MSEK (26), up 8 percent. The trend within the business area was positive, with continued favourable growth in Gaskets. Raw materials prices continued to increase during the first quarter. The impact on profit was marginal, however, as a result of extensive measures that included revised material formulas, changed suppliers and price increases. Overall, demand was favourable in Europe during the period, and capacity utilization in the European units was high. Within NAFTA (Canada, US and Mexico), activity was lower, particularly in the automotive industry and in the US construction sector, which are important market segments for HEXPOL Compounding. Nonetheless, HEXPOL Compounding s volumes increased. However, the US unit in product area Wheels reported lower volumes. In Asia, the positive trend in Sri Lanka continued and the new plants in China for product area Wheels and business area HEXPOL Compounding are now gradually increasing production. Operating cash flow increased during the first quarter and was a positive 56 MSEK (-19). The strong cash flow was achieved through reduced working capital, profit improvements and a lower rate of investment. The Group s interest expenses during the first quarter amounted to -12 MSEK (-7). Profit before tax increased to 71 MSEK (62). Profit was positively affected by currency fluctuations in an amount of 1 MSEK. Profit after tax increased by 14 percent to 50 MSEK (44), corresponding to profit per share of 1.88 SEK (1.66). MSEK Net Sales MSEK Q1 07 Q2 07 Q3 07 Q4 07 Q Operating profit and operating margin 14% 12% 10% 88% 66% 44% 22% 00% Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 HEXPOL 91

92 Sales, operating profit and operating margin by business area Sales Operating profit Operating margin % Jan-March Jan-March Full year Jan-March Jan-March Full year Jan-March Jan-March Full year MSEK HEXPOL Compounding ,5 9,3 10,0 HEXPOL Engineered Products ,7 13,3 14,2 Group total ,7 10,5 11,2 During the first quarter, HEXPOL prepared for the listing of its shares on the OMX Nordic Exchange Stockholm, which is scheduled for 9 June On 5 May, Hexagon AB s Annual General Meeting took the final resolution to distribute all of the shares in HEXPOL AB to the shareholders of Hexagon AB. A prospectus for the listing of HEXPOL AB shares is expected to be published on 5 June While planning for the listing, Hexagon Polymers AB was renamed HEXPOL AB. Furthermore, the company s head office was moved to Malmö, where the company also has its registered office. amounted to 84 MSEK (27). Operating cash flow amounted to 56 MSEK (-19). Investments, depreciation and amortization The Group s net investments, excluding company acquisitions and divestments, totalled 28 MSEK (46). Investments during the quarter primarily consisted of investments in production facilities for gaskets for plate heat exchanges in Qingdao, China. Depreciation and amortization during the first quarter amounted to 23 MSEK (17). Profitability Return on average capital employed amounted to 15.1 percent (16.4). The lower return was primarily attributable to the acquisition of GoldKey. Return on average shareholders equity amounted to 19.7 percent (19.2). Financial position and liquidity The equity/assets ratio was 35.7 percent (44.1). Total consolidated assets increased to 2,809 MSEK (2,153). Consolidated net debt amounted to 1,102 MSEK (738), and the debt/equity ratio was a multiple of 1.1 (0.8). The interest coverage ratio was a multiple of 4.9 (6.6). Cash flow During the first quarter, cash flow from operations before changes in working capital increased by 16 percent to 71 MSEK (61). Cash flow from operations Tax expenses The Group s tax expenses during the period amounted to 21 MSEK (18), corresponding to a tax rate of 29.6 percent (29.0). Tax expenses are affected by the fact that a significant portion of profit are generated in subsidiaries in countries where the tax rate differs from that in Sweden. Personnel The number of employees at 31 March 2008 was 2,337 (2,124). The increase in the number of employees was attributable to the acquisition of GoldKey, and a rise in personnel in Sri Lanka and in the newly started HEXPOL Compounding units in China and Mexico. Significant events after the closing date Decision was taken on 2 April to change the name of 92 HEXPOL

93 Hexagon Polymers AB to HEXPOL AB. Resolution was taken at Hexagon AB s Annual General Meeting on 5 May to transfer all of the shares in HEXPOL AB to the shareholders of Hexagon AB (publ) in the form of a dividend. The HEXPOL share will be listed on the OMX Nordic Exchange Stockholm starting on 9 June The company has its head office and registered office in Malmö. Business area HEXPOL Compounding MSEK Net Sales industry, followed by the construction industry. Other key segments are the cabling, water treatment, pharmaceutical, energy and oil industries. Sales increased by 41 percent and amounted to 648 MSEK (460). Acquired units accounted for 122 MSEK of the quarter s sales. Operating profit increased by 28 percent to 55 MSEK (43), corresponding to an operating margin of 8.5 percent (9.3). The decline in operating margin was attributable to the newly started units in China and Mexico, which in its start-up phase have burdened the profit. In Europe, the volume trend was favourable, and capacity utilization was high during the quarter. Deliveries to customers in Eastern Europe resulted in strong growth in the Czech operations. Successful marketing also resulted in a recovery of volumes in the company in Germany. Volume growth was also high in the Nordic region during the quarter MSEK Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Operating profit and operating margin 12% 10% 88% 66% 44% 22% In NAFTA, Mexico showed rapid growth as a result of increased car production, and the newly started company in Mexico reported a profit in March. In the US, activity was lower, particularly in the automotive and construction sectors. However, HEXPOL s volumes continued to increase during the quarter, as a result of successful sales efforts and a favourable market position. The integration of GoldKey, which was acquired in September 2007, is proceeding as planned, and both volumes 0 Q1 07 Q2 07 Q3 07 Q4 07 Q % Business area HEXPOL Compounding is a world leader in the development and manufacture of highquality advanced rubber compounds. Customers are manufacturers of rubber products with stringent demands for performance and global delivery capacity. The largest market segments are the automotive HEXPOL 93

94 Business area HEXPOL Engineered Products MSEK Net Sales period. The lower growth was due to a certain adaptation of customer inventories and to lower demand from some project-related market segments. The construction of the production facility for gaskets for plate heat exchanges in China is proceeding as planned. Start of production was postponed to the latter part of the year, however, primarily due to a favourable productivity trend in Sri Lanka. 100 Within product area Wheels, development was weak 50 0 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 during the first quarter. In both Europe and the US, volumes were lower than in the year-earlier period. In Sri Lanka, the trend was stable, but price increases for natural rubber continued. Within MSEK 40 Operating profit and margin 20% product area Profiles, the volume trend during the quarter matched year-earlier level % Parent Company 20 10% The Parent Company reported a loss after tax of 8 MSEK (2). Shareholders equity amounted to 10 55% 573 MSEK (580). 0 Q1 07 Q2 07 Q3 07 Q4 07 Q % Outlook HEXPOL expects a continued favourable development during Business area HEXPOL Engineered Products, through its considerable expertise in polymers and the production of rubber, plastic and polyurethane products, has gained a world-leading position as a supplier of advanced products, such as gaskets for plate heat exchangers and wheels for the forklift industry. Sales increased by 4 percent and amounted to 204 MSEK (196). Operating income rose 8 percent to 28 MSEK (26), corresponding to an operating margin of 13.7 percent (13.3). The improvement in the operating margin was a result of increased sales and improved productivity. The trend within the business area remained favourable. Product area Gaskets, in particular, showed favourable growth during the period, although on a somewhat lower level than in the year-earlier Risk factors The Group s and the Parent Company s business risks, risk management and management of financial risks are described in Hexagon AB s 2007 Annual Report and in the prospectus for the listing of HEXPOL AB shares that is scheduled to be published on 5 June No events of significant importance occurred during the period that could affect or change these descriptions of the Group s or the Parent Company s risks and their management. Accounting principles This interim report was prepared in accordance with IAS 34 Interim Reporting and the Annual Accounts Act. The accounting and valuation principles applied in the most recent annual report were also applied in this interim report. 94 HEXPOL

95 Financial information HEXPOL AB will publish financial information for the 2008 fiscal year on the following dates: Event Date Interim report, Friday 8 August January - June 2008 Interim report, Thursday January - September 23 October 2008 Year-end report 2008 February 2009 Financial information in Swedish and English is also available at Hexagon AB s web site at For further information, contact: Georg Brunstam, President and CEO Tel: Anders Lyrheden, CFO Tel: Malmö 8 May 2008 HEXPOL AB Georg Brunstam President and CEO This report was not subject to special review by the company s auditors. Address: Skeppsbron 3, Malmö Corporate registration number: Tel: Fax: Web site: This is the type of information that HEXPOL AB is obliged to disclose in accordance with the Swedish Securities Market Act and/or the Financial Instruments Trading Act. The information was submitted to the media for publication at 2:00 p.m. on 8 May Condensed consolidated income statement Jan-March Jan-March Full year MSEK Net sales Cost of goods sold Gross profit Sales and administration costs, etc Operating profit Financial income and expenses Profit before tax Tax Net profit of which, attributable to the Parent Company s shareholders Profit per share (SEK) 1)... 1,88 1,66 7,01 Profit per share after dilution (SEK) 1)... 1,88 1,66 7,01 Shareholder s equity per share (SEK) 1)... 37,74 35,74 38,60 CB number of shares, thousands 1) Average number of shares, thousands 1) Average number of shares after dilution, thousands 1) Depreciation and write-downs included in an amount of ) refers to the estimated number of shares after exchange listing HEXPOL 95

96 Condensed consolidated balance sheet 31 March 31 March 31 Dec MSEK Intangible fixed assets Tangible fixed assets Financial fixed assets Total fixed assets Inventories Accounts receivable Other receivables Prepaid expenses and accrued income Total current receivables Cash and cash equivalents Total current assets Total assets Shareholders equity attributable to the Parent Company s shareholders Total shareholders equity Pension provisions Provision for deferred tax Interest-bearing liabilities Total long-term liabilities Interest bearing liabilities Accounts payable Other liabilities Accrued expenses and deferred income Total current liabilities Total equity and liabilities Changes in shareholders equity 31 March 31 March 31 Dec MSEK Opening shareholders equity Translation difference Net profit for the period Total changes in net asset value, excluding transactions involving company shareholders Group contributions Closing shareholders equity HEXPOL

97 Consolidated cash flow analysis Jan-March Jan-March Full year MSEK Cash flow from operations before changes in working capital Changes in working capital Cash flow from operations Net investments in ordinary operations Operating cash flow Acquisitions of subsidiaries Cash flow from financing activities Change in cash and cash equivalents Cash and cash equivalents at 1 January Cash and cash equivalents at 31 March Jan-March Jan-March Full year Key figures Operating margin, %... 9,7 10,5 11,2 Profit margin before tax, %... 8,3 9,5 9,3 Return on shareholders equity, %... 19,7 19,2 19,5 Return on capital employed, %... 15,1 16,4 15,1 Equity/assets ratio, %... 35,7 44,1 36,7 Interest coverage ratio, multiple... 4,9 6,6 5,3 Average number of shares after exchange listing, thousands Profit per share, SEK... 1,88 1,66 7,01 Cash flow per share, SEK... 3,16 1,02 9,98 Cash flow per share before changes in working capital, SEK... 2,67 2,30 10,09 HEXPOL 97

98 Quarterly data, Group Sales per business area Jan-March Jan-March April-June July Sept Oct-Dec Full year MSEK HEXPOL Compounding HEXPOL Engineered Products Group total Sales per geographic area Jan-March Jan-March April-June July Sept Oct-Dec Full year MSEK Europe NAFTA Asia Group total Operating profit per business area Jan-March Jan-March April-June July Sept Oct-Dec Full year MSEK HEXPOL Compounding HEXPOL Engineered Products Group total Condensed Parent Company income statement Jan-March Jan-March Full year MSEK Net sales Selling, administrative costs, etc Operating profit/loss Financial income and expenses Loss before tax Tax Net loss HEXPOL

99 Parent Company balance sheet in summary 31 March 31 March 31 Dec MSEK Total fixed assets Total current receivables Cash and cash equivalents Total current assets Total assets Total shareholders equity Total long-term liabilities Total current liabilities Total shareholders equity and liabilities Financial definitions: Capital employed Total assets less non-interestbearing liabilities. Cash flow Cash flow from operating activities after change in working capital. Cash flow per share Cash flow from operating activities after change in working capital, divided by average number of shares. Profit per share Net profit divided by average number of shares. Equity/assets ratio Shareholders equity as a percentage of total assets. Interest-cover ratio Profit before tax plus interest expenses divided by financial expenses. Investments Purchases less sales of tangible and intangible fixed assets, excluding those included in acquisitions and divestments of subsidiaries. Debt/equity ratio Interest-bearing liabilities less cash and cash equivalents divided by shareholders equity. Operating margin Operating profit as a percentage of net sales for the period. Profit margin before tax Profit before tax as a percentage of net sales for the period. Return on capital employed Profit before tax plus interest expenses as a percentage of average capital employed. Return on equity Net profit as a percentage of average shareholders equity. Shareholders equity per share Shareholders equity divided by the number of shares at yearend. Share price Last settled transaction on the OMX Nordic Exchange on the last business day for the period. HEXPOL 99

100 Section contents Consolidated income statement Consolidated balance sheet Change in Group capital Consolidated cash-flow statement Parent Company income statement Parent Company balance sheet Change in Parent Company equity Parent Company cash-flow statement Accounting policies Notes

101 Historical financial statements ( ) The following section contains the legal accounting records for HEXPOL AB for 2005, 2006 and The accounts have been prepared for this prospectus and include consolidated financial statements that were not prepared historically because the Parent Company, HEXPOL AB, as wholly owned subsidiary of Hexagon AB, was not obligated to prepare consolidated accounts. To give an accurate view of the distribution of operations, these consolidated financial statements were prepared following the inclusion of the German subsidiary previously included in the Hexagon Polymers segment, but legally treated as a subsidiary of another company in the Hexagon Group, effective 1 January The consolidation is based upon the audited accounts of the subsidiaries. All amounts are presented in MSEK and rounded to whole numbers. A corporate acquisition involving companies under joint control is a transaction whereby merged companies are fully controlled by the same party before and after the acquisition and the controlling influence is not temporary. In the absence of more specific guidelines and provided that pricing is not based on a negotiation between two parties that are independent of one another, and that HEXPOL AB is considered to have controlling influence over the company before the formal transfer of ownership the German subsidiary is reported at the historical carrying amount in the Hexagon Group. Applied accounting policies From 1 January 2005, recommendation RR 32, Accounting for legal entities, issued by the Swedish Financial Accounting Standards Council, is applied in the preparation of the Parent Company HEXPOL AB s accounts. The recommendation complies with the International Financial Reposting Standards (IFRS), except in cases when Swedish law does not permit the application or when strong grounds for deviation exist. The consolidated financial statements have been prepared in accordance with IFRS. The German subsidiary Hexagon Polymers Germany GmbH, which was formally transferred from another part of the Hexagon Group in the first quarter of 2008, is reported as a part of the HEXPOL Group and included in the accounts for the entire period. HEXPOL 101

102 Consolidated income statement Amounts in MSEK Note Net sales Cost of goods sold Gross profit Selling expenses Administrative expenses Research and development costs Other operating income and expenses Operating profit...1, 5, 6, Financial income Financial expenses Profit before tax Tax Profit after tax Profit per share, SEK - before dilution... 7,01 4,44 6,10 Number of shares, thousands after the listing HEXPOL

103 Consolidated balance sheet Amounts in MSEK Note ASSETS Fixed assets Capitalized development expenditure Goodwill Other intangible fixed assets Tangible fixed assets Financial fixed assets Total fixed assets Current assets Inventories Accounts receivables Tax assets Other receivables (non-interest-bearing) Prepaid expenses and accrued income Cash and cash equivalents Total current assets TOTAL ASSETS SHAREHOLDERS EQUITY AND LIABILITIES Shareholders equity Share capital Translation reserve Accumulated profit Net profit for the year Total shareholders equity Long-term liabilities Interest-bearing liabilities Provision for pensions Deferred tax liabilities Total long-term liabilities Current liabilities Accounts payable Tax liabilities Other liabilities (interest-bearing) Other liabilities (non-interest-bearing) Accrued expenses and prepaid revenues Total current liabilities TOTAL SHAREHOLDERS EQUITY AND LIABILITIES Pledged assets...20 None None None Contingent liabilities HEXPOL 103

104 Consolidated change in shareholders equity Share capital Translation reserve Profit brought forward Total shareholders equity MSEK Opening balance, 1 January Dividends and Group contributions after tax IFRS adjustments Translation difference Net profit for the year Closing balance, 31 December Consolidated cash-flow statement Amounts in MSEK Note Cash flow from operations Operating profit Adjustment for non-cash items Net financial items Tax paid Cash flow from operations before changes in working capital Cash flow from changes in working capital Changes in operating receivables Changes in operating liabilities Cash flow from operations Investing activities Gross investment in tangible fixed assets Divestment of tangible fixed assets Gross investment in intangible fixed assets (Operating cash flow)... (92) (55) (68) Acquisition of subsidiaries Cash flow from investing activities Financing activities New issue Borrowings Dividend and group contribution Amortization of loans Cash flow from financing activities Cash flow for the year Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year HEXPOL

105 PARENT COMPANY Parent Company s income statement Amounts in MSEK Note Net sales Gross profit Administrative costs... 5, Other operating income Other operating expenses Operating profit Other interest income and similar income statement items Interest expenses and similar income statement items Profit before tax Appropriations Tax on profit for the year Net profit for the year HEXPOL 105

106 Parent Company s balance sheet Amounts in MSEK Note ASSETS Fixed assets Tangible fixed assets...10 Land and buildings Equipment Participation in subsidiaries Total fixed assets Current assets Current receivables Receivables in Group companies Other receivables Prepaid expenses and accrued income Cash and bank Total current assets Total assets SHAREHOLDERS EQUITY AND LIABILITIES Shareholders equity Restricted shareholders equity Share capital (100 shares) Statutory reserve Unrestricted shareholders equity Profit brought forward Profit for the year Total shareholders equity Current liabilities Accounts payable Interest-bearing liabilities Other liabilities Accrued expenses and prepaid revenues Total current liabilities Total shareholders equity and liabilities MEMORANDUM ITEMS... Pledged assets... None None None Contingent liabilities... None None None 106 HEXPOL

107 Parent Company s changes in shareholders equity Share capital Profit brought forward Total shareholders equity Amounts in MSEK Opening balance, 1 January Dividends and Group contributions after tax Net profit for the year Closing balance, 31 December Parent Company s cash flow statement Amounts in MSEK Operations Operating profit Adjustments for non-cash items Depreciations Interest received Interest paid Other financial income/expense Cash flow from operations before changes in working capital Changes in working capital Changes in receivables Changes in current liabilities Cash flow from operations Investing activities Investments in tangible fixed assets Investments in financial fixed assets Cash flow from investing activities Financing activities... Group contributions received Group contributions paid Dividend Shareholders contribution Cash flow from financing activities Cash flow for the year Cash and cash equivalents at the beginning of the year Cash and cash equivalents at the end of the year HEXPOL 107

108 Accounting policies HEXPOL s consolidated accounts have been prepared in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and interpretation statements by the International Financial Reporting Interpretations Committee (IFRIC), which have been approved by the EC Commission for application within the EU. Furthermore, recommendation RR 30:06, Supplementary accounting rules for corporate groups, issued by the Swedish Financial Accounting Standards Council has been applied. The Parent Company applies the Annual Accounts Act and RR 32:06, Accounting for legal entities. This means that the Parent Company applies the same accounting policies as the Group, except as outlined below. Changed accounting policies IFRS 7 Financial Instruments Disclosures and related amendments to IAS 1 Presentation of Financial Statements stipulate requirements for comprehensive disclosures concerning the significance of financial instruments for the Company s financial position and earnings, as well as qualitative and quantitative disclosures concerning the character and scope of risks. IFRS 7 and related amendments to IAS 1 have resulted in additional disclosures in the Group s financial reports for 2007 with respect to the Group s financial objectives and capital management. The standard has not resulted in a change of accounting policy, but rather only changes in the disclosure requirements for financial instruments. Basis of reporting for the Parent Company and the Group, including critical accounting estimates and assumptions The functional currency of the Parent Company is Swedish kronor as is the reporting currency for the Parent Company and the Group. Assets and liabilities are reported at historical cost with the exception of certain financial instruments (derivatives), which are reported at fair value. Preparing the reports in accordance with IFRS requires that company management and the Board of Directors carryout accounting estimates and assumptions that affect the application of the accounting policies and the reported figures for assets, liabilities, revenues and expenses. The actual outcome could deviate from these accounting estimates. Certain accounting matters involve a larger degree of subjectivity or complexity, which results in a higher risk of deviation from the accounting estimates and assumptions applied. Such matters include: valuation of unutilized deductible loss carry-forwards, the outcome of complicated legal disputes, assessment of the present value of forecast cash flows during analyzes of possible impairment requirements and the calculation of pension obligations to employees. Consolidated financial statements The consolidated financial statements consolidate the Parent Company and the other companies in which the Parent Company has a direct or indirect controlling influence. The consolidated financial statements have been prepared in accordance with the purchase method, which means that the Parent Company s acquisition value of shares in subsidiaries is eliminated against subsidiaries shareholders equity at the time of acquisition. The shareholders equity of acquired subsidiaries is determined on the basis of a market valuation of assets and liabilities at the time of acquisition including those not reported earlier by the acquired company. In those cases where the acquisition value of shares in subsidiaries exceeds the acquired shareholders equity as stated above, the discrepancy is accounted as goodwill in the balance sheet. In the event of an acquisition of minority interests, any differences between the acquisition price and the minority interest in the subsidiary s equity value are recognized as goodwill. In accordance with IFRS, goodwill amortization on a 108 HEXPOL

109 straight-line basis has been discontinued. Reported goodwill values are impairment tested at each reporting date. In accordance with the stated principles for consolidated accounting, divested companies are consolidated up to their date of divestiture, while acquired companies are consolidated from the time of acquisition onwards, meaning from the time when a controlling interest was attained. The current method is used for the translation of foreign subsidiaries, meaning that balance sheets are translated at year-end exchange rates, and income statements are translated at average exchange rates for the period. The resulting translation differences are recognized directly in consolidated shareholders equity. The value of the net assets of foreign subsidiaries, including goodwill and other intangible assets, is hedged, mainly through foreign-currency loans. Currency forward contracts are used to a lesser extent. In the consolidated financial statements, the aftertax effects of hedging are offset against those translation differences that were recognized directly in shareholders equity regarding the foreign subsidiaries. Associated companies and joint ventures HEXPOL applies the equity method for accounting associated companies and joint ventures. Associated companies are those companies over which HEXPOL, directly or indirectly, has a material influence. Joint ventures are defined as companies over which HEXPOL, through partnership agreements with one or more parties, exercises a joint controlling influence over the operational and financial control. Any differences between the acquisition value and equity value at the time of acquisition are termed goodwill, and are included in the acquisition value. In the consolidated balance sheet, holdings in associated companies are recognized at acquisition value adjusted for dividends, share in profits and losses during the holding period, and accumulated impairment losses. The consolidated income statement includes share in associated companies profits after elimination of any inter-company gains. Associated company taxes are included in the Group s tax expenses. At the close of every reporting period, the carrying amounts for associated companies and joint ventures, including implicit goodwill values, are impairment tested. Segment reporting Business areas represent the primary segments within the HEXPOL Group and geographical areas the secondary segments. Internal billings between business areas, where they occur, are made at market value. Revenues HEXPOL applies the following principles for revenue recognition: Sale of goods Revenues from sales of goods are recognized when all the following conditions are satisfied: The Company has transferred the essential risks and benefits associated with the ownership of the goods to the buyer. The Company does not retain any commitment in ongoing management usually associated with ownership, and nor does the Company exert any actual control over the goods that have been sold. Revenues can be reliably calculated. It is likely that the financial benefits for the seller associated with the transaction will arise for the seller. The expenditure that has arisen or is expected to arise as a consequence of the transaction can be reliably calculated. Research and development expenditure Expenditure for research is expensed as incurred, while expenditure for development is capitalized as follows: Capitalization of development expenses in HEXPOL 109

110 the Group are only applied to new products where significant development costs are involved, where the products have a probable profits potential that the Company may benefit from, and the costs are clearly distinguishable from ongoing product development expenditure. Leasing The HEXPOL Group has entered into both capital and operational leases. The agreements are classified in accordance with their financial implication when they were entered into. Capital leases are not material and primarily relate to vehicles. For operational leases, the lease payments are expensed straight-line over the shorter of the asset s useful life period and the lease period. For capital leases the leased asset is carried on the balance sheet with a corresponding liability for future lease payments. The leased asset is depreciated over the same period as for assets of the same kind owned by the Group. The liability for future lease payments is interest bearing. Other operating revenues/expenses Other operating revenues/expenses primarily consist of gains/losses from sales of fixed assets, currency exchange gains and losses related to operating assets and liabilities and revenues for sub-letting of premises. Financial instruments Financial instruments are measured and recognized in accordance with the rules of IAS 39. Financial assets and liabilities are recognized in, and deducted from, the balance sheet applying settlement-date accounting. With certain exceptions, financial assets and liabilities are entered at acquisition value. Financial derivative instruments are recognized at fair value, with changes in fair value recognized in profit and loss. Changes in fair value are recognized in profit and loss, apart from cases where the derivative fulfils the requirement for cash flow hedging, in which case the change in value is recognized directly in shareholders equity until the hedged transaction has been recognized. When establishing fair value, official market listings on the balance-sheet date are used. If no such listings are available, a valuation is conducted based on the discounting of future cash flows to the listed market interest rate for the particular maturity. Currency swaps and currency forward contracts are valued at the listed market rate. Translation to SEK is based on the listed exchange rate on the balance-sheet date. Receivables resulting from own lending and assets held to maturity are valued at the accrued acquisition value, applying the effective interest rate method. No financial instruments were classified in this category during 2005, 2006 and Accounts receivable and accounts payable are recognized at acquisition value. Financial liabilities are mainly measured at accrued acquisition value, applying the effective interest rate method. Balances and transactions are hedged, and hedge accounting is applied if the hedging actions taken have the stated objective of constituting a hedge, have a direct correlation to the hedged item and effectively hedge the item. An effective hedge generates financial effects that offset those that arise through the hedged position. When hedging fair value, the change in the fair value of the hedging instrument is recognized in the income statement together with the change in the value of the liability or asset to which the risk hedging applies. When hedging cash flow, the change in value of the hedging instrument is recognized directly in shareholders equity until the hedged transaction has been recognized. Borrowing costs in the form of interest expense are charged against profit during the period to which they apply, and are normally not included in an asset s acquisition value, since HEXPOL normally does not construct the types of assets that would permit this. Costs for raising loans are accrued over the maturity of the loan. 110 HEXPOL

111 Pension and similar commitments Expenditure for defined contribution plans are expensed as incurred. Expected expenditure under defined benefit plans are recognized as a liability calculated in accordance with actuarial models. Differences between expected and actual development of this liability are not expensed as long as the deviations remain within the so-called corridor. Pension expense for the year consists of pensions vested, interest expense during the period and if applicable accrued actuarial gains and losses. A deduction is made for the yield on plan assets intended to cover the obligation. The net cost is recognized in the income statement. Obligations related to defined benefit plans are recognized net in the balance sheet, meaning after a deduction of the value of any plan assets. Defined benefit plans for which the insurer (Alecta) cannot specify HEXPOL s share of the total plan assets and pension obligations, pending this information becoming available, are recognized as defined contribution plans. Income taxes Income taxes comprise: translated at the exchange rates prevailing on the balance-sheet date. The difference between acquisition value and the value on the balance-sheet date is recognized as income/expense. Inventories Inventories are accounted according to the FIFO (first-in first-out) principle. Market terms are applied for intra-group transactions. The necessary provisions are made for obsolescence and intra-group gains. Raw materials, and purchased finished and semifinished goods, are recognized at the lower of cost and fair value. Manufactured finished and semi-finished goods are recognized at the lower of manufacturing cost (including a reasonable portion of indirect manufacturing costs) and fair value. Depreciation/amortization according to plan Depreciation/amortization according to plan is performed on a straight-line basis and is calculated on the depreciable amount (acquisition cost less estimated residual value) and is based on the useful life of the asset. Current tax, meaning the tax calculated on taxable profit for the period, and adjustments regarding prior periods. Deferred tax, meaning the tax attributable to taxable temporary differences to be paid in the future, and the tax that represents a reduction of future tax attributable to deductible temporary differences, deductible loss carry-forwards and other tax deductions. Income tax expenses for the year consist of current and deferred tax, and shares in associated companies tax. Receivables and liabilities Provisions for loss risks are made on a case-by-case basis; foreign-currency receivables and liabilities are Development work years Patents and trademarks years Other intangible assets years Computers years Machinery and equipment years Office buildings years Industrial buildings years Land improvements years Impairments At each reporting date, an analysis is performed to determine whether indications of an impairment requirement exist, meaning if the recognized value of an asset exceeds its recoverable value. If an impairment need is identified, the item is impaired to an amount corresponding to the recoverable value. HEXPOL 111

112 The recoverable value is the higher of the asset s net realizable value and the value in use, meaning the discounted present value of future cash flows. Previous impairments are reversed by relevant amounts matching the degree to which the impairment is no longer warranted, although goodwill impairments are never reversed. The basic assumptions used to determine whether or not there is an impairment requirement are as follows: Basic assumptions used for determining discount rate per currency (before tax) Risk-free interest rate... 3,8 4,2 % Tax rate % Beta rate... 0,6 0,9 Applied discount rate... 8,0 10,1 % Forecasting method Forecast period... 5 years Growth after forecast period... 2 % Cash-generating units The definition of cash-generating units complies with the Group s organization, whereby assessments of whether there are any impairment requirements are made within each particular business area. The total value of intangible fixed assets that are not subject to amortization was 1,122 MSEK at 31 December The recoverable value is generally set at the value in use. Accounting policies in the Parent Company The Parent Company applies the same accounting policies as the Group with the following exceptions: The Parent Company does not apply IAS 39. In the Parent Company, all leases are treated as operational leases, regardless of their financial significance. In the Parent Company, all pension obligations are recognized as cost-based obligations. The Parent Company normally recognizes Group contributions issued and received, and the corresponding tax effect, directly in shareholders equity. However, in those cases where Group contributions received can be considered as dividends, the Group contribution is recognized as financial income, and the tax effect is included in income tax for the year in the income statement. In the Parent Company, the shares in subsidiaries are recognized at acquisition value less any impairment. The Parent Company applies hedge accounting for loans in foreign currencies that are effectively hedged by a counter-item in foreign currencies. Accordingly, changes in exchange rates are not reported for loans raised to finance acquisitions of foreign subsidiaries. 112 HEXPOL

113 HEXPOL 113

114 NOTES Note 1 Segment reporting Compounding Engineered products Group MSEK External sales Operating profit Operating margin, %... 10,0 8,0 11,2 14,2 8,8 12,5 11,2 8,2 11,6 Net financial items Tax Profit for the year Operative assets Operative liabilities Operative capital Investments Depreciation Geographic Net sales per markets recipient country Operative capital MSEK Europe NAFTA Asia TOTAL Note 2 Of the Parent Company s net sales, 100 percent pertains to other Group companies and none of the Parent Company s purchases pertain to other Group companies. 114 HEXPOL

115 Note 3 Net assets in acquired operations 2007 Acquisition of GoldKey Processing Inc. In September 2007, HEXPOL AB acquired a compound company, GoldKey Processing Inc. in Ohio, USA. GoldKey s net assets at the time of acquisition: Carrying Fair Fair value amount value reported in MSEK before adjustment the Group acquisition Goodwill Other intangibles Tangible fixed assets Current receivables, inventories, etc Cash and cash equivalents Long-term liabilities (interest-bearing) Current liabilities Total purchase consideration including acquisition costs Acquired cash and cash equivalents Net cash outflow No operations were acquired during Acquisition of Trostel SEG Lake Geneva, Wisconsin USA. In September 2005, HEXPOL AB acquired the wheel division of the Trostel operations. The Company s name is now Stellana US. Carrying Fair Fair value Stellana s net assets at the time of acquisition: amount value reported in before adjustment the Group MSEK acquisition Goodwill Tangible fixed assets Current receivables, inventories, etc Long-term liabilities (interest-bearing) Current liabilities Net cash outflow Note 4 Other income and expenses MSEK Service charges to Hexagon Capital gain from the sale of equipment Non-recurring items Other Total HEXPOL 115

116 Note 5 Employees and personnel costs GROUP Costs for remuneration to employees MSEK Salaries and remuneration, etc Total To the Board and Presidents, of which bonus and similar MSEK Pension costs Social security contributions Total Average number of employees Of which Of which Of which men men men Sweden % % % Belgium % 85 89% 77 90% Czech Republic % % % Germany % 90 93% 92 93% Mexico % 0 0% 0 0% Canada % 64 84% 65 81% USA % % 94 90% China % 7 85% 0 0% Sri Lanka % % % Total % % % Proportion of women in senior positions is 0% (0%) and the number of women on the Board is 14% (0%). Personnel costs per country MSEK Sweden Belgium Czech Republic Germany Mexico Canada USA China Sri Lanka Total HEXPOL

117 PARENT COMPANY Average number of employees Women Men Total Salaries, other remuneration and social security contributions MSEK Salaries and other remuneration Board and President Bonus and similar Other employees Total Social security contributions, pension commitments and employment tax Board and President Other employees Total For pension commitments that are not guaranteed through pension insurance, capital insurance policies have been signed. No Board fees have been paid. Gender distribution in company management Distribution between men and women on the Company s Board: Women Men Total Termination period for the President from the part of the employer is 24 months. HEXPOL 117

118 Note 6 Fees and cost remuneration to auditors GROUP KSEK Ernst & Young Audit assignment Other assignments Other auditors Audit assignment Other assignments Total Audit assignment refers to the review of the Annual Report and the accounting records as well as the management by the Board of Directors and President, other assignments that fall upon the Company s auditors to perform and advice or other assistance resulting from observations at such review or implementation of such other assignments. Other items pertain to other assignments. PARENT COMPANY KSEK Ernst & Young Audit Other assignments Note 7 Financial income and expenses GROUP Amounts in MSEK Interest income Other financial income Financial income Interest expense Other financial expense Financial expense Net financial items PARENT COMPANY Amounts in MSEK Other interest income and similar income items Interest income Interest income from Group receivables Currency gains Interest expense and similar income items Interest expense Interest expense for Group liabilities Currency losses HEXPOL

119 Note 8 Tax GROUP Reported in the income statement MSEK Current tax expense Tax expense for the period Adjustment for tax attributable to prior years Total Deferred tax expense Deferred tax pertaining to temporary differences Utilized/revaluation of loss carryforwards Total Total reported tax expense Reconciliation of effective tax MSEK Profit before tax Tax according to applicable tax rate for the Parent Company Effect of other tax rates for foreign subsidiaries Non-deductible expenses Non-taxable income Revaluation of loss carryforwards/temporary differences Tax attributable to prior years Foreign tax Total reported tax expense Deferred tax receivable/tax liabilities Deferred tax receivable/liability MSEK Tangible assets Accounts receivable Provisions Loss carryforwards Others Total PARENT COMPANY MSEK Current tax Deferred tax Total HEXPOL 119

120 Note 9 Intangible fixed assets Accumulated acquisition value Capitalized development Other intangible Goodwill expenditure assets Total MSEK Opening balance on 1 January Acquisition Investments IFRS adjustments Translation difference Closing balance on 31 December Accumulated amortization Capitalized development Other intangible Goodwill expenditure assets Total MSEK Opening balance on 1 January Amortization according to plan for the year Acquisition IFRS adjustments Translation difference Closing balance on 31 December Carrying amount on 31 December HEXPOL

121 Note 10 Tangible fixed assets GROUP Land and buildings Accumulated acquisition value MSEK Opening balance on 1 January Acquisition Investments Divestments and disposals Internal reversals Translation difference Closing balance on 31 December Accumulated depreciation MSEK Opening balance on 1 January Acquisitions Depreciation according to plan for the year Divestments and disposals Internal reversals Translation difference Closing balance on 31 December Carrying amount, land and buildings Machinery and equipment Accumulated acquisition value MSEK Opening balance on 1 January Acquisitions Investments Divestments and disposals Internal reversals Translation difference Closing balance on 31 December Accumulated depreciation MSEK Opening balance on 1 January Acquisitions Depreciation according to plan for the year Divestments and disposals Internal reversals Translation difference Closing balance on 31 December Carrying amount, machinery and equipment HEXPOL 121

122 Distribution of depreciation for the year MSEK Production costs Selling costs Administration costs Product development costs Others Total PARENT COMPANY MSEK Land and buildings Opening land acquisitions Opening building acquisitions Building acquisitions for the year Closing accumulated acquisition value Opening depreciation Depreciation for the year Closing accumulated depreciation Closing carrying value, land and buildings Taxable value, buildings Taxable value, land Total Equipment, tools, fixtures and fittings Opening value Closing accumulated acquisition value Opening depreciation Depreciation for the year Closing accumulated depreciation Closing carrying amount, equipment Note 11 Long-term receivables and other receivables Long-term receivables MSEK Others Other long-term receivables Other current receivables MSEK Others Other receivables HEXPOL

123 Note 12 Accounts receivables Age distribution of accounts receivables MSEK Not due Due, 1-60 days Due, more than 60 days Accounts receivables Provisions for bad debt losses MSEK Opening balance Acquired operations Provision for the year Actual losses Closing balance Note 13 Prepaid expenses and accrued income GROUP MSEK Prepaid leasing costs Accrued income Accrual expenses Others Total PARENT COMPANY MSEK Prepaid acquisition expenses Others Total Note 14 Shareholders equity Changes in the number of shares Number Opening balance on 1 January Closing balance on 31 December HEXPOL 123

124 Note 15 Interest-bearing liabilities Long-term liabilities MSEK Hexagon AB Long-term liabilities Current liabilities Amounts in MSEK State of Ohio Geauga Country, USA Sko FIN, Czech Republic Locabel leasing, Czech Republic SEB, Mexico Hexagon AB Short-term portion of loans Current liabilities Note 16 Provisions MSEK Provisions for pensions (interest-bearing) Provisions for pensions (non-interest-bearing) Provisions Changes in provisions Amounts in MSEK Opening balance on 1 January Provisions for the year Closing balance on 31 December Note 17 Other liabilities Other current liabilities MSEK Liabilities pertaining to employees Others Current liabilities HEXPOL

125 Note 18 Accrued expenses and prepaid revenues GROUP MSEK Maintenance contracts, prepaid income Personnel-related expenses Prepaid expenses Bonus to customers Others Total PARENT COMPANY MSEK Accrued salary-related expenses Accrued consulting fees Accrued acquisition expenses Others Total Note 19 Operational leasing Terminable leasing payments amount to MSEK Within one year Between one and five years Longer than five years Total Leasing expenses MSEK Minimum leasing fees Total HEXPOL 125

126 Note 20 Pledged assets and contingent liabilities Pledged assets MSEK Company chattel mortgages Blocked funds Total Contingent liabilities MSEK Guarantee to the benefit of associated companies Indemnity bonds for bank guarantee Total Note 21 Group companies Parent Company s holdings of shares and participations in Group companies MSEK Value in the Parent Company Subsidiaries Registered Proportion office of equity Gislaved Gummi AB... Gislaved, Sweden 100% Megufo AB... Gislaved, Sweden 50% Stellana AB... Laxå, Sweden 100% Elastomeric Engineering Co Ltd... Sri Lanka 99,6% Elastomeric Technologies Ltd... Sri Lanka 100% Elastomeric Tools & Dies Ltd... Sri Lanka 100% 2 Hexagon Polymers Compounding HQ Sprl... Belgium 100% Hexagon Polymers Compounding Sprl... Belgium 100% Hexagon Polymers Compounding s. r. o... Czech Republic 100% Hexagon Polymers Compounding NC Inc... USA 100% Stellana U.S. Inc.... USA 100% Hexagon Polymers Compounding (Qingdao) Co., Ltd... China 100% Hexagon Polymers Compounding S.A de C.V. Mexico 100% GoldKey Processing Inc.... USA 100% 361 Hexagon Polymers Gaskets (Qingdao) Co., Ltd China 100% 28 Stellana (Qingdao) Co., Ltd... China 100% 5 Thona Canada BV... Netherlands 100% 166 Hexagon Polymers Compounding ULC... Canada 100% Hexagon Polymers Compounding GmbH... Germany 100% Total carrying amount in the Parent Company Gislaved Gummi AB holds 200 shares included in this ownership. The remaining 0.4 percent of the shares are held by external parties. 2 Elastomeric Technologies Ltd. holds 69.6 percent and Elastomeric Engineering Company Ltd. holds 30.4 percent of the shares. 126 HEXPOL

127 Note 22 Cash-flow statement Interest paid and received MSEK Interest received Interest paid Adjustments for non-cash items MSEK Depreciation Provisions Assets divestment Total Acquisition of operations MSEK Net cash outflow GoldKey Processing Inc Stellana US Total Note 23 Events after closing day As of 23 April 2008, the Company changed name to HEXPOL AB. HEXPOL 127

128 Auditors report on restated historical financial statements We have audited the financial statements for HEXPOL AB (publ) on pages , which comprise the consolidated balance sheets as of 31 December 2007, 2006 and 2005 and the consolidated income statements and cash flow statements for the financial years then ended, the parent company s balance sheets as of 31 December 2007, 2006 and 2005 and the parent company s income statements and cash flow statements for the financial years then ended and a summary of significant accounting policies and other explanatory notes. The Board of Directors and CEO s responsibility The Board of Directors and CEO are responsible for the preparation and the fair presentation of the financial statements in accordance with law, International Financial Reporting Standards IFRS as adopted by the EU, other applicable supplementary regulation and the requirements of the Prospectus Directive implementing EC Regulation 809/2004. This responsibility includes designing, implementing and maintaining internal control relevant to prepare and appropriately present the financial statements that are free from material misstatement, whether due to fraud or error. RevR 5 Examination of Prospectuses. This recommendation requires that we have planned and performed the obtain reasonable assurance that the financial statements are free from material misstatements. An audit in accordance with FAR SRS s proposed RevR 5 Examination of Prospectuses involves performing procedures to obtain audit evidence corroborating the amounts and disclosures in the financial statements. The audit procedures selected depend on our assessment of the risks of material misstatements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the company s preparation and presentation of the financial statements as a basis for designing audit procedures that are applicable under those circumstances but not for the purpose of expressing an opinion on the effectiveness of the company s internal control. An audit also involves evaluating the accounting policies applied and the reasonableness of the significant accounting estimates made by the Board of Directors and CEO and evaluating the overall financial statement presentation. We believe that our audit gives us a reasonable basis for our opinion. Auditors responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with FAR SRS s proposed Opinion In our opinion the consolidated financial statements for the financial years 2007, 2006 and 2005 (the last year as comparative) give a true and fair view of the 128 HEXPOL

129 group s financial position as of 31 December 2007, 2006 and 2005 (the last year as comparative) and the group s financial performance and cash flows for the financial years then ended in accordance with International Financial Reporting Standards IFRS as adopted by the EU. In our opinion HEXPOL AB s (publ) financial statements for the financial years 2007, 2006 and 2005 give a true and fair view of the company s financial position as of 31 December 2007, 2006 and 2005 and the company s financial performance and cash flows for the financial years then ended in accordance with the annual accounts act (1995:1554) (Sw: årsredovisningslagen) and the recommendations of the Swedish Accounting standards Board (Sw: Redovisningsrådet) RR 32:06. Malmö 22 May 2008 Ernst & Young AB Ingvar Ganestam Authorized Public Accountant Stefan Engdahl Authorized Public Accountant HEXPOL 129

130 130 HEXPOL

131 Board of Directors, senior management and auditors Board of Directors Melker Schörling Chairman of the Board Independent in Independent in relation to the relation to the Audit Remuneration Company and Company s major Number of Number of Year of birth Nationality Elected Committee Committee management shareholders A shares B shares 1947 Swedish 2007 Chairman Yes No Georg Brunstam President and CEO 1957 Swedish 2007 No No Maths-Olov Sundqvist 1950 Swedish 2007 Yes No Alf Göransson 1957 Swedish 2007 Yes No Malin Persson 1968 Swedish 2007 Yes Yes Ulrik Svensson 1961 Swedish 2007 Chairman Member Yes No Jan-Anders E. Månson 1952 Swedish 2008 Yes Yes 1 Through companies. Melker Schörling Born in 1947, B.Sc. Econ. Chairman and Member of the Board since 2007 Other assignments/positions: Chairman and Member of the Board of Hexagon AB, Melker Schörling AB, AarhusKarlshamn AB, Securitas AB, Melker Schörling Tjänste AB and Edeby-Ripsa Skogsförvaltning AB. Member of the Board of H&M Hennes & Mauritz AB and Mexab Holding AB. Deputy Member of the Board of Hasta AB and Hasta Holding AB. Directorships completed in the past five years: Chairman and Member of the Board of Securitas Systems AB (currently Niscayah Group AB), Mexab Förvaltnings AB, Konverta AB, AarhusKarlshamn Sweden AB, Attendo Holding AB. Member of the Board of ASSA ABLOY AB and Noxys Invest AB. Hexagon shareholding: class A shares and class B shares, through Melker Schörling AB 2. Georg Brunstam Born in 1957, M.Sc. Industrial and Mechanical Engineering President and CEO and Member of the Board since 2007 Other assignments/positions: Various directorships within the HEXPOL Group. Member of the Board of Nibe Industrier AB, DIAB Group AB, AB Wilh Becker and Båstadtennis & Hotell AB. Directorships completed in the past five years: CEO of Nolato AB with subsidiaries. Hexagon shareholding: - 2 For each multiple of ten class A or class B shares held on the record date for right to share dividend, one share of the corresponding class of HEXPOL shares will be received. HEXPOL 131

132 Maths-Olov Sundqvist Born in 1950, Economist Member of the Board since 2007 Other assignments/positions: Member and Chairman of the Board as well as CEO of AB Skrindan. Chairman and Member of the Board of Landmärke Norra Europa AB. Member of the Board of Hexagon AB. Directorships completed in the past five years: Chairman and Member of the Board as well as CEO of WOW Flooring AB and Industrihuset Dubben AB. Chairman and Member of the Board of Fastighetsaktiebolaget Östersund-Storsjön, Barb AB, Motboken 2 AB, Motboken 3 AB, Motboken 11 AB and Motboken 12 AB. Member of the Board and CEO of AB Släden and Högfors Bruk AB. Member of the Board of Investment AB Öresund, Fabege AB, SIS Ägarservice AB, Kjell Jonsson i Östersund AB, Östersunds Test and Friskvård AB and Fabös Kristianstad AB. Hexagon shareholding: Class B shares through companies 1. Alf Göransson Born in 1957, B.Sc. Business Administration Member of the Board since 2007 Other assignments/positions: Member of the Board, CEO and President of Securitas AB. Member of the Board of Loomis AB and Axel Johnson Inc., USA. Chairman of the Lund Institute of Technology. Directorships completed in the past five years: Member of the Board and CEO of NCC AB and various directorships within the NCC Group. Member of the Board of Välinge Flooring Technology AB, Välinge International AB, Altima AB and the Stockholm Chamber of Commerce. Hexagon shareholding: - Malin Persson Born in 1968, M.Sc. Industrial Engineering and Management Member of the Board since 2007 Other assignments/positions: CEO and President of Volvo Technology. Member of the Board of Volvo Technology AB, Volvo Lastvagnar AB, Volvo Technology Transfer AB, KCI Konecranes Plc., Universeum AB. Partner in Acanthis AB. Directorships completed in the past five years: Chairman and Member of the Board of Elicit AB. Member of the Board of Green Cargo AB, Volvo Maroc SA, Volvo Mobility Systems AB and Sweden-China Trade Council Economic Association. Hexagon shareholding: - Ulrik Svensson Born in 1961, Degree in Business Administration Member of the Board since 2007 Other assignments/positions: CEO of Melker Schörling AB. Member of the Board of AarhusKarlshamn AB, Securitas Systems AB (currently Niscayah Group AB), Loomis AB and ASSA ABLOY AB. Directorships completed in the past five years: Chairman and Member of the Board and CEO of MS Karl Invest AB. Member of the Board of Securitas Direct AB, ESML Intressenter AB, ESML Intressenter Holding AB and ESML Intressenter Topholding AB. Hexagon shareholding: - Jan-Anders E. Månson Born in 1952, M.Sc. and Ph.D. Technology Member of the Board since 2008 Other assignments/positions: Vice President École Polytechnique Fédérale de Lausanne. Chairman of the Board of AISTS. Member of the Board of Konstruktions-Bakelit AB, CSEM SA, DECISION SA, EELCEE SA and FIT. Hexagon shareholding: - 1 For each multiple of ten class A or class B shares held on the record date for right to share dividend, one share of the corresponding class of HEXPOL shares will be received. 132 HEXPOL

133 Senior executives Georg Brunstam Born in 1957, M.Sc. Industrial and Mechanical Engineering President and CEO, employed in 2007 Other assignments/positions: Various directorships within the HEXPOL Group. Member of the Board of Nibe Industrier AB, DIAB Group AB, AB Wilh Becker and Båstadtennis & Hotell AB. Directorships completed in the past five years: Various directorships within Nolato AB with subsidiaries. Previous positions: President of Nolato AB CEO of Trelleborg Engineered Systems within Trelleborg AB and member of Trelleborg s Group Management CEO of Trioplast AB and senior positions within Perstorp AB Hexagon shareholding: - Anders Lyrheden Born in 1965, B.Sc. Business Administration CFO, employed in 2006 Other assignments/positions: Various directorships within the HEXPOL Group. Directorships completed in the past five years: Various directorships within the Mölnlycke Healthcare Group. Member of the Board of Sälöknapp AB. Previous positions: CFO at Mölnlycke Healthcare AB , Business Area Controller Mölnlycke Healthcare AB , Financial Manager at Nolato Plastteknik AB Hexagon shareholding: 750 Class B shares 1. Lars-Åke Bylander Born in 1965, Technician Head of the Gaskets and Profiles product areas, employed in 2000 Other assignments/positions: Member of the Board and CEO of Gislaved Gummi AB. Member of the Board of Anicho Invest AB, Cue Dee Produkter AB and MEGUFO AB. Previous positions: Marketing Manager Gislaved Gummi AB , Business Area Manager Forsheda AB (TI Group) , Sales Manager Forsheda AB , Sales Engineer Forsheda AB Hexagon shareholding: Class B shares 1. Tracy Garrison Born in 1967, B.Sc. Chemistry Head of Compounding NAFTA, employed in 2002 Previous positions: Vice President of Thona North America Sales Director North America, Rhein Chemie Corporation Management assignments, including Regional Accounts and Senior Sales, Technical and Quality Insurance Management at: Elastochem Inc., MA Hanna Rubber Compounding and Colonial Rubber Works Inc Cooperative Education, Research and Development, Colonial Rubber Works Inc Hexagon shareholding: - Peter Kruk Born in 1968, M.Sc. Engineering Physics Head of the Wheels Product Area, employed in 2007 Other assignments/positions: Member of the Board and CEO of Stellana AB. Previous positions: General Manager at Large AC Motors, ABB Automation Technologies AB, Machines Vice President Marketing & Sales, ABB Automation Technologies AB, Robotics Senior positions within ABB Group Hexagon shareholding: 300 Class B shares 1. 1 For each multiple of ten class A or class B shares held on the record date for right to share dividend, one share of the corresponding class of HEXPOL shares will be received. HEXPOL 133

134 Carsten Rüter Born in 1971, M.Sc. Engineering Head of Compounding Technology, employed in 1997 Previous positions: Vice President Technology Hexagon Polymers Compounding , Technical Director at Thona Belgium Hexagon shareholding: - Ralph Wolkener Born in 1971, Master of Business Administration Head of Compounding Europe & Asia, employed in 1997 Previous positions: Vice President Marketing at Hexagon Polymers Compounding , Marketing Director at Thona Belgium Hexagon shareholding: - Auditors Authorized Public Accountants Stefan Engdahl and Gunno Rydberg, both active at Ernst & Young AB and members of FAR SRS, have been auditor and deputy auditor of HEXPOL during the period covered by the historical financial information, meaning from 2005 up to an including the first quarter of 2008 (Gunno Rydberg as of June 2005). At Extraordinary General Meetings held on 2 April 2008 and 21 April 2008, respectively, the registered accounting firm Ernst & Young AB, with Authorized Public Accountant Ingvar Ganestam as auditor-in-charge and Authorized Public Accountant Stefan Engdahl, respectively, with Authorized Public Accountant Johan Thuresson as deputy auditor, both active at Ernst & Young AB and members of FAR SRS, were elected for the current year up to the end of All auditors can be reached at the following address: Ernst & Young AB, Box 7850, SE Stockholm. Ingvar Ganestam Born in Authorized Public Accountant and member of FAR SRS. Other audit assignments: Alfa Laval AB, Lindab International AB, Nolato AB, the IKEA Group, the Bergendahls Group and AB Tetra Pak. Stefan Engdahl Born in Authorized Public Accountant and member of FAR SRS. Other audit assignments: ITAB Shop Concept AB, KABE AB, XANO Industri AB and Liljendahlsbolagen. 134 HEXPOL

135 Other information regarding the Board of Directors and senior executives For all members of HEXPOL s Board of Directors and senior management, the office address is Skeppsbron 3, SE Malmö. The Extraordinary General Meeting of HEXPOL on 28 December 2007 and the Extraordinary General Meeting held on 2 April 2008 resolved to elect a Board of Directors comprising Melker Schörling (Chairman), Georg Brunstam, Maths-Olov Sundqvist, Alf Göransson, Malin Persson, Ulrik Svensson and Jan-Anders E. Månson. The aforementioned Board was re-elected at the 2008 Annual General Meeting for the period until the close of the 2009 Annual General Meeting. involved in a bankruptcy, liquidation or bankruptcy administration during the same period. Nor has any of them been the subject of accusations or sanction by public authorities, or prohibited by a court to be a member of a company s administration, management or control body or from having a leading position or overriding function with a company during the past five years. No Board member or senior executive has any private interest that could conflict with HEXPOL s interests. In the future, some of the Board members and senior executives could directly or indirectly gain financial interests in HEXPOL through shareholdings in the Company resulting from their current shareholdings in Hexagon. HEXPOL s Board of Directors is adjudged to fulfil the Nordic Exchange s requirement concerning independence in relation to HEXPOL and its management and to major shareholders. When arriving at this judgement, independence in relation to major shareholders has been assessed in relation to Hexagon s owners, since immediately after the proposed spin-off, HEXPOL will have the same circle of owners as Hexagon. No member of the HEXPOL Board or senior executive has been convicted in fraud-related court cases during the past five years. None of these persons has been There are no familial relationships between Board members or senior executives. No company in the HEXPOL Group has entered into an agreement with a Board member or a senior executive concerning benefits accruing after completion of the assignment. Remuneration of the Board of Directors The Chairman and Members of the Board of Directors receive director fees in accordance with resolutions of General Meetings. Special fees are paid for work Remuneration of the Board of Directors SEK Ordinary remuneration for the period up to the 2009 Remuneration for Board Member Annual General Meeting committee work Total remuneration Melker Schörling, Chairman Georg Brunstam, President and CEO Maths-Olov Sundqvist Alf Göransson Malin Persson Ulrik Svensson Jan-Anders E. Månson Total HEXPOL 135

136 on the Audit Committee. No director fees are payable to the CEO and President. Up to the Extraordinary General Meeting 2 April 2008, no fees were paid to Board Members for work on HEXPOL s Board of Directors. As a Group company within the Hexagon Group, the Company up to and including December 2007 had a Board of Directors that only comprised employees within the Group, whose job description included Board assignments. The remuneration of HEXPOL s current Board of Directors was resolved by the Extraordinary General Meeting held on 2 April The members elected by the Meeting were appointed for the period until the close of the 2009 Annual General Meeting and the fee pertains to the period that ends then. For information on director fees and the allocation among the Board Members, refer to the table on the preceding page. Remuneration, etc., of senior executives basic salary, variable remuneration, other benefits and pension. The total remuneration must be competitive in the market to ensure that the HEXPOL Group is able to attract and retain competent senior executives. The variable portion of the salary shall be connected to the Group s profit trend in terms of what the particular individual can affect and be based on individually established goals. The variable remuneration shall be maximized in relation to the basic salary. Variable remuneration, with the limitations pursuant to applicable pension commitments, shall not be pensionable. Pension benefits shall be based on either defined-benefit or defined-contribution plans, or a combination of such plans, with individually set retirement ages, although not lower than 60 years. The Board s Remuneration Committee is responsible for preparing matters involving the remuneration of members of Group Management, and of other management levels if the Committee so decides. The Committee reports its proposals to the Board of Directors, which decides on the matters. For further information refer to Corporate Governance on page 139. General principles for remuneration of HEXPOL s Group Management Remuneration of the CEO and President as well as other members of the Group Management comprises For information on the remuneration paid to Group Management in 2007 and estimated remuneration for 2008, refer to the table below. Remuneration of management Remuneration 2007 Estimated remuneration 2008 Fixed salary Variable Pension Fixed salary Variable Pension SEK remuneration 1 costs remuneration 1 costs CEO Other members of Group Management (six persons) Total Pertains to maximum outcome. 2 SEK of this amount is a fixed bonus to be paid at the listing of the company, for which amount reservations have been made in HEXPOL

137 Incentive programme Currently, no incentive programmes are in effect within HEXPOL. As a matter of principle, however, the Board of Directors takes a positive view of offering the Company s employees an opportunity to participate in incentive programmes. The Board of Directors of HEXPOL is studying the prerequisites for issuing a proposal concerning an incentive programme at an appropriate time. Terms of employment for senior executives, etc. The company and the CEO have agreed on a period of notice of 24 months, with entitlement to ordinary salary, if the employment is terminated by the company. If the employment is terminated by the CEO, a period of notice of six months applies. The period of notice for other senior executives varies from three to 12 months. Ordinary salary is paid during the notice period. The employment contract for CEO Georg Brunstam does not contain any clauses impeding the CEO from engaging in competitive operations after his employment has ceased. Further, it should be noted that the clauses in the employment contracts of certain senior executives impeding them from engaging in competitive operations after their employment has ceased, and in the employment contracts of certain other senior employees in HEXPOL s subsidiaries, could possibly be regarded as invalid, since separate compensation is not payable for the said commitments. HEXPOL HEXPOL 137

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139 Corporate governance Responsibilities of the Board of Directors The Board is responsible for determining the overall objectives for the Company s operations, developing and monitoring the Company s overall strategy, decisions concerning major company acquisitions, divestments and investments, and continuous monitoring of operations during the year. The Board is also responsible for continuous evaluation of the Company s management, the presence of effective systems for monitoring and internal control of the Company s operations and financial position and for the Group s organizational structure and administration pursuant to the Swedish Companies Act (2005:551). The Board of Directors also appoints the Chief Executive Officer, as well as the Audit Committee and Remuneration Committee, and decides on the salary and other remuneration to be paid to the Chief Executive Officer. The Board of Directors shall meet at least five times annually, in addition to statutory meeting, with at least one meeting including a visit to one of the Groups operations. The Company s auditors must attend at least one Board meeting. Procedural rules and instructions for the Board of Directors The activities of the Board of Directors and the division of duties between the Board and Group Management are governed by the procedural rules and instructions for the Board of Directors, which have to be adopted annually by the Board of Directors at the statutory meeting held after the Annual General Meeting. In accordance with the procedural rules and instructions, the Board of Directors shall decide upon, among other things, the Group s overall strategy, business and profitability targets, significant organizational changes as well as major company acquisitions and investments in real estate. The Board of Directors shall also establish parameters for the Group s operations by approving the Group s budget. The procedural rules and instructions include instructions for the CEO, an instruction for financial reporting and instructions for the Audit and Remuneration Committee. These are addressed and adopted once annually. Committees The Board of Directors has appointed an Audit Committee with the assignment to prepare, on behalf of the board, issues relating to the procurement and remuneration of auditors, to follow up the work of the auditors and the Company s internal control system, to monitor the current risk situation, to follow up the external audit and the Company s financial information, and other issues that the Board assigns the Committee to prepare. The Audit Committee shall continuously meet with HEXPOL s auditors and continuously report to the Board of Directors. The Committee has no decision-making authority; its mandate is to present its conclusions and proposals to the Board of Directors for decision. The Board has appointed Ulrik Svensson as member and chairman of the Audit Committee for the period up to the 2009 Annual General Meeting. In accordance with the Swedish Code of Corporate Governance, the Board of Directors must establish an Audit Committee comprising at least three Board Members. At present, the Company s Audit Committee has only one member. The Board of Directors has also formed a Remuneration Committee in order to address all matters pertaining to salaries, bonuses, options, pensions and other forms of remuneration to Group Management and also to other management levels, if the Board of Directors so decides. The Committee has no decisionmaking authority; its mandate is to present its conclusions and proposals to the Board of Directors for decision. The Board has appointed Melker Schörling as chairman and Ulrik Svensson as member of the Remuneration Committee for the period up to the HEXPOL 139

140 2009 Annual General Meeting. Information concerning remuneration of the Board of Directors and management is presented on page Swedish Code of Corporate Governance The Swedish Code of Corporate Governance ( the Code ) is to be applied by all companies listed on the OMX Nordic Exchange Stockholm as of 1 July HEXPOL intends to apply the Code as of the date at which its shares are listed on the OMX Nordic Exchange Stockholm. In cases where a specific rule is not being complied with, HEXPOL will explain such non-compliance in accordance with the Code. Internal control HEXPOL s Board of Directors is responsible for that the Group has effective internal control and shall continuously evaluate where the future risks that could affect operations exist. The system for internal control comprises methods and activities for safeguarding assets, verifying the correctness and reliability of internal and external financial statements and ensuring compliance with established guidelines. In addition, external parties are to be commissioned to diagnose risks and controls within functional areas that are inherently associated with high risk, such as the Group s major IT functions and internal bank. The principal components of the internal control include a distinct frame of reference for the Board of Directors and its committees, a distinct organizational structure with a documented delegation of decision-making authority from the Board to Group Management, the expertise of employees, as well as number of Group policies, procedures and parameters. The delegation of decision-making authority is documented in attestation provisions, which provide clear instructions to managers at all levels. The Board of Directors has also formulated a process for evaluating the Group s need to introduce an internal audit function. The basis of the Board s assesment is the consideration whether such a function would facilitate fulfilment of objectives by the Board and create shareholder value by adding an objective analysis of how the Board and Group Management manage risks and monitor operations. On the basis of the evaluation made, no special internal audit function has been deemed necessary. The Board of Directors evaluation will continue to be made annually as part of the Corporate Governance process within the Group. Information policy HEXPOL s Board has adopted an information policy, whose aims include ensuring that the Company fulfils the requirements concerning information disclosure to the stock market. HEXPOL s financial and other communication activities must always comply with the OMX Nordic Exchange Stockholm s regulations, generally acceptable behaviour in the stock market and other relevant regulations and legal obligations to which HEXPOL may be subject. Communication activities shall also be designed to create a flow of uniform actions between the Company, the employees and the business environment. In addition, communication activities shall make possible an exchange of ideas within the organization and contribute to enhancing the quality of the Company s communication efforts. The policy establishes the distribution of responsibility for information matters and stipulates who may represent the Company as a spokesperson, who is to determine what is to be regarded as price-impacting information, how price-impacting information is to be handled and the information content and method to be used when communicating with players in the financial market. The policy also includes procedures for the year-end report, interim reports, Annual Report, Annual General Meeting, press releases, press and telephone conference, meetings with investors, Capital Market Days and the Company s website. Finally, the information policy addresses communication in crisis situations and in the event of information leaks. Insider policy and insider register HEXPOL s Board of Directors has adopted an insider policy, as a complement to the applicable insider legislation in Sweden. The insider policy establishes procedures for closed periods, meaning that trading in financial instruments in HEXPOL is prohibited 140 HEXPOL

141 for a 30-day period prior to the disclosure of financial reports, including the day of release. HEXPOL also keeps an internal insider register, in accordance with the instructions issued from time to time by the Chief Executive Officer. This register shall include information about all the people who work for the Company that have access to insider information. Ethical policy HEXPOL has adopted ethical guidelines for ensuring that the Group upholds and promotes business methods of the highest possible ethical standards. HEXPOL supports and respects fundamental human rights and accepts responsibility for observing these rights wherever HEXPOL is active. Environmental policy Matters involving the external environment, sustainable development and health and safety are integral parts of HEXPOL s business operations. HEXPOL must fulfil environmental requirements pursuant to laws, ordinances and international agreements. Decisions concerning operations that affect the environment shall be guided by what is ecologically motivated, technically possible and financially viable. As part of HEXPOL s environmental policy, it is required that all subsidiaries implement ISO and that operations subject to permit requirements be conducted in accordance with current regulations. The entire Group takes responsibility for the environment, health and safety and each employee plays an important role in these efforts. Nomination Committee prior to the 2009 Annual General Meeting HEXPOL s 2008 Annual General Meeting resolved that HEXPOL was to have a Nomination Committee comprising four members representing the largest shareholders in terms of voting power in the Company at the start of the month of October. Information concerning the members of the Nomination Committee shall be published no later than six months before the Annual General Meeting. During the month of October, the largest shareholder shall contact the three other major shareholders and convene the Nomination Committee. In connection with this, the Nomination Committee shall from among its numbers appoint a chairman of the Nomination Committee, who must not be the Chairman of the Board. In the event that a shareholder represented by a member of the Nomination Committee ceases being one of the major shareholders in HEXPOL, or that a member of the Nomination Committee ceases being employed by such a shareholder or, for some other reason, leaves the Nomination Committee before the 2009 Annual General Meeting, the Nomination Committee shall be entitled to appoint another representative for the major shareholders to replace such a member. The Nomination Committee s duties shall be to prepare, prior to forthcoming General Meetings, the election of Chairman of the Board and other members of the Board, the election of chairman of the General Meeting, election of auditors (where applicable), and resolutions concerning fees and related matters. The Nomination Committee shall hold the number of meetings required to be able to perform its duties, although at least one meeting per year. Financial risk policy HEXPOL s Board of Directors has adopted a financial policy that specifies common guidelines, the organization and applicable mandates for financial activities, as well as the overall strategy and management of financial risk exposure and liquidity management (cash management), for the Group. HEXPOL is mainly exposed to financial risks pertaining to liquidity, interest rates, financing, loans and exchange rates, with the exchange rate risk as the predominant one. Currency exposure results from the subsidiaries international trade and gives rise to continuous exchange rate hedging of contracted and forecasted currency flows. The overall objective of the Group s financial activities is to support the business operations by safeguarding financing/credit facilities and efficient liquidity management at both the local and the central level and to manage the financial risks to which the Group is exposed. External financing and the management of the Group s financial risk exposure is centralized to HEXPOL AB. HEXPOL 141

142 142 HEXPOL

143 Articles of Association Registered name Article 1 of the Company The registered name of the Company is HEXPOL AB. The Company is a public company (publ). Registered office of Article 2 the Board of Directors The registered office of the Board of Directors shall be in the municipality of Malmö, Skåne County, Sweden Operations Article 3 The object of the Company s operations is to acquire, own and actively manage shares in primarily industrial, retail and service companies. The Company shall also own and manage securities, sell administrative services and conduct other operations related to the above. Shares Article 4 The Company s share capital shall amount to not less than forty million Swedish kronor (SEK 40,000,000) and not more than one hundred and sixty million Swedish kronor (SEK 160,000,000). The number of shares in the Company may not be fewer than twenty million (20,000,000) and not exceed eight million (80,000,000). The shares shall be issued in two series, designated Class A (A-shares) and Class B (B-shares). If two classes of shares are issued, Class A shares may account for a maximum of 50 per cent and Class B shares a maximum of 95.6 per cent of the shares outstanding in the Company from time to time. If the Company decides to issue new Class A or Class B shares through a cash issue or an issue offsetting debt, holders of Class A or Class B shares shall have preferential rights to the subscription of new shares of the same type in relation to the number of shares already held (primary preferential right). Shares not subscribed for on the basis of primary preferential rights shall be offered for subscription to all shareholders (subsidiary preferential right). If the number of shares offered on this basis is insufficient for subscription based on subsidiary preferential rights, the shares shall be distributed in relation to the number of shares already held and, insofar as this is not possible, by lottery. HEXPOL 143

144 In the event that the Company decides that new shares of either Class A or Class B alone shall be issued through a cash issue or an issue offsetting debt, all shareholders, irrespective of whether they own Class A or Class B shares, shall have preferential rights to the subscription of new shares in relation to the number of shares already held. If the Company decides to issue warrants or convertible debentures through a cash issue or an issue offsetting debt, the shareholders shall have preferential rights to subscribe for warrants as if the new issue applied to the shares that may be issued on the basis of the warrants or with respect to convertibles as if the issue pertained to the shares for which the convertibles will be exchanged. The stipulations of above shall not constitute any infringement on the possibility to make a decision regarding a cash issue or an issue offsetting debt with a deviation from the shareholders preferential rights. In the event of an increase in share capital through a bonus issue, new shares of each series shall be issued in relation to the number of shares of the same series already issued. In such cases, existing shares of a specific series carry entitlement to new shares of the same series. The aforementioned stipulation shall not constitute any infringement on the possibility, following the requisite amendment in the Articles of Association, to issues shares of a new series through a bonus issue. All shares shall carry equal rights to participation in the Company s assets and profits. Voting rights Article 5 Each Class A share entitles the holder to ten (10) votes and each Class B share entitles the holder to one (1) vote at General Meetings. Board of Directors Article 6 The Board of Directors shall consist of not fewer than five (5) and not more than ten (10) members, with not more than two (2) deputies. The Board members are elected by the General Meeting for the period until the end of the first Annual General Meeting held after the Board members were elected. Auditors Article 7 For the purpose of examining the Company s administration by the CEO and the Board of Directors and the Company s financial accounts, one or two auditors, as well as one or two deputy auditors, shall be elected by the General Meeting. A registered accounting firm may be appointed the Company s auditor or deputy auditor. Notice Article 8 Notice convening a General Meeting shall be made by announcement in Dagens Industri and in The Swedish Official Gazette (Sw. Post- och Inrikes Tidningar). 144 HEXPOL

145 Notice of the Annual General Meeting and of Extraordinary General Meetings convened to address amendments to the Articles of Association shall be issued not earlier than six weeks and not later than four weeks prior to the Meeting. Notice of other General Meetings shall be issued not earlier than six weeks and not later than two weeks prior to the Meeting. Other messages to shareholders shall either be issued in the manner stated in the preceding paragraph or be sent by post to shareholders to the address entered in the share register. To be entitled to participate in a General Meeting, shareholders shall, firstly, be registered in the transcript of the entire share register pertaining to the conditions prevailing five days prior to the Meeting and, secondly, notify the Company of their intention to attend the Meeting not later than at 12 o clock the day stipulated in the notice convening the General Meeting. The latter mentioned day must not be a Sunday, any other public holiday, a Saturday, Midsummer s Eve, Christmas Eve or New Year s Eve and must not be earlier than five weekdays before the Meeting. Opening of the Annual Article 9 General Meeting The Meeting shall be opened and directed by Chairman of the Board, or the officer appointed specifically for this matter by the Board of Directors, until a chairman of the Meeting has been elected. Business of the Annual Article 10 General Meeting General Meetings shall be held at the location of the registered office of the Board of Directors or in Stockholm. The Annual General Meeting shall be held annually within six months following the close of the financial year. The following items shall be addressed at the Annual General Meeting: 1. Election of Chairman of the Meeting 2. Preparation and approval of the list of shareholders entitled to vote at the Meeting 3. Approval of the agenda 4. Election of one or two minute-checkers 5. Determination of whether the Meeting has been duly convened 6. Presentation of the annual report and the auditors report and of the consolidated financial accounts and the auditor s report on the consolidated financial accounts 7. Resolution regarding the adoption of the income statement and balance sheet and of the consolidated income statement and consolidated balance sheet 8. Resolution regarding appropriation of the Company s profits or losses as shown in the balance sheet adopted by the Meeting 9. Resolution regarding the discharge of the members of the Board of Directors and of the CEO from liability HEXPOL 145

146 10. Determination of the number of members and deputy members of the Board and, where applicable, the number of auditors and deputy auditors, to be elected by the Annual General Meeting 11. Determination of the fees to the Board members, auditors and deputy auditors 12. Election of the members of the Board and, where applicable, deputy members of the Board 13. Where applicable, election of one or two auditors and of one or two deputy auditors 14. Other items to be addressed by the Meeting in accordance with the Swedish Companies Act or the Articles of Association. Financial year Article 11 The Company s financial year shall be the calendar year. CSD company Article 12 The Company is a CSD (central securities depository) company in accordance with the Financial Instruments Act (1998:1479). These Articles of Association were adopted at the Extraordinary General Meeting on 21 April HEXPOL

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148 Addresses Head office: HEXPOL AB (publ.) Skeppsbron 3 SE Malmö Sweden Tel: +46 (0) Fax: +46 (0) info@hexpol.com Hexagon Polymers Compounding s.r.o Sumperska 1344 CZ Unicov Czech Republic Tel: Fax: info@hpc-cz.com HEXPOL Compounding: Hexagon Polymers Compounding HQ Sprl Gewerbestrasse 8 BE-4700 Eupen Belgium Tel: Fax: info@hpc-hq.com Hexagon Polymers Compounding GmbH Ottostrasse 34 DE Hückelhoven Germany Tel: Fax: info@hpc-de.com Hexagon Polymers Compounding Sprl Industriestrasse 36 BE-4700 Eupen Belgium Tel: Fax: info@hpc-be.com Hexagon Polymers Compounding ULC 1635 Industrial Boulevard Magog, Quebec J1X 5B3 Canada Tel: Fax: info@hpc-ca.com Hexagon Polymers Compounding NC Inc. 280 Crawford Road Statesville, NC USA Tel: Fax: info@hpc-us.com Hexagon Polymers Compounding SA de CV AV. Japon # 302 Parque Industrial San Fransisco San Fransisco de Los Romo Ags. CP Mexico Tel: Fax: info@hpc-mx.com HEXPOL

149 Hexagon Polymers Compounding (Qingdao) Co., Ltd 899 Qingdao Middle Road CN Jiaonan, Qingdao China Tel: Fax: Stellana U.S. Inc. 999 Wells Street Lake Geneva, WI USA Tel: Fax: GoldKey Processing, Inc Madison Road Middlefield, Ohio USA Phone: Fax: Gislaved Gummi AB Box 522 SE Gislaved Sweden Tel: Fax: HEXPOL Engineered products: Stellana AB Box 54 SE Laxå Sweden Tel: Fax: Stellana (Qingdao) Co., Ltd 899 Qingdao Middle Road CN Jiaonan, Qingdao China Tel: Fax: Elastomeric Engineering Co Ltd 51-54, IDB Industrial Estate Horana Sri Lanka Tel: Fax: Hexagon Polymers Gaskets (Qingdao) Co., Ltd 899 Qingdao Middle Road CN Jiaonan, Qingdao China Tel: Fax: Gislaved Gummi AB Box 522 SE Gislaved Sweden Tel: Fax: Elastomeric Technologies (Private) Ltd 371 Colombo Road Piliyandala Sri Lanka Tel: Fax: HEXPOL 149

150 Production: G-byrån AB, Anderstorp. Art Director: Anders Ohrgren. Layout: Anders Ohrgren and Lena Alexandersson. Project Manager: Larz G Johansson. Photo: Pelle Wahlgren/Studio Wahlgren, Anders Ohrgren and Larz G Johansson/G-byrån, and others. Copywriting: HEXPOL AB and Swedbank AB. Fonts: Eurostile och New Century Schoolbook. Paper: cover Ensocoat, content G-print. Print: Strokirk-Landstöms, Lidköping. This is an environmentally-friendly printed matter. The Swan The Nordic Ecolabel.

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152 HEXPOL AB (publ), Skeppsbron 3, SE Malmö, Sweden Telephone +46 (0) Fax +46 (0)