Full Press Conference: LEGO Announces 2018 Financial Results

Good morning. Welcome to everyone here in Billund in the amazing LEGO House. Thank you very much for traveling here to join us here today. And also welcome to everyone who's watching us online. Thanks for taking the time to join. This morning, we'll hear a presentation from our CEO, Niels B. Christiansen, on— to give an overview of the performance of the LEGO Group during 2018 and a look ahead a little bit into our future. So without further ado, I would like to welcome Niels to share an overview of our 2018 performance.

Thanks, Anna. And also, welcome from me to all of you here. I must say, I have really been looking forward to today to be able to talk a bit about how we in the LEGO Group actually have come through 2018. And many of you may remember, when we started the year, we actually set out to do 2 things. We set out to stabilize our business, and to really start investing behind sustainable long-term growth. I'm pretty happy to say that we've done both. So we have been growing the top line by 4%, the bottom line by 4%. And we've done that primarily because of all the great efforts that have been put in by all our colleagues around the globe throughout the full year. Excuse me. Let me get on to this. Yes. But we've also done that in an industry that had quite a bit of headwind throughout the year. So we've seen a lot of changes in the industry, and it has allowed us to really lean in and work closely with our retail partners around the globe to get even closer to provide the right kind of play experiences to the consumers and children out there. It's also allowed us, of course, to start investing behind the longer-term growth, investing in many different areas of the business, investing in everything from innovation in the way we engage with consumers and customers and the way we develop products, so innovative products, all the way to also investing in infrastructure around some of our IT systems and how we actually do things fundamentally. All of that to underpin our ambition to reaching many more kids around the globe with our LEGO Play experience. Now, let's take a closer look at some of the numbers. We did grow. We grew and reached a revenue of 36.4 billion Danish kroner, a growth of 4%. A growth that, if counted in constant currencies, would actually have been 7%. And we did grow our consumer sales, so the sales to end users out of our customers' stores, with 3%, so in line with revenue. We did grow in all our major markets around the globe. We did grow in the US and in Western Europe, which is quite important for us. But obviously, there were countries like China where we grew faster, and in China, there was even a strong Double-digit growth. That was made possible because we we're now building our brand in China stronger, also outside the biggest cities, the tier one and the tier two cities in China into the broader China. Especially, I would say we've been quite pleased about the second half of the year, especially the in-season where we've performed and executed very strongly. So good momentum around that. All of this then have also added up to the operating profit or our earnings or EBIT if you want. growing to 10.8 billion kroner, a growth also of 4%. Now, what this means is that we are in a very strong financial situation. We had a net profit of 8.1 billion Danish kroner, up 3.5%. We're paying 2.4 billion Danish kroner in corporate income tax. We reached a return on invested capital north of 78%. And during the year, we've invested 1.4 billion Danish kroner in capital expenditures across the board. And after all that, we still have delivered 9.8 billion in cash flow from operations, so almost 10 billion in cash flow from operations. That puts us in a very strong position to invest in the future, to invest behind long-term sustainable growth initiatives, initiatives to really make also future generations of kids falling in love with the LEGO brand. And we believe by doing that, that our expectation is that we can continue to grow with single-digit growth rates going forward. Now, if we take a look now at the performance of different play themes, so our different products, I know that's always high on a lot of your agendas, then we've actually seen success here in top-selling themes, both in terms of our own and external. Own themes like the amazing LEGO City, that being really, really core to us keeps growing, like LEGO Friends, LEGO Ninjago, LEGO Technic, where a lot of you have seen the LEGO Technic Bugatti as one of the very hyped products in 2018. But also, of course, top-selling themes with what we call external IP, or IP where we work together with Disney and others, like Star Wars, the Harry Potter, and the LEGO Jurassic World. And just on Harry Potter, if you haven't noticed, a couple of weeks ago, And the New York Toy Fair, we actually got 3 Toy of the Year awards at the New York Toy Fair, just for some of the LEGO Harry Potter products. Especially, as I said, the second half was strong. We saw a lot of success around Harry Potter also in the second half. And that's just an example of the kind of innovation that we have to bring. Like, for 86 years, ever since the first product was developed just across the road over here, it's been constant for us every year that we are no better than the latest innovation we bring. Every year, we churn 60% of our product line. So we need to bring innovative products every year that excite and delight and are seen by kids as cool play experiences that they really would like to do. That's what we do. That's what our designers are challenged with every year. That's why they put children first. They have children in mind when they deliver or develop the products that provide these innovations for 60% of our products every year. Year. Now, that's a constant. There's another thing that's been constant for 86 years, and that's change. And we definitely also seen some change in our industry happen in 2018. Things can change really fast, and it's really important to be one step ahead of those changes when we can. Some of the overall market trends we see in our industry are really around the reshaping of the retail landscape, and I'll get more into detail on that. It's really around how digitalization is shapes and influences play and shapes and influences the way we can actually engage with shoppers and consumers. And then, of course, it's about the demographic and the economic shifts that's happening throughout the world. So, I'd like to take a bit of a view on the 3 megatrends and give you a few more details on what we see and how we actually react to some of that. So, if we take a look first at the first one, the reshaping of the retail landscape. Then, while we have a strong confidence in our industry for the longer run, we have seen quite a bit of change in 2018. You all know of the closure of Toys R Us and for those closer to this area of the world, Top Toy throughout 2018. So, there's been quite a bit of disruption around that. That being said, this segment of toy specialists is really still really important for the industry. It makes up 1/3 of the entire toy industry still, so very important, and it has a very unique position in its ability to express play experiences and brand experience to our consumers. So it's an important element in the entire toy industry. At the same time as we've seen some closures there, we've also seen e-commerce and also the online part of traditional brick-and-mortar businesses really grow. That's an industry-wide phenomenon as well, and we expect that in the industry as a whole, also the e-commerce part and the online part will actually be doubling over the next 5 years. So here it's really important for us that we can expand the physical brand experience that we've been very good at for 86 years, and also be as good and more as creative on the digital brand experience, and really make sure that we play both the physical and digital building of brand and how we engage in those channels. It's really important for us to use those new digital technologies to connect with shoppers when they want, where they want, and how they want it. If I move to the second trend of digitalization, then I just want to go back and say, at the heart of what we do is the brick. The brick and the LEGO System in Play, that's at the heart of what we do. The fact that with LEGO bricks, you can build anything you can imagine. It's your own imagination that is the limit for what can be done. That is totally unique. And that's at the center of what we do. It's actually interesting that just looking at our top-selling SKUs or top-selling products, on the top 10, we have the LEGO Classic, a LEGO Classic box of very classic bricks, where you just build whatever you want to build. So, not necessarily from an instruction, you just build what you want to do. I think that's important. Sometimes, I do get the question, okay, is it one particular product? Is it an expensive product or a Harry Potter product? And the story is, there are no specific theme, there are no specific single product that kind of is the reason for the success. It's the variety. So, on our top 10 list of products, you will find everything from kind of the most inexpensive, low-priced Harry Potter minifigure pack, all the way up to the big LEGO Technic Bugatti. Or you will find the LEGO Classic box with simple bricks in there for your own imagination, all the way to the LEGO Boost programmable robotic thing, where you build the robot and you program it. You will find the iconic LEGO City Police Station in there. So everything there. And if we look at the top 10, it's even a tendency that the top 10 makes up the same part of our sales every year. So yes, there's been a LEGO Technic Bugatti, been quite successful. The year before, there was a Millennium Falcon coming from Star Wars. The year before, there was another one. So I think that just again shows that we need to be continuously innovative and bring out things that people really like. And we've been successful in doing that again in 2018. Now, another way, of course, of bringing the brick to life with also digital or different means is The LEGO Movie 2 that launched a couple of weeks ago, where we get the LEGO brick and the LEGO Minifigs and everything on the big screen and get allowed to tell the story of what can be done with the LEGO Play System also on the big screen. We're quite happy with the way that has been received. We right now have a certified fresh score on the Rotten Tomatoes, meaning that critics and all the families and kids that have actually seen the movie have been very positive about that, have had a really good experience. And that's really most and foremost the important thing for us, that the brand experience people get when they go into the cinema and they actually watch a movie is one that supports and builds the LEGO brand, and that can be recognized as what LEGO is really about. I think we are on a good trend with that on The LEGO Movie 2. Now, of course, then moving to how digitalization influences play, then this is what we call fluid play. For us, fluid play is the combination, or the blend, if you want, between physical play and digital play. Kids today are digital natives, so they don't think about, today I'm playing digitally, tomorrow I want to play physically. They just jump between the two. They don't think about it. They're able to do that. That's what we call fluid play. And that's why we think we have a unique opportunity, of course, very well settled on the physical play. We can now add to that. And just an example, even with 3, 4-year-olds with the LEGO Duplo train that can be programmed and controlled a bit from the iPad, you can do simple coding for a 4-year-old on an iPad on a train you can control. I think that's quite amazing and an example of the kid doesn't think about this being one or the other because they're actually interacting also on the iPad. That's one way for us to do. Of course, going to LEGO Boost, where you build your own robot or whatever you want to build that you can control, and then you can actually program that in a pretty advanced way, a way that actually would, would actually teach you things you can even use when you get into university and program in the more difficult programming languages. That's on the other end of the scale, but again, combining the physical and the digital. What we also done in 2018, we launched this LEGO augmented reality playgrounds app that would allow you, on top of a physical build, to actually enhance the play experience or the roleplay you can do afterwards on that, using advanced augmented reality technology, allowing to make it an even broader play experience. Now, in 2019, we are going to extend that or build on that with what we call LEGO Hidden Side. LEGO Hidden Side is a really, really interesting new LEGO theme with some really interesting models to build, with some really exciting and scary stories behind it. And then, of course, a very advanced additional layer of augmented reality on top that allows you to really play after having built it and had all the normal play, allows you to, on top of that, augment the play experience and actually try out a lot of really exciting things. For those of you in the room today, you will actually have a chance to have a preview on this. We have some of the designers on this topic in LEGO House today, so you'll be able to see it. For those of you online, unfortunately, that will have to be later in the year when these products actually arrive in stores. But digitalization is not only about how the products and the play will shape. It's also about It also really is reshaping how we connect with children. And of course, digital safety, digital child safety is really, really important for us. And we know that it's really important to a lot of parents as well. Surveys we do actually indicate that 9 out of 10 parents indicate that they have— it's a real concern with them with online child safety. That's also one of the reasons why back in 2016, We were the first one to cooperate with UNICEF to actually design and define the safety charter for children, digital safety charter for children, to really take a stand here and actually go forward. That's why we have been investing behind LEGO Life, our own safe child digital platform where we can allow kids to have safe access to digital, where they can actually chat, do safe chat in a very safe way using emojis, where they can upload their creations and share those. We have 8 million unique users on LEGO Life already in 15 different countries around the globe. That's a way we believe to also allow kids to learn how to actually behave on a social or digital platform, and also allow us to to celebrate. It's moderated, so we can also celebrate kind of positive digital behavior while the kids are there in a safe environment. So, something that we are really keen on promoting. But of course, also digitalization can drive innovation in the broader sense. One of the examples of this is really LEGO Ideas, and we can celebrate 10 years anniversary with LEGO Ideas this year. LEGO Ideas is a platform with 1 million 1 million passionate fans that are actually out there sharing their creations, trying to come up with the most innovative creations that are so good that we will actually launch them. And last year, you may remember, we had Ship in a Bottle, we had the pop-up fairy tale book, and just a couple of weeks ago, we launched Flintstones as an example of something actually developed by creative fans. that offer this up. So, this is real crowdsourcing of ideas happening in reality. And we really, really appreciate that creativity and that support we have from many, many people around the globe. So, really exciting and another example of how we can bring innovation out and how digitalization actually will help us do that. Moving on to the third of the megatrends, the really the economic and and the social demographic shifts that's happening in the world. We believe that by 2032, 90% of the 2 billion children in the world will actually be living outside Europe and North America. And of course, a lot of those will be living in middle-class families. That also means, of course, for us, It's really important that we invest in growing into those new markets. We actually this year opened our office in Dubai, an office to really look after the potential in the Middle East, also in the northern part of Africa, to really have own employees and organization on the ground to work with the local retailers, to really also get the LEGO bricks in the hands and the LEGO experience in the hands of many kids in areas that have never known LEGO. That never tried to build with LEGO. So, this is actually an expansion into that. Looking forward, if I put on the 10, 15-year lens, I would imagine that India is an interesting place, with a lot of kids in India growing up with a very similar setup to what we see in China. And we'll try and investigate that and explore that and actually start investing behind that over the coming years to see the potential in the long run. And that's one of the beauties for us being privately owned, being able to do the right things for the long term. This is an area where there is definitely a potential coming, where we'll be investing behind those shifts as they actually happen. Now, one of the areas, of course, that is growing and where we are successful and where we have been investing behind is China. In China alone, there are more than 200 million kids. There's, of course, an ever-increasing standard of living. And we have had a very successful year in China. We've been growing strong double-digit. We added just for the fully LEGO-branded stores, either run by ourselves or by some of our certified partners, we added another 50 stores in 2018. So by the end of '18, we had more than 60 stores in 18 cities around China. One year from now, at the end of '19, we believe that number has grown beyond 140 stores in more than 30 cities, really underpinning what I said, that it's for us about building brand in China, getting further out in China, and actually doing that by opening more stores and working closely with all our partners, both physical and digital retail, to actually make that happen. We are also in China establishing a— or have established a safe digital child platform. We do that together with Tencent. We opened it throughout '18. We started out with a video zone. We've, in that video zone, we've had more than a billion, more than 1 billion views already in 2018. And we've complemented that this year with the launch of the LEGO Cube game that is now on that, that has also been received very, very positively. So this is a way for us to also in China promote children being online in a safe way, and we can make those possible. So we have a very close relationship here with the with Tencent, and we are going to push that further. So a lot of success in China. Maybe just worth mentioning that we opened our big flagship store in Beijing just on Friday, most successful launch of a store anywhere in the world ever. For the entire Friday and the weekend, we had long queues outside that store. And we had 15,000 people visiting that one store just in the opening weekend. So some amazing results actually showing the strength of the brand and also showing the very great match we see between some of the characteristics of our brand and what is also being sought for in China. So very interesting. We launched last year a couple of China-specific SKUs around the Lunar New Year. And those SKUs also have been extremely well well received and really fits into that. So whenever we do something that's also relevant, we can see an immediate impact on that. So we are eager to continue our good journey here in China, less dependent on, I think, in China, the macroeconomic predictions, much more dependent on us being successful in continuing to get our brand into— out to all the children in China. And that's a journey on which we've only taking the first steps and believe there's much more to do over the coming years. So, if I recap the megatrends, it's really about staying relevant to channels, understanding the shifts, also investing behind, of course, the move on e-commerce, on online, really committed to the safe digital access for children. It's really around digitalization, making sure we create new exciting play themes, and we take advantage of those digital technologies to serve and connect with shoppers and consumers exactly how they want and where they want it. And then it's, of course, that we, in time, in due time, invest behind some of the opportunities for going into new markets where there is going to be a high potential going forward. And as we navigate these megatrends, we have one guiding star. And that's our mission. Our mission to inspire and develop the builders of tomorrow, really getting our play system out to as many kids around the globe as we can. And that, I think, is more important than ever. If you look at children today, 65% of children today in kindergarten, they will actually grow up, and as adults, they will take on jobs that we don't know today, jobs that have not been defined yet, that don't even exist today. That's the magnitude of change we will see. So, how do you equip children of today being able to cope with that in the future? We believe it really is about teaching them at an early age the skills needed in the 21st century, skills around collaboration, problem-solving, resilience, really creativity. So, a lot of the things that we know is coming out of also playing with LEGO. And we see this in many countries that parents are increasingly also aware of the fact that when kids play, obviously, it must be fun and exciting and cool and all that stuff. But it's also good if it develops and if it helps them acquire some of those skills that are not necessarily always the ones you acquire if you just, quote unquote, sit in front of a digital screen. So, we have a role to play here in really bringing also learning through play to the broad world. And that, of course, is extremely motivating. You can probably hear that on me, but I know that we have many, many colleagues around the globe that really get up in the morning and get to work because we're making a real difference. This working for a unique company with such a strong purpose and with such a compelling mission is really important for a lot of us, and that matters. And I think we made good progress on that in Now, being mission-driven, of course, also means that we are eager to give back to society, also to make a positive impact on the planet and on the Earth that the kids are actually taking over. We do that in a lot of different areas. We have an ambition to be zero-impact operations. We actually already today balance 100% of our energy usage in all our factories all our stores and all our offices around the globe with renewable energy that we own, in terms of part-owning wind turbine farms around the globe, solar panel things. Just an example, here in Billund, you may have seen when you come in, there's a big construction going on. That's the new LEGO Campus, and we are installing on the roof of LEGO Campus one of the biggest solar roof-mounted panel systems in Denmark that will actually make 50% of the energy we actually need for running that entire campus on electricity. We're also trying to move forward on sustainable materials. Last year, we launched like 80+ elements built on or made out of total sustainable material made from sugarcane, and we are investing strongly behind pushing this to all our bricks by 2030. Now, this is not an easy task because most of these materials, they don't exist exist today. They don't exist with the properties and the characteristics and the requirements to quality and durability and safety that we need. But we are working hard with people that actually create these to actually make sure that these materials get created over the next period so that we can also make our bricks out of sustainable materials in the long term. And here our ambition is working towards 2030. It's a major undertaking that we're putting quite a bit of funds and resources behind. Also, on this area, of course, being 25% owned by the LEGO Foundation, it means that 25% of the profits belong to the LEGO Foundation, and 25% of the cash or the dividend we send up every year goes to the LEGO Foundation. And the LEGO Foundation uses those to really promote play, promote learning through play, actually get play and toys to— or play experiences and toys to kids all over the world, also disadvantaged kids that are not in a position that they can get those toys by themselves. So here, there's actually a quarter of every profit we make going back to society, really back into helping kids, promoting play, and all the good elements of play. On top of that, of course, our employees are leaning in here as well through Building to Give exercises. And also, we have the local community engagement thing. So everywhere we are, we have actually colleagues that are trained and will go out and engage with kids and really bring play into the local areas. Just in '18, we've engaged more than 800,000 kids in 26 different countries. So again, a huge willingness, just also showing why our employees work for LEGO and why we really buy into the mission. This is the type of things that's actually happened that we're very proud of. So I've been able to mention a few things here. It's been a good year, 2018, with a lot of progress in many areas. So I thought I would just I'll just share with you a very short video here showing some of the things. So, please have a look at these.