/ Annual report 2022 Operating Review PRINCIPAL ACTIVITIES The purpose of the company is manufacturing footwear and accessories for sale in the wholesale and retail business, other production and trade activities as decided by the board of directors, and having ownership of subsidiaries within production and sales. DEVELOPMENT IN ACTIVITIES AND FINANCIAL MATTERS Sales and profitability increased in 2022 despite another year of volatility and complexity. Inflation, geopolitical tension, and continued supply chain challenges with high transportation costs created a challenging environment. In January 2022, the controlling interest in ECCO Europe AG was acquired and consequently, the European sales activities are fully consolidated in the Group financial statements for 2022. Sales for the year grew by 30% to EUR 1,585.8m with comparable growth including consolidated European sales entities being 18%. Profit before tax increased by 106% to EUR 88.2m, an improvement corresponding to the outlook presented last year. Shoe sales grew in large part from stronger price realisation. This eased margin pressure from high freight costs and raw material price inflation. Growth both in sales and profitability was also achieved in the business segments of leather goods as well as shoe-related accessories. Leather sales were flat to prior year, although with slightly higher contribution margins. Investments for the year 2022 were EUR 75.7m, a 16% reduction versus prior year in part from less capital allocation towards new store openings as part of a review of the retail store portfolio. The Group ended the year with higher levels of working capital from increased inventory. Long lead times on transportation caused a high level of inventory in transit. Furthermore, inventory was produced earlier to ensure strong delivery performance in 2023. As a result primarily of the higher inventory levels, cashflow from operating activities decreased to EUR -43m. ECCO ended the financial year having a continued strong financial position. The year-end cash position was EUR 300m (in line with the EUR 297m in 2021) and the solvency ratio ended at 31.2%. PROFIT & LOSS In 2022, ECCO achieved a strong growth across all sales channels. Performance in direct-to-consumer channels was especially encouraging, partly lifted by very few COVID restrictions versus prior year. E-commerce sales grew substantially and retail sales almost doubled growth as sales were improved by stronger price realisation and increasing traffic to stores. The increase in capacity costs was mostly caused by activity-driven costs like indirect production costs from higher production levels and higher sales in the direct-to-consumer channels. Inflation has affected cost levels adversely, in particular energy costs. The strong sales growth across all sales channels ultimately resulted in a substantial improvement in profitability realising a profit before tax of EUR 88.2m. BALANCE SHEET & CASHFLOW The higher levels of inventory, which were caused primarily by longer transportation lead times, adversely affected net working capital resulting in a negative operating cashflow of EUR -43m. Cashflow from investing activities was EUR 75.7m. Major investments were related to the continued digital transformation of the ECCO Group as well as selected retail expansion in high-growth regions. Furthermore, solar panel investments have been made across ECCO’s production footprint. Despite the overall higher level of invested capital, the stronger earnings resulted in an increased return on assets of 5.9% from 3.1% in 2021. OUTLOOK The volatility and uncertainty in the world have increased substantially in recent years. Geopolitical developments could bring renewed challenges in 2023. Overall, ECCO is, however, anticipating improving supply chain circumstances with declining freight rates and improving transportation schedules. This will also affect working capital levels positively. Investment levels will be lower as the retail store portfolio is expected to decrease slightly in 2023. As a result, ECCO’s net sales and profitability are all expected to increase moderately, while free cashflow is expected to increase significantly in 2023. 7
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