Vapo Group Interim Report 1 January -30 September 2012
Tomi Yli-Kyyny, Vapo CEO:
The exceptionally poor peat production season will lead to peat shortages and the full-year operating result will be loss-making. Cash flow over the past year has been strong and during this year we have reduced net investments by EUR 46.8 million and interest-bearing net debts by EUR 71.6 million since the start of the year. The summer’s environmental investments were implemented as planned and these will be continued in coming years. The efficiency-enhancement programme, which is still ongoing, has achieved the planned results and the company is now moving forward.
In the forthcoming heating season, Vapo will not be able to supply customers, or even its own plants, with any type peat in the quantities they want. The biggest shortage will, of course, be in litter peat, but stocks of energy peat will also run out before the next production season, even if the winter is milder than usual. Peat production volumes were 47 per cent of the target. A large share of our production areas are old fields, where production stops after rain for much longer than at new areas. At new production areas, the production targets were reached or almost reached. At the oldest fields in the rainiest areas, production was below 20 per cent of the target.
The ongoing efficiency-enhancement programme improved cash flow, reduced debt levels and strengthened the balance sheet in the first three quarters of the year. The final quarter of the year is expected to be loss-making like the third quarter. This is due to a drop in turnover caused by the peat shortage and the fact that production costs resulting from below-target production will weigh on the operating result for the last two quarters. Demand for sawn timber continues to be weak. For these reasons, the result for the full year will be loss-making. Below-forecast stocks, sales of non-core balance sheet items and cuts in investments are reflecting positively in the company’s cash flow.
The efficiency-enhancement programme and cuts in investments will be continued in coming quarters, but no compromise will be made on planned environmental investments in coming years.
January-September
The turnover of the Vapo Group in the January-September 2012 period was EUR 497.4 million (EUR 530.7 million in the same period in 2011). The main reason for the drop in turnover was the early spring, which was much warmer than the reference period, and a drop in energy peat turnover of EUR 17.6 million due to low electricity prices. The turnover of Vapo Timber was EUR 12.4 million lower than the reference period and that of Vapo Bioheat was EUR 7.2 million lower. The turnover of Environment (Kekkilä) was at the previous year’s level.
Consolidated operating profit was EUR 9.0 million, or 1.8 per cent of turnover (operating loss of EUR 10.8 million, including a writedown of EUR 27.7 million in the pellets business). The operating profit includes profits on the sale of fixed assets and other one-off proceeds totalling EUR 11.2 million. Cost savings achieved through various savings programmes also significantly improved profitability.
The company cut all other investments except environmental investments. Gross investments in the year to date totalled EUR 35.1 million (EUR 67.4 million). Free cash flow before taxes was EUR 75.1 million (EUR 51.6 million). The company’s equity ratio at the end of September was 36.9 per cent (35.3%) and interest-bearing net debt was EUR 345.1 million (EUR 385.1 million). The equity ratio at the end of 2011 was 33.8 per cent and interest-bearing net debt was EUR 416.7 million.
The company employed an average of 1172 (1287) persons In the January-September period.
Vapo Biofuels the business area is responsible for the Group’s energy and environmental peat production and for wood energy and energy crops. The turnover of the business area in the January-September period was EUR 216.7 million (EUR 236.1 million) and the operating profit was EUR 23.1 million (EUR 35.6 million). Turnover in wood energy and energy crops was almost at the previous year’s level and the operating loss declined to EUR 1.3 million (EUR -3.1 million). The profitability of environmental peat weakened significantly compared to the reference period.
Vapo Bioheat the business area is responsible for sales to customers of the Group’s energy products – heat, steam and electricity. The turnover of the business area was EUR 74.0 million (EUR 81.2 million) and the operating loss EUR 2.4 million (operating profit EUR 1.8 million) in the January-September period. The drop in sales of energy products is due to the warm winter and electricity prices that were significantly lower than the reference period. Industrial customers’ energy requirements were at the reference period level. Apart from these operational reasons, profitability was dented by turbine repairs at the Forssa power plant, which led to lower income from electricity sales and higher fuel costs, because in August and September heat had to be generated from oil.
Vapo Wood Products the business area comprises Vapo Timber, which is responsible for the Group’s sawn timber production and sales, and Vapo Pellets. The turnover of the business area in the January-September period was EUR 157.9 million (EUR 170.3 million) with an operating loss of EUR 13.4 million (EUR -41.0 million, including writedowns in the pellet business).
The turnover of Vapo Timber was EUR 86.0 million (EUR 97.2 million) with an operating result of EUR -8.0 million (EUR -3.8 million). The economic downturn and a decline in construction in the main market areas has significantly decreased demand for sawn timber, in addition to which high raw material costs are weighing on profitability.
Pellets posted turnover of EUR 72.6 million (EUR 75.1 million). Pellets had an operating loss of EUR 5.4 million (EUR -36.8 million). The profitability of the business improved in Finland and Poland, but remained weak in Sweden.
Vapo Environment the business area is responsible for horticultural products, the environmental management business and landscaping for professional growers and consumers. The turnover of the business area was EUR 83.9 million (EUR 83.8 million) with an operating profit of EUR 8.4 million (EUR 4.8 million). The operating profit includes an insurance indemnity of EUR 2.6 million for the fire at the Eurajoki garden peat plant in 2010.
Group administration and other activities
The impact of Group administration and other activities on operating profit in the January-September period was EUR -5.9 million (EUR -13.1 million). In order to improve cash flow and profitability, costs have been reduced and investments cut in all Group administration functions.
Tomi Yli-Kyyny, CEO:
The exceptionally poor peat production season will lead to peat shortages and the full-year operating result will be loss-making. Cash flow over the past year has been strong and during this year we have reduced net investments by EUR 46.8 million compared to the reference period and interest-bearing net debts by EUR 71.6 million since the start of the year. The summer’s environmental investments were implemented as planned and these will be continued in coming years. The efficiency-enhancement programme, which is still ongoing, has achieved the planned results and the company is now moving forward.
The warm winter and low electricity market prices cut turnover by Biofuels and Bioheat by over EUR 20 million and operating profit by over EUR 5 million. The profitability of the sawmill business has also plunged since the reference period. The efficiency-enhancing programme and asset sales that the company launched a year ago and cuts in investments have alleviated the impact of the weaker operating environment
The summer peat production period was exceptionally poor. We only achieved around 47 per cent of our production target. For this reason turnover for the full year will decline significantly and the full-year result will also be loss-making. Fuel pricing will be revised for the forthcoming heating season to cover the increase in unit costs. Apart from Vapo, the poor production season will also entail problems for contractors and additional costs for customers, who will have to replace the shortfall in energy peat with more expensive fossil fuels.
A series of rainy summers with poor evaporation has brought the problems of ageing production areas into sharp focus. After rain, production stops at old, lower-lying areas for much longer than at new areas. If the company is to meet customers’ needs even in poor weather conditions, it is essential that the permit applications made for new production areas are processed consistently and granted. We will not apply for permits for unditched bogs and therefore the granting of permits does not threaten the diversity of the peatland environment. At the moment the authorities are processing 13,000 hectares of production areas for which Vapo has applied for production permits. The peat energy in 13,000 hectares has an estimated worth to customers of over one billion euros and an employment effect of over a thousand persons. The oldest applications were submitted for processing in 2007. For the sake of the business of Vapo’s customers, Vapo’s existence and Finland’s security of supply, bringing these into production as quickly as possible is essential.
We are not expecting demand for sawn timber to pick up this year. Profitability has improved in the pellet business following reorganization measures, but the market continues to be challenging, especially in Sweden.
We estimate that profitability will improve at the Kekkilä businesses this year compared to the previous year. Following a series of internal transactions, the Kekkilä businesses have become much more independent and self-sufficient in raw materials in Finland and Sweden. The acquisition, announced in August, of the garden composter and ecological toilet businesses of Lassila & Tikanoja will expand Kekkilä’s product range and bring in new customers in growing markets. These businesses have an annual turnover of around EUR 4 million.
Owing to the outlook for Vapo Biofuels and Vapo Wood Products, we estimate that Group turnover will be substantially below the previous year and that the full-year result will be loss-making. In the remainder of the year Vapo will continue the actions already launched to improve cash flow and profitability by improving the recycling of capital and earnings-generating performance in all business areas. Key actions include improved stock turnaround, disposal of land areas released from production and other balance sheet items not essential to key business activities and a very thorough appraisal of investments. No compromises will be made on environmental investments, however.
Cash flow has been strong over the past year and during this year we have cut net investments by EUR 46.8 million and interest-bearing net debt by EUR 71.6 million. We estimate that our efficiency-enhancing measures, cuts in investments and sales of balance sheet items, among other actions, will enable us to exceed our full-year target of free cash flow of EUR 40 million before taxes.
Vapo and Metsä Group previously announced plans for a joint biodiesel plant in Ajos, Kemi. In June Metsä Group announced it was withdrawing from the project. The project was deemed to be the best biodiesel plant that could be built in Finland, so if it goes ahead, it may NER 300 support from the EU. Vapo will now continue to search for operational partners and financing for the biodiesel project.
We have progressed with our environmental investment programme according to plan. Vapo has previously announced that enhanced water treatment will be installed at all production bogs by the end of 2014. At the end of 2011, Vapo had a total of around 47,000 hectares in production. Of this, around 36,000 are covered by the best available technology (BAT), and 11,000 hectares had basic-level water treatment. During 2012 this area will decline by around 3,000 hectares. Production areas where enhanced water treatment cannot be installed by the end of 2014 will be taken out of production.
It was also very positive that we concluded negotiations with the Ministry of the Environment on the first of the sites we have offered for conservation in Hyvinkää and Outokumpu. Vapo sold a total of 690 hectares of peatland to Metsähallitus and negotiations on other sites are progressing in a positive spirit.
Consolidated key figures
|
MEUR |
1-9/2012 |
1-9/2011 |
1-12/2011 |
|
Turnover |
497.4 |
530.7 |
705.0 |
|
Operating profit (EBITA) |
9.0 |
-10.8 |
-41.9 |
|
% of turnover |
1.8 |
-2.0 |
-5.9 |
|
Operating profit (EBITA) before impairments |
9.2 |
17.0 |
-4.5 |
|
% of turnover |
1.8 |
3.2 |
-0.6 |
|
Result for the period |
3.9 |
-19.0 |
-39.1 |
|
Operating margin (EBITDA) |
40.9 |
52.3 |
41.9 |
|
+/- Change in working capital |
49.7 |
61.7 |
59.7 |
|
– Net investments |
-15.5 |
-62.3 |
-81.2 |
|
Free cash flow before taxes |
75.1 |
51.6 |
20.5 |
|
Gross investments |
35.1 |
67.4 |
94.5 |
|
Return on invested capital % * |
-3.2 |
0.1 |
-5.8 |
|
Return on invested capital % before impairments * |
-1.8 |
4.4 |
-0.6 |
|
Return on equity % * |
-5.4 |
-2.1 |
-11.9 |
|
Balance sheet total |
810.6 |
899.7 |
869.2 |
|
Shareholders’ equity |
294.2 |
311.2 |
285.7 |
|
Interest-bearing net debt |
345.1 |
385.1 |
416.7 |
|
Equity ratio % |
36.9 |
35.3 |
33.8 |
|
Gearing % |
117.5 |
123.7 |
145.8 |
|
Average number of employees |
1172 |
1287 |
1226 |
|
*) Previous 12 months |
Turnover by segment
|
MEUR |
1-9/2012 |
1-9/2011 |
Change % |
1-12/2011 |
|
Biofuels |
216.7 |
236.1 |
-8.2 |
321.3 |
|
Energy peat |
135.0 |
152.5 |
-11.5 |
204.4 |
|
Wood energy and energy crops |
49.1 |
51.0 |
-3.7 |
74.0 |
|
Environmental peat |
28.2 |
28.2 |
0.0 |
38.0 |
|
Others |
5.1 |
4.4 |
14.6 |
4.9 |
|
Bioheat |
74.0 |
81.2 |
-8.9 |
110.6 |
|
Wood Products |
157.9 |
170.3 |
-7.3 |
227.2 |
|
Timber |
86.0 |
97.2 |
-11.6 |
121.3 |
|
Pellets |
72.6 |
75.1 |
-3.3 |
108.1 |
|
Environment |
83.9 |
83.8 |
0.2 |
101.9 |
|
Kekkilä businesses |
76.6 |
75.6 |
1.4 |
91.1 |
|
Mustankorkea |
7.3 |
8.2 |
-11.1 |
10.8 |
|
Inter-segment turnover |
-35.1 |
-40.6 |
13.6 |
-55.9 |
|
Group total |
497.4 |
530.7 |
-6.3 |
705.0 |
|
|
|
|
|
|
Operating result by segment
|
|
Interim Report 1.1.-30.9.2012 (pdf)
For further information please contact:
– Tomi Yli-Kyyny, CEO, Vapo Oy, tel. +358 20 790 5605
– Jyrki Vainionpää, CFO, Vapo Oy, tel. +358 20 790 5609
– Ahti Martikainen, Director, Communications and Public Affairs, Vapo Oy, tel. +358 20 790 5608