26th Mar 2009 07:00
26th March 2009
POWERFLUTE OYJ
PRELIMINARY RESULTS ANNOUNCEMENT
for the year ended 31 December 2008
Powerflute Oyj (the "Company" or "Powerflute"), the packaging group with established positions in Nordic semi-chemical fluting and coated woodfree papers, today announced results for the year ended 31 December, 2008. Powerflute is listed on the AIM market of the London Stock Exchange (Ticker: POWR) and on the First North list, the alternative market of the OMX Nordic Exchange Stockholm AB (Ticker POW1V)
Financial highlights
|
Net sales at € 108.0m (2007 - € 115.7m) |
|
|
Underlying EBITDA € 12.8m (2007 - € 20.4m) |
|
|
Operating profit € 6.0m (2007 - € 12.4m) |
|
|
Basic EPS 2.8 cents (2007 - 8.0 cents) |
|
|
Net assets € 25.8m (2007 - € 17.2m) |
|
|
Net debt € 41.6m (2007 - € 25.6m) |
Operating highlights
|
Acquisition of Papierfabrik Scheufelen, a manufacturer of coated woodfree papers, successfully completed |
|
|
Major investment in new headbox at Savon Sellu |
|
|
Establishment of Harvestia enhancing security and continuity of wood supply to Savon Sellu |
|
|
Management team strengthened with the appointment of David Walton as CFO |
Powerflute Chairman, Dermot Smurfit commented:
"Despite the unprecedented changes to the economic environment and the challenging market conditions we encountered, 2008 was a transformational year for Powerflute. It culminated in the exciting acquisition of Scheufelen, a manufacturer of coated wooodfree papers, which has both diversified the Group's operating activities and has the potential to be significantly earnings enhancing and to create value for our shareholders. With the acquisition of Scheufelen, the Group has doubled in size from a volume perspective and more than trebled its potential annual sales. Since the start of 2009, market conditions have continued to be very challenging. However, we are confident that we remain well placed to benefit from recovery."
Contacts
For additional information please contact:
|
Powerflute OYJ Dermot Smurfit (Chairman) Don Coates (Chief Executive Officer) |
c/o Billy Clegg, Financial Dynamics +44 (0)20 7269 7157 |
|
|
Collins Stewart Europe Ltd: Piers Coombs |
+44 (0)20 7523 8319 |
|
|
E.Öhman J:or Fondkommission AB: Ms Arja Väyrynen |
+358 9 8866 6029 |
|
|
Financial Dynamics: Billy Clegg Georgina Bonham |
+44 (0)20 7831 3113 |
|
|
K Capital Source Mark Kenny Jonathan Neilan |
+353 (1) 631 5500 |
About Powerflute
Powerflute Oyj ("the Company" or "Powerflute") is a packaging group with established positions in Nordic semi-chemical fluting and coated woodfree papers.
Through its subsidiary Savon Sellu Oy, the Group operates a paper mill in Kuopio, Finland which produces a specialised form of semi-chemical fluting made from birchwood sourced principally in Finland and Russia. Corrugated boxes manufactured using Nordic semi-chemical fluting demonstrate exceptional strength and moisture resistance and are extensively used for transportation of fruit and vegetables, high-value industrial goods such as electrical appliances and automotive components. The Kuopio mill has the capacity to produce up to 300,000 tonnes per annum and is one of three suppliers of Nordic semi-chemical fluting in Europe.
Through its recently acquired subsidiary Papierfabrik Scheufelen, the Group operates a paper mill in Lenningen, Germany which produces a range of coated woodfree papers from mixed hardwood and softwood pulps. Coated woodfree papers are used in the production of printed promotional material such as brochures, leaflets and other point of sale materials for producers and distributors of premium branded goods. The Lenningen mill has the capacity to produce up to 300,000 tonnes per annum and supplies the majority of its products into the European market where total demand has historically been in excess of 7.7 million tonnes per annum.
Powerflute is a public company and its shares are traded on the AIM market of the London Stock Exchange and on First North, the alternative market of the OMX Nordic Exchange Stockholm AB. For further information, please visit www.powerflute.com
Forward Looking Statements
Some statements in this announcement are forward-looking. They represent expectations for Powerflute's business, and involve risks and uncertainties. These forward-looking statements are based on current expectations and projections about future events. The Company believes that current expectations and assumptions with respect to these forward-looking statements are reasonable. However, because they involve known and unknown risks, uncertainties and other factors, which are in some cases beyond the Company's control, actual results or performance may differ materially from those expressed or implied by such forward-looking statements.
CHAIRMAN'S STATEMENT
In common with many other businesses in the paper and packaging sector, Powerflute faced unprecedented challenges in its key markets during 2008. Demand for Nordic semi-chemical fluting was weak for much of the second half of the year. In contrast, we made good progress with a number of our strategic initiatives. As outlined in more detail below, at the end of the year we successfully completed the acquisition of Papierfabrik Scheufelen ("Scheufelen"), a manufacturer of coated woodfree paper. We completed the investment in a new headbox at the Savon Sellu mill in Finland and we also established our own wood procurement organisation, Harvestia Oy ("Harvestia").
Whilst conditions are expected to remain challenging for the foreseeable future, we believe we are well positioned in strong and attractive markets and remain confident that the Group will deliver significant value for our shareholders in the medium term.
Operational Performance
The uncertainty that existed throughout global economies during the second half of the year adversely impacted demand for the Group's products. Sales fell by 7% to € 108.0m (2007 - € 115.7m) on volumes which were down by more than 10% to 234,000 tonnes. Deliveries in the fourth quarter were particularly weak and this led to market-related production stoppages in an effort to manage inventories. At the same time, many of the Group's operating expenses increased. Wood costs rose in anticipation of the imposition of Russian export duties, energy costs increased in line with rising oil prices and chemical costs increased driven by demand from bio-fuel producers. The Group also suffered from the adverse movement of the US Dollar relative to the Euro. Together these factors, lead to a 38% reduction in underlying EBITDA from € 20.4m to € 12.8m.
Strategic Initiatives
Acquisition of Papierfabrik Scheufelen
Despite the extremely challenging financial environment, we were able to successfully pursue our growth strategy and completed the acquisition of Papierfabrik Scheufelen, a manufacturer of coated woodfree papers based in Germany on 1 January 2009.
After exploring a number of opportunities in other sectors during the course of the year, we concluded that coated woodfree paper offered the best potential for creation of value for our shareholders due to the structural changes occurring in this market. Scheufelen is highly regarded by both its customers and competitors and is well positioned to benefit from the favourable developments in raw materials and energy costs and from the consolidation that will inevitably occur following the acquisition by Sappi of the coated woodfree businesses of M-Real.
The purchase consideration for the business and assets was € 34.7m including transaction costs and the total cost of the acquisition, including investment in net working capital, is expected to be some € 45.0m. Scheufelen currently has 500 employees and the capacity to produce 300,000 tonnes per annum of coated woodfree papers.
The acquisition of Scheufelen is consistent with the Group's strategy, outlined at the time of the Initial Public Offering in May 2007, of acquiring attractively priced "orphan assets" which have the potential to be significantly earnings enhancing and to create value for our shareholders.
New headbox at Savon Sellu
I am pleased to report that the major investment in a new headbox at the Savon Sellu mill in Finland was completed successfully during the year and that our customers are already seeing improved product quality and consistency, while the mill is achieving lower waste and higher running speeds. This very complex, major project was completed on time and within budget which is a credit to all of those involved.
Establishment of Harvestia
The establishment of Harvestia, a wood procurement joint venture with the Myllykoski Corporation, has been well received by the forest products industry and forest owners in Finland. Harvestia strengthens Powerflute's ability to cost effectively source raw materials in these uncertain times and is expected to result in both greater security of supply and lower overall wood procurement costs.
Funding
On 17 December 2008, under the terms of an authority granted to them at the Annual General Meeting held in Kuopio on 16 April 2008, the Board of Directors resolved to issue 56,818,174 new shares as part of the fundraising activities for the Scheufelen acquisition. The Directors believed that a placing was the most cost effective and expeditious method of raising new equity capital and did not consider that it would have been practical to complete a pre-emptive share offering in the time available. The placing was undertaken at a premium of 3% to the prevailing market price and raised proceeds net of expenses of € 9.6m.
Dividend
Powerflute paid a final dividend for the year ended 31 December 2007 of 3.366 cents per share (2006 - nil) in April 2008. In view of the continuing economic uncertainty, the Board does not intend to pay a dividend for the year ended 31 December 2008.
People
I am pleased to confirm as previously announced that the Board will be proposing the appointment of Dr. Ulrich Scheufelen and David Walton as Directors at the forthcoming Annual General Meeting to be held in April 2009. Dr. Scheufelen was previously a member of the advisory board and the principal shareholder of Scheufelen. David Walton has been working with the Group in an advisory capacity since March 2008 and was appointed as its Chief Financial Officer on 1 January 2009.
The business environment during 2008 has been extremely demanding and has presented our management and employees with many difficult challenges to which they have responded in a robust and resolute manner. They have played a vital role in the continuing growth and development of the Group and we thank them wholeheartedly for their efforts.
Outlook
Trading conditions in 2009 continue to be challenging with soft demand and limited visibility in both areas of the business. We have responded with market-related production stoppages to manage inventories and support pricing levels when necessary and have taken steps to reduce costs, maximise efficiency and conserve cash resources wherever possible.
Savon Sellu continues to experience weak demand and is being adversely affected by the slowdown in corrugated box markets and in the heavy machinery and automotive sectors. Nevertheless, we remain confident of the prospects for this specialised paper grade in the medium term.
Scheufelen is performing in-line with our expectations. While sales volumes are lower than originally anticipated due to the challenging market conditions, the impact of this is being offset by savings in raw materials and other input costs. Provided there is no further deterioration in market conditions, we remain confident of Scheufelen's prospects for the remainder of the year and excited about its future growth potential.
While there remains considerable uncertainty over the outlook for the remainder of 2009, the Group has strong businesses which operate in attractive markets and is well-positioned to benefit from market recovery.
Dermot Smurfit
Chairman
26 March 2009
CHIEF EXECUTIVE'S REVIEW OF OPERATIONS
Review of trading
After a strong start to the year, demand for our products was adversely affected by the global economic downturn and in common with many other businesses we experienced a very difficult second half. The focus of our business shifted from growth to securing our market position, managing controllable costs and conserving resources.
Sales decreased by € 7.7m (7%) to € 108.0m (2007 - € 115.7m). Sales in the first half were comparable with the same period in the prior year and the decrease of € 7.7m represented a 13% reduction in sales in the second half, most of which occurred in the final quarter of the year. Delivered volumes reduced by 11% to 234,000 tonnes (2007 - 262,000 tonnes).
Underlying EBITDA from operating activities decreased by € 7.6m (38%) to € 12.8m (2007 - € 20.4m) while operating profit decreased by € 6.4m (52%) to € 6.0m (2007 - € 12.4m). The principal causes of the reductions were lower production volumes and increases in wood, energy and other raw material costs which exceeded the increase in average selling prices.
In the first half, we made good progress in many areas of the business as strong underlying demand allowed us to maintain delivered volumes at close to 2007 levels. We achieved a greater degree of penetration in developing markets while maintaining volumes within our traditional European customer base. Production efficiencies improved within the Savon Sellu mill following the completion of a number of important investment projects and controllable costs were well managed.
The Group experienced significant cost increases on each of its principal raw materials during the first half of the year. Wood and other fibre costs rose by 12% as producers took advantage of the rising cost of Russian-sourced wood following the imposition of export duties and increased prices for domestically sourced timber. Energy costs increased by 25% and the cost of ammonium water, a chemical used in the production of pulp, increased by 54% due to strong demand for ammonia from manufacturers of fertiliser used in the production of bio-fuels.
The continuing upward trend in the pricing cycle for Nordic semi-chemical fluting during the first half of the year enabled the successful introduction of average price increases of 8% in most markets. However, the marked weakening of the US dollar against the Euro adversely impacted the profitability of US Dollar denominated sales into developing countries and markets outside Europe.
Despite rising raw material costs and the weakening of the US Dollar, the underlying operating performance achieved in the first half was broadly in line with our expectations and was comparable with that achieved in the prior year.
Demand during the seasonally weaker summer months was slightly lower than expected due to a number of factors, including poor fruit harvests in parts of southern Europe. However, it was during the fourth quarter that the trading environment deteriorated sharply as the financial crisis adversely impacted on the availability of credit leading to widespread destocking throughout the supply chain.
As the global economic environment deteriorated as the year progressed, demand continued to weaken. Markets in developing countries were affected by the downturn more than those in traditional European markets, while packaging for industrial goods suffered significantly more than that for fruit and vegetables.
In order to effectively balance supply and demand in support of current pricing levels and to ensure inventory levels remain within acceptable limits, a decision was taken to take a total of 36 days of market-related production stoppages during the third quarter and fourth quarters.
Strategic Initiatives
The Group made good progress with its key strategic initiatives during the year:
Upgrades to paper machine
In April and May, we completed the multi-year refurbishment of the paper machine at Savon Sellu with the installation of the new headbox at a cost of € 4.4m. The headbox is where paper is initially formed by extracting water from liquefied wood pulp. This technically complex project had to be completed to a very demanding schedule during the annual maintenance shutdown and was delivered on time and within budget.
In the relatively short time since the installation of the new headbox, we have already achieved major improvements in the strength and stiffness of our papers. This has resulted in substantial performance benefits for our customers and significant reductions in waste and production interruptions within the mill. Further improvements are expected as the processes are optimised.
Wood procurement strategy
In February 2008, we announced the establishment of a joint venture with Myllykoski Corporation, one of the world's leading producers of publication papers. The new business which is called Harvestia Oy will manage the wood procurement requirements of both Savon Sellu and Myllykoski and will ensure security and continuity of supply.
Both Powerflute and Myllykoski regard achieving greater control over the sourcing of wood, the principal raw material, as a strategic priority. Harvestia commenced procurement activities during the third quarter and its performance during this start-up phase was in line with our expectations.
Acquisitions
Despite the challenging economic environment, we continue to pursue our strategy of achieving growth through the acquisition of underperforming forest products businesses. During the year, we evaluated a number of interesting opportunities in both related and complementary sectors. However, unrealistic price expectations on the part of the sellers, together with concerns over the impact of the general economic slowdown on corrugated box markets led us to search for opportunities to create value for our shareholders through acquisitions in other, non-related sectors.
On 17 December, the Group announced that its acquisition of the business and assets of Papierfabrik Scheufelen, a manufacturer of coated woodfree papers based in Lenningen, Germany had become unconditional. The consideration for the purchase of the property, plant and equipment and inventories was € 34.7m including transaction costs. The total cost of the acquisition, including investment in net working capital and transaction costs, is expected to be in the region of € 45.0m and will be funded through an increase in the Group's bank facilities and the net proceeds of € 9.6m from the share placing undertaken in December 2008.
Coated woodfree papers are used extensively in the production of printed promotional material by producers of premium-branded goods and are manufactured from wood pulp which is purchased on international markets. After many years of oversupply and deteriorating profitability, news of capacity reductions and consolidation amongst the market leaders suggested that the sector was poised for cyclical recovery. Evidence of this was the mill closures announced in late 2007 and early 2008, together with the further capacity reductions and price increases communicated in October 2008 when Sappi, the market leader, acquired the coated woodfree businesses of M-real
In Scheufelen, we have been fortunate to acquire a business that has a strong heritage and brand identity, an excellent reputation for quality and service with its customers and which is ideally situated in the centre of the largest geographical concentration of high-quality printers, the principal converters of coated woodfree papers, in Europe.
Since we completed the acquisition of Scheufelen on 1 January 2009, market conditions have continued to deteriorate and demand has weakened. However, pulp and energy prices have also fallen sharply and we remain confident that Scheufelen's strong customer relationships and competitive position will allow it to prosper and perform in line with our expectations, provided there is no further deterioration in market conditions or weakening of demand.
Objectives for 2009
In many respects, 2008 was a transformational year for Powerflute. We completed the multi-year investment programme in Savon Sellu, our Nordic semi-chemical fluting business, and secured continuity of future wood supplies with the establishment of Harvestia. With the acquisition of Scheufelen, we have diversified into a new and exciting sector which offers significant potential for future growth and value creation. The Group has doubled in size from a volume perspective and more than trebled its potential annual sales. We were also able to strengthen and expand our shareholder base through the share placing undertaken to finance the acquisition.
In 2009, we will focus on consolidating the progress made to date in Savon Sellu and on integrating Scheufelen into the Group and driving further improvement in its performance. The trading environment will undoubtedly continue to be extremely challenging and we are working hard to consolidate our market positions and drive down production costs wherever possible. We are confident that each of our businesses is well positioned in attractive markets and we remain confident of our ability to create and return value to our shareholders.
Don Coates
Chief Executive
26 March 2008
FINANCIAL REVIEW
Income Statement
Revenue
Sales reduced by 7% to € 108.0m (2007 - € 115.7m) reflecting weak demand in most markets during the second half of the year. Sales into Countries in the EU reduced by 7.5% or € 4.6m and sales into Other Countries fell by 17% or € 6.5m, while sales into Asia increased by 23% or € 3.4m. These changes reflect the impact of the following:
11% reduction in delivered tonnages, from 262,000 tonnes in 2007 to 234,000 in 2008.
5% increase in average selling prices, achieved during the first half of the year.
The weakening of the US Dollar.
Reduced demand in Southern European fruit producing countries, particularly Spain, was only partially offset by sales into the Middle East, Africa, the Philippines and other fruit producing nations. The weakening of the Euro against the US Dollar had a significant impact as some 35% of the Group's sales are denominated in Dollars.
Operating Profit
Operating profit reduced by 52% to € 6.0m (2007 - € 12.5m). The principal causes of this were the 11% reduction in delivered tonnages, which necessitated prolonged production stoppages to effectively manage inventory levels during the fourth quarter, and sharp increases in the cost of several key raw materials and energy costs which could not be passed on to customers. Wood and other fibre costs per tonne increased by 12% during the period, while energy costs per tonne increased by 15% compared with the previous year.
Sales, general and administrative overheads were tightly controlled at the mill and were below previous year's levels. Corporate overheads increased compared with the previous year reflecting changes to the senior management structure and other costs which are now incurred on a full year basis following the Initial Public Offering in May 2007.
Underlying EBITDA
|
2008 |
2007 |
|
|
€ m |
€ m |
|
|
Operating profit |
6.0 |
12.5 |
|
Share of losses of associates |
0.4 |
- |
|
Depreciation and amortization |
5.4 |
5.2 |
|
EBITDA |
11.8 |
17.7 |
|
Non-recurring expenses |
1.0 |
3.3 |
|
Non-recurring income |
- |
(0.6) |
|
12.8 |
20.4 |
In 2008, non-recurring expenses included costs associated with the removal of accumulated process waste and by-products from the Kuopio site, the unrecovered element of costs related to a dispute over the disposal of waste products at a landfill site prior to the Group's acquisition of Savon Sellu and costs associated with unsuccessful acquisition projects. In 2007, the principal item included in non-recurring expenses was costs associated with the Initial Public Offering in May 2007.
Finance income and expenses
Net finance income and expenses reduced slightly to € 2.4m (2007 - € 2.6m).The underlying interest cost reduced as lower borrowings and an increase in cash and short-term deposits offset moderate increases in interest rates during the period.
Taxation
Tax on profits was € 1.0m (2007 - € 2.8m) and represented an effective tax rate of 29% (2007 - 28%). The rate is higher than the corporation tax rate in Finland of 26% due to the inclusion in the income statement of items which are non-deductible for tax purposes. The effective rate is higher than in 2007, which benefited from a number of adjustments relating to prior years and the inclusion of tax-exempt income.
Earnings per share and dividends
Basic earnings per share were 2.8 cents per share (2007 - 8.0 cents per share). Although the Group has a number of share option schemes in place for its Directors and senior management the fair market value of the options is such that there is currently no dilutive effect.
In view of the uncertain economic environment the Board does not intend to pay a dividend for the year ended 31 December 2008.
Balance sheet
The Group's net assets increased by € 8.6m to € 25.8m (2007 - € 17.2m) at 31 December 2008. The principal reasons for this are the net increase in share capital of € 9.6m arising from the placing in December 2008, the retained profit for the year of € 2.5m and credits relating to share schemes of € 0.6m. These were offset by payment of the final dividend for 2007 of € 3.0m in April 2008 and unrealised losses of € 1.1m on commodity derivatives treated as cash flow hedges.
Capital expenditure was € 6.1m (2007 - € 5.5m). Expenditure in both 2007 and 2008 was affected by the total investment of more than € 4.4m in the new headbox in Savon Sellu.
The most significant item in the balance sheet at 31 December 2008 was prepayments of € 25.3m which were made in connection with the acquisition of Scheufelen. Under the terms of the agreement to acquire Scheufelen, ownership of the assets and responsibility for the economic effects of the business did not transfer to the Group until 1 January 2009. However, the Group was required to make a number of payments to the seller of the business during December and also incurred costs and expenses in connection with the transaction during 2008. These have been reported within non-current assets and treated effectively as a prepayment of the investment in a subsidiary.
Net working capital was effectively managed during the period and after adjusting for the impact of accrued expenses relating to the Scheufelen acquisition was broadly comparable with the levels achieved in the prior year. This was despite the challenges of managing inventory and credit terms in a deteriorating economic environment.
Cash flow
Net debt increased by € 16.0m (2007 - € 7.8m reduction) during the year to € 41.6m (2007 - € 25.6m) due entirely to the funding of the Scheufelen acquisition.
During the year, the Group generated net cash inflow from operating activities of € 9.7m (2007 - € 13.3m) and net cash inflow from financing activities of € 28.9m (2007 - € 9.8m outflow). The inflow from operating activities comprised EBITDA of € 11.8m (2007 - € 17.7m) and a net inflow from working capital of € 1.2m (2007 - € 1.8m outflow), offset by taxes paid of € 4.0m (2007 - € 2.5m) and other items of € 0.7m (2007 - € 0.9m). The inflow from financing activities comprised net proceeds from a share issue of € 9.6m and a net increase in borrowings of € 19.2m. In 2007 the Group repaid borrowings of € 9.8m.
The principal payments made during the period were:
€ 23.0m prepayment of consideration for the acquisition of Scheufelen (2007 - nil).
€ 6.1m of capital expenditure (2007 - € 5.5m).
€ 4.0m of taxes (2007 - € 2.5m)
€ 3.0m of dividends (2007 - nil)
€ 2.5m of interest and similar costs (2007 - € 2.6m)
Cash and cash equivalents increased by € 3.1m to € 9.9m (2007 - € 6.8m).
Key performance indicators
The key financial and non-financial performance indicators ("KPIs") used by the Board to monitor progress are listed in the table below. The sources of data and the methods of calculation are consistent on a year-on-year basis.
|
Measure |
2008 |
2007 |
Definition, method of calculation and analysis |
|
Average daily production |
724 T/day |
725 T/day |
Average daily production, adjusted to take account of annual maintenance and market related stoppages, is the key measure of operational effectiveness. Source: Internal data |
|
Average selling price |
461 €/T |
440 €/T |
The average selling price achieved. Average selling prices increased by 5% as a result of increases implemented early in 2008. Source: Internal data |
|
EBITDA margin |
14% |
21% |
EBITDA is regarded as the most appropriate measure of short-term profitability in what is a capital intensive industry. EBITDA margin deteriorated during 2008 due to increases in raw material costs and lower volumes. Source: Internal data |
|
No. of days sales in trade receivables |
68 days |
68 days |
A measure of the time taken for the Group to convert receivable balances into cash. A high proportion of the Group's customers are located in markets where credit terms of 60 to 90 days are normal. Source: Internal data |
|
No. of days sales in finished goods inventory |
19 days |
17 days |
A measure of the effectiveness of capacity and inventory management. The level of inventories increased slightly in 2008 due to the difficult economic environment and weak order situation. Source: Internal data |
The Group performed strongly in terms of productivity and efficiency, but financial performance was adversely affected by increases in raw material and energy costs that outpaced the increase in average selling prices and by the impact of the economic downturn on order intake and overall utilisation levels.
Treasury management and currency risk
The functional currency of the Group is Euro. The Group also has considerable transactional and balance sheet exposures to the US Dollar. The transactional exposure arises as approximately one third of the Group's sales by volume and value and approximately 10% of its raw materials purchases are denominated in US Dollars. The balance sheet exposure arises in connection with the related assets and liabilities arising from these transactions.
It is the policy of the Group to hedge up to 100% of its foreign currency exposures for a maximum period of up to 12 months using forward exchange contracts. The Group does not seek to designate such derivative contracts as hedges for the purpose of hedge accounting. Forward currency exposures are reviewed on an ongoing basis by the senior management of the Group, but decisions on the application and implementation of the hedging policy are reserved for the Board. The Group does not engage in currency speculation.
Liquidity and covenants
At 31 December 2008, the Group had total borrowing facilities of € 52.4m (2007 - € 36.4m) of which it was utilising € 49.7m (2007 - € 30.7m) and had cash and short-term deposits of € 9.9m (2007 - € 6.8m).
The maturity profile of the Group's bank debt at 31 December 2008 was as follows:
|
2008 |
2007 |
|
|
€ m |
€ m |
|
|
Long-term debt (2010 - 2016) |
42.7 |
26.7 |
|
Short-term debt (2009) |
7.0 |
4.0 |
|
49.7 |
30.7 |
|
|
Cash and short-term deposits |
(9.9) |
(6.8) |
|
39.8 |
23.9 |
As at 31 December 2008, short-term debt was € 7.0m which was adequately covered by cash and short-term deposits and available but unutilised facilities. Long-term debt includes a securitised revolving credit facility of € 20.0 of which € 18.5m was utilised at 31 December 2008 (2007 - € 14.5m). In the normal course of business this facility should continue to be available to the Group on an ongoing basis. For further information on the Group's borrowing facilities, please refer to Notes 16 and 24.
Separate financial covenants apply to each of the Group's borrowing facilities. Approximately € 10.0m (2007 - nil) of the Group's borrowings are made to the recently established German subsidiaries and are subject to covenants which are tested by reference to the consolidated performance of the German companies and effectively to the performance of Scheufelen. The remainder of the Group's borrowings are made to Savon Sellu, the principal Finnish trading company, and are subject to covenants which are tested by reference to the consolidated performance of the Group's Finnish companies.
The principal covenants which apply to the Group's borrowings are as follows:
Ratio of senior net debt to EBITDA
Ratio of EBITDA to Total Net Cash Interest Cover
Debt Service Cover
At 31 December 2008, the Group was in compliance with all of its borrowing covenants.
Principal risks and uncertainties
The management of the Group's businesses and the execution of its strategy are subject to a number of risks attributable to both the specific operations of the business and to the macroeconomic environment. The following section comprises a summary of what the Board consider to be the principal risks and uncertainties which could potentially impact on the Group's operating and financial performance.
Macro economic environment
The majority of the Group's products are utilised in packaging and promotional materials within extended supply chains. Both in the short and medium term, demand for the Group's products is susceptible to economic cycles and levels of business confidence. By virtue of its position in the supply chain, the Group's visibility of order intake and profitability is quite short and tends to reduce further during periods of economic downturn.
Competition
The Group operates in well-defined and structured markets where there are a limited number of producers and consumers. The capital intensive nature of the business and high operational gearing can lead to the adoption of a marginal pricing philosophy by some participants in the pursuit of maximum machine utilisation. This can lead to downward pressure on prices and margins for all participants.
Technology
There is steady and constant technical evolution in each of the Group's principal markets as participants seek to improve the functionality and performance of their products while simultaneously reducing manufacturing costs. While step changes in either product performance or production cost are rare, small incremental changes can lead to clearly discernable differences necessitating constant investment in development and product evolution, even in times of economic uncertainty and weak demand.
People
Due to its relatively small size, there are certain areas where the Group is dependent upon the contribution of a number of key individuals, either collectively or individually. The Group seeks to mitigate this risk through succession planning, competitive pay and remuneration policies and the encouragement of regular and routine exchanges of information and ideas throughout the businesses, including regular opportunities for key personnel to visit other facilities.
Financial
The Group operates in markets where goods are often supplied or purchased on 60 to 90 day terms and where the use of credit insurance is commonplace. The recent economic uncertainty has lead to a dramatic tightening of the market for credit insurance with the result that many limits have been reduced or withdrawn and the Group is increasingly being forced to accept more financial risk.
Post year-end events
On 17 December 2008, the Group announced that it had entered into a binding agreement to purchase the business and assets of Scheufelen, a manufacturer of coated woodfree papers in Lenningen, Germany. The transaction completed on 1 January 2009. The consideration for the purchase of the property, plant and equipment and inventory was € 34.7m, including transaction costs. The total cost of the acquisition including investment in net working capital, is expected to be € 45.0m. The transaction included the purchase of the Scheufelen paper mill in Lenningen which is equipped with two paper machines producing some 300,000 tonnes per annum of coated woodfree papers, together with the know-how, brands, order book, customer lists, intellectual property and tangible assets.
David Walton
Chief Financial Officer
26 March 2009
INCOME STATEMENT
for the year ended 31 December 2008
|
|
2008 |
|
2007 |
|||||
|
Note |
€ 000 |
€ 000 |
||||||
|
Revenue |
5 |
108,027 |
115,737 |
|||||
|
Other operating income |
6 |
337 |
2,034 |
|||||
|
Changes in inventories of finished goods and work in progress |
700 |
(684) |
||||||
|
Raw materials and consumables used |
(57,471) |
(56,518) |
||||||
|
Employee benefits expense |
7 |
(13,837) |
(14,424) |
|||||
|
Other expenses |
8 |
(25,924) |
(28,435) |
|||||
|
Share of losses of associates |
4 |
(434) |
- |
|||||
|
Depreciation and amortisation |
14, 15 |
(5,403) |
(5,262) |
|||||
|
Operating Profit |
5,995 |
12,448 |
||||||
|
Finance income |
9 |
130 |
70 |
|||||
|
Finance expenses |
10 |
(2,539) |
(2,706) |
|||||
|
Profit before taxation |
3,586 |
9,812 |
||||||
|
Income tax expense |
12 |
(1,045) |
(2,757) |
|||||
|
Profit for the period |
2,541 |
7,055 |
||||||
|
Attributable to |
||||||||
|
- equity holders of the company |
2,541 |
7,055 |
||||||
|
Earnings per share (cents per share) |
||||||||
|
Basic |
13 |
2.8 |
8.0 |
|||||
|
Diluted |
2.8 |
8.0 |
||||||
BALANCE SHEET
at 31 December 2008
|
Note |
2008 € 000 |
2007 € 000 |
||||||
|
ASSETS |
||||||||
|
Non-current assets |
||||||||
|
Property, plant and equipment |
14 |
33,946 |
31,132 |
|||||
|
Intangible assets |
15 |
2,175 |
4,273 |
|||||
|
Investment in associated companies |
4 |
610 |
- |
|||||
|
Prepayments for acquisition |
3 |
25,295 |
- |
|||||
|
Derivative financial instruments |
16, 17 |
- |
236 |
|||||
|
Deferred income tax asset |
12 |
|
1,106 |
|
112 |
|||
|
Total non-current assets |
|
63,132 |
|
35,753 |
||||
|
Current assets |
||||||||
|
Inventories |
18 |
12,901 |
8,989 |
|||||
|
Trade and other receivables |
16, 19 |
18,805 |
25,599 |
|||||
|
Derivative financial instruments |
16, 17 |
510 |
580 |
|||||
|
Cash and short-term deposits |
16, 20 |
|
9,896 |
|
6,785 |
|||
|
Total current assets |
|
42,112 |
|
41,953 |
||||
|
TOTAL ASSETS |
|
105,244 |
|
77,706 |
||||
|
EQUITY AND LIABILITIES |
||||||||
|
Capital and reserves attributable to equity holders of the company |
||||||||
|
Issued share capital |
21 |
88 |
88 |
|||||
|
Reserves |
8,492 |
- |
||||||
|
Retained earnings |
17,223 |
17,085 |
||||||
|
Total equity |
|
25,803 |
|
17,173 |
||||
|
Non-current liabilities |
||||||||
|
Interest-bearing loans and borrowings |
16, 24 |
44,449 |
28,192 |
|||||
|
Employee benefit liability |
25 |
- |
121 |
|||||
|
Derivative financial instruments |
16, 17 |
765 |
- |
|||||
|
Deferred income tax liabilities |
12 |
|
5,756 |
|
5,150 |
|||
|
Total non-current liabilities |
|
50,970 |
|
33,463 |
||||
|
Current liabilities |
||||||||
|
Trade and other payables |
16, 23 |
20,551 |
19,909 |
|||||
|
Interest-bearing loans and borrowings |
16, 24 |
7,064 |
4,164 |
|||||
|
Employee benefit liability |
25 |
121 |
188 |
|||||
|
Derivative financial instruments |
16, 17 |
735 |
- |
|||||
|
Current income tax liabilities |
|
- |
|
2,809 |
||||
|
Total current liabiltiies |
|
28,471 |
|
27,070 |
||||
|
Total liabilities |
|
79,441 |
|
60,533 |
||||
|
TOTAL EQUITY AND LIABILITIES |
|
105,244 |
|
77,706 |
||||
STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2008
|
Attributable to equity holders of the company |
||||||||||
|
Note |
Share capital |
Other reserves |
Retained earnings |
Total equity |
||||||
|
€ 000 |
€ 000 |
€ 000 |
€ 000 |
|||||||
|
Balance at 1 January 2007 |
88 |
- |
9,550 |
9,638 |
||||||
|
Profit for the period |
- |
- |
7,055 |
7,055 |
||||||
|
Share based payments |
11 |
- |
- |
480 |
480 |
|||||
|
Balance at 31 December 2007 |
88 |
- |
17,085 |
17,173 |
||||||
|
Balance at 1 January 2008 |
88 |
- |
17,085 |
17,173 |
||||||
|
Profit for the period |
- |
- |
2,541 |
2,541 |
||||||
|
Issue of shares |
21 |
- |
10,000 |
- |
10,000 |
|||||
|
Transaction costs |
21 |
(398) |
- |
(398) |
||||||
|
Share based payments |
11 |
- |
- |
559 |
559 |
|||||
|
Cash flow hedges net of tax |
16 |
- |
(1,110) |
- |
(1,110) |
|||||
|
Dividends |
22 |
- |
- |
(2,962) |
(2,962) |
|||||
|
Balance at 31 December 2008 |
88 |
8,492 |
17,223 |
25,803 |
||||||
CASH FLOW STATEMENT
for the year ended 31 December 2008
|
2008 |
2007 |
|||||||||
|
Note |
€ 000 |
€ 000 |
||||||||
|
Operating activities |
||||||||||
|
Profit before tax from continuing operations |
3,586 |
9,812 |
||||||||
|
Non-cash: |
||||||||||
|
Depreciation of property, plant and equipment |
14 |
3,305 |
3,167 |
|||||||
|
Amortisation of intangible assets |
15 |
2,098 |
2,095 |
|||||||
|
Share-based payment expense |
11 |
559 |
480 |
|||||||
|
Change in financial instruments |
16 |
306 |
(667) |
|||||||
|
Gain on disposal of property, plant and equipment |
- |
(586) |
||||||||
|
Finance income |
9 |
(130) |
(70) |
|||||||
|
Finance expense |
10 |
2,539 |
2,706 |
|||||||
|
Share of net loss in associate |
4 |
434 |
- |
|||||||
|
Movements in provisions, pensions and government grants |
25 |
(188) |
(361) |
|||||||
|
Working capital adjustments: |
||||||||||
|
Change in trade and other receivables |
6,794 |
(5,117) |
||||||||
|
Change in inventories |
(3,912) |
1,957 |
||||||||
|
Change in trade and other payables |
(1,711) |
2,350 |
||||||||
|
Income tax paid |
(3,962) |
(2,466) |
||||||||
|
Net cash flows from operating activities |
9,718 |
13,300 |
||||||||
|
Investing activities |
||||||||||
|
Purchase of property, plant and equipment |
(6,119) |
(5,493) |
||||||||
|
Investment in an associated company |
(1,044) |
- |
||||||||
|
Prepayments for acquisition |
29 |
(22,950) |
- |
|||||||
|
Proceeds from sale of property |
- |
2,880 |
||||||||
|
Interest received |
130 |
272 |
||||||||
|
Net cash flows used in investing activities |
(29,983) |
(2,341) |
||||||||
|
Financing activities |
||||||||||
|
Proceeds from issue of shares |
21 |
10,000 |
- |
|||||||
|
Transaction costs of issue of shares |
21 |
(398) |
- |
|||||||
|
Proceeds from borrowings |
23,415 |
- |
||||||||
|
Repayment of borrowings |
(4,000) |
(9,600) |
||||||||
|
Payment of finance lease liabilities |
(251) |
(176) |
||||||||
|
Interest and similar costs paid |
(2,428) |
(2,556) |
||||||||
|
Dividends paid |
22 |
(2,962) |
- |
|||||||
|
Net cash flows from financing activities |
23,376 |
(12,332) |
||||||||
|
Net increase/(decrease) in cash and cash equivalents |
3,111 |
(1,373) |
||||||||
|
Cash and cash equivalents at 1 January |
20 |
6,785 |
8,158 |
|||||||
|
Cash and cash equivalents at 31 December |
20 |
9,896 |
6,785 |
|||||||
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Corporate Information
Powerflute Oyj is a public limited company incorporated and domiciled in Finland. The address of the registered office is Sorsasalo/Box 57, FI-70101 Kuopio, Finland.
The principal activity of the Group during the year ended 31 December 2008 was the manufacture and sale of Nordic semi-chemical fluting. The Group's products were sold globally, with the main market being Europe. With effect from 1 January 2009, the Group acquired the business and assets of Papierfabrik Scheufelen, a manufacturer of coated woodfree papers. Scheufelen's products are sold predominantly in Europe.
2.1 Basis of preparation
The consolidated financial information has been prepared on a historical cost basis, except for derivative financial instruments that have been measured at fair value. The consolidated financial statements are presented in euros and all values are rounded to the nearest thousand (€000) except when otherwise indicated.
Statement of compliance
The consolidated financial information of Powerflute Oyj and its subsidiary has been prepared in accordance with International Financial Reporting Standards (IFRS).
Basis of consolidation
The consolidated financial information comprises the financial information of Powerflute Oyj and its subsidiary as at 31 December each year. The financial information of the subsidiary is prepared for the same reporting year as the parent company, using consistent accounting policies.
All intra-group balances, transactions, income and expenses and unrealised profits and losses resulting from intra-group transactions are eliminated in full.
The business combination of Powerflute Oyj and Savon Sellu Oy is accounted for in accordance with the pooling of interest method.
2.2 Changes in accounting policy and disclosures
The Group has adopted the following new and amended IFRS and IFRIC interpretations as of 1 January 2008:
IFRIC 11 IFRS 2 - Group and Treasury Share Transactions.
IFRIC 12 - Service Concession Arrangements
IFRIC 14 IAS 19 - The Limit on a Defined benefit Asset, Minimum Funding Requirements and their interaction.
Adoption of these interpretations did not have any effect on the financial position or performance of the Group.
2.3 Significant accounting judgments, estimates and assumptions
The preparation of the Group's financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future.
Judgments
Estimates are based on historical experience and various other assumptions that are believed to be reasonable, though actual results and timing could differ from the estimates. Management believes that the accounting policies below represent those matters requiring the exercise of judgment where a different opinion could result in the greatest changes to reported results.
Estimates and assumptions
The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
(i) Fixed Assets
For material fixed assets acquired in the fluting business acquisition, the Group's management performed a fair valuation of the acquired fixed assets and determined their remaining useful lives. The Group's management believes that the assigned values and useful lives, as well as the underlying assumptions, are reasonable, though different assumptions and assigned lives could have a significant impact on the reported amounts.
The carrying amounts of fixed assets are reviewed at each balance sheet date or whenever events or changes in circumstances indicate that the carrying amount of an asset may be impaired. Triggering events for impairment reviews include, among others:
A permanent deterioration in the economic or political environment of customers or Group activities; Significant under-performance relative to expected historical or projected future performance; and
Material changes in strategy affecting Group business plans and previous investment policies.
If any such indications exist, the recoverable amount of an asset is estimated as the higher of the net selling price and the value in use, with an impairment charge being recognized whenever the carrying amount exceeds the recoverable amount.
(ii) Share-based payments
The Group measures the cost of equity-settled transactions with employees by reference to the fair value of the equity instruments at the date at which they are granted. Estimating fair value requires determining the most appropriate valuation model for a grant of equity instruments, which is dependent on the terms and conditions of the grant. This also requires determining the most appropriate inputs to the valuation model including the expected life of the option, volatility and dividend yield and making assumptions about them. The assumptions and models used are disclosed in Note 11.
a. Income Taxes
Deferred income taxes are provided using the liability method, as measured with enacted tax rates, to reflect the net tax effects of all temporary differences between the carrying amounts for financial reporting purposes and the tax bases of assets and liabilities. Principal temporary differences arise from depreciation on property, plant and equipment, fair valuation of net assets at acquisition, fair valuation of derivative financial instruments and tax losses carried forward. Related deferred tax assets are recognised to the extent it is probable that future taxable profits will be available against which deductible temporary differences and unused tax losses may be utilised.
Tax assets and liabilities are reviewed on a periodic basis and balances are adjusted as appropriate. The Group's management considers that adequate provision has been made for future tax consequences based upon current facts, circumstances and tax law. However, should any tax positions be challenged and not prevail, different outcomes could result and have significant impact on the amounts reported in the consolidated financial information.
b. Environmental Remediation Costs
Environmental expenditures resulting from the remediation of an existing condition caused by past operations and which do not contribute to current or future revenues, are expensed as incurred. Environmental liabilities are recorded, based on current interpretations of environmental laws and regulations, when it is probable that a present obligation has arisen and the amount of such liability can be reliably estimated. However, establishing the precise nature of any contingent liability for environmental liabilities is by its very nature extremely subjective, thus the Group's management can only make its best estimate based on the facts known at the time and by external advice where appropriate.
2.4 Summary of significant accounting policies
Foreign currency translation
The consolidated financial information is presented in euros, which is the Group's functional and presentation currency. Transactions denominated in foreign currency are translated into euros using the exchange rate on the transaction date. Receivables and liabilities in foreign currencies are translated into euros using the exchange rates prevailing at the balance sheet date. Foreign exchange differences for operating items are recorded in the appropriate income statement account before operating profit and, for financial assets and liabilities, in the financial items of the Income Statement.
Property, plant and equipment
Plant and equipment is stated at cost, excluding the costs of day to day servicing, less accumulated depreciation and accumulated impairment losses. Such cost includes the cost of replacing part of the plant and equipment when that cost is incurred, if the recognition criteria are met. Borrowing costs are expensed as incurred.
Land and buildings are stated at cost, excluding the costs of day to day servicing, less accumulated depreciation and accumulated impairment losses.
Depreciation is calculated on a straight line basis over the useful life of the assets.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. The asset's residual values, useful lives and methods of depreciation are reviewed and adjusted, if appropriate, at each financial year end.
Land and water areas are not depreciated as they are deemed to have indefinite life, but otherwise depreciation is based on the following expected useful lives:
|
Plant and equipment |
5-20 years |
|
Buildings |
10-50 years |
|
Other capitalized expenses |
5-20 years |
Ordinary maintenance and repair charges are expensed as incurred, however, the costs of significant renewals and improvements are capitalised and depreciated over the remaining useful lives of the related assets. Retirements, sales and disposals of property, plant and equipment are recorded by deducting the cost and accumulated depreciation from accounting records with any resulting terminal depreciation adjustments reflected in impairment charges in the income statement; capital gains are shown in "other operating income".
Business combinations and goodwill
Business combinations other than those between entities under common control are accounted for in accordance with the purchase method. Under the purchase method the cost of acquisition is allocated to the acquired identifiable assets, liabilities and contingent liabilities (net assets) based on their fair values at the date of acquisition. Any difference between the cost of acquisition and the fair value of the acquired net assets is recognised as goodwill in the consolidated balance sheet or income (referred to as negative goodwill) in the consolidated income statement.
Goodwill is initially measured at cost, being the excess of the cost of acquisition over the fair value of the acquired net assets. Following initial recognition, goodwill is measured at cost less accumulated impairment losses. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the carrying value may be impaired.
Business combinations between entities under common control are accounted for in accordance with the pooling of interest method. Under the pooling of interest method the entities are combined from the beginning of the financial year in which the combination took place. The consolidated income statement reflects the results of the combining entities for the full year and the consolidated balance sheet the assets and liabilities at their carrying values. The excess of the cost of acquisition over the share capital of the acquired entity is recognised in consolidated shareholders' equity. Goodwill is not recognised.
Investment in associated companies and joint ventures
Associated companies are entities over which the Group has significant influence but no control. The Group's investment in its associate is accounted for using the equity method of accounting. Joint ventures are entities over which the Group has contractually agreed to share the power to govern the financial and operating policies of that entity with another venturer or venturers.
Under this method, the Group's investment in its associate is initially recorded at cost and is then adjusted for post acquisition changes in the Group's share of the net assets of the associate. The Group's share of the associated company's and joint venture's profit or loss for the year is recognised on the income statement and its share of movements in reserves is recognised in reserves. The Group's interest in an associated company and joint venture is carried on the balance sheet at an amount that reflects its share of the net assets of the associated company and joint venture together with goodwill on acquisition (net of any accumulated impairment loss), less any impairment in the value of individual investments.
Unrealised gains and losses on transactions between the Group and its associates and joint ventures are eliminated to the extent of the Group's interest in the associated company and joint venture, unless the loss provides evidence of an impairment of the asset transferred. Associated company and joint venture accounting policies have been changed where necessary to ensure consistency with the policies adopted by the Group. Equity accounting is discontinued when the carrying amount of the investment in an associated company or interest in a joint venture reaches zero, unless the Group has incurred or guaranteed obligations in respect of the associated company or joint venture.
Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is fair value as at the date of acquisition.
Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets are not capitalised and expenditure is reflected in the income statement in the year in which the expenditure is incurred.
The useful lives of intangible assets are assessed to be finite.
Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortisation period and the amortisation method for the intangible asset with a finite useful life is reviewed at least at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. The amortisation expense on intangible assets with finite lives is recognised in the income statement in the expense category consistent with the function of the intangible asset.
Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the income statement when the asset is derecognised.
Intangible assets are recognised in the balance sheet at the original cost of acquisition, and are amortised using the straight-line method during their useful life. The amortisation of intangible assets is based on the following estimates of useful life:
Customer contracts 5 years
IT software 5 years
Other intangible assets 10 years
Research and development costs
Research and development costs are expensed as incurred. The Group has no development project expenditures that should be recognised as an intangible asset.
Impairment of non-financial assets
The Group assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash-generating unit's fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.
For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such indication exists, the Group makes an estimate of recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset's recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such reversal is recognised in profit or loss unless the asset is carried at revalued amount, in which case the reversal is recognised in profit or loss or shareholders' equity correspondingly to the recognition of the impairment loss.
Financial assets
Financial assets have been classified according to the IAS standard 39 as follows: 1) Financial assets at fair value through profit or loss, 2) Held-to-maturity investments, 3) Loans and other receivables and 4) Available-for-sale financial assets. The Group has financial assets only in the categories of Loans and other receivables as well as Financial assets at fair value through profit or loss (Derivative financial instruments). Categorisation depends on the purpose for which the assets were acquired and is made at the time they were originally recorded. Financial asset purchases and sales are recorded on the trade date, which is the date that Group commits to purchase the asset. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments other than at fair value through profit and loss, directly attributable transaction costs.
The Group determines the classification of its financial assets after initial recognition and, where allowed and appropriate, re-evaluates this designation each financial year.
(i) Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss includes financial assets held for trading and financial assets designated upon initial recognition as at fair value through profit or loss.
Financial assets are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated as effective hedging instruments or a financial guarantee contract. Gains or losses on assets held for trading are recognised in profit or loss.
(ii) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and the company does not hold them for trading purposes. This category includes those financial assets that arise when delivering money, goods or services to a debtor. They are valued at amortised cost and included in the current-and non-current financial assets. The loan receivables are recognised at cost in the balance sheet and the management makes an assessment of them on the reporting date. If the value of the receivables has been impaired, an impairment loss is recognised in the income statement. The amount of impairment loss is measured as the difference between the book value and the present value of future cash flows of the receivables.
(iii) Available-for-sale financial investments
Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the two preceding categories. After initial measurement, available for sale financial assets are measured at fair value with unrealised gains or losses recognised directly in equity in the net unrealised gains reserve. When the investment is disposed of, the cumulative gain or loss previously recorded in equity is recognised in the income statement.
(iv) Fair value
The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business on the balance sheet date. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm's length market transactions; reference to the current market value of another instrument, which is substantially the same; discounted cash flow analysis or other valuation models.
(v) Impairment of financial assets
The Group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired. An impairment of financial assets is recognised if the book value of the financial asset exceeds its recoverable amount.
Inventories
Inventories are valued in the balance sheet at the lower of cost or market value at the time of the closing of books.
The costs incurred in bringing each product to its present location and condition are accounted for as follows:
Market value is determined as the lower of net realisable value or replacement cost. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.
Cash and cash equivalents
Cash and short term deposits in the balance sheet comprise cash at banks.
Carbon dioxide emissions
The Group receives carbon dioxide emission allowances as a result of the European Emission Trading Scheme. The allowances are granted on an annual basis and, in return, the Group is required to remit allowances equal to its actual emissions. The Group has adopted a policy of applying a net liability approach to the allowances granted. Therefore, a provision is only recognised when actual emissions exceed the emission allowances granted and still held. Where emission allowances are purchased from other parties, they are recorded at cost, and treated as a reimbursement right.
Provisions
Provisions are recognised when the Group has a present obligation as a result of a past event and a reliable estimate can be made of the amount of the obligation. If the effect of time value of money is material, provisions are discounted using an income tax rate that reflects the risks specific to the liability. Where discounting is used, the increase of the provision due to the passage of time is recognised as a finance cost.
Pensions and other employee benefits
Employees of the Group working in Finland are covered by the provisions of the statutory Employees' Pensions Act (the TyEL -system). The obligations under the TyEL -system are insured with local pension insurance companies. The TyEL -system is classified as a defined contribution plan, and the related payments are recognised in the income statement on an accrual basis.
Probable future unemployment pension obligations are recognised as employee benefits expense in the income statement and as employee benefit liabilities in the balance sheet.
Share-based payment transactions
Employees (including senior executives) of the Group receive remuneration in the form of share-based payment transactions, whereby employees render services as consideration for equity instruments ('equity-settled transactions').
In situations where equity instruments are issued and some or all of the goods or services received by the entity as consideration cannot be specifically identified, they are measured as the difference between the fair value of the share-based payment and the fair value of any identifiable goods or services received at the grant date.
The cost of equity-settled transactions with employees is measured by reference to the fair value of the equity instruments at the date on which they are granted. The fair value is determined by an external value using an appropriate pricing model, further details of which are given in Note 11.
The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the performance and/or service conditions are fulfilled, ending on the date on which the relevant employees become fully entitled to the award ('the vesting date'). The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the Group's best estimate of the number of equity instruments that will ultimately vest. The profit or loss charge or credit for a period represents the movement in cumulative expense recognised as at the beginning and end of that period.
The outstanding options had not dilutory effect in the 2008 and 2007 financial statements, as their subscription price exceeded their fair value (see Note 11).
Leases
The determination of whether an arrangement is, or contains a lease is based on the substance of the arrangement at inception date of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets or the arrangement conveys a right to use the asset.
Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased property or, if lower, the present value of the minimum lease payments. Related lease liabilities are recognised at the corresponding amounts. Lease payments are appointed between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are reflected in the income statement.
Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Group will obtain ownership by the end of the lease term.
Operating lease payments are recognised as an expense in the income statement on a straight line basis over the lease term.
Reporting by business segment
The Group has only one business segment and therefore it does not report individual business segments. Sales, assets and investments by geographical segment are shown by customer location and covers countries in the EU, Asia and other countries.
Revenue recognition
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and revenue can be reliably measured. Revenue is measured at the fair value of the consideration received, excluding discounts, rebates, and other sales taxes or duty, and is adjusted for exchange differences on sales in foreign currency.
(i) Sale of goods
Revenue from the sale of the goods is recognised as income when the significant risks and benefits associated with ownership of the products have passed to the purchaser and the seller no longer has an actual right of possession or control over the products. Sales are recorded upon delivery of goods to the customer in accordance with agreed terms of delivery, which are based on Incoterms 2000. The main categories of terms covering group sales are:
"D" terms, under which the Group is obliged to deliver the goods to the buyer at the agreed destination, usually the buyer's premises, in which case the point of sale is the moment of delivery to the buyer.
"C" terms, whereby the Group arranges and pays for the external carriage and certain other costs, though the Group ceases to be responsible for the goods once they have been handed over to the carrier in accordance with the relevant term. The point of sale is thus the handing over of the goods to the carrier contracted by the seller for the carriage to the agreed destination.
"F" terms, being where the buyer arranges and pays for the carriage, thus the point of sale is the handing over of goods to the carrier contracted by the buyer.
(ii) Interest income
Revenue is recognised as interest accrues using the effective interest method.
Discontinued operations and assets held for sale
A discontinued operation is one which has been sold or identified for sale. Such operations are identified by the assets, liabilities and net financial results which are distinguishable, operationally, physically and by financial reporting. Assets are classified as such when it is highly probable that the carrying amount of the asset will be recovered through a sale transaction rather than continuing use. The pre-tax gain or loss on disposal of discontinued operations is shown as a separate item in the income statement.
Government grants
Government grants are recognised where there is reasonable assurance that the grant will be received and all attaching conditions will be complied with. When the grant relates to an expense item, it is recognised as income over the period necessary to match the grant on a systematic basis to the costs that it is intended to compensate. Where the grant relates to an asset, it is set up as deferred income. Where the Group receives non-monetary grants, the asset and the grant are recorded at nominal amounts and the grant is released to the income statement over the expected useful life of the relevant asset by equal annual instalments.
Financial liabilities
(i) Interest bearing loans and borrowings
All loans and borrowings are initially recognised at the fair value less directly attributable transaction costs. After initial recognition, interest bearing loans and borrowings are subsequently measured at amortised cost using the effective interest method.
Interest-bearing liabilities are classified as non-current liabilities unless they are due to being settled within twelve months after the balance sheet date.
Gains and losses are recognised in the income statement when the liabilities are derecognised as well as through the amortisation process.
(ii) Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss includes financial liabilities held for trading and financial assets designated upon initial recognition as at fair value through profit or loss.
Financial liabilities are classified as held for trading if they are acquired for the purpose of selling in the near term. Derivatives are also classified as held for trading unless they are designated as effective hedging instruments. Gains or losses on liabilities held for trading are recognised in profit or loss
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.
Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability and the difference in the respective carrying amounts is recognised in the income statement.
Derivative financial instruments and hedging
The Group uses derivative financial instruments such as forward exchange contracts, interest rate options and commodity derivatives to hedge its risks associated with fluctuations in exchange rates of foreign currencies, interest rates and the price of electricity. Such derivative financial instruments are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative.
Any gains or losses arising from changes in fair value during the year on derivatives which do not qualify for hedge accounting are taken directly to profit or loss. The fair value of foreign exchange forward contracts is calculated by reference to current forward exchange rates for contracts with similar maturity profiles. The fair value of the interest rate options are calculated based on the present value of the estimated future cash flows. Commodity derivatives are valued based on quoted market rates on the balance sheet date.
For the purposes of hedge accounting, hedges are classified as:
Fair value hedges when the hedging the exposure to changes in the fair value of a recognised asset or liability or an unrecognised firm commitment (except for foreign currency risk);
Cash flow hedges when hedging exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or liability or a highly probable forecast transaction or the foreign currency risk in an unrecognised firm commitment; or
Hedges of a net investment in a foreign operation.
At the inception of a hedge relationship, the Group formally designates the hedge relationship to which the Group wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the effectiveness of the hedging instrument will be assessed. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.
The Group did not have any fair value or hedges of net investments at 31 December 2008 and 2007. Cash flow hedges which meet the strict criteria for hedge accounting are accounted for as follows:
The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while any ineffective portion is recognised immediately in the income statement.
Amounts taken to equity are transferred to the income statement when the hedged transaction affects profit or loss, such as when the hedged financial income or financial expense is recognised or when a forecast sale occurs.
If the forecast transaction or firm commitment is no longer expected to occur, amounts previously recognised in equity are transferred to the income statement. If the hedging instrument expires or is sold or the requirements of hedge accounting can no longer be achieved, amounts previously recognized in equity remain in equity until the forecast transaction occurs.
The Group uses forward exchange contracts as hedges of its exposure to foreign currency risk in forecasted transactions and firm commitments, but does not apply hedge accounting.
Taxes
(i) Current income tax
Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted by the balance sheet date.
Current income tax relating to items recognised directly in equity is recognised in equity and not in the income statement.
(ii)…Deferred income tax
Deferred income tax is provided using the liability method on temporary differences at the balance sheet date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.
Deferred income tax liabilities are recognised for all taxable temporary differences.
Deferred income tax assets are recognised for all deductible temporary differences, carry forward of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilised.
The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profit will allow the deferred tax asset to be recovered.
Deferred income tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the balance sheet date.
Deferred income tax relating to items recognised directly in equity is recognised in equity and not in the income statement.
Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current income tax liabilities and the deferred income taxes relate to the same taxable entity and the same taxation authority.
(iii) Sales tax
Revenues, expenses and assets are recognised net of the amount of sales tax except:
where the sales tax incurred on a purchase of assets or services is not recoverable from the taxation authority, in which case the sales tax is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and
receivables and payables that are stated with the amount of sales tax included.
The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the balance sheet.
2.5 Future changes in accounting policies (Standards issued but not yet effective)
IFRS 8 Operating Segments
IFRS 8 is effective for accounting periods beginning on or after 1 January 2009. IFRS 8 replaces IAS 14 Segment Reporting and requires that the information reported is that which management uses internally for evaluating the performance of operating segments and allocating resources to those segments. This information may differ from information reported in the income statement and balance sheet and entities will need to provide reconciliations of the differences. The Group will evaluate the effects of implementing the new standard during the current accounting period.
IAS 23 Borrowing Costs
A revised IAS 23 Borrowing costs becomes effective for financial years beginning on or after 1 January 2009. The standard has been revised to require capitalisation of borrowing costs when such costs relate to a qualifying asset. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. In accordance with the transitional requirements in the Standard, the Group will adopt this as a prospective change. Accordingly, borrowing costs will be capitalised on qualifying assets with a commencement date after 1 January 2009. No changes will be made for borrowing costs incurred to this date that have been expensed.
IAS 1 Presentation of Financial Statements
A revised IAS 1 Presentation of Financial Statements is aimed at improving users' ability to analyse and compare the information given in financial statements by separating changes in equity of an entity arising from transactions with owners from other changes in equity. The Group will evaluate the effects of implementing the new standard during the current accounting period.
IFRS 3 Business Combinations
A revised standard IFRS 3 Business Combinations becomes effective for financial years beginning on or after 30 June 2009. The standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase of business are to be recorded at fair value at the acquisition date, with some contingent payments subsequently remeasured at fair value through Income Statement. Goodwill may be calculated based on parent's share of net assets or it may include goodwill related to minority interest. All transaction costs will be expensed. Only the last point is expected to affect Group reporting, but not materially.
Other standards issued but not yet effective and their interpretations are not expected to have any significant impact on Group's financial statements.
3. Business combinations
Acquisition of Papierfabrik Scheufelen
On 1 January 2009, the Group completed the acquisition of the business and assets of Papierfabrik Scheufelen, a manufacturer of coated woodfree papers based in Lenningen, Germany.
As at 31 December 2008, the Group had entered into a conditional agreement to acquire the property, plant and equipment and inventories of Papierfabrik Scheufelen for total consideration of approximately € 34.7m including transaction costs. In anticipation of the completion of the acquisition, the Group established a number of new subsidiary companies to act as the acquirers of the Scheufelen assets. Funding for the transaction was provided through an issue of shares in December 2008 which raised net proceeds of € 9.6m and an increase of € 20.0m in the Group's available borrowing facilities. Funding for the working capital requirements of Scheufelen is to be provided by a debt factoring facility.
At 31 December 2008, the Group had made payments on account to the seller of € 23.0m. These payments, together with the accrued transaction costs, have been recognised in the financial statements for the year ended 31 December 2008 as a prepayment for acquisition within non-current assets. The balance of the consideration of € 9.2m falls due for payment within the year ending 31 December 2009. The assets, liabilities and results of Scheufelen have not been consolidated for the year ended 31 December 2008.
Details of the net assets acquired and the consideration paid are as follows:
|
€ 000 |
||
|
Net assets acquired at book value: |
||
|
Property plant and equipment |
[73,000] |
|
|
Inventories |
[10,600] |
|
|
[83,600] |
||
|
Purchase consideration: |
||
|
Cash paid |
22,950 |
|
|
Deferred consideration (falling due for payment in 2009) |
9,250 |
|
|
32,200 |
||
|
Costs directly related to acquisition |
2,500 |
|
|
34,700 |
The Group has not yet completed its evaluation of the fair values of the assets acquired and accordingly the information presented above is the unaudited net book value of the assets acquired as at 1 January 2009.
Deferred consideration of € 9,200,000 relates principally to amounts due in connection with the acquisition of inventories on hand at 31 December 2008. These amounts fall due for payment during the year ending 31 December 2009 and have not been recognised in the financial statements for the year ended 31 December 2008.
4. Interest in a joint venture
On 29 February 2008, the Group entered into an agreement with Myllykoski Corporation for the establishment of a wood procurement joint venture to be known as Harvestia Oy ("Harvestia"). Harvestia is a private limited company. The Group has a 33 % interest in Harvestia.
The joint venture is accounted for using equity method. The Group's share of the assets, liabilities, income and expenses of the jointly controlled entity at 31 December 2008 and for the year then ended are as follows:
|
2008 |
|
|
€ 000 |
|
|
Current assets |
2,073 |
|
Non-current assets |
103 |
|
2,176 |
|
|
Current liabilities |
(1,855) |
|
Net assets |
321 |
|
Revenue |
1,070 |
|
Cost of sales |
(999) |
|
Administrative expenses |
(490) |
|
Finance costs |
(15) |
|
Loss for the year from continuing operations |
(434) |
|
Carrying amount of the investment |
610 |
5. Segment information
The management of the Group reviews performance from both a product and a geographic perspective. The principal measures used to assess business performance are sales volumes, revenues and adjusted EBITDA, which excludes the impact of non-recurring and non-operational items.
In the year ended 31 December 2008, the Group had only one product segment - Nordic semi-chemical fluting. Accordingly, no further analysis is provided of assets, liabilities, revenues or profits by product.
Management considers the principal geographic segments based on customer location to be Countries in the EU, Asia and Other countries.
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Revenues from external customers: |
||
|
Countries in the EU |
56,654 |
61,289 |
|
Asia |
18,600 |
15,170 |
|
Other countries |
32,773 |
39,277 |
|
108,027 |
115,737 |
|
|
Assets: |
||
|
Countries in the EU |
97,731 |
66,153 |
|
Asia |
730 |
2,733 |
|
Other countries |
6,783 |
8,820 |
|
105,244 |
115,737 |
|
|
Capital expenditure: |
||
|
Countries in the EU |
6,119 |
5,493 |
|
Asia |
- |
- |
|
Other countries |
- |
- |
|
6,119 |
5,493 |
6. Other operating income
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Government grants |
38 |
35 |
|
Insurance compensation |
20 |
25 |
|
Net gains on disposal of property, plant and equipment |
- |
586 |
|
Net proceeds from sale of emissions credits |
- |
1,239 |
|
Other |
279 |
149 |
|
337 |
2,034 |
7. Employee benefits expense
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Wages and salaries |
10,595 |
11,128 |
|
Pension and other post employment benefits |
1,893 |
1,679 |
|
Social security costs |
790 |
1,137 |
|
Expense of share-based payment schemes |
559 |
480 |
|
13,837 |
14,424 |
The average total number of employees during the year was 199 (2007 - 216).
8. Other operating expenses
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Freight, distribution and other sales expenses |
19,701 |
21,697 |
|
Other operating and administrative expenses |
6,223 |
6,739 |
|
25,924 |
28,435 |
9. Finance income
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Interest income on short-term bank deposits |
130 |
70 |
10. Finance expenses
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Interest expense: |
||
|
Bank loans and other borrowings |
2,041 |
2,372 |
|
Finance leases |
41 |
41 |
|
2,082 |
2,413 |
|
|
Other finance expenses |
457 |
293 |
|
2,539 |
2,706 |
11. Share-based payment plans
The expense recognized for employee services received during the year is shown in the following table:
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Expense arising from equity-settled share-based payment transactions |
559 |
480 |
The share-based payment plans are described below. There were no cancellations or modifications to any of the plans during 2008 or 2007.
Powerflute Stock Option Plan
Under the Powerflute Stock Option Plan ("PSOP") share options are granted to senior executives who devote substantially all of their working time to the activities of the Group. There are three categories of options: 2007A, 2007B and 2007C. The 2007A options have been granted in full to senior executives, while the 2007B and 2007C options have been granted to the Group's trading subsidiary Savon Sellu Oy and are available for future awards to employees. The exercise price of each category of options is as follows:
In the event of any variation in the share capital of the Group, the exercise price and the number of shares granted by each option may be varied at the discretion of the Remuneration Committee.
The maximum number of shares that may be issued pursuant to grants under the PSOP is 8,800,000 which represented 10% of the Group's issued share capital at the commencement of the scheme.
Movements during the year
The following table illustrates the number (No.) and weighted average exercise prices (WAEP) of, and movements in, share options during the year.
|
2008 |
2008 |
2007 |
2007 |
||
|
No. |
WAEP |
No. |
WAEP |
||
|
Thousands |
Pence |
Thousands |
Pence |
||
|
At 1 January |
5,280 |
110 |
- |
- |
|
|
Granted during the year |
- |
- |
5,280 |
110 |
|
|
At 31 December |
5,280 |
110 |
5,280 |
110 |
The weighted average remaining contractual life for the share options outstanding as at 31 December 2008 was 3.3 years (2007 - 4.3 years). The weighted average fair value of options granted during the year was € nil (2007 - € 0.46). The exercise price for options outstanding at 31 December 2008 was 110 pence.
The fair value of each 2007A option was estimated using a Black & Scholes pricing model using the following assumptions:
Dividend yield (%) 0.0
Expected volatility (%) 26.6
Risk-free interest rate (%) 4.18
Expected life of option (years) 4.08
Weighted average share price (€) 1.617
The expected life of the options is based upon historical data and is not necessarily indicative of exercise patterns that may occur. The expected volatility reflects the assumption that the historical volatility over a period similar to the life of the options is indicative of future trends, which may also not necessarily be the actual outcome.
The PSOP is an equity-settled plan and the fair value is measured at the grant date.
12. Income tax expense
Consolidated income statement
The major components of the income tax expense for the years ended 31 December 2008 and 2007 are:
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Income statement |
||
|
Current income tax charge |
1,048 |
2,924 |
|
Deferred income tax charge |
(2) |
(167) |
|
1,046 |
2,757 |
A reconciliation between the tax expense and the product of accounting profit multiplied by the domestic tax rate in Finland of 26% for the years ended 31 December 2008 and 2007 is as follows:
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Accounting profit before income tax |
3,586 |
9,812 |
|
Taxation at domestic income tax rate of 26% (2007 - 26%) |
932 |
2,551 |
|
Adjustments in respect of prior years |
- |
(227) |
|
Expenses not deductible for tax purposes |
134 |
7 |
|
Income not subject to tax |
- |
(94) |
|
Difference relating to assets sold |
- |
559 |
|
Other |
(21) |
(39) |
|
Income tax expense |
1,045 |
2,757 |
Deferred income tax
Deferred income tax in the income statement at 31 December relates to the following:
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Deferred tax liability |
||
|
Revaluation of assets to fair value on acquisition |
(782) |
(1,410) |
|
Accelerated depreciation for tax purposes |
670 |
379 |
|
Borrowing costs capitalized |
295 |
(45) |
|
Acquisition costs capitalized |
466 |
- |
|
Revaluation of forward contracts to fair value |
(43) |
176 |
|
Deferred tax assets |
||
|
Share of losses of an associate company |
(113) |
- |
|
Losses available for offset against future profits |
(539) |
227 |
|
Deferred revenue |
(2) |
57 |
|
Post-employment pension benefits |
49 |
94 |
|
Finance leases |
(3) |
(5) |
|
Employee profit sharing scheme |
- |
324 |
|
Revaluation of forward contracts to fair value |
- |
36 |
|
Deferred income tax expense/(income) |
(2) |
(167) |
The change in the deferred income tax liability recognised in equity is € 390,000 (2007 - € nil) and arises from the revaluation of forward contracts to fair value. The total change in net deferred income tax liabilities was € 388,000 (2007 -€ 167,000).
Deferred income tax in the balance sheet at 31 December relates to the following:
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Deferred tax liability |
||
|
Revaluation of assets to fair value on acquisition |
3,318 |
4,100 |
|
Accelerated depreciation for tax purposes |
1,404 |
734 |
|
Borrowing costs capitalized |
435 |
140 |
|
Acquisition costs capitalized |
466 |
- |
|
Revaluation of forward contracts to fair value |
133 |
176 |
|
5,756 |
5,150 |
|
|
Deferred tax assets |
||
|
Losses available for offset against future profits |
539 |
- |
|
Share of losses of an associate company |
113 |
- |
|
Deferred revenue |
29 |
27 |
|
Post-employment pension benefits |
31 |
80 |
|
Finance leases |
4 |
5 |
|
Revaluation of forward contracts to fair value |
390 |
- |
|
1,106 |
112 |
|
|
Deferred tax liabilities net |
4,650 |
5,038 |
13. Earnings per share
Basic earnings per share is calculated by dividing net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year.
Diluted earnings per share is calculated in accordance with the requirements of IAS 33 - Earnings per share, by dividing net profit for the year attributable to ordinary equity holders of the parent by the weighted average number of ordinary shares outstanding during the year plus the weighted average number of shares that would be issued on conversion of all the dilutive ordinary shares into ordinary shares.
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Net profit attributable to ordinary equity holders of the parent |
2,541 |
7,055 |
|
Thousands |
Thousands |
|
|
Weighted average number of shares for Basic Earnings per Share |
89,561 |
88,000 |
|
Effect of dilution: |
||
|
Share options |
- |
- |
|
Weighted average number of shares adjusted for dilution |
89,561 |
88,000 |
14. Property, plant and equipment
|
Property |
Plant and equipment |
Other tangible assets |
Assets in progress |
Total |
|
|
€ 000 |
€ 000 |
€ 000 |
€ 000 |
€ 000 |
|
|
Net Book Value - 1 January 2007 |
|||||
|
Cost or valuation |
8,181 |
22,634 |
730 |
1,758 |
33,303 |
|
Accumulated depreciation |
(580) |
(4,254) |
(101) |
- |
(4,935) |
|
7,601 |
18,380 |
629 |
1,758 |
28,368 |
|
|
Year ended 31 December 2007 |
|||||
|
Opening net book amount |
7,601 |
18,380 |
629 |
1,758 |
28,368 |
|
Additions |
- |
2,121 |
- |
3,810 |
5,931 |
|
Transfer |
- |
1,731 |
- |
(1,731) |
- |
|
Depreciation charge for the year |
(291) |
(2,868) |
(8) |
- |
(3,167) |
|
Closing net book amount |
7,310 |
19,364 |
621 |
3,837 |
31,132 |
|
Net Book Value - 31 December 2007 |
|||||
|
Cost or valuation |
8,181 |
26,486 |
730 |
3,837 |
39,234 |
|
Accumulated depreciation |
(871) |
(7,122) |
(109) |
- |
(8,102) |
|
7,310 |
19,364 |
621 |
3,837 |
31,132 |
|
|
Year ended 31 December 2008 |
|||||
|
Opening net book amount |
7,310 |
19,364 |
621 |
3,837 |
31,132 |
|
Additions |
- |
5,209 |
- |
910 |
6,119 |
|
Transfer |
- |
3,829 |
- |
(3,829) |
- |
|
Depreciation charge for the year |
(291) |
(2,959) |
(55) |
- |
(3,305) |
|
Closing net book amount |
7,019 |
25,443 |
566 |
918 |
33,946 |
|
Net Book Value - 31 December 2008 |
|||||
|
Cost or valuation |
8,181 |
35,524 |
730 |
918 |
45,353 |
|
Accumulated depreciation |
(1,162) |
(10,081) |
(164) |
- |
(11,407) |
|
7,019 |
25,443 |
566 |
918 |
33,946 |
The carrying value of plant and equipment held under finance lease and hire purchase contracts at 31 December 2008 was € 743,000 (2007 - € 601,000). Additions during the year included € 365,000 (2007 - € 398,000) of plant and equipment held under finance leases. Leased assets and assets held under hire purchase contracts are pledged as security for the related finance lease and hire purchase liabilities.
15. Intangible assets
|
Patents and licences |
Customer contracts |
Total |
|||
|
€ 000 |
€ 000 |
€ 000 |
|||
|
Net Book Value at 1 January 2007 |
|||||
|
Cost or valuation |
1,139 |
9,333 |
10,472 |
||
|
Accumulated depreciation |
(387) |
(3,734) |
(4,121) |
||
|
752 |
5,599 |
6,351 |
|||
|
Year ended 31 December 2007 |
|||||
|
Opening net book amount |
752 |
5,599 |
6,351 |
||
|
Additions |
16 |
- |
16 |
||
|
Depreciation charge for the year |
(228) |
(1,866) |
(2,094) |
||
|
Closing net book amount |
540 |
3,733 |
4,273 |
||
|
Net Book Value at 31 December 2007 |
|||||
|
Cost or valuation |
1,155 |
9,333 |
10,488 |
||
|
Accumulated depreciation |
(615) |
(5,600) |
(6,215) |
||
|
540 |
3,733 |
4,273 |
|||
|
Year ended 31 December 2008 |
|||||
|
Opening net book amount |
540 |
3,733 |
4,273 |
||
|
Additions |
- |
- |
- |
||
|
Depreciation charge for the year |
(231) |
(1,867) |
(2,098) |
||
|
Closing net book amount |
309 |
1,867 |
2,175 |
||
|
Net Book Value at 31 December 2008 |
|||||
|
Cost or valuation |
1,155 |
9,333 |
10,488 |
||
|
Accumulated depreciation |
(846) |
(7,467) |
(8,313) |
||
|
309 |
1,866 |
2,175 |
Patents and licenses include intangible assets acquired through business combinations.
16. Financial instruments
Financial instruments by category
|
Loans and receivables |
Items at fair value through profit and loss |
Derivatives used for hedging |
Financial liabilities at amortised cost |
Total |
|
|
€ 000 |
€ 000 |
€ 000 |
€ 000 |
€ 000 |
|
|
At 31 December 2008: |
|||||
|
Financial assets |
|||||
|
Trade and other receivables |
15,962 |
- |
- |
- |
15,962 |
|
Derivative financial instruments |
- |
510 |
- |
- |
510 |
|
Cash and short-term deposits |
9,896 |
- |
- |
- |
9,896 |
|
25,858 |
510 |
- |
- |
26,368 |
|
|
Financial liabilities |
|||||
|
Trade and other payables |
- |
- |
- |
9,972 |
9,972 |
|
Derivative financial instruments |
- |
- |
1,500 |
- |
1,500 |
|
Interest bearing loans and borrowings |
- |
- |
- |
51,513 |
51,513 |
|
- |
- |
1,500 |
61,485 |
62,985 |
|
|
At 31 December 2007: |
|||||
|
Financial assets |
|||||
|
Trade and other receivables |
23,068 |
- |
- |
- |
23,068 |
|
Derivative financial instruments |
- |
816 |
- |
- |
816 |
|
Cash and short-term deposits |
6,785 |
- |
- |
- |
6,785 |
|
29,853 |
816 |
- |
- |
30,669 |
|
|
Financial liabilities |
|||||
|
Trade and other payables |
- |
- |
- |
10,561 |
10,561 |
|
Derivative financial instruments |
- |
- |
- |
- |
- |
|
Interest bearing loans and borrowings |
- |
- |
- |
32,356 |
32,356 |
|
- |
- |
- |
42,917 |
42,917 |
Fair Values
Set out below is a comparison of the carrying amounts and fair values of the Group's financial instruments that are carried in the financial statements
|
Carrying Amount |
Fair Value |
||||
|
2008 |
2007 |
2008 |
2007 |
||
|
€ 000 |
€ 000 |
€ 000 |
€ 000 |
||
|
Financial assets |
|||||
|
Trade and other receivables |
15,962 |
23,068 |
15,962 |
23,068 |
|
|
Derivative financial instruments |
510 |
816 |
510 |
816 |
|
|
Cash and short-term deposits |
9,896 |
6,785 |
9,896 |
6,785 |
|
|
26,368 |
30,669 |
26,368 |
30,699 |
||
|
Financial liabilities |
|||||
|
Trade and other payables |
9,972 |
10,561 |
9,972 |
10,561 |
|
|
Derivative financial instruments |
1,500 |
- |
1,500 |
- |
|
|
Interest bearing loans and borrowings |
51,513 |
32,356 |
51,513 |
32,356 |
|
|
62,985 |
42,917 |
62,985 |
42,917 |
||
The fair value of the financial assets and liabilities are included at the amount at which the instrument could be exchanged in a transaction between willing parties, other than in a forced liquidation or sale. The following methods have been used to estimate fair value:
Cash and short-term deposits, trade receivables, trade payables and other short-term liabilities approximate their carrying amounts largely due to the short-term nature of these instruments.
The fair value of loans from banks, obligations under finance leases and other financial indebtedness are considered be approximately the same as their carrying values because they bear interest at market rates.
The Group enters into derivative instruments with various counterparties, principally financial institutions with investment grade credit ratings. The method of calculation of fair value for derivative financial instruments depends upon the type of instruments.
17. Derivative financial instruments
|
2008 |
2007 |
||||
|
Assets |
Liabilities |
Assets |
Liabilities |
||
|
€ 000 |
€ 000 |
€ 000 |
€ 000 |
||
|
Forward foreign exchange contracts |
510 |
- |
141 |
- |
|
|
Commodity derivatives |
1,500 |
675 |
- |
||
|
Total |
510 |
1,500 |
816 |
||
|
Less: non-current portion |
|||||
|
Forward foreign exchange contracts |
- |
- |
- |
- |
|
|
Commodity derivatives |
- |
765 |
236 |
- |
|
|
- |
765 |
236 |
- |
||
|
Current portion |
510 |
735 |
580 |
- |
|
The full fair value of a hedging derivative is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months, and as a current asset or liability if the maturity of the hedged item is less than 12 months.
|
Net gains (losses) on financial instruments included in operating profit |
2008 |
2007 |
|
€ 000 |
€ 000 |
|
|
Electricity derivative financial instruments designated as cash flow hedges |
122 |
- |
|
Non-hedge accounted foreign exchange rate derivative instruments |
202 |
- |
Derivatives not designated as hedging instruments
The Group uses foreign currency denominated borrowings and forward currency contracts to manage some of its transaction exposures. Forward currency contracts are entered into based upon predicted currency exposures for periods of up to 12 months in advance. These forward currency contracts are not designated as cash flow, fair value or net investment hedges.
Forward currency contracts are revalued based upon forward rates as at the balance sheet date and changes in the fair value are recognised in the income statement within sales and other expenses. The values of financial derivatives not designated as hedging instruments are presented under derivative financial instruments as assets when the fair value is positive and as liabilities when the fair value is negative.
Cash flow hedges
The Group uses commodity derivatives to manage its exposure to fluctuations in the price of electricity, oil, natural gas and other sources of energy. Forward contracts for the purchase of energy are entered into on the basis of highly probable forecast transactions which are expected to occur within the next 12 to 24 months. Such contracts are designated as cash flow hedges and hedge accounting has been applied with effect from 1 January 2008.
Gains and losses arising from commodity derivatives are recognised in the hedging reserve in equity and are recognised in the income statement within other expenses during the period or periods in which the hedged forecast transaction affects the income statement. This is generally within the next 24 months of the balance sheet date. Movements in hedging reserve are presented in the statement of changes in equity. Testing is conducted backwards on a quarterly basis to review the effectiveness of hedging transactions.
The effective portion of the gain or loss on the hedging instrument is recognised directly in equity, while any ineffective portion is recognised immediately in the income statement. The ineffective portion of the Group's commodity derivatives has not been material during the financial year 2008 (2007 - € nil).
The cash flow hedges of the expected electricity purchases in the next 24 months were assessed to be highly effective, and a net unrealized loss of € 1,500,000 with a related deferred tax asset of € 390,000 was included in equity in respect of these contracts (2007 - € nil). The amount entered from equity in other expenses in the income statement during the period was €122,000 (2007 - € nil).
18. Inventories
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Raw materials and supplies |
7,151 |
3,939 |
|
Finished goods |
5,750 |
5,050 |
|
12,901 |
8,989 |
There were no substantial write-downs in the value of inventory during 2008 or 2007.
19. Trade and other receivables (current)
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Trade receivables |
15,962 |
23,068 |
|
Prepayments and other receivables |
2,843 |
2,531 |
|
18,805 |
25,599 |
Trade receivables are non-interest bearing and are generally on 30 to 90 day terms.
At 31 December, the age profile of trade receivables was as follows:
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Current |
13,997 |
20,313 |
|
Past due but not impaired: |
||
|
|
659 |
2,310 |
|
30-60 days |
614 |
439 |
|
60-90 days |
692 |
- |
|
90-120 days |
- |
- |
|
>120 days |
- |
6 |
|
15,962 |
23,068 |
The carrying amounts of the Group's trade and other receivables are denominated in the following currencies:
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Euros |
12,299 |
17,021 |
|
US Dollar |
6,318 |
8,143 |
|
UK Pound |
188 |
164 |
|
Other currencies |
- |
271 |
|
18,805 |
25,599 |
20. Cash and short-term deposits
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Cash at banks and on hand |
9,896 |
6,785 |
|
Short-term deposits |
- |
- |
|
9,896 |
6,785 |
Cash at banks earns interest at floating rates based upon daily bank deposit rates.
At 31 December 2008, the Group had available € 1,500,000 (2007 - € 5,500,000) of undrawn committed facilities in respect of which all conditions precedent had been met.
Cash, cash equivalents and bank overdrafts include the following for the purposes of the cash flow statement:
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Cash at banks and on hand |
9,896 |
6,785 |
21. Share capital and reserves
Authorised share capital
|
2008 |
2007 |
|
|
Thousands |
Thousands |
|
|
Ordinary shares |
144,818 |
88,000 |
During the year the amount of ordinary shares was increased by 56,818,174 shares. The nominal value of each new share is € nil.
Issued and fully paid share capital and reserve for invested non-restricted equity
|
No. of shares |
Share capital |
Reserve for invested non-restricted equity |
Total |
|
|
Thousands |
€ 000 |
€ 000 |
€ 000 |
|
|
At 1 January and 31 December 2007 |
88,000 |
88 |
- |
88 |
|
Movements during the year: |
||||
|
Placing of new shares |
56,818 |
- |
10,000 |
10,000 |
|
Transaction costs of issue of shares |
- |
- |
(398) |
(398) |
|
At 31 December 2008 |
144,818 |
88 |
9,602 |
9,690 |
In December 2008, the share capital of the Group was increased by the issue of 56,818,174 new shares. The shares were issued as fully paid shares with no nominal value and for total consideration of € 10,000,000. The new shares rank pari passu with the existing shares in all respects. The proceeds from the share issue have been credited to a reserve for invested non-restricted equity. The transaction costs associated with the issue of shares were € 398,000.
Other reserves
|
Hedging Reserve |
Retained Earnings |
||||
|
€ 000 |
€ 000 |
||||
|
At 1 January 2007 |
- |
9,550 |
|||
|
Share-based payment |
- |
480 |
|||
|
Profit for the year |
- |
7,055 |
|||
|
At 31 December 2007 |
- |
17,085 |
|||
|
Share-based payments |
- |
559 |
|||
|
Cash flow hedges |
(1,500) |
- |
|||
|
Tax effect of cash flow hedges |
390 |
||||
|
Dividends paid |
- |
(2,962) |
|||
|
Profit for the year |
- |
2,541 |
|||
|
At 31 December 2008 |
(1,110) |
17,223 |
Nature and purpose of other reserves
The hedging reserve is used to record the notional gain or loss on cash flow hedges.
22. Dividends paid and proposed
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Dividends on ordinary shares declared and paid during the year: |
||
|
Final dividend for 2007 (3.366 cents per share) |
2,962 |
- |
23. Trade and other payables
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Trade payables |
9,972 |
10,561 |
|
Amounts due to related parties |
781 |
- |
|
Other payables and accrued liabilities |
9,798 |
9,348 |
|
20,551 |
19,909 |
Trade payables are non-interest bearing and are normally settled on terms of 30 to 60 days. Other payables are non-interest bearing and have an average term of less than six months. Interest payable is normally settled monthly throughout the financial year.
24. Interest bearing loans and borrowings
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Non-current |
||
|
Loans from financial institutions |
42,958 |
26,706 |
|
Shareholder capital loan |
1,000 |
1,000 |
|
Finance lease liabilities |
491 |
486 |
|
44,449 |
28,192 |
|
|
Current |
||
|
Loans from financial institutions |
6,750 |
4,000 |
|
Finance lease liabilities |
314 |
164 |
|
7,064 |
4,164 |
|
|
Total borrowings |
51,513 |
32,356 |
(a) Loans from financial institutions
Loans from financial institutions include amortising term loans of € 32,400,000 (2007 - € 16,400,000) which mature at various times between 2009 and 2016, together with a revolving credit facility of € 20,000,000 which is available to the Group until December 2011. Further details of the maturity profile of the Group's borrowing facilities are provided in Note 28.
Loans from financial institutions bear interest at floating rates based upon the one month Euribor rate plus a bank margin. The average rate of interest payable on all borrowings during the year was 1.9% over Euribor.
The facilities are secured by mortgages and charges over certain of the Group's assets in Finland and in Germany and are subject to financial and other covenants which are assessed on a quarterly basis. The principal covenants measure ratios of senior net debt to EBITDA, total net cash interest cover and debt service cover.
(b) Shareholder capital loan
At 31 December 2008, the Group had a subordinated shareholder loan of € 1,000,000 (2007 - € 1,000,000) which falls due for repayment on 31 July 2013. The loan, including any accrued interest, is unconditionally subordinated to the secured and unsecured claims of any other lender to the Group and may only be repaid if there are sufficient reserves available to cover the restricted equity and other non-distributable reserves after repayment.
The shareholder capital loan bears interest at a rate which is fixed on an annual basis on the first banking day of April of each year based upon the 12-month Euribor rate plus a margin of 4%. Interest accrues annually, but may only be paid to the extent that the Group has sufficient retained and distributable profits arising from the financial period to which the interest relates and only once the financial statements for the year to which it relates have been approved by the shareholders at the Annual General Meeting.
(c)…Finance lease liabilities
The Group uses finance leases to fund the purchase of certain items of plant and equipment. The duration of such agreements is generally five years or less and as 31 December 2008 the Group had no obligations with a maturity of more than five years (2007 - € nil). Under the terms of the agreements, the rights to the leased assets revert to the lessor in the event of default by the lessee. Further details of the assets purchased by the Group which are subject to finance leases and the Group's obligations in connection with these assets are provided in Notes 14 and 27.
25. Pensions and other post-employment benefit plans
The Group has a liability for early-retirement pensions arising from the dismissal of personnel in 2005. In accordance with legislation in Finland, the Group remains liable for payment of early-retirement pensions for certain of these employees if they are not able to secure alternative employment before they become eligible to receive a normal retirement pension.
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
At 1 January |
309 |
670 |
|
Charge in income statement |
(188) |
(361) |
|
At 31 December |
121 |
309 |
26. Related party disclosures
Subsidiary companies
These financial statements include the financial statements of Powerflute Oyj and the subsidiaries listed in the following table:
|
Country of |
% equity interest |
||||
|
incorporation |
2008 |
2007 |
|||
|
Savon Sellu Oy |
Finland |
100.0 |
100.0 |
||
|
Coated Papers Finland Oy |
Finland |
100.0 |
- |
||
|
Platin 305. GmbH |
Germany |
100.0 |
- |
||
|
Platin 312. GmbH |
Germany |
100.0 |
- |
||
|
Platin 305. GmbH & Co Verwaltung KG |
Germany |
100.0 |
- |
||
Coated Papers Finland Oy and the Platin companies were established in connection with the Group's acquisition of the business and assets of Papierfabrik Scheufelen GmbH & Co KG which was completed on 1 January 2009.
Associates
The Group has a 33% interest in Harvestia Oy (2007 - nil), a wood procurement company incorporated in Finland.
Transactions with related parties
(a)) Sales and purchases of goods and services
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Sale of services to related parties |
3 |
- |
|
Purchase of goods and services from related parties: |
||
|
Associate - Harvestia Oy |
441 |
- |
|
Other directors' interests |
- |
170 |
During both 2007 and 2008, services were supplied at normal market prices and on normal market terms by companies in which two directors had controlling interests.
Savon Sellu, the Group's principal trading subsidiary purchases a proportion of its raw materials from Harvestia Oy. The goods are purchased on normal market terms.
(b) Amounts due to or from related parties
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Amounts due from related parties arising from the sale of goods/services |
- |
- |
|
Amounts due to related parties arising from the purchase of goods/services |
||
|
Associate - Harvestia Oy |
422 |
- |
|
Other directors' interests |
- |
- |
|
Other amounts due to related parties |
||
|
Shareholder capital loan |
1,000 |
1,000 |
|
Other amounts due from related parties |
||
|
Associate - prepayments to Harvestia Oy |
423 |
- |
(c) Key management compensation
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Salaries and other short-term employee benefits |
756 |
1,045 |
|
Directors fees |
380 |
233 |
|
Consultancy fees paid to Executive Directors |
200 |
102 |
|
Fees for services provided by companies in which directors have interests |
- |
170 |
|
Share-based payments |
559 |
480 |
|
1,895 |
2,030 |
(d) Directors' interests in employee share incentive plans
The share options held by executive members of the Board of Directors providing the entitlement to purchase ordinary shares have the following expiry dates and exercise prices:
|
Expiry |
Exercise |
Number outstanding |
|||
|
Issue date |
date |
price |
2008 |
2007 |
|
|
Thousands |
Thousands |
||||
|
3 May 2007 |
31 May 2012 |
£1.10 |
4,400 |
4,400 |
|
27. Commitments and contingencies
Mortgages
The Group has also pledged all of its assets, including the shares of its subsidiary companies, as security for its borrowings.
Guarantees and other commitments
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
On behalf of Associated company |
||
|
Guarantee |
2,000 |
- |
|
On behalf of others |
||
|
Guarantee |
- |
450 |
|
Other commitments, own |
||
|
Operating leases, repayable in less than one year |
203 |
182 |
|
Operating leases, repayable after one year |
511 |
427 |
|
714 |
609 |
|
|
Guarantees |
2,000 |
450 |
|
Operating leases |
714 |
609 |
|
Total |
2,714 |
1,059 |
Finance lease and hire purchase commitments
The Group has finance leases and hire purchase contracts for various items of plant and machinery, software licenses and certain of its intangible assets. Future minimum lease payments under finance lease and hire purchase contracts, together with the present value of the net minimum lease payments were as follows:
|
2008 |
2007 |
|||
|
Minimum payments |
Present value of payments |
Minimum payments |
Present value of payments |
|
|
€ 000 |
€ 000 |
€ 000 |
€ 000 |
|
|
Within one year |
335 |
314 |
197 |
164 |
|
After one but not more than five years |
568 |
491 |
523 |
486 |
|
Total minimum lease payments |
903 |
805 |
720 |
650 |
|
Less amounts representing finance charges |
(98) |
- |
(70) |
- |
|
Present value of minimum lease payments |
805 |
805 |
650 |
650 |
Capital commitments
At 31 December 2008, the Group had capital commitments of € 1,770,000 (2007 - € 3,364,000) relating to investments in plant and equipment at Savon Sellu.
Sale of CO2 emissions rights
The Group was allocated CO2 emissions rights for the period 2008 to 2012 which were in the opinion of the Directors in excess of its requirements. As at 31 December 2007, the Group had sold surplus emission rights of 20,000 tonnes of CO2 and had recognised the profit on sale in the income statement for the year ended 31 December 2007.
The Group's estimated annual CO2 emissions and the emission rights available for the years 2008 to 2012 are as follows:
|
Emission rights |
Usage |
|||||
|
available |
Peat |
Heavy oil |
Other |
Total |
Surplus |
|
|
t CO2 |
t CO2 |
t CO2 |
t CO2 |
t CO2 |
t CO2 |
|
|
2008 |
127,832 |
104,500 |
22,000 |
100 |
126,600 |
1,232 |
|
2009 |
127,832 |
103,000 |
22,000 |
100 |
125,100 |
2,732 |
|
2010 |
127,832 |
102,500 |
21,000 |
100 |
123,600 |
4,232 |
|
2011 |
127,832 |
102,500 |
20,000 |
100 |
122,600 |
5,232 |
|
2012 |
127,832 |
101,160 |
20,000 |
100 |
121,260 |
6,572 |
|
639,160 |
513,660 |
105,000 |
500 |
619,160 |
20,000 |
|
The Group has received confirmation of the emission rights available to it for the period 2008 to 2012 from the Finnish government. The forecast annual CO2 emissions are based upon estimates of future annual production volumes and the following assumptions:
Total energy consumption is expected to reduce through investment in the production processes.
The use of bio-fuels will increase, leading to a reduced dependence upon peat which has the highest CO2 content of all of the fuels used by the Group.
Investments in power plant technology will lead to a reduction in the consumption of heavy oil.
Emission rights are freely traded as commodities. In the event that the Group produces more CO2 emissions than forecast, it is possible to purchase the necessary additional emission rights. CO2 emissions were below forecast levels for the year ended 31 December 2008 and accordingly, it was not necessary to purchase any additional emission rights.
28. Financial risk management objectives and policies
The Group's principal financial liabilities, other than derivatives, comprise loans and borrowings, trade and other payables. The main purpose of these financial liabilities is to raise finance for the Group's operations. The Group has loan and other receivables, trade and other receivables, and cash and short-term deposits that arise directly from its operations. The Group also enters into derivative transactions.
The Group is exposed to various types of risk including interest rate risk, foreign currency risk, commodity risk, credit risk and liquidity risk. The senior management of the Group oversees the management of these risks and ensures that the Group's financial risk-taking activities are governed by appropriate policies and procedures and that financial risks are identified, measured and managed in accordance with the Group's policies and appetite for risk. The Board of Directors regularly reviews and agrees policies for managing each of the principal risks which the Group faces.
All derivative activities for risk management are carried out by managers that have the appropriate skills and experience, working under the direct supervision of the Board of Directors. It is the Group's policy that no trading in derivatives for speculative purposes shall be undertaken.
Interest rate risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Group's exposure to the risk of changes in market interest rates relates primarily to the Group's long-term debt obligations with floating interest rates.
The Group manages its interest rate risk by maintaining an appropriate portfolio of fixed and variable rate loans. To achieve this, from time to time the Group enters into interest rate swaps, in which the Group agrees to exchange at specified intervals the difference between fixed and variable interest rate amounts calculated by reference to an agreed-upon notional principle amount. These swaps are designated to hedge underlying debt obligations. At 31 December 2008, after taking account of the interest rate swaps, none of the Group's borrowings was at a fixed rate of interest (2007 - 18%).
Interest rate sensitivity
The following table demonstrates the sensitivity to changes in interest rates, with all other variables held constant, of the Group's profit before taxation (through the impact on floating rate borrowings). The impact on the Group's equity is not material.
|
Increase/decrease in basis points |
Effect on profit before taxation |
|
|
€ 000 |
||
|
2008 |
100 |
+/- 524 |
|
2007 |
100 |
+/- 364 |
Foreign currency risk
Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. The Group's exposure to the risk of changes in foreign exchange relates primarily to the Group's operating activities (when revenue or expenses are denominated in a different currency to the Group's functional currency which is the Euro) and the Group's net investment in foreign subsidiaries.
The Group manages its foreign currency risk by hedging transactions that are expected to occur within a maximum 12 months period. Transactions that are certain may be hedged without any limitation in time. It is the Group's policy to negotiate the terms of the hedge derivatives to match the terms of the hedged item in order to maximize the hedge effectiveness.
In the year ended 31 December 2008, the principal foreign currency risk arose as a result of sales in currencies other than the functional currency. In particular, approximately 35% of Group's sales were denominated in US Dollars and 1% were denominated in Sterling.
The following table demonstrates the sensitivity to a changes in the US Dollar exchange rate, with all other variables held constant, of the Group's profit before tax (due to changes in the fair value of monetary assets and liabilities).
|
Increase/decrease in US Dollar rate |
Effect on profit before taxation |
|
|
€ 000 |
||
|
2008 |
+10% |
460 |
|
- 10% |
618 |
|
|
2007 |
+10% |
144 |
|
- 10% |
152 |
Commodity risk
Commodity risk is the risk arising from fluctuations in the availability and cost of certain of the Group's raw material and other input costs. In particular, the Group is exposed to fluctuations in the availability and cost of wood and other fibres and to fluctuations in the cost of electricity.
Commodity risk is managed through the use of formal agreements with recognised and established counterparties and the purchase of commodity derivates. Wood and other fibre purchases are secured for periods of up to 12 months in advance through supply agreements made with wood procurement companies, including the Group's associate Harvestia Oy. Availability of electricity is secured through the use of framework agreements with suppliers and the risk associated with price fluctuations is hedged using commodity derivatives.
At 31 December 2008, the Group had hedged approximately 90% of its electricity purchases for the following 12 month period. Hedge accounting has been adopted for such derivatives and notional gains and losses are taken to a hedging reserve within equity and only transferred to the income statement during the period in which the hedged cost is incurred.
The following table demonstrates the effect that changes in the electricity price would have, with all other variables held constant, on the fair value of electricity derivatives and on the Group's profit before tax. The effect has been estimated using a VaR model with a holding period of 10 days and a confidence level of 95%.
|
Increase/decrease in electricity price |
Effect on profit before taxation |
|
|
€ 000 |
||
|
2008 |
20-25% |
+/- 352 |
|
2007 |
20-25% |
+/- 371 |
Credit risk
Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group is exposed to credit risk from its operating activities and its financing activities, including deposits with banks and financial institutions, foreign exchange transactions and other financial instruments.
Credit risk related to receivables: Customer credit risk is managed by each business unit in accordance with the Group's policy, procedures and controls relating to the management of credit risk. Credit quality of customers is objectively assessed and outstanding receivables are regularly monitored. Deliveries to the majority of customers are covered by either letter of credit or other forms of credit insurance and the uninsured exposure is monitored and managed centrally by the Group. The Group has a large number of different customers and counterparties in international markets. Accordingly, there is no concentration of credit risk in any particular counterparty or country. The maximum exposure to credit risk related to receivables is the carrying value of each class of financial assets mentioned in Note 16.
Credit risk related to financial instruments and cash deposits: Credit risk from transactions and balances with banks and other financial institutions is managed centrally by the Group. The Group only enters into transactions with approved counterparties and within limits which are reviewed by the Group's Board of Directors on an annual basis. The Group's maximum exposure to credit risk for the components of the balance sheet at 31 December 2008 and 2007 is the carrying value of the amounts as illustrated in Note 16.
Liquidity risk
The Group monitors its liquidity risk using a recurring liquidity planning tool which forecasts the amounts and timings of future cash flows. The Group's objective is to maintain a balance between continuity of funding and flexibility through the use of bank overdrafts, bank loans, finance leases and hire purchase contracts.
The table below summarises the maturity profile of the Group's financial liabilities at 31 December 2008 based on contractual undiscounted payments.
|
As at 31 December 2008 |
On demand |
Less than 3 months |
3 to 12 months |
1 to 5 years |
>5 years |
Total |
|
€ 000 |
€ 000 |
€ 000 |
€ 000 |
€ 000 |
€ 000 |
|
|
Interest bearing loans and borrowings |
- |
1,306 |
5,758 |
42,199 |
2,250 |
51,513 |
|
Employee benefit liability |
- |
- |
121 |
- |
- |
121 |
|
Trade and other payables |
- |
19,545 |
1,006 |
- |
- |
20,551 |
|
Income tax payable |
- |
- |
- |
- |
- |
- |
|
- |
20,851 |
6,885 |
42,199 |
2,250 |
72,185 |
|
|
Derivative financial instruments |
||||||
|
Forward foreign exchange contracts - not hedge accounting |
||||||
|
Cash flow payable |
- |
(10,850) |
- |
- |
- |
(10,850) |
|
Cash flow receivable |
- |
11,360 |
- |
- |
- |
11,360 |
|
Commodity derivatives - hedge accounting |
||||||
|
Cash flow payable |
(860) |
(2,581) |
(2,758) |
- |
(6,199) |
|
|
Cash flow receivable |
678 |
2,025 |
1,993 |
- |
4,696 |
|
|
- |
328 |
(556) |
(765) |
- |
(993) |
|
|
As at 31 December 2007 |
On demand |
Less than 3 months |
3 to 12 months |
1 to 5 years |
>5 years |
Total |
|
€ 000 |
€ 000 |
€ 000 |
€ 000 |
€ 000 |
€ 000 |
|
|
Interest bearing loans and borrowings |
- |
2,041 |
2,123 |
28,192 |
- |
32,356 |
|
Employee benefit liability |
- |
- |
188 |
121 |
- |
309 |
|
Trade and other payables |
- |
16,983 |
2,926 |
- |
- |
19,909 |
|
Income tax payable |
- |
- |
2,809 |
- |
- |
2,809 |
|
- |
19,024 |
8,046 |
28,313 |
- |
55,383 |
|
|
Derivative financial instruments |
||||||
|
Forward foreign exchange contracts - not hedge accounting |
||||||
|
Cash flow payable |
- |
(10,010) |
- |
- |
- |
(10,010) |
|
Cash flow receivable |
- |
10,151 |
- |
- |
- |
10,151 |
|
Commodity derivatives - not hedge accounting |
||||||
|
Cash flow payable |
- |
- |
- |
- |
- |
- |
|
Cash flow receivable |
- |
- |
439 |
236 |
- |
675 |
|
- |
141 |
439 |
236 |
- |
816 |
Interest bearing loans and borrowings include amounts borrowed under a revolving credit facility which is available to the Group until December 2011. While the maturity of individual loan advances under this facility may be less than one year, under the terms of the facility any amounts repaid may be reborrowed. Accordingly, such advances are included within amounts falling due for repayment after more than one year.
Capital management
The primary objective of the Group's capital management is to ensure that healthy capital ratios are maintained in order to support its business and maximize shareholder value. The Group manages its capital structure and makes changes to it in light of changes in economic conditions and business requirements or objectives. No changes were made to the underlying objectives, policies or processes during the years ended 31 December 2008 and 2007.
The Group monitors capital using a gearing ratio, which is defined as net debt divided by total capital plus net debt. Net debt includes interest bearing loans and borrowings less cash and cash equivalents. Capital includes equity attributable to the equity holders of the parent.
|
2008 |
2007 |
|
|
€ 000 |
€ 000 |
|
|
Interest-bearing loans and borrowings |
51,513 |
32,356 |
|
Less cash and short-term deposits |
(9,896) |
(6,785) |
|
Net debt |
41,617 |
25,571 |
|
Equity attributable to equity holders of the parent |
25,803 |
17,173 |
|
Capital and net debt |
67,420 |
42,744 |
|
Gearing ratio |
62% |
60% |
29. Events after the balance sheet date
Business combinations
The Group completed the acquisition of business and assets of Papierfabrik Scheufelen on 1 January 2009 for total consideration of € 34.7m including transaction costs. Further details of the transaction are provided in Note 3.
Related Shares:
POWR.L