Vapo Group Interim Report 1 January-30 June 2012

The availability of peat in the 2012-2013 heating season will depend on the success of peat production in the remainder of the 2012 season. Due to the exceptionally rainy summer, peat production levels will be very low – even in the best case 50 per cent of target at most. The fact that much of the production area is “old peatlands” amplifies the impact of the weather. After rain, production stops for much longer at old fields than at new ones. Due to the extremely poor peat production situation, Vapo has taken exceptional action to boost production in order to safeguard customer deliveries. Despite these actions, Vapo has been forced to notify its customers throughout Finland of force majeure.

An efficiency enhancement programme has been launched. This improved profitability and cash flow, reduced debt and strengthened the balance sheet in the first half. The second half is expected to be clearly loss-making. For years, the authorities have been slow in processing environmental permits. This has prevented Vapo from commissioning new production areas and has contributed to a weakening of security of supply. Additionally, Vapo Wood Products is expected to make a loss also in the second half. The efficiency programme and investment cuts will be continued, but there will be no compromise on environmental investments.

January-June

The turnover of the Vapo Group in the January-June 2012 period was EUR 391.3 million (EUR 418.1 million in the same period 2011). The main reason for the lower turnover was a drop in turnover in energy peat of EUR 15.6 million, caused by the early spring being much warmer than the reference period and low electricity prices. Compared to the reference period, the turnover of Vapo Timber was EUR 9.7 million lower and that of Vapo Bioheat EUR 6.8 million lower. 

Group operating profit was EUR 32.3 million, or 8.3% of turnover (EUR 31.6 million, 7.6%). The operating profit includes profits of EUR 5.4 million on the sales of fixed assets. Cost savings achieved through various savings programmes significantly improved profitability. 

The company cut all investments, with the exception of environmental investments. Gross investments in the year to date totalled EUR 24.6 million (EUR 46.1 million). Free cash flow before taxes was EUR 73.3 million (EUR 82.3 million). The company’s equity ratio at the end of June was 37.8% (37.5%) and interest-bearing net debt was EUR 343.9 million (EUR 352.4 million). At the end of 2011 the equity ratio was 33.8% and interest-bearing net debt EUR 416.7 million. 

The company employed an average of 1171 (1272) persons in the January-June period. Following the round of employee consultations concluded in the spring, around 60 person work years were removed from operations in Finland. 

Vapo Biofuels The business area is responsible for the Group’s energy and environmental peat production and for wood energy and energy crops. The turnover of the business area in the January-June period was EUR 178.4 million (EUR 191.5 million) and operating profit was EUR 31.3 million (EUR 34.2 million). Wood energy and energy crops posted an operating loss in each country. Turnover and profitability in environmental peat deteriorated slightly compared to the reference period. 

Vapo Bioheat The business area is responsible for sales to customers of the Group’s energy products, i.e. heat, steam and electricity. The turnover of the business area was EUR 59.8 million (EUR 66.6 million) and operating profit was EUR 5.2 million (EUR 7.5 million) in the January-June period. The drop in sales of energy products is due to the warm winter and much lower electricity prices than in the reference period. Industrial customers’ energy requirements were at the reference year’s level. 

Vapo Wood Products The business area comprises Vapo Timber, which is responsible for the Group’s sawn timber production and sales, and Vapo Pellets. The turnover of the business area in the January-June period was EUR 116.3 million (EUR 125.0 million) and the operating result was -7.4 million (EUR -6.0 million). 

The turnover of Vapo Timber was EUR 59.3 million (EUR 69.0 million) and the operating result was EUR -4.4 million (operating profit of EUR 0.3 million). A sluggish economy and a decline in construction in the main market regions have significantly reduced demand for sawn timber, added to which stubbornly high raw material costs are weighing on profitability. 

The turnover of Vapo Pellets was EUR 57.6 million (EUR 57.8 million) and the operating result was EUR -3.0 million (EUR -6.0 million). Turnover includes the one-off sale of the pellet stocks in Denmark (17,000 tonnes) in the second quarter. 

Vapo Environment The business area is responsible for horticultural products to professional growers and consumers, the environmental management business and landscaping. The turnover of the business area was EUR 64.2 million (EUR 66.0 million) and the operating profit was EUR 8.9 million (EUR 5.4 million). The operating profit includes an insurance payment of EUR 2.6 million for the fire at the Eurajoki horticultural peat plant in 2010. 

Group Administration and other activities

The impact of Group Administration and other activities on the operating profit in the January-June period was EUR -5.7 million (EUR -10.3 million). Costs have been cut and investments minimized in order to improve cash flow and profitability in all Group administration activities. 

Tomi Yli-Kyyny, CEO:

For Vapo, the first half was operationally much weaker than expected. The winter was warm and electricity market prices remained low, which cut turnover by Biofuels and Bioheat by over EUR 20 million and operating profit by over EUR 5 million. The profitability of the sawmill business has also plunged since the reference period. The company started to take action last autumn to safeguard profitability and cash flow. In the first half we were able to maintain last year’s profitability level by making savings and selling balance sheet items. Due to these actions, Vapo’s balance sheet has begun to strengthen and debt levels are coming down.

Following a poor spring, the peat production season was at record-lows. At this stage we estimate that even in the best case we will achieve 50 per cent of peat production at most. For our customers this will regrettably mean shortfalls in peat deliveries and for us both lower turnover and weaker profitability for the remainder of the year, because our fixed costs do not move in line with lower production.

A series of rainy summers with poor evaporation has brought the problems of ageing production areas into sharp focus. After rain, production stops at old areas for much longer than at new areas. We have not obtained sufficient new environmental permits, nor have we been able to build up adequate stocks to allow us to prepare for poor production summers. For this reason we will not be able to meet the security of supply expectations placed on us. Peat contractors have also been placed in a difficult situation. Acquiring new production areas is important.

We are not expecting demand for sawn timber to pick up this year. Profitability has improved in the pellet business, but the market continues to be challenging.

We estimate that profitability will improve at the Kekkilä businesses this year compared to the previous year.

Owing to the outlook for Vapo Biofuels and Vapo Wood Products, we estimate that Group turnover will be substantially below the previous year and that the second half will be clearly loss-making. In the second half Vapo will continue the actions already launched to improve cash flow and profitability by improving the recycling of capital and earnings-generating performance in all market areas. Key actions include disposal of land areas released from production and other balance sheet items not essential to key business activities and a very thorough appraisal of investments. The capital tied up in the peat and wood energy businesses will be reduced by amending payment terms and reducing stock purchases of spare parts and supplies. The pricing of peat and wood fuels for the upcoming heating season will be reviewed to bring them in line with costs. We estimate that these actions will allow us to achieve our target of free cash flow of EUR 40 million before taxes for the full year.

Vapo and Metsä Group previously announced plans for a joint biodiesel plant in Ajos, Kemi. In June Metsä Group announced it was withdrawing from the project. During the autumn Vapo will study the possibility of carrying out the project with new partners or external financiers, if the project is granted EU support.

The company has progressed with its environmental investment programme according to plan. Vapo has previously announced that enhanced water treatment will be installed at all production bogs by the end of 2014. At the end of 2011 Vapo had a total of around 47,000 hectares in production, 11,000 hectares of which had basic-level water treatment. During 2012 this area will decline by around 3,000 hectares. Production areas where enhanced water treatment cannot be installed by the end of 2014 will be taken out of production. 

Altogether Vapo has production at over 400 bogs. Currently the water treatment level is being raised at around 50 bogs. In addition, the existing structures are being improved at around 30 bogs. In total, these actions affect over 4,000 hectares and permit decisions for actions to enhance water treatment are being awaited for 30 further sites or around 1,800 hectares.

 Consolidated key figures

MEUR	1-6/2012	1-6/2011	1-12/2011
Turnover	391.3	418.1	705.0
Operating profit (EBITA)	32.3	31.6	-41.9
% of turnover	8.2	7.5	-5.9
Operating profit (EBITA) before impairments	32.3	31.5	-4.5
% of turnover	8.2	7.5	-0.6
Result for the period	21.6	16.0	-39.1
Operating margin (EBITDA)	52.6	54.2	41.9
+/- Change in working capital	34.6	68.1	59.7
– Net investments	-13.9	-40.0	-81.2
Free cash flow before taxes	73.3	82.3	20.5
Gross investments	24.6	46.1	94.5
Return on invested capital % *	-5.9	5.4	-5.8
Return on invested capital % before impairments *	-0.5	5.9	-0.6
Return on equity % *	-10.8	6.9	-11.9
Balance sheet total	834.1	941.6	869.2
Shareholders’ equity	310.0	347.2	285.7
Interest-bearing net debt	343.9	352.4	416.7
Equity ratio %	37.8	37.5	33.8
Gearing %	110.9	101.5	145.8
Average number of employees	1171	1272	1226
*) Previous 12 months

Turnover by segment

MEUR	1-6/2012	1-6/2011	Change %	1-12/2011
Biofuels	178.4	191.5	-6.8	321.3
Energy peat	114.0	129.6	-12.0	204.4
Wood energy and energy crops	41.9	38.8	8.2	74.0
Environmental peat	18.4	19.5	-5.6	38.0
Others	4.9	3.6	34.6	4.9
Bioheat	59.8	66.6	-10.3	110.6
Wood Products	116.3	125.0	-6.9	227.2
Timber	59.3	69.0	-14.1	121.3
Pellets	57.6	57.8	-0.3	108.1
Environment	64.2	66.0	-2.8	101.9
Kekkilä businesses	59.7	60.6	-1.5	91.1
Mustankorkea	4.5	5.4	-17.3	10.8
Inter-segment turnover	-27.4	-31.0	11.4	-55.9
Group total	391.3	418.1	-6.4	705.0

Operating profit/loss by segment

MEUR	1-6/2012	1-6/2011	Change %	1-12/2011
Biofuels	31.3	34.2	-8.6	29.0
Energy peat	27.7	31.9	-13.1	31.5
Wood energy and energy crops	0.4	-1.1	132.3	-6.1
Environmental peat	2.4	3.4	-30.1	3.9
Others	0.8	0.1	730.3	-0.2
Bioheat	5.2	7.5	-30.9	1.0
Wood Products	-7.4	-6.0	-22.3	-56.6
Timber	-4.4	0.3	-1415.5	-8.9
Pellets	-3.0	-6.0	50.0	-47.3
Environment	8.9	5.4	63.1	2.4
Kekkilä businesses	8.0	4.2	88.9	-0.4
Mustankorkea	0.9	1.2	-27.2	2.8
Other operations	-4.9	-9.0	45.8	-17.1
Eliminations *)	-0.8	-0.6	-33.3	-0.6
Group total	32.3	31.6	2.2	-41.9

*) Eliminations includes dividends reported to segments

 Interim Report 1 January-30 June 2012 (pdf)

For further information please contact:

– Tomi Yli-Kyyny, CEO, Vapo Oy, tel. +358 20 790 5605
– Jyrki Vainionpää, CFO, Vapo Oy, tel. +358 20 790 5609
– Ahti Martikainen, Director, Communications and Public Affairs, Vapo Oy, tel. +358 20 790 5608