HK RUOKATALO GROUP OYJ ANNUAL REPORT 2004

Transcription

1 HK RUOKATALO GROUP OYJ ANNUAL REPORT 2004

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3 HK RUOKATALO GROUP OYJ ANNUAL REPORT 2004 Contents Company overview Shareholder information... 6 Headlines in CEO's review HK Ruokatalo's vision is to evolve into the leading meat company in the Baltic Region Market area: Finland Commercial Operations Group Slaughtering & Cutting Group Processing & Production Group Poultry Group Logistics Group Raw meat procurement and control LSO Foods Oy Working to enhance operations Market area: the Baltics Market area: Poland Report of the Board of Directors Financial indicators Profit and loss account Balance sheet Cash flow statement Notes to the financial statements Shares and shareholders Signatures of the Board of Directors and CEO Report of the Auditors Corporate governance Board of Directors Management Team in Finland Management Team in the Baltics Stock exchange bulletins Addresses HK Ruokatalo Group Oyj, Kaivokatu 18, FI Turku. Registered office: Turku. Business Identity Code:

4 COMPANY OVERVIEW Prospering in Finland strong in the Baltics growing in Poland HK Ruokatalo's mission We at HK Ruokatalo are committed to delivering added shareholder value through a successful combination of quality food production, the excellence of our people, strong brands and consumer and customer driven operations. HK Ruokatalo Group 2004 Turnover: EUR 680 million Employees: Finland 2 600, the Baltics and Poland Product range: meat, poultry meat, processed meats, convenience foods Market leader in the retail trade in processed meats and poultry products in Finland and the Baltics, in processed meats in Latvia and Poland Financial targets Operating profit: Over 5 per cent of turnover Return on equity: Over 15 per cent Equity ratio: Over 40 per cent International business: Over 40 per cent of turnover Dividend distribution: At least 30 per cent of net earnings HK Ruokatalo Group's structure HK Ruokatalo Group Oyj Finland turnover 2004: EUR million HK Ruokatalo Oy LSO Foods Oy the Baltics turnover 2004: EUR million AS Rakvere Lihakombinaat AS Tallegg AS Ekseko AS Rigas Miesnieks UAB Klaipedos Maisto Mesos Produktai Poland * turnover 2004: EUR million Saturn Nordic Holding AB Sokolów S.A. * HK Ruokatalo s and Danish Crown s joint venture (50/50) Saturn Nordic Holding AB owns 75.31% of Sokolów s shares (as at 17 February 2005). 4

5 COMPANY PRESENTATION FINLAND Outokumpu FINLAND Tampere Eura Säkylä Turku Mellilä Forssa Vantaa ESTONIA St Petersburg Tallinn Rakvere ESTONIA Viiratsi Riga LATVIA LATVIA LITHUANIA Vilnius LITHUANIA POLAND Czyzew Kolo Warsaw Sokolow POLAND Tarnow Debica Jaroslaw 5

6 SHAREHOLDER INFORMATION Annual General Meeting The Annual General Meeting of HK Ruokatalo Group Oyj will be held at the company s head office at Kaivokatu 18, Turku at 2pm on Tuesday 12 April Examination of proxy forms will begin at 1pm. Shareholders wishing to attend the Annual General Meeting should notify the company of their intention to do so by 4pm Finnish time on 7 April 2005 either in writing to HK Ruokatalo Group Oyj, Annual General Meeting, PO Box 50, FI Turku, Finland, by telefacsimile , by to marjukka.hujanen@ hk-ruokatalo.fi or by telephoning / Mrs Hujanen. Eligibility To be eligible to attend the Annual General Meeting, shareholders should be registered by 1 April 2005 in the share register maintained by the Finnish Central Securities Depository (APK). Shareholders who have not transferred their shares to the book-entry securities system are also eligible to attend the meeting provided that they were registered in the company s share register before 1 November Such shareholders should also produce evidence or some other proof at the Annual General Meeting to show that title to the shares has not been transferred to the book-entry system. Dividend The Board of Directors is to recommend to the Annual General Meeting that a dividend of EUR 0.29 per share be declared for The dividend decided by the Annual General Meeting will be paid to those shareholders entitled to such dividend who are registered in the share register at 15 April The proposed payment date for the dividend is 22 April Shareholders whose shares are not registered in the book-entry securities system at the record date, 15 April 2005, will duly receive their dividend once they have transferred their shares to the book-entry securities system. Share register HK Ruokatalo s share register is kept by the Finnish Central Securities Depository Ltd, Unioninkatu 32 B, FI Helsinki, Finland. The Finnish Central Securities Depository s phone number in Finland is Shareholders should notify any changes of name and address to the book-entry securities register where their book-entry account is registered. Financial information HK Ruokatalo Group publishes an English translation of the original Finnish annual report in April each year and three interim reports. The interim report for January to March will be published on 2 May 2005, for January to June on 15 August 2005 and for January to September on 21 October These reports are published in Finnish and English and may be viewed on the company s website at where the company s stock exchange bulletins are also published. Printed versions of the annual report will be posted automatically to all shareholders with at least 250 HK Ruokatalo shares and registered in the company s share register kept by the Finnish Central Securities Depository. The interim reports are published in stock exchange bulletin format and may be viewed on HK Ruokatalo s website. Copies of interim reports will be sent on request by post or as an attachment. Annual reports and interim reports may be ordered via our website or from HK Ruokatalo Group Oyj, Communications or PO Box 50, FI Turku, Finland or by at hk.viestinta@hk-ruokatalo.fi 6

7 HEADLINES IN 2004 Headlines in 2004 Financial targets Turnover growth on target. Earnings improved in the Baltics and Poland and remained unchanged at home. Turnover was EUR 680.4, up by 5.1 per cent, and earnings were EUR 26.1 million. All the 8,615,798 Series A Shares in the November offering were subscribed. The issue provided EUR 36.2 million in new equity. Operations front HK Ruokatalo and Danish Crown began strategic cooperation in Sokolów in Poland. Our joint ownership in Sokolów rose to 72.8 per cent. We are merging subsidiaries Broilertalo, Food Kuljetus, Koiviston Teurastamo and Pouttu Foods with the parent company HK Ruokatalo Oyj to simplify the corporate structure in Finland. In second stage of restructuring, the Group s Finnish industrial operations, including employees, will be transferred to a separate subsidiary. The Production Group was split into two: the Processing and Production Group and the Logistics Group. We progressed further with our process way of working by simplifying the roles of the processed meat factories and by switching production at Riihimäki to Vantaa and outsourcing the production of salads. Customer expectations We have been actively involved in the change taking place in the retail sector by making customer relationships more like partnerships, taking into account consumers changing needs. HK Ruokatalo is market leader in its main product groups - processed meats and poultry products in Finland and the Baltics. The company processed over 140 million kg of Finnish meat. We strengthened our position as the largest buyer and user of Finnish meat. Employee contribution We continued work on building the performance management system and improving our management culture. All autonomous teams thought about our values. Employees made 2,230 suggestions to improve work and the work environment. The company paid its employees in Finland performance bonuses of almost EUR 0.7 million. 6

8 CEO S REVIEW We are making strong progress in internationalisation There are currently four major factors impacting on the food industry. Firstly, the accession to the EU on 1 May 2004 of ten new Member States - among them large agricultural countries and food producers - is reflecting somehow on old EU Member States. Secondly, the internationalisation and concatenation of the retail trade is having broad implications for the food industry, which needs to be able to provide products for increasingly larger, stronger customers. Thirdly, consumer buying behaviour is becoming more difficult to anticipate. Consumers are fragmenting into groups, with the appearance of completely new groups whose preferences no longer comply with the established pattern. Lastly, pending international trade agreement negotiations are changing the competitive environment in the food industry. Together, these factors are leading to major structural change across the EU, also in the meat industry. Strong at home, growing abroad HK Ruokatalo has sought to anticipate changes and in its internationalisation policy has aimed at developing its operational structure in good time in response to future needs. We set out on the path of internationalisation over six years ago. This year, an estimated 40 per cent of Group turnover and half of production volume will be generated outside Finland. At home, HK Ruokatalo processed over 140 million kg of Finnish meat and is by far the largest marketing avenue for domestic meat. We are making extensive production investments in Finland to secure the capacity and efficiency we need far into the future. Milestone year in our basic strategy During the course of 2004, we significantly strengthened our position in the Baltic Sea Region. In the late summer, increased ownership in Sokolów, Poland s leading meat production and processing company, led to cooperation with Danish Crown, the largest meat company in Europe. 8

9 CEO S REVIEW The driving force behind strategic cooperation in the ownership of Sokolów is to further develop Sokolów s operations and to help it gain access for its products to the Central and Eastern European markets. Besides Poland s own market of some 40 million consumers, Sokolów also aims to draw on Danish Crown s sales and distribution network to access the Central European market. Bearing future development needs in mind, in November 2004, HK Ruokatalo raised EUR 36.2 million of new capital through a rights issue of 8.6 million new shares. The issue was fully subscribed. We are using the proceeds in investments to develop the Group s international and domestic business and to strengthen the capital structure. "This year, an estimated 40 per cent of Group turnover and half of production volume will be generated outside Finland." The road ahead HK Ruokatalo Group s turnover in 2004 was EUR million, up by EUR 33.0 million or 5.1 per cent on the figure a year earlier. The operating profit rose to EUR 31.3 million (EUR 27.5m) and the operating result before exceptional items was EUR 26.1 million, compared to EUR 22.2 million in Since the beginning of 2005, the figures for Sokolów have been consolidated into the accounts of the entire HK Ruokatalo Group in accordance with IAS rules governing the inclusion of associates. Taking this into account, the Group s revenue target for the current year is around EUR 900 million. We have grown into the largest industrial meat processing company in our business sector. The food industry operates in an open international competitive environment. Even though fresh food markets are traditionally regional, exports of consumer products from one country to another are already on the rise and in the long run, small home markets can provide neither protection nor growth potential. It is important that Finland is home to flourishing international food companies. In this respect, HK Ruokatalo has a head start. New effective corporate structure The autumn saw us make a start on streamlining the legal structure of the business in Finland. Numerous corporate subsidiaries acquired over the years were merged into one industrial company, HK Ruokatalo Oy. HK Ruokatalo Group Oyj is the group s parent company. This new structure better corresponds to the operative division of roles and our process-like way of working. It also enhances business and cuts costs. Since our development programme in the Baltics aims at a similar process-like way of working, we streamlined legal and operative structures there, too. In December, Sokolów appointed a Board of Directors to reflect the new ownership structure. Simo Palokangas CEO 9

10 MARKET AREA: FINLAND Active change and development at home Commercial Operations Group HK Ruokatalo s Commercial Operations Group is responsible for sales to retail and horeca customers, marketing, product development, exports and industrial sales. The grocery sector has undergone a thorough change in recent years. We have been actively involved in this change by making customer relationships more like partnerships, taking into account consumers changing needs. This work is being done on the logistics, product group management, marketing and product development fronts. Greater buying power evident in business The year under review was a challenging one on the sales front. Tough competition translated into lower prices despite rising raw meat prices. We enhanced our own sales operations by discarding around one hundred products and by focusing more on the company s core products. This is part of an extensive product management project intended to enhance the range of products from both the company, customer and consumer aspect. Sales of consumer-packed meat were on target. Our new products have gone down well with customers and sales of seasonal products were extremely successful. Our extensive selection of barbecue meats was tremendously popular in summer Likewise, our from the Farm to the Consumer core process came into its own in the Christmas season with HK Ruokatalo supplying almost half the Christmas hams eaten in Finland. The growing interest in meaty products is also evident in grilling sausages, and A-class sausages increased their popularity. HK Kabanossi Original and HK Camping were the top-selling A-class and general class grilling sausages respectively. In poultry meat, the focus was on boned products such as fillet strips and cutlets, which have seen a sharp rise in consumption. Kariniemen fillet products have established a firm position in consumer purchases throughout the year. Best progress was made with various meals on the convenience foods front. Generally speaking, consumers are increasingly switching over to premium convenience food products. The focus on processed meats was on cold cuts, in other words sliced whole meat products and cold meats. We also addressed packaging during the year under review. The packaging of large product groups - food sausages, cold cuts and frankfurters - was given a new look. In response to consumer wishes, we also improved salad containers making them easier to open and handle. HK Kabanossi Original and HK Camping were the top-selling A-class and general class grilling sausages respectively. More meals eaten outside the home The HoReCa sector performed well during the year and HK Ruokatalo successfully retained its position despite tough competition. Changes in the price of raw meat and tough competition somewhat eroded profitability towards the end of the year. In Finland, the number of meals eaten outside the home rose to million portions, a rise of some two per cent on the year. Almost a third of the Finnish population availed themselves of meal services outside the home each day. HK Ruokatalo s HoReCa sector addressed costeffectiveness and reliable deliveries. We work together with customers to provide consumers with quality meals, taking into account the requirements of various customer and consumer groups. We have done this by working with customers to build new operational models to develop the range of products and logistics solutions. Active exports deliver results HK Ruokatalo successfully increased its Finnish exports in terms of both volume and value. Since prices on the world market began to rise, export profitability also improved. EU enlargement has resulted in greater demand for pork and broiler meat within the Union. This in turn has pushed up raw meat prices, but also strengthened export prices. Although a further strengthening of the euro against the US dollar and Japanese yen weakened exports conducted in those currencies, the overall impact of changes in exchange rates affected HK Ruokatalo s exports less than in We steadily increased exports of pork throughout the year and, as in earlier years exports went to Russia, 10

11 MARKET AREA: FINLAND the EU, Japan and the United States. There was a marked increase in the turnover and volume of exports to Russia. Taking customer wishes into account in cutting meat, for example, has provided durability and predictability and enabled considerable sales of pork to Japan and the United States. Despite Russia introducing a temporary ban on imports of poultry meat from Western Finland in July in the wake of an outbreak of avian disease in the region, exports of poultry meat rose in terms of both value and volume. The ban resulted in increased exports of poultry meat to the Baltics and Sweden. The year under review saw the Far East become a new market territory for poultry meat exports. Finland 2004 % 2003 % Turnover Operating profit Result Employees The amounts are EUR million. The number of employees is the year-end figure. The percentage indicates the proportion of the Group figure. 11

12 MARKET AREA: FINLAND Efficiency and new work practices Slaughtering & Cutting Group HK Ruokatalo s Slaughtering & Cutting Group is responsible for slaughtering and cutting operations at the pork abattoirs in Forssa and Mellilä and at the beef abattoir in Outokumpu. Volumes were healthy in The slaughterhouse utilisation rate in Forssa remained good throughout the year and broke a new record in production output, as did the meat cutting plant. New records in production volume were also recorded at the Mellilä and Outokumpu facilities. HK Ruokatalo is Finland s largest processor of pork, with a share of around 40 per cent of the market, and ranks second in beef, with a market share of some 20 per cent. Continuous improvement Maintaining profitability in the fiercely competitive slaughterhouse business calls for constant vigilance. We are stepping up production and cost control to further improve profitability. The development of work practices is an essential part of this process. We are at the leading-edge of pork cutting development in Finland. Improvements made at the Forssa cutting plant and in work practices in processing, coupled with an overhaul of the processing process, enabled us to deliver to the shops almost half of the Christmas hams sold in Finland. During the summer we also took the decision to replace the entire pork slaughtering line, dating from 1987, at Forssa in a bid to further improve competitiveness. The capacity at Forssa is no longer adequate for future requirements. The project will also see the modernisation of animal reception facilities and the quick carcass refrigeration plant. The project at Forssa is HK Ruokatalo s largest single investment in production in Finland for ten years and is intended to take us to the cutting-edge of efficiency in Europe. We embarked on a programme to improve the work environment at Mellilä and Outokumpu, the latest newcomers to the Group. Other production localities have already completed the programme. All employees at Mellilä and Outokumpu attended a three-day basic training course, after which we made a start on the introduction of working in semi-autonomous teams. Processing and Production Group The Processing and Production Group is responsible for the production of meat, processed meats and convenience foods at the Tampere, Turku and Vantaa factories. Fierce competition for market shares continued throughout 2004 both in processed meats and convenience foods. This is why we focused on strengthening our own competitiveness. We demerged processing and logistics into two separate groups. This arrangement simplifies the division of roles and makes for efficient use of resources. Efficiency programme in processed meats HK Ruokatalo has deployed a development programme in its meat processing operations in Finland to cut operational costs, enhance production and improve competitiveness. Under the programme, autumn 2004 saw us define the division of roles between the processed meat factories at Turku and Vantaa by switching the production of food sausages in skins from Turku to Vantaa. Turku will focus on the manufacture of skinless frankfurters and sausages and short production series of grilling and ring sausages. In line with an earlier decision, the convenience food factory in Riihimäki closed down at the start of The production of salads was outsourced and the remaining production transferred to Vantaa. Noteworthy investments included modernisation and development measures at the slicing department at the processed meat factory in Vantaa. A start was made on increasing the degree of automation of the food sausage-packing department at Vantaa. Spring 2005 will see the completion of the first stage of an investment to greatly enhance the technology and efficiency in the department. Work on developing the processing meat departments will continue in Poultry Group Located in Eura and Säkylä, our poultry production facilities manufacture broiler and turkey products marketed under the Kariniemen brand. HK Ruokatalo has a market share of over 50 per cent and clear leadership of the Finnish poultry meat market. Finland consumed 83.4 million kg (+1.1%) of poultry meat in The growth rate slowed slightly in broiler meat consumption and ceased altogether in turkey meat. In 2004, HK Ruokatalo procured 42.1 million kg of poultry meat, all of which came from its own contract producers. After several years of strong growth, sales of turkey meat remained unchanged on the year. The profitability of the turkey business was unsatisfactory and action has been taken to remedy the situation. 12

13 MARKET AREA: FINLAND Improved productivity Improvements to production resulted in a major improvement in productivity during the year. At the Eura production facilities, we improved the manufacturing process of boneless products and increased capacity. At Säkylä, we started work on a feasibility plan to upgrade the production of cooked products. Improvements to processes generated major savings in water consumption during On the product development front, the focus was on cooked poultry products, boned broiler and turkey fillet and drumstick-thigh products. We intensified cooperation with our Estonian sister company AS Tallegg. Tallegg s restructure and EU membership of the Baltic States have paved the way for comprehensive development within the Group. The impacts of our actions taken will be reflected in Tallegg s operations during the current year. Increasing amounts of cheap poultry meat produced in Brazil and Thailand have begun to appear in the EU and consequently in Finland. We need to respond to increasingly tougher international pressure and to this end work is at hand on several projects to further boost cost-effectiveness and process function. 13

14 MARKET AREA: FINLAND Logistics Group HK Ruokatalo s Logistics Group is resposible for the the operations of the Vantaa and Tampere distribution terminals and associated dispatch logistics, the transportation of raw materials and finished products between places of business and the transportation of goods for distribution in Finland. The units concerned are responsible for managing the transportation of live animals and exports. The Logistics Group took over operational responsibility for transportation from subsidiary Food Kuljetus Oy at the beginning of Cost-effective customer service The distribution terminals located on the site of production facilities in Vantaa and Tampere will form the focus of order picking for delivery to customers. To this end we expanded the terminal building at Vantaa during the year under review. Our next step is to upgrade the order picking system and increase the level of automation in the older part of the terminal. We are responding to changes in customer expectations costeffectively, whilst enhancing logistics throughout the chain from production to the retail outlet. Outsourcing frozen food logistics to our specialist associate Pakastamo Oy went as planned and the solution achieved the aims set. The most important development project on the frozen food logistics front is the freezing plant planned for Forssa. The decision to build is likely to be taken during spring this year. The freezing plant will serve HK Ruokatalo s needs regarding the seasonal storage of raw meat and in freezing and loading export products. The constant development of logistics in the entire delivery chain will become an increasingly important competitive factor. This is why we consider it essential to step up collaboration with all links in the chain to improve logistics quality and to further cut miscosts. Raw meat procurement and management The Raw Material Group is responsible for the procurement of pork and beef raw meat material for HK Ruokatalo s Finnish units. The group manages meat flow in the core process from the Farm to the Consumer to ensure efficient, profitable operations at all stages in the process. The group is also responsible for customer satisfaction in respect of the availability, quality and reliable delivery of raw meat material. Key to the group s roles is to place raw meat material as profitably as possible. The group also coordinates and manages the raw meat material need and balance between companies within HK Ruokatalo Group. The group s remit includes purchases of materials and consumables. Centralised buying, good planning and inviting tenders generate synergetic purchasing benefits. Meat balance sheet of the Group s Finnish units Procurement and purchases by HK Ruokatalo Group s units in Finland in 2004 (million kg) million % of meat kg used by the Group Own slaughter animal procurement in Finland -Pork Poultry Beef Other Own procurement, total Purchases in Finland Meat from Finland, total Imports for own production Imports for resale to others Use of meat, total Additionally, the Rakvere Lihakombinaat and Tallegg groups procured 48.2 million kg of meat for their own use. When we add this to the figures for Finland, HK Ruokatalo Group s meat balance sheet total rises to million kg of meat Use of raw meat material (kg million) Finland Baltics 14

15 MARKET AREA: FINLAND Beginning of the chain in balance Pork production and consumption in Finland both rose an encouraging 3 per cent on the year. Total pork production rose to million kg. Conversely beef production fell to 91.1 million kg. Since consumption was up by 3 per cent at the same time, imports increased and national self-sufficiency in beef declined to 94 per cent. On the poultry meat front, the situation was fairly balanced with consumption up by around 1 per cent and production by 4 per cent. A total of 86.9 million kg of poultry meat was produced in Finland. Own procurement by HK Ruokatalo companies increased in all types of meat, with purchases of pork up by 3.2 per cent and, despite declining production, purchases of beef up by 1.7 per cent. The picture was similar in purchases of poultry meat, which rose by 0.4 per cent. Besides own procurement, we also supplemented supplies with purchases from other Finnish meat companies as in previous years. Our total volume of raw meat rose by some three million kg on the year to stand at million kg. HK Ruokatalo remained the largest processor of domestic raw meat material in Finland. All HK, Kariniemen and Popsi brand products were made from Finnish meat. Despite market fluctuations, meat flow control went as planned and our management system proved it functioned well. The Group s raw meat material balance sheet was in equilibrium throughout the year LSO Foods Oy LSO Foods Oy purchases the Group s live raw meat material, except for poultry. Procurement is based on production contracts with producers. We work together with some seven thousand meat production farms, pork farms in Southern Finland and beef farms in an area extending to Northern Ostrobothnia, North Savo and Kainuu. We provide a reliable and competitive marketing avenue for feeder and slaughter animals. The three focus points in LSO Foods strategic development are: controlled growth of the raw meat material procured, efficient meat chain management in primary production and procurement and quality assurance of the raw meat material procured. These focus points are a direct result of the aims and expectations HK Ruokatalo has set for the meat procurement business. During 2004, the Group switched the procurement operations of Pouttu Foods Oy and Koiviston Teurastamo Oy to LSO Foods. This resulted in LSO Foods increasing its procurement by almost 22 million kg and expanding its operating area to Eastern Finland. Integrating procurement also delivered considerable cost savings and enabled the standardisation of operations models. Meat markets Pork producer prices moved up in Finland, by some 15 per cent between January and December, and across the rest of the EU. Higher prices improved the profitability of pork production in the EU. The pork producer price in Finland was roughly the same as that in nearby EU Member States. Finnish beef producer prices remained fairly stable throughout the year. The average price in Finland for young beef, especially bull, was on a par with the EU average, whilst that for heifers remained below the EU average. A sharp rise in the cost of calves for rearing eroded the profitability of beef production. A ban on applications for financial aid for national investments slowed production development, especially on pig farms. Similarly, the uncertainty surrounding the reform of CAP, the EU s Common Agricultural Policy, curbed development actions on beef farms. Procurement and primary production services LSO Foods acquires some 70 per cent of all the raw meat and almost all the pork and beef required by HK Ruokatalo. During 2004, LSO Foods purchased a total of 97.2 million kg of beef and pork. Procurement of pork rose by over 3 per cent and that of beef by almost 2 per cent. Our share of the total pork produced in Finland rose to around 40 per cent and consolidates our clear market leadership in pork procurement. Higher beef procurement took LSO Foods share of total beef production to over 20 per cent, making us Finland s second largest beef buyer. The number of feeder animals supplied was also up. During 2004, LSO Foods supplied farms with 614,000 piglets and 27,000 calves for rearing. Effective management of the meat chain is pivotal to the company s strategy and is used to anticipate the supply of raw meat material and to better enable us to manage the right amount and timing of raw meat supply. Process management worked as planned during the year under review. 15

16 MARKET AREA: FINLAND We extended our work to improve the quality of primary production to cover the entire from the Farm to the Consumer process. The aim is to work together with contract producers to innovate ways of working to minimise the occurrence of miscosts in the following parts of the chain. Early 2004 saw the launch of contract production coaching, which we have called the LSO Master Meat Producer project. The idea is to train a considerable number of contract producers to understand the joint rules of play in contract production. The reforms and operating models generated by coaching have already been deployed. LSO Foods benefits from cost-effective ebusiness. Notification of around 80 per cent of slaughter pigs and 60 per cent of slaughter cattle now takes place electronically. At the start of 2005, we introduced our eproducer project to study potential new forms of ebusiness between the company and contract farmers. Greater competitiveness in primary production LSO Foods seeks modest growth in procurement volume in Given the likelihood of the uncertainty surrounding agricultural support policy decisions continuing in the foreseeable future, strategic efforts are called for to enhance primary production. The competitiveness of primary production needs be quickly enhanced to ensure the production of Finnish raw meat at HK Ruokatalo. A start on work on a strategy and plan of action on this front has already been made. Working to enhance operations Operational system sets the framework Building a performance management system is an essential part of developing our operational culture and management. In the performance management system, the strategy and related success factors and targets are communicated from Group level to the core process and further down the entire organisation. A strategy map and balanced scorecards are being used to help. We regularly measure progress from four different aspects: employee innovativeness and learning, processes, customers/consumers and finances. To ensure continuous operational improvement, it is important to be successful on all counts. Work continued on further developing indicators to measure success at all organisational levels. Alongside performance management, we continue to develop our process way of working. This will enable us to improve the efficiency of the operating process and competitiveness. HK Ruokatalo s core process is from the Farm to the Consumer. HK Ruokatalo has ISO 9001:2000 certification, which covers the entire core process from procurement to production and transportation. It is envisaged certification will subsequently be extended to include the Mellilä and Outokumpu slaughterhouses. Within the limits of the operating system, we are standardising our working practices, creating a methodical system and directing our resources towards the goals we have agreed together. The performance management system is an integrated part of quality management at HK Ruokatalo. Improving our own operations Our Human Resources unit was reorganised to enable it to more efficiently provide services and tools that core and support processes can use to implement the Group s HR strategy in their own operations. Values discussion HK Ruokatalo s values were summed up in discussions that every employee contributed to in autumn An extensive round of discussions resulted in our values reflecting the shared view of the company and its people. Adoption of the values continued in all production facilities and departments at all organisational levels throughout Employees in different workplaces considered what the values mean in everyday working FROM THE FARM TO THE CONSUMER - THE CORE PROCESS IN FINLAND PORK AND BEEF PRODUCERS POULTRY PRODUCERS Procurement Slaughtering Cutting Production Procurement Slaughtering Cutting Production TERMINALS DISTRIBUTION SUPPORT PROCESSES Finance and administration Information management Communications Processes supporting production Production maintenance SALES R&D MARKET- ING CUSTOMER CONSUMER 16

17 MARKET AREA: FINLAND Part of Finnish society Figures for Finland Employees, average 2,802 2,854 Employees at 31 December 2,579 2,657 Salaries paid, EUR million Social security costs, EUR million Turnover per employee (EUR 1000)* Operating profit per employee (EUR 1000)* Suggestions per 100 employees Rewards paid for suggestions (EUR 1000) Employee structure (at year-end) Blue-collar staff 2,038 2,128 White-collar staff Directors and senior clerical Women 1,232 1,304 Men 1,347 1,353 *) Totals calculated using average number of employees in Finland. Employees by country at year-end 2004 and Finland 2,579 (58.4%) Estonia 1,591 (36.0%) Latvia 197 (4.5%) Lithuania 45 (1.0%) Other 5 (0.1%) 2003 Finland 2,657 (55.5%) Estonia 1,684 (35.2%) Latvia 337 (7.0%) Lithuania 105 (2.2%) Other 5 (0.1%) Finland Estonia Latvia Lithuania Other Finland Estonia Latvia Lithuania Other Employees by company at year-end Change HK Ruokatalo Oyj 1,695 1,703-8 AS Rakvere Lihakombinaat Group 1,200 1, AS Tallegg Group Broilertalo Oy LSO Foods Oy Other HK Ruokatalo Group, total 4,417 4, Group employees at year-end Employees outside Finland shown in lighter shading. life, how they can be translated into action, how they affect the way we work and our prosperity and not least, how they can integrated into our everyday work. This phase ended in early From now on, we will use indicators to track how the values have been implemented in each team, unit and management team. The results will be analysed and we will provide support to implement the values as required. Our bonus scheme built together with employees consists of two parts: a basic part and a performancerelated part. The basic part is linked to team and unit targets and the performance-related part depends on the Group achieving its operating profit target. In 2004, the company paid its employees in Finland performance bonuses totalling almost EUR 0.7 million. Employees were active in making suggestions and came up with 2,230 initiatives, 120 more than in Right to good management Each HK Ruokatalo employee has a right to good management. This is an inherent part of our culture and to this end we continued building and further developing the performance management system in Managers received training in how to be a coach, how to develop a team-like way of working and how to manage conflict situations in the workplace. We likewise continued to chart leadership skills. A third group of HK Ruokatalo employees began to study for the specialist vocational diploma in management (JET) This group of 25 persons includes almost all the HK Group s Management Team and the management team of the Baltic Group. Reliable in-house control As a food company, HK Ruokatalo recognises its responsibility to consumers and to this end has created an in-house control system for all its production facilities. This system goes far beyond statutory requirements. Approved by the authorities, our in-house control system is based on risk assessments of products, raw materials and manufacturing processes and on the management programmes made thereon. FINAS accredited laboratories in conjunction with the production facilities in Vantaa, Forssa and Eura ensure that quality criteria are met. 17

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19 THESE ARE OUR VALUES Trust We keep our promise. Trust has to be earned every day. Competence We want to rank among the best players in the business. Continuous improvement and development Doing things better today than yesterday, doing things better tomorrow than today. Customer satisfaction We recognise customer needs. We anticipate them and respond to them in the best possible way. Profitability We aim for success, both of the company and the individuals working there. This ensures business continuity. 19

20 MARKET AREA: FINLAND Good food and a clean environment HK Ruokatalo operates on the principle of causing minimum environmental impact during production. This is why environmental management is an integrated part of the Group s operational system and involves the entire core process from product development to manufacture and transportation. In the food industry, energy, water, waste arising from processing biological materials, wastewater and smoke gases from heating plants cause the greatest environmental loading. HK Ruokatalo seeks to reduce the amount of energy and water consumed in relation to production (= specific consumption), to reduce the relative amount of landfill waste and to improve sorting. Since there are differences in operations and technology, targets vary from one production facility to another. We monitor the implementation and follow-up results of action programmes to achieve targets. We have achieved results by combining and rationalising operations, by introducing new policies and by adjusting and improving technology. We hold training events for employee groups to help them understand the importance of environmental issues. In 2004, we standardised the monitoring of environmental indicators and introduced energy and water measurements at the Mellilä and Outokumpu slaughterhouses. A summary of our environmental achievements is given in the table below. Additionally, we measured the environmental effectiveness of transport in respect of the degree of fullness of our own fleet and by costs in outsourced transport services. We monitor energy consumption and efficiency in the transport of animals. HK Ruokatalo started work on building an environmental management system in The system was integrated into the operational system in Instead of earlier factory-specific certificates, HK Ruokatalo now has one combined ISO environmental management certificate. Certification does not yet cover the Mellilä and Outokumpu slaughterhouses. Environmental management certification was awarded by Det Norske Veritas. Achievement of environmental measurements A 2004 B 2003 change % C 2004 change % Electricity - total consumption (MWh) 83,165 85, , specific consumption (kwh/production kg) (kwh / external sales kg) Heat - total consumption (MWh) 96,839 95, , specific consumption (kwh/production kg) (kwh / external sales kg) Water - total consumption (m3) 1,432,950 1,509, ,527, specific consumption (litre/production kg) (kwh / external sales kg) Waste Landfill waste - total amount (t / pa) 1,387 1, amount (g/production kg) Amount of total waste used for recycling (%) Columns A and B include the production facilities at Eura, Forssa, Riihimäki, Säkylä, Tampere, Turku and Vantaa. Column C also includes the facilities at Mellilä and Outokumpu, which were previously outside the Group s environmental measurements. 20

21 MARKET AREA: THE BALTICS Rapidly changing market in the Baltics ESTONIA Whilst demand and affluence are growing in Estonia, Latvia and Lithuania, the markets are also undergoing rapid change. Many companies have modernised production with the help of EU aid. This has resulted in increased capacity, which in turn keeps prices low despite, for example, a rise in the price of raw pork. The structure of the retail trade is changing apace as the trade currently focuses purchases and builds chains across the Baltics. Successful suppliers need to understand the needs of the trade and be capable of operating in all three countries. HK Ruokatalo s Baltic Group is well placed to do so. The Baltic Group comprises AS Rakvere Lihakombinaat and subsidiaries and AS Tallegg and subsidiaries. Rakvere Lihakombinaat has a presence in Estonia, Latvia and Lithuania, Tallegg in Estonia. We restructured and reorganised the Baltic Group to standardise ways of working and to improve management of the entire business process. This became an issue when the EU gave rise to a single common market across the Baltics and the need arose to overhaul the operations of the Baltic Group to respond to the ensuing new business environment. In Latvia and Lithuania, business was based on one operative unit in each country. In Latvia, Rigas Miesnieks acquired Tallat s business operations. In Lithuania, Selingas merged into Klaipedos Maisto Produktai. Tallat and Selingas were formerly subsidiaries of Tallegg. Baltics 2004 % 2003 % Turnover Operating profit Result Employees The amounts are EUR million. The number of employees is the year-end figure. The percentage indicates the proportion of the Group figure. Successful suppliers need to understand the needs of the trade and be capable of operating in all three countries. Production and logistics Extensive efficiency measures were underway on the production front and production was reorganised between the Rakvere factory, the Riga factory and Tallegg. We modernised the slaughtering line at Rakvere and switched over to using a gas stunning system, which has considerably improved meat quality. Meat cutting in Riga was wound up and centred on Rakvere, where we were able to increase the proportion of cut meat and thus reduce sales of low margin carcases. Tallegg transferred its sausage production to Rakvere, which ceded production of fresh poultry products to Tallegg in return. Rakvere became the focus of the production of cold cuts and other sliced products. The new consumerpacked meat line at Rakvere enables larger volumes and better storage. This means Rakvere can also supply products to the Latvian and Lithuanian markets. The production facilities in Riga were thoroughly modernised and all processes have been streamlined. The facilities have received EU approval. LATVIA LITHUANIA 21

22 MARKET AREA: THE BALTICS Started in 2003, production restructuring at Tallegg was completed and we embarked on the following stage to further intensify the production structure. We need to continuously push costs down to enable us to retain our competitiveness in poultry meat. On the logistics front, the most important project was the completion of a large logistics centre at the Rigas Miesnieks factory in Riga in spring The centre is responsible for deliveries of the group s products throughout Latvia. The aim is to achieve major cost savings without compromising on customer service. In Lithuania, we merged order picking, storage and transportation of Klaipedos Maisto Produktai and Selingas products. In Estonia, Tallegg ceased using external storage facilities and now uses just one warehouse at its principal place of business in Loo. Primary production Primary production company Ekseko made progress as planned. Enlargements of the piggery resulted in increased production. Higher pork prices improved Ekeseko s profitability, likewise efficiency increased. Ekseko is contending to be one of the top producers in Europe. The company is currently expanding the contract production of pork and its main production unit at Viiratsi will increasingly concentrate on running a sow farm and rearing slaughter pigs. Autumn 2004 saw the merger of Tallegg s primary production department with Ekseko to create an effective unit seeking to deliver major cost savings starting in Commercial operations Sales of our main brands - Rakvere, Rigas Miesnieks, Klaipedos Maistas and Tallegg - were up on the year. Marketing focused on managing the product range in all units. We successfully revamped the range of products for the summer and Christmas season. Sales of new grilling sausages and consumer-packed meats launched for the summer exceeded expectations. Such good progress was made with improving ham products that we were able to launch new sliced products in Estonia in the autumn. Sales of these products were up by almost 30 per cent on the year. Rakvere Lihakombinaat exceeded its sales targets, the other units were slightly below target. We are clear market leader in red meat, with a 35 per cent of the market in Estonia. Profitability on this front improved. Tallegg has an approximately 30 per cent share of the Estonian poultry meat market. High feed costs coupled with increased imports from Lithuania into Estonia eroded profitability in the poultry industry towards the end of the year. Rigas Miesnieks is market leader in Latvia with a market share of almost 19 per cent. The structural changes introduced affected the way sales work, especially in Latvia and Lithuania. The sales organisations now operate uniformly and the meat team, for example, is responsible for all meat sales throughout the Baltic States. 22

23 MARKET AREA: POLAND Modern production in Poland Higher turnover and earnings for Sokolów Sokolów s turnover in 2004 rose to PLN 1,358.9 million (EUR 342.5m), up by PLN million or 31.0 per cent on the figure a year earlier. Group earnings were PLN 42.2 million, including exceptional income. Since all the major international chains have a presence in Poland, competition in the retail sector was extremely fierce. Nevertheless, Sokolów successfully managed to increase sales volumes in Exports were also healthy in the wake of Poland s EU membership and already accounted for over 20 per cent of turnover. However, the continued strengthening of the Polish zloty against the euro and US dollar has begun to chip away at export profitability. This is why stabilisation of the exchange rate is needed to safeguard growth of the Polish economy. Pork and beef prices rose sharply on Poland s accession to the EU on 1 May 2004 since raw meat prices mostly took their cue from prices in neighbouring Germany. Although prices began to fall slightly towards the year-end, they were still higher than before Poland joined the EU. Sokolów s own retail network, which currently comprises a couple of hundred shops and sales outlets across Poland, is one of its success factors. Some of these shops and outlets operate on a franchise basis. Sokolów sold a quarter of its sales through this network and the company plans to build further on this network. Sokolów and its subsidiaries provide some 3,700 jobs. 23