HK RUOKATALO GROUP OYJ ANNUAL REPORT 2005

Transcription

1 HK RUOKATALO GROUP OYJ ANNUAL REPORT 2005

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3 Contents Company overview... 4 Headlines in Reviews by the CEOs... 6 Market area: Finland Commercial Operations Logistics Group Meat business Raw meat procurement and management LSO Foods Oy Poultry business Processed meat and convenience food business Integrated management system and employees Market area: Baltics Funds statement Accounting policies Notes to the income statement Notes to the balance sheet Shares and shareholders Annual General Meeting Signatures of the Board of Directors and CEO Auditors report Corporate governance Board of Directors Management team in Finland Management team in the Baltics Stock exchange bulletins Addresses Market area: Poland Report of the Board of Directors for the financial year ending 31 December Financial indicators Consolidated financial statements Income statement Balance sheet Cash flow statement Statement of changes in shareholders equity Accounting policies Notes to the income statement Notes to the balance sheet Parent company financial statements Income statement We seek a costcompetitive food company to enhance the everyday life of consumers by providing not only traditional classic products, but also innovations to make cooking easier. Kai Seikku - Balance sheet HK Ruokatalo Group Oyj, Kaivokatu 18, FI Turku, Finland. Registered office: Turku. Business Identity Code:

4 COMPANY OVERVIEW Making everyday life easier for consumers in Finland, the Baltics and Poland. FINLAND 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. 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 at 1 April 2006 ESTONIA HK Ruokatalo Group Oyj CEO Kai Seikku Finland turnover 2005: EUR million HK Ruokatalo Oy LSO Foods Oy The Baltics turnover 2005: EUR million AS Rakvere Lihakombinaat AS Tallegg AS Ekseko AS Rigas Miesnieks UAB Klaipedos Maisto Mesos Produktai Poland * turnover 2005: 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 82.04% of Sokolów s shares. EUR million of Sokolów s revenue was consolidated to HK Ruokatalo Group concern. LATVIA 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. LITHUANIA 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. POLAND 4

5 Kolo POLAND Warszawa Eura Säkylä Turku Czyzew Sokolow Mellilä Tampere Forssa Tallinn Vantaa Riga FINLAND ESTONIA Viiratsi LITHUANIA Vilnius Rakvere LATVIA Outokumpu St Petersburg Headlines in 2005 Financial targets A successful year for our international business. On target in the Baltics and Poland. The company missed its performance target at home despite increased net sales. Net sales rose by 29.8% to EUR million and the operating profit was EUR 24.1 million. The inclusion of our business in Poland in the consolidated accounts notched up growth. Operations front HK Ruokatalo Group Oyj s wholly-owned subsidiaries Broilertalo Oy, Food Kuljetus Oy, Koiviston Teurastamo Oy and Pouttu Foods Oy merged with and into HK Ruokatalo Group Oyj on 31 March After this, the group s Finnish industrial operations, sales, marketing, logistics and transportation, as well as the employees concerned, were transferred to a new subsidiary known as HK Ruokatalo Oy. The business transfer from HK Ruokatalo Group Oyj to HK Ruokatalo Oy took place on 1 April Joint ownership by Danish Crown and HK Ruokatalo Group of Sokolów in Poland rose to over 82%. On 12 April 2005, the company s Board of Directors appointed Kai Seikku MSc (Econ. & Bus. Admin.) to be HK Ruokatalo Group s next CEO. Seikku joined the company on 1 September as managing director of HK Ruokatalo Oy, which is responsible for the group s business operations in Finland. He took up the post of CEO of the entire HK Ruokatalo Group on 1 April 2006 on the retirement of CEO, Simo Palokangas. The Finnish management organisation was restructured on 9 November 2005 in a bid to increase the company s market approach and to improve results accountability. The extensive investment programme launched in 2004 in Forssa progressed as planned and the new pork slaughtering line came on stream at the end of On 10 January 2006, the company announced a two-year programme to overhaul its production structure in Finland. The plan is to focus most of the processed meat production on the Vantaa facilities and the processing of fresh meat on the Forssa facilities. It is envisaged that Vantaa will form the centre of logistics. Tarnow Debica Jaroslaw Employee contribution In our team-like way of working, we are now at a stage where a manager s work is increasingly becoming coaching leadership. Employees made suggestions to improve work and the work environment. 5

6 REVIEWS BY THE CEOS Reviews by the CEOs Internationalisation process makes further progress The food and drinks industry is the EU s largest industrial sector in terms of net sales and employee numbers. Whereas some sectors of the food industry have already progressed far down the path of internationalisation, other sectors, such as the European meat industry, that have long remained local or regional, are now experiencing an expansion phase. HK Ruokatalo has sought to anticipate changes in the business environment. The progress we have made with our internationalisation process over the past seven years now means that more than 40% of our revenue is generated outside Finland. Despite this, Finland is and will remain an important core business area. We aim at a higher growth rate than the rise in consumption on our home market, too. This we will achieve through our excellence, advanced automation and appealing products to consumers and customers. HK Ruokatalo is definitely the largest meat marketing channel in Finland. The year under review was a dichotomous one for the HK Ruokatalo Group concern. Our international business performed well, with Rakvere Lihakombinaat and its subsidiaries in the Baltics and Sokolów in Poland achieving their targets. Cleaning operations to make the production chain salmonella-free eroded Tallegg s profitability in Estonia. At home, we missed our commercial targets and performance was definitely unsatisfactory. Actions are already underway to remedy this. When I took over the reins as HK Ruokatalo s CEO twelve years ago, the company s very existence was seriously at risk. Saddled with heavy losses, the company had practically exhausted its equity. The company s backers were reluctant to continue to provide finance and in just under a year Finland was to become a full EU member overnight. Today, HK Ruokatalo Group is a major European meat and food company, looking strongly towards the future from a healthy strategic position. HK Ruokatalo has every chance of prosperity. It operates on a sound platform and the present shortcomings in operations can be overcome. Over the past twelve years, a whole host of people and partners have helped make HK Ruokatalo what it is today. I would like to express my heartfelt gratitude to everyone concerned for the contribution they have made in restoring the company. Although I retired at the beginning of April, I will continue to champion the cause of our company in the competition prevailing in the European food industry. Simo Palokangas 6

7 REVIEWS BY THE CEOS Tough year at home The year under review was one of disappointment for HK Ruokatalo s Finnish business, which was incorporated on 1 April We missed commercial targets for the second sales period, especially on both sides of the summer barbecue season, and for the last quarter of A successful Christmas season and sales of ham slightly mitigated what was otherwise a lackadaisical financial year. The undersigned joined the company and assumed responsibility for its Finnish business operations on 1 September The autumn was marked not only by commercial failures, but also by focusing the strategy at home. A restructured management team and its areas of accountability were announced on 9 November 2005 as part of our actions on this front. Apart from these changes as regards personnel, another major change was the division of the company s Finnish operations into three units differing in terms of business logistics: the meat, poultry and processed meat and convenience food businesses. Furthermore, the organisation of the Commercial Operations Group in the matrix was strengthened by the addition of logistics and raw meat purchases were integrated into the meat business unit. These changes indicate future development trends. Profit responsibility is now more focused than earlier. The meat business, which is only modestly profitable in terms of financial highlights, can be developed independent of the more successful processed meats and convenience food business, providing a focus to the Commercial Operations Group. Our aim during the current year will be growth at home and, despite the march of avian flu prominently in the press at the time of writing and fierce competition, much higher operating profit than in Although the company anticipates at the moment that avian flu will have an insignificant impact on financial performance, potential impacts on business will be felt through any emotional reactions by consumers in the course of time. The change in the production structure announced in January 2006 is a major step forward in updating the company s domestic strategy. In the longer-term, we seek a cost-competitive food company throughout its long value chain to enhance the everyday life of consumers by providing not only traditional classic products, but also innovations to make cooking easier. Kai Seikku 7

8 MARKET AREA: FINLAND Commercial Operations HK Ruokatalo s Commercial Operations unit is responsible for sales to retail and HoReCa customers, marketing, product development, exports, industrial sales, logistics and distribution terminals. Emphasis on products and consumer awareness Central firms in the retail trade continue to rationalise their operations and seek market shares primarily through pricing and corporate restructuring. As decision-making becomes increasingly centralised, product group expertise and a deep insight into consumer behaviour form the basis for profitable cooperation. With this in mind, we set up a customer marketing organisation to assist sales. We established a team focusing on the sales of meat cuts to draw on increased sales potential and reviewed our telephone sales resources and cooperation between sales staff in the field and telephone sales. The year was marked by fierce competition, which translated into an unsatisfactory price trend. Choice cuts of poultry meat and, in some cases, pork products imported by our competitors also eroded our margins. Nevertheless, we made progress in many directions as reported below. The consumer-packed meat market grew dynamically and HK had a successful summer barbecue season. Alongside seasonal favourites, we developed HK Lihaämpärit, tubs containing 1.2 kg of marinated pork, which proved to be very popular with barbecue enthusiasts. During the summer, we sold barbecue meats and sausages worth EUR 50 million and were market leader with more than 38% share of the market. Again, we sold almost half of the Christmas hams in Finland. On the processed meats front, the focus was on cold cuts, especially on whole meat cold cuts, where our sales grew faster than the market average. Sales of grilling sausages were up on the year and the more meaty A-class sausages remained top-sellers. HK Kabanossi Original was the top-selling A-class grilling sausage and HK Camping and Poprilli the best-selling general class grilling sausages in summer The HK Sininen range saw the addition of skinless HK Sininen and HK Sininen Saunalenkki sausages. On the convenience foods front, HK Ruokatalo s sales grew faster than the market as a whole. Best-sellers were minced (ground) meat products and light mayonnaise-based salads. We had market leadership in both sectors. Meal components also sold well. In line with decisions made earlier, we outsourced the production of salads and triangular sandwiches. On the poultry front, we addressed cooking convenience with the launch of Kariniemen minute steaks and oven fillets, which were received very well on the market. These are ready to roast in an oven dish, which is also ideal for serving. This type of added value product helped increase market value as a whole. Finns increasingly eat out The HoReCa sector produced 769 million meals (+0.4%) in Finland. Growth was in the commercial sector. The number of meals declined in the public sector and in staff dining rooms. HoReCa meat sector sales rose by around 1.3%. HK Ruokatalo grew sales by 6.2% and increased its share of the market especially in meat and poultry meat, but also in processed meats. Conversely, we lost a slight share of the market in convenience foods. Online orders placed by customers were up by 25% during the year and now account for almost 60% of all orders received. This led us to overhaul our customer service operations model in response to the new situation. Fierce price competition early in the year somewhat weakened HoReCa profitability because it was impossible to pass on the full rise in raw material and other costs to selling prices. However, a good Christmas season improved profitability towards the end of the year. Further rise in exports from Finland Our exports to more than 25 different countries were up both in terms of net sales and volume. The market developed encouragingly and there was strong demand in Russia and the Baltics throughout the year. HK s top quality products and dependable transport and deliveries have led to a steady growth in exports to neighbouring territories for several years in succession. Russia, the EU, Japan and the United States were HK Ruokatalo s main export markets for pork. The autumn saw New Zealand being added to the list of export countries. The global market for pork was good and it was only in Japan that demand weakened in late autumn owing to large stocks and disruptions in exports. In the United States, increased pork production and increased imports eroded the price of barbecue products. 8

9 In most households meals are usually made at home during the week and at weekends (except lunches eaten by students and people of working age). - Taloustutkimus Oy, Suomi Syö (6/2005, responses by around 2050 Finns deciding on buying household groceries) Global pork production is expected to grow at about 2% a year, whilst the global pork trade is poised to rise by 4% a year. This will fuel future global demand for Finnish pork. Exports of our poultry meat also rose in terms of value and volume. Prices were high until the autumn, when news of bird flu led to a collapse in the demand for broiler in Southern Europe and lowered prices. Stronger demand mainly in the Asian market enabled us obtain higher prices for poultry meat than in Market disturbances, of which the greatest is obviously bird flu, make it difficult to predict the market trend. Logistics Group The Logistics Group comprises the order picking and storage functions at the company s Finnish distribution terminals, despatch operations and transport. Commercial Operations is responsible for logistics functions. The new part of the despatch terminal completed at Vantaa is operating at the envisaged capacity. Modernisation of the main system in the older part of the terminal is progressing as planned and is scheduled for completion in autumn March 2005 saw the merger of the group s transport company since when Vantaa has served as the focus of logistics operations. Three principal hauliers are responsible for actual transportation. The freezer plant building project at Forssa is nearing completion and is scheduled to be operative in spring January 2006 saw work start on preliminary plans to switch the operations of the Tampere distribution terminal to Vantaa as part of restructuring HK Ruokatalo s Finnish business operations. The switch is being made in a bid to achieve competitive logistics. Finland 2005 % 2004 % Net sales Operating profit Employees The amounts are EUR million. The number of employees is the year-end figure. The percentage indicates the proportion of the group figure. 9

10 MARKET AREA: FINLAND Meat business HK Ruokatalo s meat business includes slaughtering and cutting operations at the pork abattoirs in Forssa and Mellilä and at the beef abattoir in Outokumpu. The added value processing of fresh meat takes place at Forssa and Tampere. The remit of the meat business also includes the supply of raw pork and beef material and meat flow control throughout the entire process. Some of the meat we process is used as a raw material in the company s own processed meat industry, part is sold as carcasses or in separate joints to industrial customers and for export. We work together with marketing and product development to further process an increasing share of our meat into consumer products. There was a slight increase year on year in the volume of meat we handled. The production plant utilisation rate was good and, for example, we supplied almost half of the Christmas hams sold in Finland. Seeking improved profitability Profitability in the slaughtering and cutting industry depends on how low operating costs can be squeezed and how efficiently meat handling flows in the process. From this aspect, 2005 was unsatisfactory for us. Improved competitiveness is essential, which is why we addressed rationalisation. Operations were centred on Forssa, which is in a key position because of the large volume of meat passing through it. Progress was made as planned with the extensive investment programme embarked on in 2004 and the new pork slaughtering line came on stream in late This not only replaces the old line, but also greatly increases the degree of automation and ensures capacity to deal with even larger volumes of meat when the time comes. The next step is to replace the quick carcass refrigeration plant and animal reception facilities and the primary cutting of carcasses on the cutting side. The investments will take final shape in the second half of Although technical modernisation plays an important role in improving the profitability of the meat business, we also need to be more commercially active than earlier to innovate interesting new products for customers and consumers. Raw meat procurement and management The Raw Material Group procures pork and beef raw meat material for HK Ruokatalo s Finnish units. The aim is for managed raw material flows to ensure the entire operating process works efficiently. The Group is responsible for customer satisfaction in respect of the availability, quality and reliable delivery of raw meat material. Key to the Group s roles is the raw meat balance and to place raw meat material as profitably as possible. The Raw Material Group also coordinates the raw material need and balance between group companies. The Group s remit includes purchases of materials and consumables. Pork production in Finland rose by 3% to million kg in Consumption declined by about 1% and Finnish production accounted for 90.9% of consumption. Beef production fell by 8% to 84.3 million kg. Since consumption over the same period was also down by 1%, home produced beef accounted for 84.8% of consumption. This was the first time that more poultry meat than beef was produced in Finland. Poultry meat production was 87 million kg, the same as in Consumption was up by around 1%. Own procurement of pork was up by 2.4% and poultry meat by 1.4%, whereas that of beef declined by just 1.7%. Besides own procurement we also supplemented supplies with purchases from other Finnish meat companies. Our total volume of raw meat rose by 2.2 million kg on the year to stand at million kg. The group s raw meat material balance sheet was in equilibrium throughout the year. 10

11 Sliced ham, cooked ham, grilling/ring sausages, sliced turkey, ham sausage and salami are the most popular cold cuts. - Taloustutkimus Oy, Suomi Syö (6/2005, responses by around 2050 Finns deciding on buying household groceries) Meat balance of the Finnish units in 2005 Procurement and purchases by HK Ruokatalo Group concern s Finnish units in million kg million % of meat used kg 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 Own procurement includes meat procured by LSO Foods Oy and HK Ruokatalo Oy. Additionally, the Rakvere Lihakombinaat Group and AS Tallegg procured 49.9 million kg of meat for their own use. When we add this to the figures for Finland, HK Ruokatalo Group concern s meat balance sheet total rises to million kg Use of raw meat material (kg million) Finland Baltics

12 MARKET AREA: FINLAND LSO Foods Oy As part of the Raw Material Group, LSO Foods Oy purchases HK Ruokatalo s live raw meat material, except for poultry. Procurement is based on production contracts with producers. Our supplies of pork mainly come from producers in Southern Finland, whereas beef comes from producers throughout the country from as far afield as North Ostrobothnia, North Savo and Kainuu. LSO Foods strategy is based on HK Ruokatalo s expectations and aims: controlled growth of the raw meat material to be procured, efficient meat chain management in primary production and procurement and quality assurance of the raw meat material. Achieving these aims requires working together with contract producers to develop contract production. In 2005, we harmonised procurement operating principles on the basis of arrangements made the previous year when the procurement operations of LSO Foods, Pouttu Foods and Koiviston Teurastamo were merged. Whereas the number of contract producers declined slightly during the year, there was an increase in the amount of meat produced on farms. At year-end, LSO Foods had 1,189 pork contract producers and 5,037 beef contract producers. We intensified operations in new areas in Central Ostrobothnia and North Savo. Procurement and consultation During the year under review, LSO supplied 98.8 million kg of raw meat material, up by just under a couple of per cent on the year. Our procurement of pork rose by just under 3%, which corresponded to the development of pork production in Finland. We are market leader with a share of procurement approaching 40%. Whilst we lost a couple of per cent in beef, beef production in Finland declined by much more and our share of the market rose to almost 23%. We are Finland s second large supplier of beef. The number of feeder animals supplied continued to rise. During 2005, we supplied farms with 645,000 piglets and 27,000 calves for rearing. One of our strategic development points is to develop meat chain management. This is used to anticipate the supply of raw meat material and better enable us to manage the right amount and timing of raw meat supply. Meat chain management has become an important tool for the entire meat chain and benefits both the producer and slaughterhouse alike. We completed the LSO Master Meat Producer contract production coaching programme, which is part of our quality work in primary production. This enabled us to specify and establish a joint understanding in respect of cooperation between LSO Foods and contract producers. The aim is to minimise miscosts in the meat chain. The development ideas generated by coaching have been effected in contract production. Early 2005 saw us embark on the eproducer project in a bid to make further use of ebusiness. The idea is to implement an information system to serve the beginning of the entire meat chain contract production and supply processes. The system will compile the information arising in different organisations and make it available for shared use. This will considerably facilitate and improve meat chain management. The project continues into Outlook for 2006 LSO Foods seeks to achieve further cost-effectiveness in its business and moderate growth in procurement volumes, especially in pork. The aim in beef is to achieve the same figure as in This increase calls for strategic development work in primary production, where the pressure to improve competitiveness is greatest. Government support intended to develop the structure of pork production can still be applied for only in exceptional circumstances. Financial aid for beef production is obtainable. Smaller national aid together with a reform of CAP, the EU s Common Agricultural Policy, create additional challenges for farm profitability. The answer to this is to improve productivity and increase farm size. Also production investment costs must be lowered. 12

13 Various minced meats are the most popular form of meat products. Broiler strips and breast are the most popular broiler products. Different minced meats and broiler products are increasingly popular. MARKKINA-ALUE: SUOMI - Taloustutkimus Oy, Suomi Syö (6/2005, responses by around 2050 Finns deciding on buying household groceries) Poultry business The Eura and Säkylä facilities produce fresh strips, fillets and cold cuts from broiler and turkey meat for a variety of dishes. We also make cooked products. Our poultry products are marketed under the Kariniemen brand and are acclaimed for their high quality. Kariniemen products are made from Finnish raw poultry meat material. Finland consumed 83.8 million kg (+0.5 %) of poultry meat in The year under review was the second in succession that broiler consumption rose only slightly. Turkey consumption experienced a slight decline. In 2005, HK Ruokatalo procured 42.7 million kg of poultry meat, all sourced from its own contract producers. Several development projects in animal production We support the competitiveness of contract production through active development and training. The introduction of a lighter feed for mother hens and information on production and conditions improved broiler chick production. We successfully increased the use of whole corn in feed in rearing for slaughtering. In rearing turkeys for slaughtering, we switched over to rearing hens and cocks separately. The birds remained healthy. Work on improving transport logistics continued by overhauling broiler catching and the fleet used to transport broilers to slaughter. We have the capacity for higher production volumes Extensive development actions continued in production. At Eura, we implemented several innovations both in the slaughterhouse and in the packing of boned products. These enable us to cope with even higher production volumes in future. The degree of automation was also raised in the same context. Additionally, we embarked on measures to develop the packing of products on the bone. Since demand is increasingly towards boned products, we enhanced the cutting of both fillet and thigh meat to enable us to respond to the new consumer expectations. The profitability of the turkey business was again unsatisfactory. However, we have stepped up actions to reverse this situation. We further intensified cooperation with our Estonian sister company Tallegg. The encouraging results of this were in evidence particularly in the second half of the year. Imports into Finland of Brazilian broiler fillets calmed slightly after the initial rush in early Competition increased and in future imported meat will permanently incite Finnish producers in the provision of fresh broiler meat in the retail trade. This means that HK Ruokatalo must ensure its own competitiveness remains at an international level. 13

14 Convenience foods are increasingly meeting the needs of time-starved consumers. - Taloustutkimus Oy, Suomi Syö (6/2005, responses by around 2050 Finns deciding on buying household groceries) Processed meat and convenience food business HK Ruokatalo s processed meat and convenience food business is responsible for the production of processed meats and convenience foods at the Vantaa factory and for processed meat production at the Turku factory. In terms of euros, sales of processed meats were up by about 3% in Finland. The sales value of HK Ruokatalo s processed meats rose at about the same rate. The rise in our sales of cold cuts, especially whole meat products, exceeded market growth as a whole. The rise in the demand for processed meats was increasingly towards meatier products. The Finnish convenience foods market grew by an estimated 4%. The value of HK Ruokatalo s sales in this sector rose by around 8%, spearheaded by minced (ground) meat products and snack products. During the year under review, we increased costeffectiveness by improving joint control of the Vantaa and Turku production facilities and by investing in packing line automation. The convenience food factory in Riihimäki closed at the start of the year. In the same context, the production of salads and sandwiches was outsourced. In 2006, we will be addressing the development of operations and our product range and will continue to improve production cost-effectiveness. We will do this by automating the production lines and by developing customer-driven operations. In early 2006, we embarked on plans to switch production at the Turku factory to Vantaa as part of the restructuring of HK Ruokatalo s Finnish business operations. 14

15 MARKET AREA: FINLAND Integrated management system delivers results HK Ruokatalo has an integrated management system covering all areas. The system comprises quality and environmental management and is tasked with (1) coordinating and directing towards shared objectives; supporting the implementation of HK Ruokatalo s values and strategy, (2) ensuring continual improvement in a changing business environment, (3) creating and developing shared operations models for the entire organisation, (4) ensuring the high quality and safety of products and (5) reducing adverse environmental impacts The strategy is communicated from the group level to the core processes and throughout the entire organisation using a strategy map and score cards. We regularly measure progress from four different aspects: employee innovativeness and learning, processes, customers/consumers and finances. The system is built on ISO 9001 and standards under which HK Ruokatalo s operations have been certified. During the year under review, we extended the integrated management system to Mellilä and Outokumpu. Det Norske Veritas audited the quality and environmental management of both production facilities and these will be certified during spring We regularly train our people to ensure their commitment to quality and environmental management. Reliable in-house control As a food company, HK Ruokatalo recognises its responsibility to consumers and to this end has an inhouse control system at all its production facilities. This system goes far beyond statutory requirements. Our inhouse control system has been approved by the authorities and is based on risk assessments of the products, raw materials and manufacturing processes and on the management programmes made on these bases. Our FINAS-accredited laboratories in conjunction with the production facilities in Vantaa, Forssa and Eura ensure quality criteria are met. FROM THE FARM TO THE CONSUMER CHAIN IN FINLAND BUSINESS PROCESSES: Meat Poultry Processed meat and convenience foods Commercial operations CORE PROCESS PRODUCER PROCURE- MENT SLAUGH- TERING CUTTING PRODUCT- ION TERMINALS DISTRIBUTION SUPPORT PROCESSES Finance and administrator processes Information management processes Communications processes Processes supporting processes Production maintenance processes SALES R & D MARKET- ING CUSTOMER CONSUMER 15

16 MARKET AREA: FINLAND Good food and a clean environment HK Ruokatalo operates on the principle of causing minimum environmental impact during production. 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 all waste, particularly the relative amount of landfill waste, and to improve sorting. We measure the environmental effectiveness of outsourced transfer and delivery transport by monitoring costs. We monitor energy consumption and efficiency in the transport of animals. Since there are differences in operations and technology, focus areas vary from one production facility to another. A summary of our environmental achievements is given in the table below. We have achieved continuous improvement by combining and rationalising operations, by introducing new policies and by adjusting and improving technology. Success factors - good management and employee know-how Alongside the specialist vocational diploma in management (JET), many HK Ruokatalo employees also complete a specialist vocational diploma in technology or product development or a vocational diploma in business and administration. The qualifications are completed as apprenticeship training and are funded out of public money. In our team-like way of working, we are now at a stage where a manager s work is increasingly becoming coaching leadership. To support this change, at Vantaa and Tampere we formed teams, headed by retraining coaches, where managers spar their skills. The importance of language skills has increased with internationalisation. During 2005, we had twelve groups of different levels learning English or building on their earlier language skills. Teaching took place using our own resources. To chart employee skills, we compiled information about the training, courses and competence of each employee. Managers use this information when preparing training plans. In the same context, a part-time person responsible for training was appointed to each workplace. The bonus scheme was again in use and employees in Finland were paid bonuses totalling EUR 0.6 million. The scheme consists of two parts: the basic part is linked to team and unit targets and the performancerelated part depends on the result in Finland before extraordinary items. The employee suggestion scheme continued in all workplaces and we received suggestions, 206 fewer than in Achievement of environmental measurements change % Electricity - total consumption (MWh) specific consumption (kwh / external sales kg) Heat - total consumption (MWh) specific consumption (kwh / external sales kg) Water - total consumption (m 3 ) specific consumption (l / external sales kg) Waste - all waste, total (t / pa) amount (g / production kg) 137, waste destined for landfill (t / pa) amount (g / production kg) Amount of recycling waste of total amount (%)

17 MARKET AREA: FINLAND Part of Finnish society HK Ruokatalo Group concern figures in Finland Employees, average Employees at 31 December of which part-time Salaries paid, EUR million Social security costs, EUR million Net sales 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 White-collar staff Senior white-collar staff Managers Women Men *) Totals calculated using average number of employees in Finland. Employees by country at year-end 2005 Finland (58.6%) Estonia (36.0%) Latvia 178 (4.1%) Lithuania 51 (1.2%) Russia 5 (0.1%) Additionally, the Sokolów Group employed persons in Poland. Employees by country at year-end 2004 Finland (58.4%) Estonia (36.0%) Latvia 197 (4.5%) Lithuania 45 (1.0%) Russia 5 (0.1%) Finland Estonia Latvia Lithuania Russia Finland Estonia Latvia Lithuania Russia Employees by company at year-end Change HK Ruokatalo Group Oyj HK Ruokatalo Oy AS Rakvere Lihakombinaat Group AS Tallegg Broilertalo Oy LSO Foods Oy Other HK Ruokatalo Group concern total Group employees at year-end Employees outside Finland shown in lighter shading. 17

18 MARKET AREA: BALTICS Rakvere performing well in the Baltics We performed well on the red meat front in the Baltics. Rakvere Lihakombinaat and its subsidiaries posted a record performance. Poultry company Tallegg suffered some setbacks, which temporarily derailed it from good performance to date. In-house internal development systematically carried out in Rakvere Lihakombinaat has delivered improved competitiveness and profitability. Despite discounts and pressure on costs, margins remained good and cost discipline was maintained. In the wake of good performance by the Rakvere Group, the operating profit of our business in the Baltics accounted for 5.7% of revenue, which surpassed the target set. New, more highly processed products, consumerpacked meat and sliced products sold well. New products by innovated Rakvere for the summer season were a sales success. Likewise Rakvere had a good Christmas season. Higher HoReCa sales and good delivery reliability compared to competitors contributed to good performance. Positive progress was supported by quality, competitive pork raw material produced by Rakvere s subsidiary, Ekseko. With a 33% share of the market, Rakvere Lihakombinaat is clear market leader in Estonia. (Source: A.C. Nielsen). May saw Tallegg start work on cleaning operations following the discovery of salmonella. In the same context, a decision was made to overhaul the entire production chain to make production salmonella-free as it is in Finland. This caused occasional disruptions in supply and sales of poultry meat failed to reach the previous year s level. Conversely, there was a marked increase in the sale of cooked poultry products. Egg sales also went without a hitch. Tallegg has a 30% share of the Estonian broiler market and a 50% share of the egg market. (Source: A.C. Nielsen). The confusion surrounding avian flu in the headlines towards the end of the year caused uncertainty as to how the market will develop. Local prices took a turn downwards and hampered exports of poultry meat from Estonia. Loss of profit arising from additional costs and disruptions in supply were the main reasons Tallegg s performance was in the red. Nevertheless, the basic work has now been done and Tallegg aims to break even during the current year. Exports of Rakvere pork have increased steadily, with most customers in the EU. Exports of poultry meat outside the Baltics are still in their infancy, but showing potential. The main destinations are Russia and Ukraine. Progress made in Latvia and Lithuania In Latvia, there was a marked growth in Rigas Miesnieks sales in all product groups following a reorganisation of the sales team at the start of The results of modernising production and internal restructuring a year earlier in the wake of EU membership is now in evidence in improved efficiency and profitability. With an 18% share of the market, Rigas Miesnieks enjoys market leadership in Latvia. In our main product groups, we have a 20% share of the cooked sausage market and no less than 48% of the frankfurter market. (Source: A.C. Nielsen). In Lithuania, there was a marked increase in sales of Klaipedos Maistas products and our sales company successfully improved operative performance year on year. However, fierce competition means that prices in Lithuania are the lowest in the Baltics. Since HK does not have its own production facilities in Lithuania, the products we sell there are manufactured by Rakvere, Rigas Miesnieks and Sokolów. Rapid changes continue The national economy in the Baltics continues growing faster than that in Finland. This is also reflected in foodstuffs in the form of growing consumption of consumerpacked meats and more expensive sliced whole meat products. On the other hand, there is a huge gap between the standard of living in towns and in the countryside, the later spawning demand for low-priced products and even by-products. Industry must take into account the differences in culinary traditions and tastes between the Baltic states. Retail concatenation continues to progress apace, with retail chains spreading from one Baltic state to another. This trend favours large producers such as HK Ruokatalo Group s Baltic Group, which is capable of operating in all three countries. The next few years will witness a decline in the numbers of producers across the Baltics, especially in Lithuania, where there are still over 300 meat processing plants and where the market is fragmented. Baltics 2005 % 2004 % Net sales Operating profit Employees The amounts are EUR million. The number of employees is the year-end figure. The percentage indicates the proportion of the group figure. 18

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20 MARKET AREA: POLAND Growth potential in Central Europe Poland and its neighbouring territories constitute an important foothold in Central and Eastern Europe. This is where our focus of growth is in years to come. Sokolów, Poland s leading meat and meat processing company, reported net sales of PLN million (EUR 376.6m) in This is PLN million or 11.5% more than in EUR million of Sokolów s net sales were accounted for in HK Ruokatalo Group s figures. Exports, which were up in terms of both volume and value, boosted higher net sales. Exports, mostly to other EU states, already contribute 24% of Sokolów s total sales. A strengthening of the Polish zloty against the euro and US dollar is currently making it difficult to further increase exports. In April 2005, for example, one euro was PLN 4.25, at year-end a euro was worth around just EUR A reversal of this trend in exchange rates would help restore exports to the growth track. The Polish market of almost 40 million consumers took a breath after the enthusiasm fuelled by EU membership a year earlier. Although the pace of investments in Poland picked up considerably, the national economy grew less than expected. Positive notes from Sokolów s point of view are that inflation has remained low and unemployment began to improve. This in turn resulted in the start of improved buying power for households. Sokolów sells 22% of its products through its own stores, 26% through outside shops and 23% through super- and hypermarkets. Processed products account for around 40% of Sokolów s sales volume and 60% meat. These percentages are about the same as HK Ruokatalo s figures in Finland. An extensive development programme is currently underway in Sokolów in a bid to streamline and intensify the division of work between six production facilities. Specialisation and mass production will also deliver greater competitiveness in the long term. In the same context, a PLN 60.5 million (EUR 15.0m) investment programme was completed in To achieve an annual increase in net sales of over 10% as planned, Sokolów requires production efficiency, functioning logistics, cost discipline and employee commitment. All major international chain stores have branches in Poland and there is fierce competition for retail shelf space. HK Ruokatalo Group and Danish Crown have exercised and exercise their controlling power in Sokolów in joint understanding with operative management in making the company s strategic outlines and in target setting. This trilateral approach has proved to be successful in developing the company. As was usually the case in earlier years, the Polish corporate culture did not seek huge operating profits. Sokolów has decided thatin accordance with other parts of HK Ruokatalo Group it will gradually set a target of five per cent. In 2005, the operating profit sum almost doubled and rose to 2% of revenue, compared with 1.2% a year earlier. Poland 2005 % 2004 % Net sales Operating profit Employees The amounts are EUR million. The number of employees is the year-end figure. The percentage indicates the proportion of the group figure. There are no comparable figures for Poland for

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22 REPORT OF THE BOARD OF DIRECTORS Report of the Board of Directors for the financial year ending 31 December 2005 Revenue and performance HK Ruokatalo Group concern s international business performed well during 2005, with targets being met in the Baltic market and Poland. Rakvere Lihakombinaat and Sokolów both reported higher revenue and improved year-on-year performance. Higher sales also contributed to greater revenue at home. Despite positive progress made, however, sales profitability was much more modest than envisaged. The subtext of this was unsatisfactory earnings and operating profit at home. Similarly in Estonia, Tallegg s performance was below target. The consolidated operating profit grew by % to EUR million. The inclusion of our business in Poland in the consolidated accounts notched up growth. International operations accounted for 39.3% of total revenue, up from 23.2% in The consolidated book operating profit was EUR 24.1 million (EUR 35.7m in 2004) and the comparable operating profit was EUR 28.8 million (EUR 31.1m). Business outside Finland accounted for 42.3% of the operating profit. The profit before taxes was EUR 20.3 million, compared to EUR 32.6 million in Any comparison should take into account the extraordinary item of EUR 2.9 million recognised in Q4 of This was owing to changes in the principles for calculating disability pension liabilities under the Finnish statutory employment pension scheme (TEL). Furthermore, additional one-off impairment charges of EUR 5.7 million during Q4 eroded earnings at home. These charges were partly attributable to writedowns in fixed assets in preparation for the winding up of production in Turku and Tampere, inasmuch as progress is made with business restructuring as planned, and partly to employee and pension arrangements made earlier. Additionally the EUR 1 million final part of the disability pension liabilities under the Finnish statutory employment pension scheme (TEL) booked in the opening IFRS balance sheet on 1 January 2004 was recognised in Q4. Saturn Nordic Holding AB - in which HK Ruokatalo Group has a 50% stake and which owns 82.5% of the shares in Poland s leading meat production and processing company Sokolów S.A. - has been accounted for in the HK Ruokatalo Group s consolidated figures using proportionate consolidation since 1 January Revenue (EUR million) The figures for are shown in accordance with Finnish Accounting Standards (FAS) Operating profit (EUR million) The figures for are shown in accordance with Finnish Accounting Standards (FAS) Revenue by market areas 2005 (%) Poland 21.2 The Baltics 12.4 Finland 66.4 Operating profit by market areas 2005 (%) Poland 15.4 The Baltics 27.0 Finland 57.6 Revenue and operating profit in the group s principal market areas for the last quarter and during the entire financial year were as follows: 22

23 REPORT OF THE BOARD OF DIRECTORS Revenue and operating profit (EUR million) 10-12/ /2004* 1-12/ /2004* Revenue Finland Baltics Poland Between segments Total Operating profit Finland Baltics Poland Between segments Total *) Comparative information for the Polish market for 2004 was included in the Income Statement in the item Share of associates results and so does not appear as a separate item in the table. Business in Finland Although revenue in Finland rose by 2.6% to EUR million, the operating profit slumped by 52.7% to EUR 13.9 million. Our poor operating profit indicates that business at home was seriously off target, with higher sales volume being partly at the expense of profitability. Moreover, the additional charges above eroded in full domestic operations. We are aware of the problems our business is facing at home and will be addressing them during HK Ruokatalo s processed meat sales were up 3.7% in terms of volume in the retail trade compared to market growth of 1.9% over the same period. We performed best in the largest segments: grilling sausages and whole meat cold cuts. However, lower retail prices as a result of a fiercely competitive market meant we lost a slight share of the market in terms of euros. HK Ruokatalo was market leader in processed meats. The Finnish convenience food market rose by 3.8%. At the same time, HK Ruokatalo s convenience foods were up 18.9% in sales volume. The increase was attributable to snacks and meal components. The fact that our market share rose by 1.6 percentage points in terms of volume and just 0.4 percentage points in terms of value reflects the impact of price competition. HK Ruokatalo was in third place on the convenience foods market. The market for industrially packed meat rose by 10.5%. Competition was fiercest in our strong segments, pork cutlets, cold cuts and oven-ready joints. HK Ruokatalo was market leader in terms of industrially packed meat volume and ranked second in terms of value. Sales were unsatisfactory and we lost a 2.2 percentage point share of the market. Whilst sales volumes of HK Ruokatalo s poultry meat grew in line with that of the market as a whole, a change in the sales structure was discernible. Our supplies to the retail trade declined partly in the wake of falling demand for pieces on the bone and partly because of tougher competition in imported poultry meat fillet products at the start of the year. On the other hand, we provided Finnish poultry meat for Tallegg to safeguard its own raw meat supplies. This occasionally reduced supplies at home. The popularity of boneless products, especially fillets, grew at the expense of onthe-bone products in Finland. Extensive publicity about avian flu, which had spread from Asia during the last few months of the year, had no impact on the consumption of poultry meat in Finland. Consumer confidence in Finnish foodstuffs gained ground during the year. The Finnish HoReCa market rose by around 1.3%. HK Ruokatalo s sales volume in this sector rose by 6.2%, most of this rise was in meat and poultry meat. Although we lost a small share of the convenience food market, our share of the processed meats market was slightly up. Fierce price competition early in the year somewhat weakened HoReCa profitability because it was impossible to pass on the full rise in raw material and other costs to sales prices. However, a good Christmas season improved profitability towards the end of the year. HK Ruokatalo successfully increased its exports from Finland in terms of both volume and value. Demand and prices were good in Russia, an important export market for pork. Other major export countries were Japan, the USA, the Baltics and Sweden. Exports were valued at EUR 64.6 million. Business in the Baltics Revenue in the Baltics rose by 3.2% to EUR million and the operating profit by 3.4% to EUR 6.5 million. The year was clearly dichotomous. We performed well on the red meat front and Rakvere Lihakombinaat and its subsidiaries posted a record performance. The in-house development programme systematically carried out at Rakvere delivered improved competitiveness and profitability. Despite discounts and pressure on costs, margins remained good and cost discipline was maintained. New, more highly processed products, consumer-packed meat and sliced products sold well. Positive progress was supported by quality, competitive pork raw material produced by Rakvere itself. With a 33% share of the market, Rakvere Lihakombinaat is clear market leader in Estonia. The year was a difficult one on the poultry meat front. We began to build a salmonella-free production chain based on the Finnish model following the discovery of salmonella bacteria in the production chain of poultry company Tallegg in spring This caused occasional disruptions in the supply and sales of poultry meat in Estonia were down year-on-year. On a more positive note, there was a marked rise in sales of cooked products such as nuggets and overall Tallegg successfully retained its market leadership in broiler products with a 30% share of the market. Sales of eggs remained healthy and bolstered other operations. Despite improved hygiene and animal health, Tallegg was way behind target. Lost profits and investments in upgrading the production chain had an impact of around EUR 2.5 million on Tallegg s result. In Latvia, Rigas Miesnieks new brand and range of products provided the momentum for an almost 20% increase in revenue. Specialisation and good cost disci- 23