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

24 REPORT OF THE BOARD OF DIRECTORS pline restored the company to profit. Rigas Miesnieks slightly increased its share of the market to 18% and ranked number one on the Latvian market. In Lithuania, we were able to increase sales in our important Klaipedos Maistas cooked sausages and frankfurters range, where we have a market share of around 9%. Since there are still over 300 meat processing plants, the Lithuanian market is fragmented. Business in Poland The year under review was the first full financial year of cooperation with Danish Crown in the ownership of Sokolów. Sokolów S.A. reported revenue of EUR million, up by EUR 38.8 million or 11.5% year-on-year. The operating profit was also up on the year. After consolidation, HK Ruokatalo had a EUR million share of Sokolów s revenue and EUR 3.7 million share of the operating profit. Changes in recognition practice mean there are no comparable figures available for Sokolów achieved its operative targets. There are several reasons behind this positive development. Sokolów has Poland s highest-respected meat brand and a wealth of experience in the business. Poland is home to almost 40 million consumers, with nearly one hundred million more in neighbouring territories. The region provides considerable growth potential. Transition to IFRS reporting HK Ruokatalo Group concern switched over to IFRScompliant financial reporting at the start of A stock exchange bulletin dated 29 April 2005 presented the IFRS comparative information for 2004 and an explanation of the material changes in the consolidated financial statements arising from the adoption of IFRS. The bulletin contained an IFRS-compliant income statement and balance sheet for 2004, quarterly figures and bridging statement of the transition from Finnish GAAP to IFRS accounting. The interim reports and comparison information published in 2005 were prepared in compliance with IFRS recognition and measurement principles. Management On 12 April 2005, the company s Board of Directors appointed Kai Seikku MSc (Econ. & Bus. Admin.) to be HK Ruokatalo s next CEO. Seikku joined the company on 1 September 2005, 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. Kai Seikku had earlier carved out a career for himself in business management consulting and marketing communications. He joined HK Ruokatalo from advertising agencies Hasan & Partners Oy and McCann- Erickson, where he was respectively CEO and Country Chairman. The management organisation was restructured on 9 November 2005, when Antti Lauslahti MSc (Econ. & Bus. Adm.) was appointed executive vice president Commercial Operations. Various operative management posts were also reorganised in the same context. These measures were carried out in a bid to create added market focus and improve results accountability. Amendment to the Articles of Association An Extraordinary General Meeting held on 23 February 2005 voted in favour of changes relating to the corporate restructuring under way at the time. The most important item of business was the proposal to change the trading name of the company from HK Ruokatalo Oyj to HK Ruokatalo Group Oyj. At the same time, Article 2 was amended in line with the company s changing circumstances by the addition to the company s objects to include not only the possession, letting and trading of land, buildings and shares, but also other investment activities. Article 7 was amended so that general meetings of shareholders can be held in Turku, Espoo, Eura, Forssa, Helsinki, Pori, Tampere or Vantaa. The new Articles of Association entered into force on 31 March Changes in Group structure September 2004 saw a start made on streamlining the company s business operations in Finland. Streamlining was completed in two stages during the year under review. In the first stage, HK Ruokatalo Group Oyj s fully-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 In the second stage, 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 Subsequent to the business transfer, the parent company, HK Ruokatalo Group Oyj, retained responsibility for group management, finance and administration. HK Ruokatalo Group Oyj owns the entire share capital of HK Ruokatalo Oy. Procurement company LSO Foods Oy continues to trade as a wholly owned subsidiary of HK Ruokatalo Group Oyj. Restructuring took place in the group s poultry business in Estonia. Holding company AS Baltic Poultry ceased trading and merged with AS Tallegg in June. July 2005 saw Tallegg discontinue egg processing operations by selling its 50% stake in AS Eesti Munatooted. In Poland during the year, Saturn Nordic Holding AB, the joint venture owned by HK Ruokatalo Group and Danish Crown, increased its holding in Sokolów S. A. from 72.8% to 82.5%. Investing activities Group gross investments totalled EUR 59.2 million (EUR 52.3m). EUR 42.5 million of this was spent on projects at home and EUR 8.9 million on projects in the Baltics. HK Ruokatalo Group s share of Sokolów investments was EUR 7.8 million. There were major projects under way during the year. The project to modernise and raise the capacity of the slaughtering line at Forssa is nearing completion for production use and the freezing plant project progressed to the equipment installation stage. The cost of the new slaughtering line at Forssa will be around 24

25 REPORT OF THE BOARD OF DIRECTORS EUR 30 million instead of just over EUR 20 million as reported earlier. The earlier figure quoted did not include the cost of the quick carcass refrigeration plant. Work was completed on expanding the delivery terminal at the production facilities in Vantaa. The project also included upgrading the order picking system and increasing the level of automation in the older part of the terminal. Financing activities Group interest-bearing liabilities at year-end 2005 were EUR million, compared to EUR million a year earlier. EUR 13.4 million of the increase in debt was a result of consolidating the debt of joint venture Saturn Nordic Holding Group. The equity ratio was 44.7% (49.3%) Bruttoinvestoinnit Profit before tax (EUR (Meur) million) , ,4 64, ,3 59, The figures for are shown in accordance with Finnish Accounting Standards (FAS) Board of Directors authorisations to increase share capital Meeting on 12 April 2005, the Annual General Meeting authorised the Board of Directors to decide whether to increase the share capital through one or more rights issues, whether to issue one or more convertible bond loans and/or warrants so that in a rights issue or when issuing convertible bonds or warrants, a maximum of 2,000,000 of the company s new Series A Shares having a nominal value of EUR 1.70 may be issued and the company s share capital may be raised by no more than EUR 3,400,000. The authorisation allows the Board of Directors to disapply the pre-emption rights of existing shareholders and to decide the issue price and other terms and conditions of subscription and the terms and conditions of a convertible bond loan or warrants. The authorisation is valid until 12 April To date, the Board of Directors has not exercised this authorisation. Employees HK Ruokatalo Group concern employed an average of 4,541 persons (4,713) in Finland and the Baltics during the financial year. At year-end 2005, we provided jobs for 4,309 people in Finland and the Baltics. This compares with 4,417 a year earlier. Additionally, the Sokolów Group in Poland employed an average of 4,734 persons. The parent company employed an average of 1,702 persons during Q and an average of 11 persons during the rest of the year (1,856 persons in 2004). This decrease was attributable to the parent company transferring its Finnish industrial operations, including employees, to subsidiary HK Ruokatalo Oy at the beginning of April. Risks, uncertainty factors and the environment HK Ruokatalo Group and its business units in Finland, the Baltics and Poland constantly assess the risks relating to their business at both the operative and owner administration levels. Assessment also takes into account whether or not the risk management means are appropriate in terms of quality and scope. In the meat industry, factors of uncertainty may constitute fluctuations in the price and availability of raw meat material and, in the long term, changes in the EU s common agriculture policy (CAP) and decisions by the WTO in world trade issues. Animal diseases can also constitute an uncertainty factor. At the moment there is uncertainty primarily relating to consumer behaviour and buying decisions in our principle market areas. Gross Bruttoinvestoinnit investments (EUR (Meur) million) Depreciation (EUR million) , , , , , The figures for are shown in accordance with Finnish Accounting Standards (FAS) The figures for are shown in accordance with Finnish Accounting Standards (FAS) 25

26 REPORT OF THE BOARD OF DIRECTORS HK Ruokatalo operates on the principle of causing minimum environmental impact during production. This principle is put into practice in Finland, the Baltics and Poland, taking into account existing regulations and certification processes. Operative management in each principal market area is responsible for ensuring the appropriate organisation of environmental management. Events taking place since 31 December 2005 On 10 January 2006, the company announced a twoyear 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. When implemented, the plan will signal the closure of production at the Turku processed meat factory, the Tampere meat processing plant and the Tampere distribution terminal. Together with efficiency measures already announced earlier, the plan will affect an estimated 500 jobs in Finland by the end of On 17 January 2006, chef Jyrki Sukula was appointed Creative Director of HK Ruokatalo Oy and a member of the Management Team. HK Ruokatalo also acquired Sukula s VIA line of products in the same context. Towards the end of January, HK Ruokatalo Oy and Atria Oy announced they were to look at ways of safeguarding turkey production in Finland. The aim is to work together to restore the loss-making turkey business to profitability. The future Progress is being made with streamlining the production structure in Finland. The focusing of operations seeks to achieve annual cost savings in the region of EUR 15m-20m starting in Sales and customer relationship management is being overhauled in commercial operations. Product and brand strategy is also under review. The plan is to develop consumer-driven, interesting new products alongside traditional ones, especially in convenience foods and cookery products. The three-year investment stage to modernise and increase the capacity of the Forssa slaughtering facilities is progressing apace so that quick carcass refrigeration, new animal reception facilities and pre-cutting operations in the boning plant will be completed during We have taken steps in preparation for the spread of avian flu to Finland and the Baltics. We comply with official regulations and internal precautionary practices. Our production chain emphasises hygiene and poultry is reared in halls strictly isolated from the outside environment. The National Veterinary and Food Research Institute (EELA) has stated that it is perfectly safe to eat Finnish broiler meat. Abroad, care should be taken to ensure poultry meat has been properly cooked. The publicity about avian flu has had little impact on the decision of consumers in Finland to buy Finnish poultry meat. In the Baltics and Poland, publicity in the media has lowered prices. Sokolów, which makes cooked poultry products from raw meat material it purchases from others, is able to capitalise on the fall in raw poultry meat prices. In the Baltics, we expect Rakvere Lihakombinaat and its subsidiaries continue to make positive performance progress. Cleaning operations will continue at Tallegg during the start of Despite avian flu and thanks to improved salmonella control, Tallegg is aiming to break even. We are continuing to restructure at Sokolów, with production facilities specialising more than earlier. This reduces operational overlaps and improves costeffectiveness. We continue to explore the possible expansion of our international business outside the countries in which we currently have a presence. Dividend The consolidated distributable equity is EUR 45.1 million. The parent company s distributable equity is EUR 9.5 million. The Board of Directors is to recommend that the company pays a 2005 dividend of EUR 0.27 per share, in other words a total of EUR 9.3 million. Interest-bearing liabilities (EUR million) Equity ratio (%) Includes capital loan

27 FINANCIAL INDICATORS Financial indicators Five year financial summary * 2002* 2001* Revenue, EUR million Operating profit/loss, EUR million as % of revenue Profit/loss before tax, EUR million as % of revenue Return on equity, % Return on investment, % Equity ratio, % Gross investments, EUR million as % of revenue R&D expenses, EUR million as % of revenue Employees, average Per share data * 2002* 2001* Earnings per share, EUR Earnings per share (EPS), undiluted, EUR Earnings per share (EPS), diluted, EUR Equity per share, EUR Dividends Dividend per share, EUR Dividend payout ratio, undiluted, % Dividend payout ratio, diluted, % Effective dividend yield, % Price/earnings ratio (P/E) - undiluted diluted Highest trading price, EUR Lowest trading price, EUR Middle price during the financial period, EUR Market capitalisation, EUR million Trading volume (1000 shares) Trading volume, % Weighted middle value of adjusted number of shares during the financial period (1000) Adjusted number of shares at end of financial period, (1000) * The figures for are shown in accordance with Finnish Accounting Standards (FAS). 27

28 FINANCIAL INDICATORS Formulae for financial indicators RETURN ON EQUITY (%) Profit/loss before extraordinary items, provisions and taxes - taxes Shareholders equity + minority interests (average) X 100 RETURN ON INVESTMENT (%) Profit/loss before extraordinary items, provisions and taxes + interest and other financial expenses Balance sheet total zero interest debts (average) X 100 EQUITY RATIO (%) Shareholders equity + minority interests Balance sheet total advances received X 100 EARNINGS PER SHARE EQUITY PER SHARE DIVIDEND PER SHARE Result before extraordinary items, provisions and taxes - Taxes +/- minority interests Average number of shares during the financial period Shareholders equity Adjusted number of shares at balance sheet date Dividend per share Coefficient of share issues after the financial year DIVIDEND PAYOUT RATIO (%) Adjusted dividend per share Earnings per share X 100 EFFECTIVE DIVIDEND YIELD (%) Dividend per share Adjusted closing price on the last trading day of the financial year X 100 P/E RATIO Adjusted closing price on the last trading day of the financial year Earnings per share MARKET CAPITALISATION The number of outside shares at the end of the financial period multiplied by the closing price on the last trading day of the financial period 28

29 CONSOLIDATED INCOME STATEMENT Consolidated income statement for 1 January to 31 December (EUR million) Note Revenue Change in inventories of finished goods and work in progress Work performed for own use and capitalised Other operating income Materials and services Employee benefits expense Depreciation and amortisation Impairment Other operating expenses Operating profit Financing income Financing expenses Share of associates' results Profit/loss before tax Tax on income from operations Profit/loss for the financial period Net profit attributable: Equity holders of the parent To minority interests Total Earnings per share calculated on profit attributable to equity holders of the parent EPS, undiluted, continuing operations, EUR/share EPS, diluted, continuing operations, EUR/share

30 CONSOLIDATED BALANCE SHEET Consolidated balance sheet at 31 December (EUR million) Note Assets Non-current assets Intangible assets Goodwill Property, plant and equipment Investments in associates Long-term receivables Non-current trade and other receivables Other long-term investments Deferred tax asset Total long-term assets Current assets Inventories Trade and other receivables Income tax receivable Cash and bank Total current assets Total assets Equity and liabilities Share capital Share premium account Fair value reserve and other reserves Translation differences Retained earnings Equity attributable to equity holders of the parent Minority interest Total shareholders equity Long-term liabilities Deferred tax liability Long-term interest-bearing liabilities 21, Pension obligations Non-current provisions Total non-current liabilities Current liabilities Short-term interest-bearing liabilities 21, ,0 Trade payables and other liabilities Income tax liability Current provisions Current liabilities Total equity and liabilities

31 CONSOLIDATED CASH FLOW STATEMENT Consolidated cash flow statement (EUR million) Operating activities Operating profit Adjustments to operating profit Depreciation and amortisation Change in net working capital Financing income and expenses Taxes Net cash inflow/outflow from operating activities Investing activities Net PPE investments Net cash inflow/outflow from investing activities Cash inflow/outflow before financing activities Financing activities Change in loans Dividends paid Share issue 39.2 Net cash inflow/outflow from financing activities Change in liquid assets Liquid assets at 1 January Liquid assets at 31 December Change in liquid assets in the balance sheet Saturn Nordic Holding Group s opening balance at 1 January 2005 has been taken into account in the 2005 cash flow statement. 31

32 CHANGES IN GROUP EQUITY Statement of changes in consolidated shareholders equity Share- Share- Hedging Other Translation Retained capital premium reserve reserves differences earnings Total Shareholders equity at 1 Jan Cash flow hedging - Amount transferred to shareholders equity during the period Change in translation difference Other changes Net profit/loss recognised directly in shareholders equity Profit for the financial period Total profits and losses Dividend distribution Total shareholders equity at 31 Dec Share Share- Hedging- Other Translation Retained capital premium reserve reserves differences earnings Total Shareholders equity at 1 Jan Change in translation difference Direct recognition in retained earnings Other changes Net profit/loss recognised directly in shareholders equity ,8 2,2 Profit for the financial period Total profits and losses Dividend distribution Rights issue Share premium Transaction costs for shareholders equity Total shareholders equity at 31 Dec

33 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the consolidated financial statements for 2005 Basic information about the company HK Ruokatalo Group Oyj is a Finnish public limited company established under the law of Finland. The company s registered office is in Turku. HK Ruokatalo Group and its subsidiaries produce, sell and market meat, poultry meat, processed meats and convenience foods to retail, HoReCa, industrial and export customers. The group has business activities in Finland, Estonia, Latvia, Lithuania and Poland. HK Ruokatalo Group Oyj is a subsidiary of LSO Osuuskunta and part of the LSO Osuuskunta Group. LSO Osuuskunta s registered office is in Turku. A copy of the HK Ruokatalo Group concern s consolidated financial statements can be viewed on the company s website at under Investor information / Annual and interim reports or is available for inspection at the parent company s head office at Kaivokatu 18, Turku. Accounting policies Basis of preparation These are the group s first IFRS-compliant accounts and have been prepared in compliance with IAS and IFRS (International Financial Reporting Standards) and the SIC and IFRIC interpretations valid at 31 December International Financial Reporting Standards refers, in the Finnish Accounting Act and in the provisions given thereupon, to the standards approved for application within the EU according to the pro-cedure as established in EU Regulation (EC) No. 1606/2002 and the interpretations thereof. The notes to the financial statements also comply with Finnish accounting and corporate legislation. The group adopted IFRS during 2005 and in this context has applied the IFRS 1 first-time adoption standard. The transition date was 1 January 2004, except for standard IAS 39, Financial Instruments: Recognition and Measurement, the transition date of which is 1 January An amendment to IAS 39 made in March 2004 enables a group to show financial instruments coming within IAS 32 and IAS 39 in accordance with Finnish accounting practice during the comparison year. The differences arising from the adoption of IFRS are shown in reconciliation calculations, which are included in note 28 Transition to IFRS reporting.the consolidated financial statements have been prepared under the historical cost convention except for financial instruments and agriculture, which have been measured at fair value. The goodwill in respect of business mergers taking place before 2004 corresponds to the book value based on earlier accounting norms that have been used as the deemed cost according to IFRS. The accounting policies in respect of subsidiaries have been changed to correspond to those of the parent company if required. HK Ruokatalo s subgroup, Rakvere Lihakombinaat Group has complied with IFRS since The group s joint venture, Sokolów Group is a listed company in Poland and as such has prepared IFRS-compliant financial statements for The preparation of the financial statements in accordance with IFRS standards requires management to make estimates and judgments in applying the accounting policies. Information about these judgments is shown under Accounting policies requiring management judgments and factors of estimation uncertainty. Unless otherwise stated, the information in the consolidated financial statements is given in millions of euros (EURm). Comparability with previous years Consolidation of the Saturn Nordic Holding Group must be taken into account line by line starting from 2005 when making any comparison with previous years. The status of ownership of the group s Sokolów shares has changed from being an associated company to a joint venture. Accounting policies for consolidated financial statements Subsidiaries The consolidated financial statements include the accounts of the parent company HK Ruokatalo Group Oyj and its subsidiaries. Subsidiaries are companies over which the group exercises control. Control arises when the parent company either directly or indirectly holds over half the voting rights or otherwise exercises control, for example, through agreements concluded with principal owners. The consolidated financial statements include the accounts of the parent company HK Ruokatalo Group Oyj and the following subsidiaries that have or had business operations: HK Ruokatalo Oy, LSO Foods Oy and its subsidiary Lounaisfarmi Oy, Lihatukku Harri Tamminen Oy, Helanderin Teurastamo Oy and HK International Ab. In connection with the corporate restructure taking place on 31 March 2005, 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 (formerly HK Ruokatalo Oyj). Under the restructure, the Group s Finnish industrial operations, sales, marketing, logistics and transportation were assigned as a business transfer to a subsidiary known as 33

34 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS HK Ruokatalo Oy. The transfer of business operations from HK Ruokatalo Group Oyj to HK Ruokatalo Oy took place so that HK Ruokatalo assumed responsibility for the operations from 1 April The consolidated financial statements also include the accounts of the AS Rakvere Lihakombinaat subgroup (Estonia, Latvia and Lithuania) and of AS Tallegg (Estonia). AS Tallegg s subsidiary AS Baltic Poultry merged with AS Tallegg on 10 June Intragroup share ownership has been eliminated using the historical cost convention. Subsidiaries acquired are consolidated from the date the group acquires a controlling interest in them. All intragroup transactions, receivables and liabilities are eliminated upon consolidation. Intragroup distribution of profit has also been eliminated. Distribution of profit for the financial period to owners of the parent company and to minority interests is shown in the income statement and the share of equity attributable to minority interests is shown as a separate item in the balance sheet under shareholders equity. The share of minority interests of accumulated losses is recognised up to a maximum of the investment in the consolidated accounts. Associates Associates are companies over which the company exercises a significant influence, which arises when the group holds 20-50% of a company s voting rights. Associates have been consolidated using the equity convention. If the group s share of the losses of an associate exceeds the investment carrying value, the investment is recognised as having no value and, unless the group is committed to meeting the obligations of associates, no losses exceeding the carrying value are combined. Investments in associates include the goodwill arising on their acquisition. Dividends received from associates have been eliminated in the consolidated financial statements. The accounts of the following associates have been consolidated: Pakastamo Oy, Honkajoki Oy, Etelä-Suomen Multaravinne Oy, Lihateollisuuden Tutkimuskeskus LTK osuuskunta group, Best-In Oy and Finnpig Oy. Joint ventures A joint venture is a company in which the group exercises joint control with another party. The group s share in the joint venture is consolidated proportionately line by line. The consolidated financial statements include the group s share of the joint venture s assets, liabilities, income and expenses. In the comparison year 2004, the accounts of the Sokolów Group were consolidated into HK Ruokatalo Group Oyj s accounts as an associate until 30 September The accounts of Saturn Nordic Holding AB, a joint venture established to own Sokolów, have been consolidated into HK Ruokatalo Group Oyj s accounts, using the equity method, since 1 October Since the start of 2005, joint venture Saturn Nordic Holding Group has been consolidated proportionately as a joint venture line by line. More detailed information about group companies and holdings in associates is shown below under Inner circle transactions. Translation of foreign currency items The result and financial position of each of the Group s business units are measured in the currency of the main operating environment for that unit. The consolidated financial statements are shown in euros, which is the operational and presentational currency of the group s parent company. The assets and liabilities of foreign subsidiaries and the foreign joint venture are translated into euros at the average exchange rates confirmed by the European Central Bank at the balance sheet date. The income statements are translated into euros using the average rate for the period. A translation difference arises from translating the result for the period at different rates in the income statement and balance sheet. This is recognised under equity. The translation differences arising in eliminating the acquisition cost of foreign subsidiaries and the joint venture are recognised in translation differences in the group s equity. Translation differences arising before 1 January 2004 have been recognised in retained earnings as allowed by IFRS 1. Translation differences arising after the transition date are shown as a separate item of equity. The following exchange rates have been used in consolidation Income statement* Balance sheet EEK SEK *) calculatory value of monthly average rates Group companies recognise transactions in foreign currencies at the rate quoted on the day the transaction took place. Trade receivables, trade payables, loan receivables denoted in foreign currencies and foreign currency bank accounts have been translated into the operational currency at the exchange rates quoted at the balance sheet date. Profits and losses arising from business transactions in foreign currencies and from the translation of monetary items have been recognised in financing income and expenses in the income statement. Property, plant and equipment Property, plant and equipment have been measured at cost less accumulated depreciation and any impairment. Depreciation of assets is made on a straight-line 34

35 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS basis over the expected useful life. No depreciation is made on land. The expected useful lives are as follows: Buildings Building machinery and equipment Machinery and equipment years years 2-10 years The residual value and useful life of assets are reviewed in each financial statement and if necessary adjusted to reflect changes taking place in expected useful life. Depreciation on property, plant and equipment ends when an item is classified as being for sale in accordance with IFRS 5 Non-current assets held for sale and discontinued operations. Gains and losses arising on the disposal and discontinuation and assignment of property, plant and equipment are included either in other operating income or expenses. Maintenance and repair costs arising from normal wear and tear are recognised as an expense when they occur. Major refurbishment and improvement investments are capitalised and depreciated over the remaining useful life of the main asset to which they relate. Borrowing costs Borrowing costs are recognised as an expense during the period in which they are incurred. Government grants Government grants received are recognised as expense adjustments to earnings during the financial period, except for investments when they reduce the cost. Investment properties Investment properties are properties that are held because of their rental income or a rise in value. The group has no property classified as investment properties. Intangible assets Goodwill Goodwill is that part of the acquisition cost exceeding the group s share of the fair value of the net assets of a company acquired after 1 January 2004 at the time acquisition took place. Goodwill on the combination of transactions prior to this corresponds to the carrying value based on the earlier accounting norm which has been used as the deemed cost. The classification or accounting treatment of these acquisitions has not been adjusted when preparing the opening IFRS balance sheet of 1 January Most of the consolidated goodwill arising from combining transactions took place prior to 1 January Goodwill (and other intangible items that have an unlimited period of financial impact) is no longer subject to regular depreciation but is tested yearly for impairment. For this reason goodwill is allocated to cashgenerating units (CGU), in the case of an associate, is included in the acquisition cost of the associate concerned. Goodwill is measured according to the historical cost convention less impairment. Impairments recognised in respect of goodwill are not cancelled. See Impairment and Impairment testing. Research and development costs Research and development costs are charged as incurred and are included in other operating expenses in the income statement. Group development costs do not satisfy the requirements for capitalisation. Other intangible assets An intangible asset is recognised in the balance sheet only if its acquisition cost can be reliably determined and it is likely that the expected economic benefit of the asset turns out to be for the good of the company. Intangible rights include trademarks, patents and other intangible assets such as software licences. These are recognised in the balance sheet at original cost and are carried as expenses based on straight-line depreciation during the impact period, which varies from five to ten years. Inventories Inventories are measured at the acquisition cost, replacement cost or likely selling price, whichever is the lower. The acquisition cost is determined using the weighted average price method. The acquisition cost of finished and unfinished products is calculated to include the cost of raw materials, indirect work, other direct costs, variable acquisition and production costs, fixed overheads and depreciation on acquisition and production. Overheads and depreciation are allocated to inventories in accordance with the normal used capacity. Biological assets Biological assets, which mean living animals in the case of the HK Ruokatalo Group concern, are recognised at fair values in the balance sheet. The group s live slaughter animals are measured at market price. Animals producing slaughter animals (sows, boars, mother hens) have been measured at cost, less an expense corresponding to a reduction in fair value caused by ageing. Impairment The carrying amounts of the group s assets are reviewed at each balance sheet date to see whether or not there are any indications of impairment. If such an indication exists, the recoverable amount of the asset is estimated. An impairment loss is recognised if the carrying value of the asset exceeds the recoverable amount for the asset. The recoverable amount of good- 35

36 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS will is estimated each year, regardless of whether there are any indications of impairment. The need for impairment is reviewed at the level of cash generating units, in other words the smallest group of assets that includes the asset under review, which is largely independent of other units and has a cash flow that can be separated from other cash flows. See Accounting policies requiring management judgments and factors of estimation uncertainty. Goodwill was tested for impairment applying IAS 36 as required by the transition standard on 1 January 2004, the transition date to IFRS. Subsequently testing was carried out on 31 December 2004 and 31 December Testing showed no need for depreciation arising from goodwill. Leases The group as lessee Leases applying to tangible assets where the group assumes a substantial part of the risks and benefits of ownership are classified as finance leases. These items are recognised in the balance sheet at the fair value of the asset leased at the commencement of the lease or at the present value of minimum lease payments, whichever is the lower. Assets acquired under finance leasing are subject to depreciation within the financial impact of the asset or the lease period, whichever is the shorter. Lease payments are divided into finance expenses and debt amortisation during the lease period. Leasing commitments are included in interest-bearing liabilities. It is mostly companies in the Baltics that have finance leasing agreements. Leases where the lessor assumes a substantial part of the risks and benefit of ownership are treated as other leases. These payments are recognised as an expense in the income statement on a linear basis. Employee benefits Pension plans Statutory pension cover for Finnish Group companies has been arranged through pension insurance. Pension plans in respect of companies outside Finland have been made in accordance with local regulations and practice. In contribution-based schemes like most of the Finnish employment pension scheme (TEL), pension scheme contributions are recognised in the income statement during the financial period in which they are incurred. All pension cost calculations are based on actuarial valuations prepared annually by authorised acturaries. The group has no defined benefit pension schemes apart from the pension liability for the CEO of the parent company. This is shown in the notes to the parent company financial statements. The work disability component of the Finnish TEL system is also treated as a defined benefit scheme in the IFRS opening balance sheet dated 1 January At the end of 2004, the Finnish TEL scheme was amended so that the arrangements dealt with by insurance companies are henceforth considered as contribution-based schemes. Based on actuarial calculations, the group booked the liabilities recognised on 1 January 2004 so that EUR 2.9 million was booked during Q4 of 2004 and the remainder, around EUR 1 million, was recognised during Q4 of Following outsourcing of the pension foundations, the insurance company invoices future indexlinked pension increases each year. Pension obligations The pension obligations in the balance sheet mostly comprise the pension commitment in respect of the parent company s CEO and of provisions for changes in the disability pension business. Other provisions A provision is recognised when the group has a legal or actual obligation as the result of a past event, it is likely that the payment obligation will be realised and the magnitude of the obligation can be reliably estimated. The provisions made relate to taxes. Tax on income from operations The taxes in the income statement include the taxes based on the taxable profit of group companies for the financial period calculated in accordance with the relevant legislation in each company s domicile, taxes debited and refunded for previous financial periods and the change in deferred taxes. Deferred tax assets and liabilities are calculated on all temporary differences in bookkeeping and taxation using the tax rate valid at the balance sheet date or expected date the tax is paid. Temporary differences arise as a result of depreciation, provisions and benefitbased pension schemes. Recognition policies Goods sold and services provided Revenue from the sale of goods is recognised when the significant risks and benefits of ownership have been transferred to the buyer. Revenue is shown as a net value, with value added tax, discounts and other sales adjustments subtracted from sales income. Assets held for sale Non-current assets held for sale are classified as available for sale and are measured at the carrying value or at fair value less the cost of sale, whichever is the lower. Financial assets and liabilities Depending on their nature, the group s financial assets are classified on acquisition into the following categories: 1) financial assets held for trading, 2) loans and other receivables, 3) held-to-maturity investments and 36

37 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 4) available-for-sale financial assets. The group s financial assets comprise primarily of loan receivables and other receivables in non-current assets. Loan receivables are recognised in the balance sheet at the acquisition cost and are regularly and systematically assessed in relation to the security available. Interest on receivables is included in financial items. The group s financial liabilities comprise primarily of short- and long-term bonds and credit limit facilities from financial institutions and the commercial paper programme. Trade receivables Trade receivables are recognised in accordance with the original amount invoiced. All credit losses on trade receivables have been recognised as a charge when there is objective evidence that the receivable is impaired. Cash and bank Cash and bank comprises cash in hand and at bank. This consists of cash, money in bank accounts and other current liquid financial assets with a maturity date of less than three months. The credit lines used are included in current interest-bearing liabilities in the balance sheet. Derivatives and hedge accounting Profits and losses arising from the assessment of fair value are treated in the income statement in the manner determined by the purpose of the derivative. Derivatives excluded from hedge accounting as defined in IAS 39 are recognised in the income statement. Derivatives treated as hedge accounting instruments and which are effective are shown congruently with the hedged item. Hedge accounting Both the risk to be hedged and the hedging relationship at the start of a hedging relationship are documented in accordance with hedge accounting policies and in compliance with the company s adopted risk management principles. The effectiveness of a hedging relationship is established before hedge accounting commences and thereafter at least quarterly each year. During the year under review, cash flow hedge accounting was in use to hedge against changes in the spot market price of electricity. The group has used electricity futures as the hedging instrument. Changes in the fair value of the effective part of hedging instruments are recognised in equity in the hedging reserve and changes in the ineffective part in the income statement. The cumulative gains or losses accumulating in the hedging reserve are recognised in the income statement in financial income and expenses when the hedged business operation takes place. When a hedging instrument matures, is sold, the hedging relationship is noted as being ineffective or is closed, the cumulative gain or loss on the hedging instrument earlier recognised in equity when the hedge was effective remains separately recognised in equity until the transaction forecast occurs. The cumulative gain or loss is recognised immediately in the income statement if the transaction forecast is no longer expected to occur. The ineffective part of the hedging relationship is recognised in the income statement under financial income and expenses. The fair values of derivatives are shown in the balance sheet as current assets and liabilities. Despite the fact that some hedging relationships satisfy the group s risk management hedging criteria, they do not satisfy hedge accounting as defined in IAS 39 or the group does not apply hedge accounting to them. These include currency futures that the group uses to hedge net currency positions. Accounting policies requiring management judgments and factors of estimation uncertainty The preparation of the financial statements requires management to make estimates and assumptions affecting the content and to exercise judgment in applying the accounting policies. Most of these estimates affect the possible impairment of goodwill and other assets as well as provisions. Actual results may differ from these estimates. Earnings per share Earnings per share are calculated by dividing the profit for the financial year attributable to shareholders of the parent company by the weighted average number of shares issued. Since the parent company has no option or other programmes that would cause dilution, the fully diluted number of shares is the same. Dividend Dividends recommended by the Board of Directors to the Annual General Meeting are not deducted from distributable equity until approved by the Annual General Meeting. 37

38 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Notes to the financial statements 1. Segment information The division of segments is based on the group s organisation and on Board of Directors and management reporting. The management of HK Ruokatalo Group concern monitors the profitability of business operations by market area. The group s primary reporting segments are geographical segments: Finland, the Baltics and Poland. The Polish market has been shown as a separate segment since 1 January HK Ruokatalo Group concern has only one business segment: meat processing. The assets and liabilities of the segments are items that are either directly or fairly allocated to the business of the relevant segment. Segment assets include tangible and intangible assets, investments in associates, inventories and zero-interest receivables. Segment liabilities include current zero-interest liabilities. Unallocated items include financial and tax items and items common to the entire group. Primary segment 2005 (EUR million) Domestic Baltic Polish Eliminations Unallocated Group operations operations operations total Income statement information External sales , Internal sales Sales Segment operating profit Unallocated items Operating profit Financial income and expenses Share of associates' results Tax on income from operations Result for the financial year from continuing operations Result for the financial year Balance sheet information Segment assets Investments in associates Unallocated assets Total assets Segment liabilities: Unallocated liabilities Total liabilities Other information Sales, goods Sales, services Investments Depreciation and amortisation Impairment Goodwill Primary segment 2004 (EUR million) Domestic Baltic Polish Eliminations Unallocated Group operations operations operations total Income statement information External sales Internal sales Sales Segment operating profit Unallocated items Operating profit

39 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Financial income and expenses Share of associates' results Tax on income from operations Result for the financial year from continuing operations Result for the financial year Balance sheet information Segment assets Investments in associates Unallocated assets Total assets Segment liabilities: Unallocated liabilities Total liabilities Other information Sales, goods Sales, services Investments Depreciation and amortisation Goodwill Other operating income Rental income Other operating income Gain on disposal of non-current assets Other operating income Materials and services Purchases during the financial year ,6 Increase/decrease in inventories Materials and supplies External services Materials and services Employee benefits expense Salaries and fees Pension expenses, defined contribution schemes Pension expenses, defined benefit schemes Total pension expenses Other social security costs Other social security costs Employee benefits expense Managing directors and vice presidents Board members Management salaries, fees and benefits Average number of employees during the financial year White-collar staff Blue-collar staff Total Additionally, the Sokolów Group in Poland employed an average of 4,734 persons in

40 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 5. Depreciation and impairment Depreciation and amortisation Depreciation and amortisation Impairment charge for non-current assets Impairment Total Other operating expenses Rents/leases Loss on disposal of non-current assets Audit fees Audit fees, other expert services Audit fees R&D costs Non-statutory staff costs Energy Maintenance Advertising, marketing and entertainment costs Service, information management and office costs Other costs Total other operating expenses Audit fees The group s audit fees paid to PricewaterhouseCoopers, the principal independent auditors are presented below. The audit fees are in respect of the audit of the annual accounts and legislative functions closely associated therewith. The other expert audit services result from services that establish the correctness of the accounts. Fees in respect of tax advice and planning are also included in the fees for expert services. The figures also include the audit fees (KPMG) in Poland Financing income and expenses Other interest receivable and financial income from others Other financial income Foreign exchange gains Total financial income Other interest and financial expenses to parent company Other interest and financial expenses Total other interest and financial expenses Foreign exchange losses Total financial expenses Total financial income and expenses Tax on income from operations Income tax on ordinary operations Tax for previous financial years Change in deferred tax liabilities and assets Income tax before other direct taxes Other direct taxes Tax on income from operations

41 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Cumulative tax rate reconciliation 12 / / 2004 Income taxes Income tax on ordinary operations Tax for previous financial years Change in deferred tax liabilities and assets Other direct taxes Income tax on ordinary operations / / 2004 Accounting profit/loss before taxes Deferred tax at parent company s tax rate Effect of different tax rates applied to foreign subsidiaries Non-deductible expenses Tax-free income Tax for previous financial years Tax difference Tax provision in the income statement Notes to the balance sheet 9. Intangible assets 2005 Intangible rights Prepayments Total Acquisition cost at 1 January Additions Disposals Reclassifications between items Acquisition cost at 31 December Accumulated depreciation at 1 January Accumulated depreciation on disposals and reclassifications Depreciation for the financial year Accumulated depreciation at 31 December Carrying value at 31 December Intangible assets 2004 Intangible rights Prepayments Total Acquisition cost at 1 January Additions Disposals Reclassifications between items Acquisition cost at 31 December Accumulated depreciation at 1 January Accumulated depreciation on disposals and reclassifications Depreciation for the financial year Accumulated depreciation at 31 December Carrying value at 31 December

42 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 10. Goodwill 2005 Acquisition cost at 1 January 42.0 Joint venture combination at 1 January 17.8 Additions 0.4 Disposals -0.3 Acquisition cost at 31 December 59.9 Accumulated depreciation at 1 January Accumulated depreciation at 31 December Carrying value at 31 December Specification of goodwill 2005 Finnish red meat 12.7 Baltic white meat 5.5 Baltic red meat 11.1 Business in Poland 17.5 Total 46.8 Goodwill 2004 Acquisition cost at 1 January 39.5 Translation differences (+/-) 1.8 Additions 0.7 Acquisition cost at 31 December 42.0 Accumulated depreciation at 1 January Accumulated depreciation on corporate acquisitions -0.6 Depreciation for the financial year -0.1 Accumulated depreciation at 31 December Carrying value at 31 December Specification of goodwill 2004 Finnish red meat 12.4 Baltic white meat 5.5 Baltic red meat 11.1 Business in Poland 0.0 Total 29.0 Impairment testing The sums recoverable have been estimated for all cash generating units. Cash flow forecasts are based on plans approved by management. The cash flow after the forecast period has been extrapolated using cautious growth factors (1%-2.5%). The growth factors of cash generating units have been defined at a level lower than historical growth. Business result targets are based on levels recently realised and management expectations as to the development in each market area. Interest rates have been defined excluding the tax effect and taking into account market area risks. The interest rate has been defined as the weighted average cost of capital (WACC) so that the equity ratio of all cash generating units has been calculated in line with the group s long-term average capital structure. The tax rates used are 7.2% for Finland, 8.7% for the Baltics and 10.4% for Poland. As far as management is aware, reasonable changes in assumptions used do not necessitate impairment for the goodwill of any cash generating unit. Sudden changes in the business environment of cash generating units may result in an increase in capital costs or in a situation where a cash generating unit is forced to assess falling cash flows. Recognition of an impairment loss is likely in such situations. 11. Plant, property and equipment 2005 Land Buildings Machinery Other Payments on account and and PPE and unfinished water equipment constr. projects Tot. Acquisition cost at 1 January Joint venture combination at 1 January Additions Disposals Reclassifications between items Acquisition cost at 31 December

43 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Accumulated depreciation at 1 January Joint venture combination Accumulated depreciation on disposals and reclassifications Depreciation for the financial year Impairment Accumulated depreciation at 31 December Carrying value at 31 December Plant, property and equipment Investments in associates Land Buildings Machinery Other Payments on account and and PPE and unfinished water equipment constr. projects Tot. Acquisition cost at 1 January Additions Disposals Reclassifications between items Acquisition cost at 31 December Accumulated depreciation at 1 January Accumulated depreciation on disposals and reclassifications Depreciation for the financial year Accumulated depreciation at 31 December Carrying value at 31 December Investments in associates 2005 Acquisition cost at 1 January 4.1 Additions 0.5 Disposals -0.2 Acquisition cost at 31 December 4.4 Share of associates' results 0.7 Carrying value at 31 December Investments in associates 2004 Acquisition cost at 1 January 21.0 Translation differences (+/-) 2.1 Additions 38.9 Disposals Acquisition cost at 31 December 43.9 Share of associates' results 2.0 Carrying value at 31 December

44 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS A list of associates and their combined assets, liabilities, revenue and profit/loss (EUR million) appears below. The figures given are gross and not proportional to group ownership. Saturn Nordic Holding Group was accounted for as an associate until 31 December 2004 and thereafter as a joint venture Saturn Nordic Holding Ownership (%) - 50% Assets Liabilities Revenue Profit/loss Pakastamo Oy Ownership (%) 50% 50% Assets Liabilities Revenue Profit/loss Honkajoki Oy Ownership (%) 38.33% 38.33% Assets Liabilities Revenue Profit/loss Best-In Oy Ownership (%) 50% 50% Assets Liabilities Revenue Profit/loss Finnpig Oy Ownership (%) 50% 50% Assets Liabilities Revenue Profit/loss LTK group Ownership (%) 44.8% 44.8% Assets Liabilities Revenue Profit/loss Etelä-Suomen Multaravinne Oy Ownership (%) 24.62% 24.62% Assets Liabilities Revenue Profit/loss Non-current receivables 31 December December 2004 Long-term loan receivables Other long-term receivables Long-term loan and other receivables Other long-term investments Deferred tax asset Total non-current receivables

45 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 14. Deferred tax assets and liabilities Specification of tax assets 1 Jan 2005 Translation Recognised in Companies 31 Dec 2005 difference income statement acquired/sold Pension benefits From combinations Total Specification of tax liabilities 1 Jan 2005 Translation Recognised in Companies 31 Dec 2005 difference income statement acquired/sold Depreciation difference and voluntary provisions Other matching differences From combinations Direct recognition in retained earnings Total Specification of deferred tax assets 1 Jan 2004 Translation Recognised in Companies 31 Dec 2004 difference income statement acquired/sold Pension benefits Total Specification of deferred tax liabilities 1 Jan 2004 Translation Recognised in Companies 31 Dec 2004 difference income statement acquired/sold Depreciation difference and voluntary provisions Other matching differences Direct recognition in retained earnings Total Inventories 31 December December 2004 Materials and supplies Unfinished construction projects Finished products Goods Other inventories Prepayments for inventories Total inventories Trade and other short-term receivables 31 December December 2004 Trade receivables from participating interests Loan receivables from participating interests Short-term receivables from participating interests Trade receivables Other receivables Short-term receivables from others Commodity derivatives, hedge accounting Short-term derivative receivables

46 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Interest receivables Matched staff costs, short-term receivables Other prepayments and accrued income Short-term prepayments and accrued income Tax receivables (income tax) Income tax receivable Total short-term receivables Cash and bank 31 December December 2004 Cash and bank Short-term money market investments Total cash and bank Cash and bank based on the cash flow statement are as follows: 31 December December 2004 Cash and bank Short-term money market investments Total cash and bank Saturn Nordic Holding Group s cash and bank in the opening balance at 1 January 2005 has been taken into account in figures for 31 December Notes relating to equity Shares Share capital Share premium Total (1 000) EUR million EUR million EUR million 1 January Rights issue Share premium Transaction costs for equity December December Pension obligations 31 December December 2004 Pension liability/receivable in balance sheet, defined benefit Pension obligations Pension liability (+)/ receivable (-) in balance sheet Defined benefit pension expense in income statement Pension obligations Defined benefit pension expense in income statement (IFRS) Movement in liabilities /receivables arising from benefits Balance at 1 January Defined benefit pension expense in income statement (IFRS) Other change 0.4 Liabilities/receivables at end of financial year Provisions 1 Jan 2005 Increase in Exercised during 31 Dec 2005 provisions financial period (-) Long-term provisions Current provisions Total Jan 2004 Increase in Exercised during 31 Dec 2004 provisions financial period (-) Long-term provisions Total

47 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 21. Liabilities 31 December December 2004 Long-term liabilities Interest-bearing Loans from financial institutions Other liabilities Equity loans Long-term interest-bearing liabilities Non-current provisions Deferred tax liability Pension obligations Long-term liabilities Current liabilities Interest-bearing Loans from financial institutions Other liabilities Short-term interest-bearing liabilities Trade payables and other liabilities Advances received Trade payables Other liabilities Accruals and deferred income Short-term interest-bearing liabilities Matched staff costs Other short-term accruals and deferred income Trade payables and other liabilities Income tax liability Current provisions Current liabilities Total liabilities Structure of the group s interest-bearing finance liabilities (EUR million) 31 Dec Maturity of credit type Credit type Drawn Undrawn >2010 Bonds Credit facilities Leasing and factoring Commercial paper programme Other borrowings Total Analysis of the group s interest-bearing finance liabilities (EUR million) 31 Dec Maturity Currency Drawn Undrawn >2010 EUR PLN EEK LVL Total Finance lease liabilities 31 December December 2004 Long-term interest-bearing finance lease liabilities Short-term interest-bearing finance lease liabilities Total finance lease liabilities

48 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 23. Financial risk management Group financing within the HK Ruokatalo Group concern is tasked with ensuring cost-effective funding and financial risk management for group companies. The finance policy in use provides the principles for financial management. Financial risks mean unfavourable movements taking place in the financial markets that may erode accrual of the company s result or reduce cash flows. Financial risk management aims to use financial means to hedge the company s intended earnings performance and equity and to safeguard the group s liquidity in all circumstances. Risk management may employ various instruments such as futures, options and interest or currency swaps. Derivatives are used for the sole purpose of hedging, not speculation. Funding of the group s Finnish and Baltic operations is focused on a finance unit operating under the CFO. Refinancing and liquidity risk The group must maintain adequate liquidity under all circumstances to cover its business needs in the foreseeable future. The availability of funding is ensured by spreading the maturity of the borrowing portfolio, financing sources and instruments. The group also has revolving credit facilities with banks, bank borrowings, insurance company borrowings and the short-term Finnish commercial paper programme. The aim is to balance the borrowing portfolio maturity schedule and to maintain sufficiently long maturity for long-term borrowings. Counterparty risk A counterparty risk is defined as the risk that a counterparty will be unable to fulfil its contractual obligations. The risks are mostly related to investment activities and counterparty risks in derivative contracts. Only financial institutions and other actors with sound creditability are used as counterparties. Cash is invested only in bank deposits and certificates of deposit. Foreign exchange risk The HK Ruokatalo Group concern has productive activities in Finland and the Baltics and, through a joint venture in Sweden, in Poland. Group companies also engage in foreign trade. Owing to income and expenses denominated in foreign currencies and equity investments and earnings denominated in foreign currencies, the group is exposed to foreign exchange risk arising from movements in exchange rates. The US dollar, Japanese yen and Swedish crown are the most significant exchange risks affecting the group s commercial operations. Currency futures, options and swaps can be used to hedge foreign exchange risks. The basic guideline is that an average of 50% of the anticipated net currency flow is hedged. The largest equities of group companies are in Swedish crowns and Estonian crowns The group does hedge balance sheet risks. Interest rate risk Financial assets and liabilities at fixed interest rates are exposed to price risks caused by movements in interest rates. Financial assets and liabilities at variable interest rates are subject to movements in market interest rates and thus exposed to cash flow risks caused by interest rates. To manage interest rate risks, group borrowings are spread across fixed and variable interest instruments. The company may borrow at either fixed interest rates or variable interest rates and use interest swaps to achieve a result in keeping with the finance policy. Around 40% of group borrowings were at fixed interest rates at the balance sheet date. No hedging instruments were used to manage interest risks during the period under review. Credit risk relating to trade receivables The group s trade receivables are spread across a broad customer base. Almost all customers have credit limits that are systematically monitored. Most customers are insured through credit insurance. Additionally, financial security, bank guarantees, confirmed letters of credit and advance payments are used. 24. Derivative instruments Nominal values of derivative instruments 31 December December 2004 Foreign exchange derivatives - Foreign exchange contracts Commodity derivatives - Electricity futures Total Fair value Fair value Fair value Fair value Fair values of derivative instruments positive negative net net Foreign exchange derivatives - Foreign exchange contracts Commodity derivatives - Electricity futures Total

49 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Derivative instruments included in hedge accounting Nominal value Fair value effective part Commodity derivatives - Electricity futures Contingent liabilities Debts secured by mortgages and shares 31 December December 2004 Pension plan loans Loans from financial institutions Total Real estate mortgages Pledged securities Floating charges Total Security for debts of participating interests Guarantees Total Security for debts of others Guarantees and pledges Total Other contingencies Lease liabilities Lease liabilities maturing in less than a year Lease liabilities maturing in 1-5 years Total Other liabilities Subsequent other liabilities Total Total other contingencies Inner circle transactions Parties are considered as belonging to each other s inner circle if one of the parties is able to exercise control or a significant influence over the other in decisions affecting its finances and business. The group s inner circle includes the parent company, subsidiaries, associates and joint ventures. The inner circle also includes the Supervisory Board and Board of Directors of the parent company (LSO Osuuskunta) of the group s parent, the members of the group s Board of Directors, the group s CEO and his successor, vice presidents and their immediate family members. The group strives to treat all parties equally in its business. HK Ruokatalo Group Oyj s principal owner, LSO Osuuskunta, is a cooperative comprising around 5,000 Finnish meat producers. The cooperative is tasked with fostering its members meat production and marketing by exercising its power of ownership in HK Ruokatalo. Today, LSO Osuuskunta has no actual business, but receives an income in the form of dividend from dividend paid by HK Ruokatalo and, to a lesser extent, income in the form of rent and other financial assets. HK Ruokatalo Group concern applies pure market price principles to the acquisition of raw meat material. The sale of animals to the group by persons on the group s Board of Directors and on the Supervisory Board and Board of Directors of the parent company LSO Osuuskunta totalled EUR 4.6 million in 2005 (EUR 4.4m in 2004). Animal purchases from the group by the persons in question totalled EUR 1.4 million in 2005 (EUR 1.4m in 2004). Otherwise inner circle members are not in a material business relationship with the company. 49

50 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Shares in subsidiaries Number Carrying value Holding of shares (EUR 1000) % Owned by the group s parent company HK Ruokatalo Oy, Turku LSO Foods Oy, Turku Helanderin Teurastamo Oy, Loimaa Lihatukku Harri Tamminen Oy, Vantaa Linocon Oy, Helsinki HK International Ab, Sweden AS Rakvere Lihakombinaat, Estonia AS Linnulihatooted, Estonia AS Tallegg, Estonia Total Owned by LSO Foods Oy Lounaisfarmi Oy, Turku Total 8 Owned by AS Rakvere Lihakombinaat * AS Ekseko, Estonia AS Rigas Miesnieks, Latvia UAB Klaipedos Maisto Mesos Produktai, Lithuania Total * The book values are based on the carrying values in the companies balance sheets and, in compliance with local accounting practice, include the movement in the subsidiary s equity, which has been taken into account using the equity convention. Shares and holdings in associates Owned by the group s parent company Honkajoki Oy, Honkajoki Etelä-Suomen Multaravinne Oy, Forssa Pakastamo Oy, Helsinki Finnish Meat Research Institute, LTK osuuskunta, Hämeenlinna Best-In Oy, Kuopio Saturn Nordic Holding Ab, Sweden Total Owned by LSO Foods Oy Finnpig Oy, Vaasa The group carries on business with associates by engaging in the production and sale of pet food, by trading in spices and by using leasing, waste disposal and research services. All commercial agreements are negotiated on market terms. The following transactions were carried out with the inner circle Product sales - Associates Product purchases - Associates Open balances at 31 December Trade receivables - Associates Trade payables - Associates

51 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 27. Events taking place after the balance sheet date 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. When implemented, the plan would signal the closure of production at the Turku processed meat factory, the Tampere meat processing plant and the Tampere distribution terminal. Together with efficiency measures already announced earlier, the plan will affect an estimated 500 jobs in Finland by the end of Towards the end of January, HK Ruokatalo Oy and Atria Oy announced they were to look at ways of safeguarding turkey production in Finland. The aim is to work together to restore the loss-making turkey business to profitability. 28. Transition to IFRS accounting HK Ruokatalo Group Oyj adopted International Financial Reporting Standards (IFRS) at the start of Prior to this the company s financial statements were based on Finnish Accounting Standards (FAS). These are the group s first accounts prepared in accordance with IFRS. Transition to IFRS has changed the way the financial statements are reported, the notes to the financial statements and the accounting policies compared to earlier. The accounting policies are in the balance sheet before the notes to the consolidated financial statements. These policies have been applied when preparing the accounts for the financial year ended 31 December 2005, the comparable figures for the financial year ended 31 December 2004 and the opening IFRS balance sheet dated 1 January The reconciliation calculations below illustrate the differences between IFRS and Finnish Accounting Standards for 2004 and the transition date to IFRS on 1 January The most significant changes arising from the transition to IFRS within the HK Ruokatalo Group group relate to pension arrangements and the retraction of depreciation of goodwill. Equity reconciliation, EUR million 1 January December 2004 Equity FAS IAS 12 Income taxes IAS 16 Property, plant and equipment IAS 19 Employee benefits (pensions) IAS 28/31 Joint ventures and associates IAS 38 Intangible rights IAS 41 Agriculture IFRS 3 Business combinations Total IFRS adjustments Equity IFRS Reconciliation of profit for the financial year, EUR million 31 December 2004 Profit for the financial year FAS 20.5 IAS 12 Income taxes -1.0 IAS 16 Property, Plant and Equipment -0.1 IAS 19 Employee benefits (pensions) 2.9 IAS 28/31 Joint ventures and associates 0.3 IAS 38 Intangible rights 0.8 IAS 41 Agriculture 0.3 IFRS 3 Business Combinations 2.3 Total IFRS adjustments 5.5 Profit for the financial year IFRS 26.0 Consolidated income statement for 1 January to 31 December 2004 (EUR million) IFRS FAS adjustments IFRS Revenue Share of associates' results Operating profit Share of associates' results Financial income and expenses Profit before taxes Income taxes Minority interest Result for the financial year Opening balance sheet at 1 January 2004 (EUR million) FAS IFRS IFRS 1 January 2004 adjustments 1 January 2004 Assets Intangible assets Goodwill Property, plant and equipment Investments in associates

52 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Deferred tax asset Other long-term receivables Non-current assets Inventories Trade and other receivables Cash and bank Current assets Total assets Equity and liabilities Share of equity holders of the parent Minority interest Equity Deferred tax liability Long-term interest-bearing liabilities Pension obligations Long-term liabilities Short-term interest-bearing liabilities Short-term zero-interest liabilities Current liabilities Total equity and liabilities Balance sheet at 31 December 2004 (EUR million) FAS IFRS IFRS 31 December 2004 adjustments 31 December 2004 Assets Intangible assets Goodwill Property, plant and equipment Investments in associates Deferred tax asset Other long-term receivables Non-current assets Inventories Trade and other receivables Cash and bank Current assets Total assets Equity and liabilities Share of equity holders of the parent Minority interest Equity Deferred tax liability Long-term interest-bearing liabilities Pension obligations Long-term liabilities Short-term interest-bearing liabilities Short-term zero-interest liabilities Current liabilities Total equity and liabilities

53 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Impacts of the change in financial statement practice Below is an explanation of the significant differences in the change in financial statement practice that affect HK Ruokatalo Group s consolidated figures. Property, plant and equipment The historic cost convention in compliance with IAS 16 is used to measure PPE. PPE is stated at acquisition cost and depreciated in accordance with their expected economic life. The revalued cost as allowed by IFRS 1 has been used as the deemed cost of the Säkylä property at the date of transition to IFRS on 1 January In future the revalued value will be depreciated normally according to plan. Leases Under IAS 17, leases where a substantial part of the risks and benefits of ownership have been transferred are classified as finance leases. HK Ruokatalo Group concern s Baltic units have already used finance leases in previous financial statements and these have been stated in the balance sheet under property plant and equipment and as interest-bearing debt. HK Ruokatalo Group concern s Finnish companies have no significant finance leases. Business combinations HK Ruokatalo Group concern has made use of the opportunity allowed under IFRS 1 (First Time Adoption of IFRS) in the combination of companies. The assets and liabilities of subsidiaries have not been stated retrospectively at fair value but have been included in the balance sheet at the date of transition at their value according to earlier accounting practice. Goodwill in the consolidated balance sheet Under IFRS 3 (Business Combinations) goodwill is no longer regularly depreciated but is subject to impairment each year or whenever a particular need arises. Goodwill was tested at the transition date of 1 January 2004 and in the situation at 31 December 2004 and no need for impairment was found. The EUR 3.0 million depreciation of goodwill in 2004 under FAS has been retracted. HK Ruokatalo Group concern s IFRS-compliant consolidated balance sheet dated 31 December 2004 includes goodwill of EUR 29.0 million. Inventories Inventories were already stated in the financial statements dated 31 December 2003 in accordance with a principle that required the inclusion of fixed production overheads in the acquisition cost. Biological assets been stated at fair value as required under IAS 41 (Agriculture). While there are few biological assets in the group s Finnish operations, they are substantial in the group s companies in Estonia. Pension obligations and expenses arising from employee benefits The group s pension arrangements are largely contribution based, which means that the contributions paid are charged to the income statement in the year to which they relate. An exception to this is the disability pension under the Finnish TEL scheme, which has been a benefit-based scheme. A change in the basis of payment of disability pensions covered by TEL insurance will enter into force at the start of This change means that employment disability benefits covered by TEL insurance will become contribution based. A benefit-based liability of EUR 4.9 million has been stated in the opening balance sheet dated 1 January This figure is based on the actuarial calculation provided by the insurance company. This liability has been recognised as a non-recurring item of EUR 2.9 million in Q4 of The IFRS-compliant balance sheet dated 31 December 2004 shows a total of EUR 2.5 million to be outstanding on pension obligations arising from disability benefits under TEL insurance and liabilities arising from other insurance benefits. Deferred tax assets and liabilities and income tax Deferred taxes are calculated on all temporary differences in bookkeeping and taxation. Under IFRS, deferred tax assets and liabilities are stated as separate items in balance sheet assets and liabilities. The effect of IFRS adjustments on deferred tax assets and deferred tax liabilities in the opening balance sheet dated 1 January 2004 is EUR 1.4 million and EUR 1.0 million respectively. Likewise the effect on deferred tax assets and deferred tax liabilities in the balance sheet dated 31 December 2004 is EUR 0.5 million and EUR 1.1 million respectively. The largest temporary differences arise from benefit based pension arrangements. Share of associates' results Under IFRS, the group share of associates results is reported as a separate item after operating profit. Under FAS this item was shown before operating profit. Segment reporting The division of segments is based on the group s organisation and on Board of Directors and management reporting. The management of HK Ruokatalo Group concern tracks the profitability of business operations by market area. The group s primary reporting segments are geographical segments: Finland, the Baltics and Poland. The Polish market has been shown as a separate segment since 1 January HK Ruokatalo Group concern has only one business segment: meat processing. Financial instruments Despite the fact that IAS 39 was not adopted until 1 January 2005, foreign exchange derivatives have been measured at fair value and recognised in the income statement. Minority interest Minority interests are recognised separately in the balance sheet in the consolidated equity whereas under Finnish accounting standards they were stated as a separate item from the equity belonging to shareholders of the parent company. Translation differences Translation differences arising from foreign units prior to the transition to IFRS are not stated as a separate item of equity but have been integrated into retained earnings at the transition date of 1 January Research and development costs There are no changes in the treatment of research and development costs in consequence of the transition to IFRS. Research and development costs are booked as an annual cost. 53

54 PARENT COMPANY INCOME STATEMENT Parent company income statement for 1 January to 31 December (EUR 1000) Note Net sales Change in inventories of finished goods and work in progress Work performed for own use and capitalised Other operating income Materials and services Staff costs Depreciation and value adjustments Other operating expenses Operating profit Financial income and expenses Profit/loss before extraordinary items Extraordinary items Profit/loss after extraordinary items Appropriations Income taxes Other direct taxes Profit/loss for the financial year

55 PARENT COMPANY BALANCE SHEET Parent company balance sheet at 31 December (EUR 1000) ASSETS Note Non-current assets 11 Intangible assets Tangible assets Financial assets Non-current assets, total Current assets Inventories Long-term receivables Deferred tax asset Short-term receivables Cash and bank Total current assets TOTAL ASSETS EQUITY AND LIABILITIES Shareholders equity 15 Share capital Share premium Revaluation reserve Other reserves Retained earnings Profit/loss for the financial year Total shareholders equity Accumulated appropriations Provisions Liabilities Long-term interest-bearing liabilities Current interest-bearing liabilities Current zero-interest liabilities Total liabilities EQUITY AND LIABILITIES. TOTAL

56 PARENT COMPANY FUNDS STATEMENT Parent company funds statement (EUR 1000) Operating activities Operating profit Adjustments to operating profit Change in net working capital Interest Dividends received Taxes Net cash inflow/outflow from operating activities Investing activities Purchase of shares Purchase of other fixed fixed assets Disposal of other fixed assets Other change Total cash inflow/outflow from investing activities Cash flow before financing activities Financing activities Non-current borrowings raised Non-current borrowings repaid Increase/decrease in non-current receivables Increase/decrease in current financing Dividends paid Other change 11 9 Share issue Group contributions received Total financing activities Increase/decrease in liquid assets Liquid assets at 1 January Liquid assets at 31 December Change in liquid assets in the balance sheet Change in net working capital: Increase (-)/decrease (+) in inventories Increase (-)/decrease (+) in current operating receivables Increase (-)/decrease (+) in current zero-interest liabilities

57 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS Notes to the parent company financial statements for 2005 Basic information about the company HK Ruokatalo Group Oyj is a Finnish public limited company established under the law of Finland. The company s registered office is in Turku. Until 31 March 2005, HK Ruokatalo Group Oyj engaged in production and sales activities. In connection with the corporate restructure taking place on 31 March 2005, 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 (formerly HK Ruokatalo Oyj). Under the restructure, the Group s Finnish industrial operations, sales, marketing, logistics and transportation were assigned as a business transfer to a subsidiary known as HK Ruokatalo Oy. The transfer of business operations from HK Ruokatalo Group Oyj to HK Ruokatalo Oy took place so that HK Ruokatalo Oy assumed responsibility for the operations from 1 April HK Ruokatalo Group Oyj retained responsibility for group management, finance and administration. HK Ruokatalo Group Oyj is a subsidiary of LSO Osuuskunta and part of the LSO Osuuskunta Group. LSO Osuuskunta s registered office is in Turku. Copies of HK Ruokatalo Group Oyj s financial statements are available at the company s registered office at Kaivokatu 18, Turku. Accounting policies Basis of preparation The parent company s financial statements have been prepared in compliance with valid Finnish accounting legislation (FAS). HK Ruokatalo Group s consolidated financial statements have been prepared in compliance with IAS and IFRS (International Financial Reporting Standards) and the SIC and IFRIC interpretations valid at 31 December The parent company complies with the accounting policies of the group whenever possible, except for the differences listed below. In other respects, the accounting policies are the same as those of the group. Goodwill in the parent company s balance sheet is depreciated on a straight-line basis over a period of five years. The amounts in the parent company income statement, balance sheet and notes are in thousands of euros unless otherwise stated. Comparability with previous years The mergers and business transfer above means that the figures for 2005 are not comparable to those of Transactions in foreign currency Transactions in foreign currency are recognised at the exchange rate on the day the transaction takes place. Trade receivables, trade payables, loan receivables denoted in foreign currencies and foreign currency bank accounts have been translated into the operational currency at the average exchange rate quoted by the European Central Bank at the balance sheet date. Profits and losses arising from business transactions in foreign currencies and from the translation of monetary items have been recognised in financial income and expenses in the income statement. Derivative instruments Open derivatives in foreign currencies are valued at the exchange rates quoted at the balance sheet date. Changes in the value of currency futures are recognised in financial income and expenses in the income statement. Pension plans HK Ruokatalo Group Oyj employees statutory pension cover has been arranged through insurance in a pension insurance company. Statutory pension expenses have been charged in the year to which the contributions relate. Management retirement benefit obligations and severance payments The Board of Directors appoints the parent company s CEO and also decides his salary and other benefits. Under his service agreement, CEO Simo Palokangas could have retired at the age of 60 in October The CEO s pension is determined in accordance with the Employees Pension Act (TEL) and the supplementary pension insurance taken out by the company and amounts to 60% of the salary forming the basis of pension under the Employees Pension Act. The company s pension commitment in respect of the defined benefit relating to this was EUR 2.6 million at 31 December The age of retirement of the new CEO, Kai Seikku, is 60. He will receive a pension of 60% of his pensionable pay calculated on the basis of his total pay received prior to retirement. The CEO s period of notice is six months by either party. If his employment is terminated by the company, the CEO is entitled to severance pay equivalent to 18 months salary excluding incentive bonuses. In 2005, Simo Palokangas was paid EUR 415,230 and received other benefits worth EUR 14,156. Kai Seikku was paid EUR 106,000 and received other benefits worth EUR 5,080. Income taxes Consolidated accounting principles are applied to income taxes and deferred tax assets and liabilities when allowed under Finnish accounting principles. The deferred tax liability on depreciation difference is disclosed as a note. Leases All leasing payments have been treated as rent. Leasing payments based on unpaid leasing agreements are shown in contingent liabilities in the financial statements. Extraordinary income and expenses Extraordinary income and expenses consists of group contributions received, which are eliminated in the consolidated financial statements. Accumulated appropriations Appropriations are the change in depreciation difference. The difference in depreciation according to plan and accounting depreciation is shown as an appropriation in the income statement and the accumulated difference in depreciation according to plan and accounting depreciation is shown in the balance sheet as accumulated appropriations. 57

58 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS Notes to the income statement EUR Jan-31 Dec Jan-31 Dec Division of sales Sales in Finland Sales in the Baltics Sales in Poland Sales in the rest of EU Sales outside EU Total sales Total other operating income Rental income Other operating income Gain on disposal of non-current assets Total other operating income Materials and services Purchases during the financial year Increase/decrease in inventories Materials and supplies External services Materials and services Employees, average 1 Jan-31 Mar 2005/1 Jan 31 Dec Apr-31 Dec Staff costs Salaries and fees Pension expenses Other social security costs Staff costs Management salaries, fees and benefits Managing directors and vice presidents Board members Total Inner circle ínformation Inner circle loans Depreciation and impairment Depreciation according to plan Depreciation according to plan on non-current assets and goodwill Impairment charge for non-current assets Exceptional value adjustments and cancellations of non-current assets Total depreciation and value adjustments Other operating expenses Rents/leases Loss on disposal of fixed assets, tangible assets, total Loss on disposal of non-current assets Loss on merger, internal

59 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS Audit fees Audit fees, other expert services Audit fees R&D costs (in income statement) Non-statutory staff costs Energy Maintenance Advertising, marketing and entertainment costs Service, information management and office costs Other costs Total other operating expenses Financial income and expenses Financial income Dividends received and corporation tax credit (2004) from participating interests Dividends received and corporation tax credit from others 6 6 Income from holdings Interest income on non-current financial assets from participating interests Interest income from other non-current financial assets Other interest receivable and financial income from group companies Other interest receivable and financial income from others Other financial income Total financial income Financial expenses Other interest and financial expenses payable to group companies Other interest and financial expenses payable to participating interests -3 0 Other interest payable and financial expenses to others Other financial expenses 9 0 Total other interest and financial expenses Total financial expenses Total financial income and expenses Foreign exchange gains Foreign exchange losses Total financial gains and losses Extraordinary items Extraordinary income Total extraordinary items Appropriations Increase (-) or decrease (+) in inventories Total appropriations Direct taxes Income tax on ordinary operations Income tax on extraordinary items Tax for previous financial years Change in deferred tax liabilities and assets Income tax on ordinary operations

60 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS Notes to the balance sheet EUR Non-current assets Intangible assets 2005 Intangible rights Goodwill Total Acquisition cost at 1 January Increase Decrease Reclassifications between items 4-4 Acquisition cost at 31 December Accumulated depreciation at 1 January Accumulated depreciation on disposals and reclassifications Depreciation for the financial year Adjustments Accumulated depreciation at 31 December Book value at 31 December Tangible assets 2005 Land Buildings Machinery Other Advance Total and and equipment tangibles payments water Acquisition cost at 1 January Increase Decrease Transfers between items Acquisition cost at 31 December Accumulated depreciation at 1 January Accumulated depreciation on decreases and transfers Depreciation for the financial year Value adjustments Accumulated depreciation at 31 December Book value at 31 December Revaluations included in acquisition cost Revaluations at 1 January Increase Decrease Revaluations at 31 December Financial assets 2005 Shares Shares Amounts Other in group in owed by shares and companies associates associates holdings Total Acquisition cost at 1 January Increase Decrease Acquisition cost at 31 December Book value at 31 December

61 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS 31 Dec Dec Non-current assets Intangible assets Intangible rights Goodwill Intangible assets Tangible assets Land and water Buildings Machinery and equipment Other tangible assets Payments on account and tangible assets in the course of construction Tangible assets Financial assets Shares in group companies Shares in associates Amounts owed by participating interests Other investments Financial assets Non-current assets, total Inventories Materials and supplies Unfinished construction projects Finished goods and goods for resale Other inventories Total inventories Long-term receivables Long-term loan receivables Deferred tax asset Total Amounts owed by group companies: Long-term group loan receivables Long-term receivables from group companies Total long-term receivables Short-term receivables Trade receivables Short-term prepayments and accrued income (from others) Other 0 7 Total Amounts owed by group companies: Trade receivables Loan receivables Other Total Amounts owed by participating interests: Trade receivables Loan receivables Other prepayments and accrued income 0 24 Other 2 21 Short-term receivables from participating interests Total short-term receivables

62 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS Main items included in prepayments and accrued income Matched financial items Matched staff costs Matched taxes Accounts receivable payments for VAT receivable Other prepayments and accrued income 6 69 Other prepayments and accrued income, participating interests 0 24 Total Shareholders equity Shareholders equity 2005 Share Share premium Revaluation Other Profit Total capital reserve reserve reserves reserve Shareholders equity at 1 Jan Increase Dividend distribution Other changes Profit for the financial period Shareholders equity at 1 Dec Shareholders equity 2004 Share Share premium Revaluation Other Profit Total capital reserve reserve reserves reserve Shareholders equity at 1 Jan Rights issue Share premium Increase Dividend distribution Profit for the financial period Shareholders equity at 31 Dec Distributable assets 31 Dec Dec Contingency fund Retained earnings Profit/loss for the financial year Distributable assets Accumulated appropriations Depreciation difference Total appropriations Provisions Provisions for pensions Total provisions Long-term liabilities Loans from financial institutions Pension plan loans Other liabilities Total Total long-term liabilities Long-term liabilities Interest-bearing: Amounts owed to others Long-term interest-bearing liabilities Total long-term liabilities

63 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS 19. Current liabilities Loans from financial institutions Pension plan loans Trade payables Accruals and deferred income Other liabilities Advances received 0 1 Total Amounts owed to group companies Trade payables Accruals and deferred income 0 16 Other liabilities Total Amounts owed to participating interests Trade payables Other liabilities Total Total current liabilities Current liabilities Interest-bearing: Current amounts owed to group companies Current amounts owed to participating interests Amounts owed to others Current interest-bearing liabilities Zero-interest: Current amounts owed to group companies Current amounts owed to participating interests Amounts owed to others Current zero-interest liabilities Total current liabilities Main items (non-current and current) included in accruals and deferred income Matched staff costs Matched interest costs Matched income taxes Purchase invoices for Other accruals and deferred income Other accruals and deferred income, group 0 16 Total Liabilities due in five years or more Loans from financial institutions Pension plan loans Other long-term liabilities Liabilities due in five years or more Contingent liabilities Debts secured by mortgages and shares 31 Dec Dec Pension plan loans Loans from financial institutions Total Real estate mortgages Floating charges Securities pledged Total

64 NOTES TO THE PARENT COMPANY FINANCIAL STATEMENTS Security for debts of subsidiary and other group companies Guarantees Total Security for debts of participating interests Guarantees Total Security for debts of others Guarantees Total Other contingencies Lease liabilities Lease liabilities maturing in less than a year 0 39 Lease liabilities maturing in 1-5 years 0 51 Total 0 90 Other liabilities Subsequent other liabilities Total Total other contingencies Derivative instruments Nominal values of derivative instruments 31 Dec Dec Foreign exchange derivatives - Foreign exchange contracts Commodity derivatives - Electricity futures Fair value Fair value Fair value Fair value Fair values of derivative instruments positive negative net net Foreign exchange derivatives - Foreign exchange contracts Commodity derivatives - Electricity futures

65 SHARES AND SHAREHOLDERS Shares and shareholders Share capital HK Ruokatalo Group Oyj s registered and fully paid share capital at the balance sheet date was EUR 58,587, There was no increase in share capital during the year. At the balance sheet date, the share capital was divided into 29,063,193 A Shares and 5,400,000 K Shares. Each share has a nominal value of EUR 1.70 and gives equal entitlement to a dividend. Under the company s Articles of Association, each A Share conveys one vote and each K Share 20 votes. All the K Shares are owned by LSO Osuuskunta. The company s shares joined the book-entry securities system on 31 October At the balance sheet date, the company had 8,306 registered owners. Stock exchange listings HK Ruokatalo s A Share has been quoted on the Helsinki Exchanges since 6 February During the year under review, 11,395,007 of the company s shares were traded for a total of EUR 104,612,945. The highest price quoted was EUR and the lowest EUR The middle price was EUR 9.17 and the closing price on the year was EUR The share price rose by 34% on the year. HK Ruokatalo s market capitalisation (A and K Shares) at the balance sheet date was EUR million, compared to EUR million at year-end Since 3 June 2005, HK Ruokatalo Group has had a market making agreement which meets the requirements of the Helsinki Exchanges Liquidity Providing (LP) operation. The agreement was concluded with FIM Pankkiiriliike Oy. Notice of change in ownership On 23 December 2005, Osuuspankkikeskus (Osk) announced that its stake in HK Ruokatalo Group Oyj had risen to 5.17% of the share capital and 1.30% of the votes. The stake includes the holding of Osuuspankkikeskus and its subsidiaries, as well as the mutual funds administrated by OP and Pohjola Treasury companies. 65

66 SHARES AND SHAREHOLDERS Shares traded (value of shares in million euros traded per month) Shares traded (number of shares traded per month) / / / / /2005 Source: OMX Helsinki Stock Exchange / / / / /2005 Source: OMX Helsinki Stock Exchange Share performance (middle price in euros each month) / / / / /2005 Source: OMX Helsinki Stock Exchange The trading code of HK Ruokatalo Group s A Share on the Helsinki Exchanges is HKRAV and the ISIN code FI Total shares traded on Helsinki Exchanges (EUR million) Total dividends paid (EUR million)

67 SHARES AND SHAREHOLDERS Analysis of shareholders as at 30 December 2005 Size of Number of % Number of % Number % shareholding shareholders shares of votes , , , , , , , , ,000 1, , , ,001-10,000 1, ,026, ,026, , , ,442, ,442, , , ,924, ,924, , ,977, ,577, Total 8, ,305, ,905, Waiting list General account 157, , Total 34,463, ,063, Shareholder profile as at 30 Decmber 2005 % of % of shareholders shares Corporates Finance and insurance companies Public sector entities Non-profit organisations Households Abroad Waiting list 0.00 General account 0.46 Share capital by share series as at 30 December 2005 Share Number % % series of shares shares votes A Shares 29,063, % 21.20% K Shares 5,400, % 78.80% Total 34,463, % % Each A Share conveys one (1) vote, each K Share conveys 20 votes %, of the total shares, including nominee registered shares, were in foreign ownership. This compares to 17.58% a year earlier. Largest shareholders as at 31 January 2006 A Shares K Shares % of total % of votes LSO Osuuskunta 7,252,522 5,400, Danish Crown AmbA 3,494, Pohjola Finland Value mutual fund 1,143, Varma Mutual Pension Insurance Company 638, Central Union of Agricultural Producers and Forest Owners 608, OP-Suomi Kasvu mutual fund 403, Säästöpankki Kotimaa mutual fund 379, Tapiola Mutual Pension Insurance Company 373, Evli Select mutual fund 370, Nordea Fennia mutual fund 275, Veritas Pension Insurance Company 262, EQ Pikkujättiläiset mutual fund 260, Nordea Fennia Plus mutual fund 200, Nordea Pro Suomi mutual fund 183, Fondita Nordic small cap mutual fund 182, Nordea Nordic small cap mutual fund 176, Aktia capital mutual fund 145, Ilmarinen Pension Insurance Company 140, Nominee registered 2,801, Other 9,771, Total 29,063,193 5,400,

68 ANNUAL GENERAL MEETING Annual General Meeting The Annual General Meeting of HK Ruokatalo Group Oyj will be held at 11am Finnish time on Friday 21 April 2006, in meeting room 201 at Helsinki Fair Centre, address Messuaukio 1 (Southern entrance), Helsinki, Finland. Examination of proxy forms will begin at 10 am. Shareholders wishing to attend the Annual General Meeting should notify the company of their intention to do so by 4pm Finnish time on 13 April 2006 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 11 April 2006 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 0.27 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 26 April The proposed payment date for the dividend is 4 May Shareholders whose shares are not registered in the book-entry securities system at the record date, 26 April 2006, 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, Urho Kekkosen katu 5 C, 8th floor, 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 28 April 2006, for January to June on 7 August 2006 and for January to September on 8 November 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 500 HK Ruokatalo Group 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 [email protected] 68

69 SIGNATURES OF THE BOARD OF DIRECTORS AND CEO AND AUDITORS' REPORT Signatures of the Board of Directors and CEO Vantaa, 24 February 2006 Marcus H. Borgström Markku Aalto Kjeld Johannesen Heikki Kauppinen Tiina Varho-Lankinen Simo Palokangas Auditors report To the shareholders of HK Ruokatalo Group Oyj We have audited the accounting records, financial statements, the report of the Board of Directors and administration for the period 1 January 31 December The Board of Directors and the CEO have prepared the report of the Board of Directors and the consolidated financial statements in compliance with International Financial Reporting Standards as adopted by the EU and have prepared the parent company s financial statements - which comprise the parent company s balance sheet, income statement, funds statement and notes to the financial statement - in accordance with the prevailing regulations in Finland. Based on our audit, we express an opinion on the consolidated financial statements, the parent company s financial statements, the report of the Board of Directors and administration. We have conducted the audit in compliance with Finnish Standards on Auditing. Those standards require us to perform the audit to ensure reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting policies used and significant estimates made by management as well as overall evaluation of the financial statement presentation. The purpose of our audit of administration is to examine that members of the Board of Directors and the CEO of the parent company have legally complied with the rules of the Companies Act. Consolidated financial statements In our opinion, the consolidated financial statements give a true and fair view, as referred to in the International Financial Reporting Standards as adopted by the EU and defined in the Finnish Accounting Act, of the consolidated result of operations as well as of the financial position. Parent company s financial statements, report of the Board of Directors and administration In our opinion, the parent company s financial statements have been prepared in compliance with the Finnish Accounting Act and other rules and regulations governing the preparation of financial statements in Finland. The financial statements give a fair and true view, as defined in the Finnish Accounting Act, of the parent company s result of operations as well as of the financial position. The report of the Board of Directors has been prepared in compliance with the Finnish Accounting Act and other rules and regulations governing the preparation of such reports in Finland. The report of the Board of Directors is consistent with the financial statements and gives a true and fair view, as defined in the Finnish Accounting Act, of the consolidated and parent company s result of operations as well as of the financial position. The consolidated and parent company s financial statements can be adopted and the members of the Board of Directors and the CEO can be discharged from liability for the period audited by us. The proposal by the Board of Directors for the disposal of distributable funds is in compliance with the Companies Act. Vantaa, 7 March 2006 PricewaterhouseCoopers Oy Authorised Public Accountants Petri Palmroth, APA Jari Henttula, APA 69

70 CORPORATE GOVERNANCE Corporate governance Additional information about corporate governance is available on the company s website at under Investor information. Annual General Meeting Ultimate decision-making power at HK Ruokatalo Group Oyj is vested in shareholders at the Meeting of Shareholders. The Annual General Meeting is held by the end of June each year. The Board of Directors sends a notice to shareholders and draws up the agenda. The Annual General Meeting convenes for the following purposes: - to receive the accounts - to decide on the distribution of profit - to decide the number of members of the Board of Directors - to appoint members to the Board of Directors and to elect the auditors - to decide the fees of members of the Board of Directors Likewise, changes in the share capital and Articles of Association are also items of business to be considered by the Annual General Meeting or, if necessary, by an Extraordinary General Meeting. Share series HK Ruokatalo Group has two share series, Series A and Series K. Series A Shares are quoted on the Main List of the Helsinki Exchanges. Series K Shares are unquoted. The series entitle to identical rights, except that each A Share conveys one vote and each K Share 20 votes. All the K Shares are owned by LSO Osuuskunta. Supervisory Board The company has no Supervisory Board. Board of Directors HK Ruokatalo Group Oyj s Board of Directors comprises six members, who represent the company s shareholders and have a considerable breadth and depth of commercial and international experience that is important to the company. Under the Articles of Association, the Board of Directors comprises between five and seven members. The Annual General Meeting decides the number of Board members, appoints all members for a term of office of one year at a time and also fixes the fees they receive. Persons elected to the Board of Directors must be under the age of 62. In accordance with the prevailing practice, producer representatives form a majority on the company s Board of Directors and have a production contract to supply the company with raw meat at the market price. Additionally, one member of the Board is managing director of a company that is a major shareholder in HK Ruokatalo Group and with which HK Ruokatalo Group is involved in strategic cooperation. The Board of Directors elects a chairman and deputy chairman from among its members. The chairman may not be an employee of the company. The work of the Board of Directors is based on the Finnish Companies Act, the provisions contained in the Company s Articles of Association and the Board s own rules of procedure. The Board of Directors operates as a collegiate body with all Board members participating in all matters considered by the Board. Temporary working groups or permanent committees may be established if required. The Board of Directors meets at least five times a year at pre-arranged times. More meetings may be held if required. The chairman of the Board normally sends notices of Board meetings at least one week beforehand. At least half the members must be present for the Board to be quorate. During 2005, the Board held 11 meetings. The average attendance rate of Board members was 93.5%. In 2005, members of the Board of Directors received fees and other benefits as follows: Marcus H. Borgström, EUR 23,700 Markku Aalto, EUR 14,830 Kjeld Johannesen, EUR 9,000 Heikki Kauppinen, EUR 10,300 Tiina Varho-Lankinen, EUR 10,140 Simo Palokangas EUR - From 1 April 2005, HK Ruokatalo Group Oyj s Board of Directors also serves as the Board of Directors of HK Ruokatalo Oy. Board members receive no separate fees or compensation for this duty. CEO The Board of Directors appoints the parent company s CEO and also decides his salary and other benefits. On his retirement at the end of March 2006, CEO Simo Palokangas will be succeeded by Kai Seikku MSc (Econ. & Bus. Admin.),who, on 12 April 2005, the Board of Directors chose to replace him. Mr Seikku assumed the post of CEO on 1 April In 2005, Simo Palokangas was paid EUR 415,230 and received other benefits worth EUR 14,156. Kai Seikku was paid EUR 106,000 and received other benefits worth EUR 5,080. Kai Seikku will retire at the age of 60 and will receive a pension of 60% of his pensionable pay calculated on the basis of total pay received prior to retirement. The CEO s period of notice is six months by either party. If his employment is terminated by the company, the CEO is entitled to severance pay equivalent to 18 months salary excluding incentive bonuses. Salaries and remuneration Management salaries and remuneration totalled EUR 1.2 million, of which EUR 0.1 million was paid to members of the Board and EUR 1.1 million, including benefits, to managing directors and their deputies. The Company has no share bonus or share derivative reward schemes in place for members of the Board of Directors or for management. Members of the 70

71 CORPORATE GOVERNANCE company s operative management may be paid a personal incentive bonus if their performance so warrants. Additionally, the group s employee performance bonus scheme in Finnish units also applies to the CEO and management team. Auditors Under its Articles of Association, HK Ruokatalo Group shall have two auditors and two deputy auditors, one of the auditors and one of the deputy auditors shall be duly authorised by the Central Chamber of Commerce. The term of any auditor or any deputy auditor is the calendar year following their appointment. Auditors from authorised public accountants PricewaterhouseCoopers Oy served as the company s independent auditors. In 2005, the auditors fees for the statutory audit in the parent company were EUR 113,398 and in the group EUR 220,405. In addition, PricewaterhouseCoopers were paid EUR 127,550 for services unrelated to the audit. These services included assignments relating to tax advice and planning. Risk management The aim of risk management within the HK Ruokatalo Group concern is to safeguard the conditions to achieve business objectives and enable uninterrupted business operations. HK Ruokatalo s risks are by nature strategic, operative, financial, and risk of loss, damage or injury. Risk management constitutes a key part of the group s management system, which is based on quality and process management. Quality and environmental management as well as internal supervision are integrated into our certified management system, which is regularly audited by external auditors. The system ensures and harmonises continual improvement in the quality of operations and products and reduces adverse environmental impacts. The Board of Directors and CEO have responsibility for the risk management strategy and principles within the group and for managing risks that threaten achievement of the group s strategic intents. Business process managers are responsible for operative risks. The group CFO is responsible for managing financial risks and risks to persons and property. Internal supervision and audit Under the Finnish Companies Act, the Board of Directors is responsible for arranging proper supervision of the company s books and asset management. The CEO is responsible for ensuring that bookkeeping complies with the law and that asset management is arranged in a reliable manner. Complying with generally accepted accounting principles, the responsibility of the auditors is to ensure the Board of Directors and the CEO have carried out their obligations above. The internal audit within the HK Ruokatalo Group is a management tool used to perform supervision and is organised around an internal controller. The company s auditors, who constantly perform audits of various operational units, also participate in internal auditing. The aims of the internal audit are integrated into the company s management system, which is based on the principle of continuous improvement. Corrective and preventive actions are key to the function of the entire process. Management interests At year-end 2005, members of the Board of Directors and the company s CEO owned a total of 66,343 A Shares, which corresponded to 0.19 of the total number of shares and 0.05 per cent of the votes. Share agreements The company is not aware of any shareholder agreements or other commitments agreed on share ownership or the exercise of votes in the company. Insider holding HK Ruokatalo Group has complied with the insider holding guidelines prepared by the Helsinki Exchanges, the Central Chamber of Commerce and the Federation of Finnish Industry and Employers since 1 March An updated insider holding guideline entered into force on 1 January Effective from 17 October 2005, HK Ruokatalo Group s insider holdings have been split into a public register and a company-specific register. By law, insiders included on the public register of insider holdings include members of the Board of Directors, the company s auditors and CEO. By corporate decision, the public register of insider holdings also includes members of the Management Team and the chairpersons of the principal owner s Board of Directors and Supervisory Board. There are 22 persons on the company s public register of insider holdings. By corporate decision, certain members of financial and accounting clerical staff, corporate communications, management secretaries, etc. - a total of 15 persons - have been included in the company-specific register of permanent insiders. HK Ruokatalo Group s insiders may trade during 30 days following the disclosure of an interim report and financial statement bulletin. HK Ruokatalo ensures compliance with insider holding guidelines by reminding insiders in advance of a forthcoming ban on trading and by checking the Finnish Central Securities Depository register once a year to see the trades carried out by insiders. In the same context, the company sends an extract from the register to each insider to allow him or her to check and complete their own personal information in the register. HK Ruokatalo Group s group administration maintains and manages the register of insider holdings. The actual register is kept in the Finnish Central Securities Depository s SIRE system. In compliance with the standard on declarations of insider holdings and registers, since 17 October 2005 public viewing has been arranged in the NetSire online service maintained by the Finnish Central Securities Depository. 71

72 CORPORATE GOVERNANCE Board of Directors Appointed on 12 April 2005 Marcus H. Borgström (born 1946) Chairman of the Board since 1997, member since 1995, MSc (Agriculture and Forestry), Agricultural Counsellor (Hon) Pork producer in Sipoo, Itä-Uusimaa. Member of the Board of Directors of Veritas Life Insurance Company Ltd, chairman of the Supervisory Board of Itä- Uudenmaan Osuuspankki bank, OKO Bank Group Pension Fund and Osuuskauppa Varuboden and a member of the Supervisory Board of SOK Corporation. Member of the Board of Directors of LSO Osuuskunta. Current elected positions: Chairman of the Board of Pellervo-Seura and Finlands Svenska Andelsförbund (the Confederation of Swedish-Speaking Cooperatives in Finland) and representative of Finnish farmers on the General Committee for Agricultural Co-operation in the European Community (COGECA). Shares: 20,334 Markku Aalto (born 1950) Member of the Board since 1994, deputy chairman since 2003 Pork producer in Jämijärvi, Satakunta. Chairman of the Board of Directors of LSO Osuuskunta. Shares: 1,200 Kjeld Johannesen (born 1953) Member of the Board since 2004, MSc (Econ. & Bus. Admin.) CEO of Danish Crown. Deputy chairman of the Board of Directors of DAT-Schaub, Tulip Food Company and Sokolów S.A. and a Board member of the following companies: Vest-Wood A/S, DBC Ltd (UK), The Danish Bacon and Meat Council, Plumrose USA, Inc and Tulip Ltd. (UK). Shares: - Tiina Varho-Lankinen (born 1962) Member of the Board since 2003, MSc (Econ. & Bus. Admin.) Beef and broiler meat producer, a farm entrepreneur in Oripää, Varsinais- Suomi. Deputy chairman of the Board of Directors of LSO Osuuskunta and chairman of Suomen Broileryhdistys (Finnish Broiler Association). Shares: 671 Heikki Kauppinen (born 1947) Member of the Board since 2003, BSc (Econ. & Bus. Admin.) An expert on the international marketing of branded goods and has served as managing director of Suomen Unilever Oy from A member of the Board of Directors of Oy Halva Ab and Laatusuhde Suomi Oy and chairman of the Board of Directors of the Finnish Orienteering Association. Shares: 2,011 Simo Palokangas (born 1944) Member of the Board since 2005, MSc (Agriculture), Counsellor of Mining (Hon). CEO of HK Ruokatalo Group Oyj and managing director and a member of the Board of Directors of LSO Osuuskunta Earlier served as managing director of Munakunta and CEO of Lännen Tehtaat Oy Currently a member of the Board of Directors of Lännen Tehtaat Oyj, chairman of the Board of Directors of Domus Yhtiöt Oy, and a member of the Board of Turku University Foundation and the Board of Trustees of the Jenny and Antti Wihuri Foundation. Shares: 42,127 Auditors for the 2005 and 2006 financial years Auditors Authorised public accountants PricewaterhouseCoopers Oy, with Jari Henttula MSc (Econ. & Bus. Admin.), APA of Turku as the principal auditor Petri Palmroth, MSc (Econ. & Bus. Adm.), Authorised Public Accountant, Turku Deputy auditors Mika Kaarisalo, MSc (Econ. & Bus. Adm.), Authorised Public Accountant, Turku Pasi Pietarinen, MSc (Econ. & Bus. Adm.), Authorised Public Accountant, Turku The Annual General Meeting was held in Turku on 12 April Management team in Finland Kai Seikku (born 1965) CEO, MSc (Econ. & Bus. Admin.) CEO of HK Ruokatalo Group Oyj from 1 April Managing director of HK Ruokatalo Oy since 1 September 2005, managing director of LSO Osuuskunta from 1 April Mr Seikku was CEO of advertising agency Hasan & Partners Oy and Country Chairman of advertising agency McCann-Erickson Prior to this he served as a business management consultant with the Boston Consulting Group in Stockholm and Helsinki and as a consultant with SIAR- Bossard Mr Seikku is on the Boards of the Finnish Food and Drink Industries Federation, Turo Tailor, Trainers' House and Alma Media Oyj. Shares: 2,000 Matti Perkonoja (born1949) CFO and CEO s deputy, commercial college graduate Mr Perkonoja s remit is finance and administration, information management and group business development, work environment and quality issues. Member of the Board of Directors of AS Rakvere Lihakombinaat, AS Tallegg and Sokolów 72

73 CORPORATE GOVERNANCE S.A. He joined the group as managing director of Broilertalo Oy in 1993 before being made director of commerce. He assumed his present position in 2000 Shares: 7,000 Antti Lauslahti (born 1966) Executive vice president Commercial Operations, MSc (Econ. & Bus. Admin.) Mr Lauslahti s remit is Finnish retail and HoReCa sales, marketing, product development and exports, logistics and distribution terminals. He joined HK Ruokatalo on 1 January 2006 from LU Suomi Oy, part of the Danone Group, where he was commercial director. Prior to this, he served L Oréal in Finland, the UK, Russia and China, and has also worked for Suomen Unilever. Shares: - Esa Mäki (born 1966) Executive vice president Meat Business, MSc (Agriculture and Forestry) Mr Mäki s remit is pork and beef processing. He joined HK Ruokatalo in 2003 as executive vice president of the Poultry Group. He assumed his present position in November Prior to this he was meat line director at Atria Oy and most recently director of control and logistics at Atria Group plc. Shares: - Raimo Laine (born 1943) Executive vice president, Raw Material, trade technician Mr Laine is responsible for the procurement of raw meat material, raw material control and material purchases until 30 June He joined the Group in 1964, assumed his present position since 2000, prior to which he was sales director. Shares: 1,342 Reijo Kiskola (born 1954) Executive vice president, Poultry Business, dairy technician He assumed his present position in November 2005, prior to which he was executive vice president Commercial Operations. Mr Kiskola joined HK Ruokatalo as managing director of Broilertalo Oy in 2001, prior to which he served eight years as managing director of Osuuskunta Satamaito dairy. Shares: - Pekka Kaikkonen (born 1961) Executive vice president Processed Meat and the Convenience Food Business, MSc (Food Sciences) Mr Kaikkonen s remit is the production of processed meat and convenience foods. He joined HK Ruokatalo in From 1990 he served Järvi-Suomen Portti Cooperative, most recently as its managing director Shares: - Jyrki Sukula (born 1965) Creative director, chef Mr Sukula s job is to introduce a new type of food philosophy to HK Ruokatalo and to create entirely new products and product concepts. Jyrki Sukula was appointed to HK Ruokatalo s Management Team on 17 January 2006 and continues to run a restaurant and catering business. Shares: - Matti Puntila (born 1960) Mr Puntila has been employee group representative in the Management Team since the start of Matti Puntila is a food industry employee at the Tampere factory and joined HK Ruokatalo in Shares: - Management team in the Baltics Olli Antniemi (born 1959) Executive vice president, Baltic Group, MSc (Econ. & Bus. Admin.) His remit is HK Ruokatalo Group operations in the Baltics. He joined the Group in 1996 as export director. Prior to this he served the Huhtamäki Group, including a spell with Leaf in the United Kingdom. Shares: - Olle Horm (born 1967) President of Rakvere Lihakombinaat since 2000 and president of Tallegg , MSc (Tech) Olle Horm was earlier a director of the construction firm AS EMV and of the Estonian national oil company AS Eesti Kütus. Shares: - Teet Soorm (born 1970) President of AS Tallegg since 2006, president of AS Ekseko in Estonia since 2000, MSc (Econ. & Bus. Admin.) Mr Soorm s remit includes HK Baltic Group s primary production, including pig and broiler breeding, feed and primary production support services. Rakvere Lihakombinaat's CFO Shares: - Toomas Koovit (born 1965) President of Rigas Miesnieks A/s in Latvia since 2004, MSc (Tech.) He joined Rakvere Lihakombinaat in 2003 as technical director. Prior to this he served the Estonian energy business. Shares: - Aldis Skutans (born 1970) Sales director of Rigas Miesnieks A/s (Latvia) since 2005 Mr Skutans' remit includes sales of Klaipedos Maistas products and sales coordination in entire HK Baltic Group. Shares: - 73

74 STOCK EXCHANGE BULLETINS 74 Stock exchange bulletins We issued 20 stock exchange bulletins during These can be read on our website at / English under Stock Exchange Bulletins. A summary of the more important bulletins appears below. 23 February 2005 Extraordinary General Meeting The Meeting approved an amendment to the Articles of Association whereby HK Ruokatalo Oyj s trading name becomes HK Ruokatalo Group Oyj. The amendment relates to corporate restructuring commenced in autumn The group s Finnish industrial operations, sales, marketing, logistics and transportation are to be transferred on 1 April 2005 to a new subsidiary known as HK Ruokatalo Oy. The business transfer is conditional on pending mergers, whereby Broilertalo Oy, Food Kuljetus Oy, Koiviston Teurastamo Oy and Pouttu Foods Oy merge with and into HK Ruokatalo Oyj, being entered in the trade register by 31 March In the same context, the Extraordinary General Meeting approved an amendment to Article 2 of the Articles of Association to revise the objects of the company in response to the company s changing circumstances and an amendment of Article 7 regarding the venues of general meetings of shareholders. 24 February 2005 Financial statement bulletin The financial statements disclosed by the company show a year-on-year rise of 5.1% in Group turnover to EUR million. The result before extraordinary items was EUR.26.1 million (EUR 22.2m in 2003). The Board of Directors is to recommend a dividend of EUR 0.29 per share (EUR 0.28 in 2003). This is equivalent to almost half the Group s earnings for the year. 31 March 2005 Corporate restructure almost complete The corporate restructure embarked on in autumn 2004 is almost complete. HK Ruokatalo Oyj s wholly-owned subsidiaries Broilertalo Oy, Food Kuljetus Oy, Koiviston Teurastamo Oy and Pouttu Foods Oy have merged with and into HK Ruokatalo Oyj. The mergers have been entered in the trade register today. The amendments to the Articles of Association approved by the Extraordinary General Meeting on 23 February 2005 were likewise entered in the Trade Register today. Under the amendments HK Ruokatalo Oyj is to change its name to HK Ruokatalo Group Oyj. 12 April 2005 Kai Seikku to be company s next CEO The company s Board of Directors appointed Kai Seikku as HK Ruokatalo s next CEO. He joins HK Ruokatalo from hasan&partners advertising agency, where is currently managing director, and McCann Erickson, where he is country chairman. Mr Seikku will join the company as managing director of HK Ruokatalo Oy on 1 September 2005 and will take up the post of CEO of the entire HK Ruokatalo Group on 1 April 2006, on the retirement of Simo Palokangas. 12 April 2005 Annual General Meeting bulletin The Annual General Meeting adopted the parent company s and consolidated financial statements and discharged the members of the Board of Directors and the CEO from liability for It was decided to declare a dividend of EUR 0.29 per share as recommended by the Board of Directors. The number of members of the Board of Directors was confirmed as six. Marcus H. Borgström, Markku Aalto, Kjeld Johannesen, Tiina Varho-Lankinen and Heikki Kauppinen were reelected to the Board of Directors. Simo Palokangas was appointed as a new member. 29 April 2005 Group s IFRS comparable information for 2004 HK Ruokatalo Group Oyj adopted International Financial Reporting Standards (IFRS) at the start of Prior to this the company s financial statements were based on Finnish Accounting Standards (FAS). The first IFRS-compliant financial statements will be prepared for the 2005 financial year. The interim reports for 2005 will be prepared in compliance with IFRS recognition and measurement principles. This bulletin shows the figures for 2004 based on FAS published earlier and the comparative figures in compliance with IFRS. The most significant changes arising from the transition to IFRS within the HK Ruokatalo Group concern relate to pension arrangements and the retraction of depreciation of goodwill. 2 May 2005 Interim report for 1 January to 31 March Group turnover in Q1 of 2005 rose by 29.9% to EUR million. Group operating profit rose to EUR 5.8 million and the result before taxes was EUR 5.0 million. Earnings per share were EUR 0.11 (EUR 0.13). This interim report and comparative information have been prepared for the first time in compliance with IFRS recognition and measurement principles. 6 June 2005 Poultry product supply problems in Estonia Estonian subsidiary Tallegg is currently experiencing difficulties in supplying poultry products to Estonia and the other Baltic states as a result of cleaning and disinfection operations at the factory following the discovery of salmonella bacteria during routine control. In the interest of consumers, deliveries of poultry products have been restricted until further notice. Cleaning operations will restore the situation to normal and eliminate any sources of contamination. These actions will cause temporary disruptions to supply in the Baltics. It is difficult to estimate how long these disruptions will last. The cleaning operations will add to costs and have a negative impact on Tallegg's performance. 5 August 2005 Interim report for 1 January to 30 June Group revenue rose to EUR million, up more than EUR 95 million on the figure a year earlier. Group operating profit was EUR 12.1 million (EUR 12.7m) and the pretax profit was EUR 10.5 million (EUR 11.7m). Earnings per share were EUR (EUR 0.36). 31 October 2005 Interim report for January to September Turnover for the first nine months of the year rose by 30% to EUR million. The operating profit was EUR 21.7 million and the pretax profit was EUR 18.7 million (EUR 20.8m). The figures include our business in Finland, the Baltics and Poland. Earnings per share were EUR (EUR 0.59). 9 November 2005 Management organisation to be overhauled HK Ruokatalo is to overhaul its Finnish management organisation in a bid to improve accountability and increase market focus. Antti Lauslahti was appointed new executive vice president, Commercial Operations. He joins HK from LU Suomi Oy, which is part of the Danone Group. In the same context, the following changes will be made to the management organisation. Reijo Kiskola will become executive vice president of the poultry business, Esa Mäki executive vice president of the meat business and Pekka Kaikkonen will assume accountability for the processed meat and convenience food business. Raimo Laine, current executive vice president of the Raw Material Group, will remain in his present post until his retirement on 30 June On 1 January 2006, logistics and the distribution terminals will be integrated to form part of a new commercial operations group, for which executive vice president Jari Leija remains responsible. 27 December 2005 Change in company ownership Disclosure under Chapter 2, Section 9 of the Finnish Securities Markets Act. Osuuspankkikeskus Osk announced that its ownership in HK Ruokatalo Group Oyj had risen to 5.17% of the share capital and 1.3% of the votes. This includes not only the holdings of Osuuspankkikeskus, but also those of its subsidiaries and the mutual funds managed by OP and Pohjola Treasury companies.

75 ADDRESSES HK Ruokatalo Group Oyj, Communications/ Printed by Painoprisma Oy HK RUOKATALO GROUP OYJ (Head office, group management and administration) PO Box 50 (Kaivokatu 18) FI Turku, Finland (Group management and administration) PO Box 49, FI Vantaa, Finland tel: fax: FINLAND HK RUOKATALO OY tel: Turku (Processed meat and convenience foods business, administration, exports) PO Box 50 (Kaivokatu 18) FI Turku, Finland fax: Vantaa (Processed meat and convenience foods business, sales, marketing, product development, distribution centre, logistics) PO Box 49 (Väinö Tannerin tie 1) FI Vantaa, Finland fax: Forssa (Meat business) Teollisuuskatu 17 FI Forssa, Finland fax: Eura (Poultry business: production, procurement, marketing, administration) Kariniementie 2 FI Eura, Finland fax: Tampere (Processing of fresh meat, distribution centre) Kolismaankatu 1 FI Tampere, Finland fax: Mellilä (Meat business) Ysitie 387 A FI Mellilä, Finland fax: Outokumpu (Meat business) Kuvernöörinkatu 27 FI Outokumpu, Finland fax: LSO FOODS OY (Procurement and information) Turuntie 4 FI Forssa, Finland tel: fax: [email protected] ESTONIA AS RAKVERE LIHAKOMBINAAT (Production facilities, sales and marketing in the Baltics) Roodevälja küla Sõmeru vald EE Lääne-Virumaa, Estonia tel: fax: [email protected], [email protected] AS TALLEGG (Production facilities, sales and marketing in the Baltics) Saha tee 18, Loo Harju mk 74201, Estonia tel: fax: [email protected] AS EKSEKO (Production of pigs) Mäetküla Viiratsi sjk EE Viljandi maakond, Estonia tel: fax: LATVIA RIGAS MIESNIEKS A/S (Production facilities, sales and marketing in Latvia) Atlasa iela 7 LV-1026 Riga, Latvia tel: fax: [email protected] LITHUANIA UAB KLAIPEDOS MAISTO MESOS PRODUKTAI (Sales and marketing in Lithuania) V.A.Graiciuno g. 22 LT Vilnius, Lithuania tel: fax: [email protected] POLAND SOKOLÓW S.A. - Headquarters Aleja 550-lecia Sokolów Podlaski, Poland tel: ax: SOKOLÓW S.A. - Head Office in Warsaw 22 Sielecka Str Warsaw, Poland tel: fax: [email protected] Säkylä (Poultry business: turkey production, cooked poultry products) Säkyläntie 120 FI Säkylä, Finland fax: Banks and stockbrokers in Finland analysing HK Ruokatalo as an investment HK Ruokatalo Group Oyj is not liable for any evaluations presented in the analyses. Carnegie Investment Bank AB, Finland Branch tel: [email protected] eq Pankki Ltd Kalle Karppinen tel: firstname. [email protected] Evli Pankki Oyj Kirsti Iivonen tel: [email protected] FIM Securities Ltd Linda Blom tel: [email protected] Kaupthing Bank Oyj Jutta Rahikainen tel: [email protected] Mandatum Stockbrokers Ltd Noora Alestalo tel: [email protected] Opstock Ltd Mikael Doepel tel: [email protected] SEB Enskilda Kari Paajanen tel: [email protected]

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