1 (9) 15.2.2008 Itella Corporation Board of Directors Report for 2007 Business environment Economic conditions remained buoyant in Itella Group s markets, contributing favourably to demand for the Group s services. Radical changes in the postal sector s business environment and business models are continuing, with electronic communications creating adjustment pressures within print communications and letter services. Meanwhile, operations are being expanded into marketing communications, information logistics and material logistics. For many companies with a background in postal services, logistics has become a new cornerstone and their major growth area. Home markets are no longer national, but pan European or global. The EU postal market is undergoing deregulation. While the entry into force of the Postal Services Directive has been postponed for two years, under the new Directive, approved in January 2008, all EU countries must open up their postal services to competition by 2011, unless they have already done so, like Finland. Nevertheless, eleven member states have been granted an additional two year transition period. The impact of the Directive in Finland will depend on the national legislation passed regarding its implementation. Market liberalisation will open up business value chains to new players. Due to this, the market will see greater service offerings, fiercer competition and stronger price pressures. Net sales and profit performance Itella Group s consolidated net sales rose by 8.9% in 2007, to 1,688.3 million ( 1,550.6 million in 2006), acquisitions accounting for 3.4 percentage units of this growth. Finland represented 5.6% and other countries 20% of Group growth. Of consolidated net sales, 25% (23%) were generated outside Finland. Net sales increased in all of the three business groups. Consolidated operating profit grew by 14.4% to 101.8 million ( 89.0 million), making up 6% (5.7%) of consolidated net sales. All business groups showed a profit. Operating profit improved in Itella Mail Communication and Itella information, but declined in Itella Logistics. At the beginning of October, a new two year collective agreement came into force in Finland, bringing pay rises that increased costs for the last quarter by approximately 16 million. The profit for the period includes a total of 7.0 million in write downs on information systems, applications and fittings, as well as 2.9 million in provisions for restructurings, among other things. The expense provision for the employees profitsharing scheme totalled 6.0 million ( 4.2 million). Itella Oyj Kotipaikka: Helsinki Y tunnus 1531864 4, ALV rek.
2 Consolidated profit after financial items amounted to 109.5 million ( 94.4 million). Income tax totalled 31.0 million ( 26.7 million) and consolidated net profit 78.5 million ( 67.7 million). Return on equity stood at 11.1% (10.1%). Itella s business groups Itella Mail Communication, Itella Information and Itella Logistics form the primary segment reporting format under IFRS. Costs resulting from Group management and centralised support functions, not allocated to these segments, are presented under Other operations. Certain clarifications made in the Group s organisation on 1 January 2007 affected the segmentspecific figures. In addition, the principles governing the allocation of centralised support function costs to business groups have been specified. The segment specific 2006 comparatives therefore differ from the financial data published a year earlier. Key figures of Itella Group 2007 2006 2005 Net sales, MEUR 1,688.3 1,550.6 1,348.2 Operating profit (EBIT), MEUR 101.8 89.0 97.8 EBIT margin, % 6.0 5.7 7.3 Comparable operating profit, MEUR 101.8 90.9 86.2 Profit before tax, MEUR 109.5 94.4 103.7 Return on equity, % 11.1 10.1 10.0 Return on investment, % 15.6 14.1 15.4 Equity ratio,% 65.9 65.1 63.5 Gearing, % 36.4 32.1 34.3 Personnel in average 25,623 25,294 24,624 Capital expenditure, MEUR 94.2 69.5 143.0 Dividends, MEUR 39.0 *) 27.0 43.0 *) Board of Directors' proposal Itella Mail Communication Itella Mail Communication improved its net sales by 2.8% to 893.8 million ( 869.7 million). This growth was organic and was generated in all service areas. Letter mail volumes rose slightly from the previous year, with the 1 st class letter volume growing by about 2% and the 2 nd class letter volume slightly declining. Addressed direct mail decreased by 1%, whereas unaddressed direct mail deliveries were up 14% on the year before. Due to particularly aggressive competition in the media market, the average prices of unaddressed deliveries fell year on year. Magazine delivery volumes increased by 2%. Delivery volumes of subscription newspapers remained stable, corresponding to general circulation trends. Newspapers account for around 8% of the Itella Group s total net sales. The volume of local freesheets delivered by Itella decreased from the previous year.
3 Itella Mail Communication s operating profit came to 88.9 million ( 73.6 million), accounting for 9.9% (8.5%) of net sales. This improvement was the result of high demand for all services and more efficient use of the business group's own delivery network. The office services business of the Inhouse unit was sold to ISS Palvelut Oy on 1 September 2007. This business annual net sales amounted to approximately 10 million. Some 300 employees transferred to ISS Palvelut as a result of the deal. In 2007, Itella Mail Communication launched a four year project to develop cutting edge mail sorting and delivery. To this effect, about 150 million will be invested in equipment, systems and buildings throughout Finland during the years 2007 2009. Itella Information Itella Information reported net sales of 201.1 million ( 171.3 million), up 17.4%, acquisitions representing 6.4 percentage units of this growth. Net sales showed an improvement in all service areas and countries, with the exception of Germany. The business group s operating profit amounted to 5.4 million (a loss of 5.3 million), accounting for 2.7% ( 3.1%) of net sales, due to positive developments in document management and digital services, as well as a decrease in corporate office costs. In Germany and Sweden, profit was mainly burdened by price competition and lower printing service volumes as well as investments in the launch of electronic services. Itella Logistics Itella Logistics net sales soared to 619.8 million ( 530.0 million), up 16.9%, acquisitions accounting for 7.9 percentage units of this growth. The Finnish SHW Logistiikka Oy was included in the accounts as of 1 June 2007 and the Swedish PS Logistics AB as of 1 August 2007. Of the previous year s acquisitions, Itella Logistics AB (former Roadlink AB) was included in the accounts as of 1 March 2006 and Itella Logistics AS (former Universal Spedisjon AS) as of 1 September 2006. Demand for all logistics services continued to be brisk. In Finland, Express and parcel services in particular experienced a strong upswing. Itella Logistics operating profit came to 22.2 million ( 36.7 million), accounting for 3.6% (6.9%) of net sales. This performance was undermined by increased production costs which are difficult to manage during a period of strong growth, intense competition in freight and forwarding, and the cost of launching operations in Russia.
4 Key Figures of Business Groups, EUR million 2007 2006 Change Itella Mail Communication Net sales, MEUR 893.8 869.7 2.8% Operating profit (EBIT), MEUR 88.9 73.6 20.8% EBIT margin,% 9.9% 8.5% Itella Information Net sales, MEUR 201.1 171.3 17.4% Operating profit (EBIT), MEUR 5.4 5.3.. EBIT margin,% 2.7% 3.1% Itella Logistics Net sales, MEUR 619.8 530.0 16.9% Operating profit (EBIT), MEUR 22.2 36.7 39.5% EBIT margin,% 3.6% 6.9% Other activities Net sales, MEUR 16.8 21.5 21.9% Operating profit (EBIT), MEUR 14.7 16.0.. EBIT margin,% 87.5% 74.4% Intra Group sales 43.2 41.9.. Itella Group Net sales, MEUR 1,688,3 1,550.6 8.9% Operating profit (EBIT), MEUR 101.8 89.0 14.4% EBIT margin,% 6.0% 5.7% Business risks Risk management policies and practices were specified further in 2007, in order to enable their integration with the Group s management and development processes. The position of Chief Risk Officer was created, in addition to designating risk management coordination and support persons for all business groups. Business environment risks are associated, for example, with changes in communication technology. Major near term uncertainties relate to the shift from conventional towards electronic communications, which will reduce letter mail, perhaps at a quickening pace. Itella is preparing for this change by continuously enhancing the productivity of its delivery network and through the timely allocation of resources in accordance with volumes. The entry into force in 2011 of the EU Postal Directive may result in changes in industry regulations, the industry structure and the competitive situation, which will also be reflected in Itella s operations. Key risks for Itella include risks associated with acquisitions, since the company is planning to continue growing through acquisitions. These risks relate to the identification of companies that represent a good fit with Itella s strategy; the technical arrangements, purchase prices and terms of deals; and the integration of the companies into the Group. Itella is continuously developing its
5 acquisition and integration skills and the related processes, both at Group level and within its business groups. Significant risks are associated with human resources and competencies. Itella is simultaneously facing an urgent need for streamlining, and labour shortages in physical jobs and certain areas of special knowledge. Major uncertainties which may affect profit performance in the next few years relate to how well Itella can adjust its labour costs to changes in letter mail volumes. Preventing occupational accidents, disability cases and sick leave are among the risk management tools associated with occupational safety. Itella also places an emphasis on preventive occupational healthcare services. Major risks affecting profit performance include an increase in significant cost items, such as fuel, energy and labour. Information system and technology risks are associated, for instance, with system reliability, availability, information security and the accessibility of data. Note 30 to the Consolidated Financial Statements provides a detailed description of financial risks and their management. Risks associated with operational control and decision making information include operational challenges in pricing, contract management and performance measurement managed by means of process management and systematic quality management work. The Group aims to take out insurance against all risks that it deems financially or otherwise reasonable with respect to risk management. Insurance covering personnel, business continuity, assets and liabilities is managed by the Group on a centralised basis. Liability risks include risks caused by operations and products, as well as corporate management liabilities. In dimensioning the related excesses, the Group takes account of its risk tolerance. Changes in corporate structure Itella Information acquired the Swedish Infologistics AB, which was included in the consolidated accounts as of 1 January 2007. The impact on net sales was approximately 10 million and 110 employees transferred to Itella. Itella Logistics acquired SHW Logistiikka Oy, which was included in the consolidated accounts as of 1 June 2007. The company s net sales for the previous year totalled 8 million, and it employed some 80 staff. In Sweden, the business group acquired PS Logistics AB, which was included in the consolidated accounts as of 1 August 2007. Its net sales came to approximately 9 million, and it had around 20 employees. On 1 September 2007, Itella sold the office services of the Inhouse unit, with annual net sales of around 10 million and a staff of some 300 people.
6 Capital expenditure Itella Group s capital expenditure totalled 71.9 million ( 42.2 million), the most significant investments being allocated to machines, equipment and buildings. In 2007 Itella started a three year investment programme related to mail sorting and delivery, which is one of the company s most extensive investments for decades. Acquisitions amounted to 22.3 million ( 27.3 million). Of consolidated capital expenditure, 41% was targeted at international operations. Research and development Itella Group s research and development expenditure for 2007 totalled 30.5 million, or 1.9% of the Group s total operating expenses. The 2006 and 2005 comparatives were 32.8 million (2.2%) and 23.9 million (1.8%), respectively. Itella s research activities focus on annual analyses of the execution of the Group strategy and its success vis à vis the competition, and customer satisfaction and employee retention. For domestic letters, service level measurement is based on the requirements set out in the Postal Services Act, while the measurement of international letter mail is based on international agreements, forming the basis for interconnection charges. New research themes for 2007 included awareness of the Itella brand, consumer needs, media usage among young people and, in particular, predicting the future of print media. In 2007, the SCM programme, related to supply chain management, was completed in Itella Logistics. The outcomes of the programme included plans for simplifying the product range of the parcel business, streamlining the production process and improving the logistics tracking information system. Itella Mail Communication launched an investment project for cutting edge sorting technology and information systems, to be completed by 2011. The aim is to increase production flexibility and process efficiency, as well as enabling the provision of new functionality to customers. The first phase of the programme for the management of communications was implemented at Itella Mail Communication, with the expansion of the address information maintenance service to cover other consumer contact information. Currently, the programme is focusing on the development of preference management with regard to various messaging methods and channels. Significant development investments were also made within the NetPosti Services business unit, which is developing solutions for future electronic transactions and information flows. In 2007, attention was devoted to mobile and tracking technologies of importance to delivery and transport operations. Research into RFID technology, positioning data and positioning as well as the search for application areas continued.
7 Environmental impacts Most of Itella s environmental impacts are related to greenhouse gas emissions. In the spring of 2007, Itella pledged to cut its carbon dioxide emissions by 10% by 2012 (compared to 2007). To achieve this target, Itella aims to reduce its vehicles' fuel consumption through transport planning, driver training and alternative fuels, as well as reducing energy consumption in its buildings. Internal environmental performance can also be improved by making recycling and waste management more efficient and through purchase management. Better external environmental performances can be achieved by providing customers with logistics services for the reuse and recycling of products and their packaging, and by creating information logistics services enabling the transmission of data in a non physical format. For more detailed information on environmental matters, see page 34 of the Annual Report. The Group has not published an environmental report verified by an independent, external party. Financial position Consolidated net cash flow from operating activities totalled 153.3 million ( 97.5 million) before investment activities. The sale of assets and operations to 16.2 million ( 6.7 million). The Group had no net interest bearing liabilities. On 31 December 2007, interest bearing liabilities were 31.2 million 35.3 million) and cash and cash equivalents 297.6 million ( 253.7 million). On the same date, the equity ratio stood at 65.9% (65.1%) and gearing was 36.4% ( 32.1%). Share capital and shareholding Itella Corporation is wholly owned by the Finnish State, its share capital consisting of 40,000,000 shares of equal per share value. The company holds no treasury shares, nor has it subordinated loans. It has neither granted loans to related parties nor given commitments on their behalf. Furthermore, the company has not issued shares, stock options or other rights entitling to holdings in company shares. Its Board of Directors has no authorisation to issue shares or stock options or other special rights entitling to holdings in company shares. Administration and auditors On 26 March 2007, Itella Corporation s Annual General Meeting elected the following members to the Board of Directors: Eero Kasanen (Chairman), Rector; Mikko Kosonen (Vice Chairman), Senior Vice President; Kalevi Alestalo, Senior Financial Counsellor; Hele Hannele Aminoff, General Manager; Erkki Helaniemi, Partner; Soili Suonoja, kauppaneuvos (Finnish honorary title); and Maarit Toivanen Koivisto, Chair of Board of Directors. The AGM re elected Antero Palmolahti, National Chief Shop Steward, and Mirja Sandberg, National Chief Shop Steward, employee representatives to the Board. KPMG Oy Ab (Authorised Public Accountants) was re elected as Itella Corporation s auditor. Jukka Alho, M.Sc. (Tech.), acted as Itella Corporation s President and CEO in 2007.
8 Antero Kekkonen and Leena Harkimo were re elected Supervisory Board Chairman and Vice Chairman, respectively. Human resources At the year end 2007, Itella Group employed a staff of 25,211 (24,806), the average number being 25,623 (25,294). This corresponds to 21,512 man years if part time employees are converted to fulltime equivalents. The parent company had 21,585 (21,609) employees at the year end, the average number being 21,597 (21,938). The number of employees working outside Finland increased to 1,918 (1,550) due to acquisitions. Group Personnel 2007 2006 2005 Wages and salaries, EUR million 647.6 604.5 554.0 Personnel 31.12. 25,211 24,806 24,408 Personnel in avarage 25,623 25,294 24,624 The profit for the period included 6.0 million ( 4.2 million) in expense provision for the employee profit sharing scheme. For more detailed information on human resources, see page 29 of the Annual Report. Events after the balance sheet date Itella Information has made an agreement on the acquisition of the Polish Business Point S.A.'s operations. The deal is conditional on the approval of the Polish competition authorities. In 2006, the company s net sales amounted to approximately 15 million. It employs some 100 people. Itella Logistics is to acquire the Finnish Kauko Group Oy, a provider of international freight services with a staff of 110 and reported net sales of around 56 million in 2007. The deal will be confirmed upon its approval by the competition authorities. Outlook for 2008 Conditions should continue to favour growing demand for Itella's services. However, the chances of a change in the economic conditions are greater than in the previous year, which may be reflected in demand for logistics and marketing communications in particular. The accelerating substitution of paper based communication with electronic means will reduce letter mail volumes, but also offer new growth opportunities in the information logistics market. Increased outsourcing, the globalisation of operations and the diversification of delivery channels will create opportunities for service logistics. Itella Group expects its consolidated net sales to continue rising.
9 In Finland, the new two year collective agreement, concluded in the autumn of 2007, will result in a significant cost increase. Improving productivity and adjusting production costs in line with volume fluctuations are the prerequisites for maintaining profitability. Itella Logistics and Itella Information will continue investments related to strengthening the operational and information systems required by international operations. In Finland, the upgrading of the production structure will lead to an increase in capital expenditure. Board of Directors proposal to the AGM According to the financial statements for 2007, the parent company s distributable profits totalled 679,118,362.20, of which net profit for 2007 accounted for 67,989,877.00. There have been no material changes in the Group s financial standing since the end of the financial year, nor does the solvency test, as referred to in Chapter 13, section 2 of the Companies Act, affect the distributable profits. The Board of Directors proposes to the Annual General Meeting that the distributable profits be allocated as follows: Payment of a per share dividend of 0.975, or a total of 39,000,000. Retention of 28,989,877.00 under equity.