Finland's Vapo Group posts €11.6M operating loss in first nine months, down from profit of €27.3M a year earlier, blames €27.7M wood pellet writedown, reduced sawmill profitability

JYVASKYLA, Finland , October 28, 2011 (press release) – The turnover of the Vapo Group in the January-September 2011 period was EUR 530.7 million (EUR 512.3 million in the same period in 2010). The Group posted an operating loss of EUR 11.6 million, -2% of turnover (operating profit of EUR 27.3 million, 5%). The key reasons for the sharp deterioration in operating earnings were weaker operational profitability in the pellet business, a writedown of EUR 27.7 million in the pellet business in the third quarter and ongoing reduced profitability in the sawmill business.

The equity ratio on 30 September 2011 was 35.3% (39.0 %). Cash flow from operating activities before investments in the January-June period was EUR 100.9 million (EUR 55.2 million). Overall investments in the year to date totalled EUR 67.4 million (EUR 56.0 million) and cash flow after investments was EUR 42.1 million (EUR 4.3 million). The positive development in cash flow was due in particular to a reduction in working capital.

The following business areas posted turnover higher than the comparison period: Biofuels (5.2% higher), Bioheat (15.9% higher) and Environment (7.2% higher). Turnover in wood products, i.e. the sawmill industry, was 3.9% lower than the comparison period.

The Vapo Biofuels business area is responsible for the Group’s energy generation and environmental peat, wood-based energy and energy crops and pellet production. The turnover of the business area amounted to EUR 291.0 million (EUR 276.5 million) with an operating loss of EUR 4.5 million (operating profit of EUR 27.9 million). Operating profit before the writedown for the pellet business amounted to EUR 23.2 million. Operating profit in energy peat was EUR 31.8 million (EUR 28.7 million). The pellet business posted an operating loss of EUR 37.1 million, with an operational loss before the writedown of EUR 9.4 million (EUR -1.1 million). The cold winter clearly increased energy peat usage and the electricity market situation meant that more electricity was generated in condensing power plants from fuel peat. Below-target peat production in 2011, a drop in the exchange price of electricity and the warm start to the autumn reduced peat deliveries in the third quarter. The wood energy and energy crops business was still loss-making, but in environmental peat turnover and profitability developed positively.

The Vapo Bioheat business area is responsible for sales to customers of the Group’s energy products - heat, steam and electricity. The turnover of the business area was EUR 78.9 million (EUR 68.1 million) and operating profit EUR 5.1 million (EUR 3.3 million). The growth in turnover was attributable to high market prices for electricity and electricity products in the first quarter and the sales prices for heat.

The Vapo Timber business area is responsible for production and sales of the Group’s sawn timber. The turnover of the business area was EUR 97.2 million (EUR 101.1 million) with an operating loss of EUR 4.2 million (operating profit of EUR 4.8 million). There was substantial oversupply in sawn timber markets, leading to lower sales prices and higher stock levels. Vapo Timber increased production by 4% in the first nine months, but sales prices were 5% lower than the comparison period.

The Vapo Environment business area is responsible for horticultural and garden products for professional growers and consumers, the environmental management business and landscaping. The turnover of the business area was EUR 83.1 million (EUR 77.5 million) and operating profit EUR 4.8 million (EUR 6.0 million). Demand developed positively, especially in the professional growing business.

Profitability in the business area was constrained by additional expenses due to the fire at Eurajoki, Finland, in April 2010 and fire damage at the Niibi unit in Estonia in May 2011.

The Group employed an average of 1287 persons in the January-June period (1278).

According to CEO Tomi Yli-Kyyny, the third quarter was weaker than forecast for Vapo. The measures taken in the third quarter to restore the pellet business to health, where earnings have slumped, will improve profitability in the future, but the poor peat production season and the difficulties in the sawmill industry will mean that full-year operating earnings for 2011 will be loss-making. Yli-Kyyny points out that pellets are an environmentally friendly and local fuel and thus an excellent energy source. Vapo will continue to be active in sales and production of pellets and will guarantee the pellet requirements of all current and new customers, now and in the future.

Our biggest long-term concern at the moment is procuring permits for new production areas, which are all-important for peat production. This year alone, over 2500 hectares of old production areas will be taken out of use, and less than 400 hectares of new peatlands have been obtained in their place. If this trend continues, in Yli-Kyyny’s opinion it could even jeopardize Finland’s objective of deriving 38% of its energy from renewable sources by 2020. Declining peat availability will inevitably mean that wood energy usage will not increase as planned, since most power plants are designed for combined combustion of wood and peat. In the worst case, a reduction in peat production areas may lead to increased usage of imported fossil fuels.

The low equity ratio (35%) will limit investments, but Yli-Kyyny says that environmental investments will not be compromised. – To give an example, the company is accelerating the timetable by which enhanced water treatment is introduced at all production areas.


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