KUOPIO, Finland, March 26, 2014 (Press Release) -Powerflute Oyj ("Powerflute" or the "Group"), the packing and paper group, today announces its preliminary results for the year ended 31 December 2013. Powerflute is quoted on the AIM market of the London Stock Exchange (Ticker: POWR).
The Group has made significant progress over the last twelve months, delivering solid growth in revenues and a significant increase in operating margins and profitability. We successfully completed a number of challenging investment projects and the returns from these are evident in our performance, which represents a marked improvement on the prior year.
- Revenues increased 14% to €129.4 million (2012: €113.1 million)
- EBITDA from operating activities increased 41% to €17.4 million (2012: €12.3 million)
- Operating profit improved 58% to €10.9 million (2012: €6.9 million)
- Profit before tax of €10.0 million (2012: €6.3 million)
- EPS of 2.8 cents per share (2012: 1.9 cents)
- Strong balance sheet with net cash of €5.1 million
- 4% increase in dividend to 1.35 cents per share (2012: 1.30 cents)
Commenting on the results, Dermot Smurfit, Chairman of Powerflute said:
"I am delighted to report on a year of positive change and achievement during which we have grown volumes, revenues and operating profits considerably. In addition, we have successfully completed a number of major investment projects that will further strengthen the market position of our packaging papers business. We are beginning to realise the benefits of a more focused marketing and product development strategy and achieve returns on the investment projects completed in recent years. We are confident that there is scope for further improvement in both operational and financial performance of our existing businesses.
Market conditions have continued to be broadly favourable and the Group has made a positive start to 2014, with volumes and prices both well ahead of the same period of the prior year. The Group has a solid foundation from which to pursue development of its existing businesses and to consider further strategic investments. We remain confident in our ability to create value for our shareholders."
Revenues increased by 14% to €129.4 million (2012: €113.1 million) due to a combination of higher volumes and better pricing. EBITDA from operating activities increased by 41% to €17.4 million (2012: €12.3 million), operating profit improved to €10.9 million (2012: €6.9 million) and profit before tax was €10.0 million (2012: €6.3 million). Basic earnings per share were 2.8 cents (2012: 1.9 cents) and the Board intends to recommend that the dividend is increased by 4% to 1.35 cents per share for the year ended 31 December 2013 (2012: 1.30 cents per share).
In marked contrast to the difficulties encountered during the final quarter of 2012, we achieved a strong performance in production and were able to capitalise on healthy demand with deliveries up by 10% on the prior year. Further progress was made with efforts to increase the diversity of both customer and geographical mix and this, together with broadly favourable market conditions, contributed to the 4% improvement in average selling prices. During the year, we also successfully completed a number of major projects in the pulp mill aimed at further increasing capacity and quality.
Despite an activity related increase in net working capital during the period and relatively high levels of capital expenditure, the Group continues to be in a strong financial position with net cash of €5.1 million (2012: €10.9 million) consisting of cash and cash equivalents of €28.9 million (2012: €35.1 million) and borrowings of €23.8 million (2012: €24.2 million).
Our vision is to be one of the most innovative and successful organisations in our sector, injecting entrepreneurial spirit into the businesses in which we invest, delivering service and value to our customers, attracting and developing the best people and achieving superior returns for our shareholders and other stakeholders.
The industry in which we operate is constantly evolving due to growing demand for environmentally sustainable packaging solutions and increasing globalisation of the food supply chain. Our customers operate in a challenging competitive environment and demand superior service, cutting edge technology and continuous improvement in the balance between product performance and cost. We are responding to these challenges with a multi-year programme of targeted capital investment and research and development which has already been underway for several years. We are now in a much stronger position, better able to meet the demands of our customers and well-positioned to respond to the challenges and opportunities of the future.
Our business model for the long-term development of the Group continues to be based upon the acquisition of under-performing or non-core businesses and their development into successful and profitable organisations with diversified and resilient revenue streams, well invested manufacturing operations and decentralised and empowered organisations.
Corporate responsibility underpins our business, driving decision-making processes and enabling us to achieve our strategic goals in a responsible and sustainable way. The Board is fully committed to the integration of corporate social responsibility into the Group's operating policies and procedures and to encouraging a greater focus on social and environmental issues to benefit the communities in which we operate or in which our products are used.
We remain committed to a policy of maintaining or increasing dividends and this year the Board will propose the payment of an increased dividend of 1.35 cents per share for the year ended 31 December 2013 at the Annual General Meeting of Shareholders to be held in Kuopio, Finland on 29 April 2014 (2012: 1.30 cents per share). The ex-dividend date for the proposed dividend would be Wednesday, 30 April 2014, the record date would be Monday, 5 May 2014 and the payment would be made on or about Friday, 23 May 2014.
Leadership and people
The Board is supported by an experienced and committed executive management team which is successfully delivering the Group's strategy and they in turn are supported by strong leadership teams and a committed workforce in each of our businesses. On behalf of the Board, I would like to take this opportunity to sincerely thank them for their continuing dedication, professionalism and commitment, and to add my personal thanks for what we have achieved together.
Summary and outlook
Powerflute has enjoyed a successful year, delivering solid growth in revenues and a significant increase in operating margins and profitability. Further progress was made in diversifying the customer mix and improving product performance and quality and the investments made during 2013 are expected to result in further increases in capacity into 2014 and beyond. Market conditions have continued to be broadly favourable and the Group has made a positive start to the year, with volumes and prices both well ahead of the same period of the prior year. The Group has a solid foundation from which to pursue development of its existing businesses and to consider further strategic investments. We remain confident in our ability to create value for our shareholders.
CHIEF EXECUTIVE'S STATEMENT
This has been a year of significant progress during which we have capitalised on the hard work and investments made in prior years and continued to push forward with an ambitious multi-year programme of product and operational development which should deliver further improvement in the future.
For much of the year, we enjoyed relatively favourable market conditions. Demand remained strong in all major markets and as a result of increased diversity in the sales mix the usual seasonal fluctuations were less evident than in prior years, resulting in a much greater degree of price stability. Against this background of strong demand and stable pricing, we were able to make further progress with marketing and business development programmes which place greater emphasis on value-based selling to reinforce our message that Nordic semi-chemical fluting is the best solution for long-distance transportation of fruit and vegetables in high humidity conditions, with a view to further improving the profitability and resilience of our business.
Research and development
We continued to invest in product development activities and this resulted in further performance improvements in a number of key areas which are of significance to our customers. We continue to target our efforts towards improving the balance between price and performance and further enhancing the superior strength, consistency and moisture resistant characteristics of our product.
For several years now, we have been engaged in a structured programme of investment, process modifications and development projects intended to improve the performance and quality of our products, lower production costs, increase capacity and reduce the environmental impact of our business.
During 2012 we made extensive modifications to the vacuum systems and winder station of the paper machine to reduce power consumption and increase production capacity. After some initial difficulties, both investments are now delivering returns ahead of our expectations. Modifications to the waste water treatment plant made ahead of the traditionally challenging winter period proved even more successful than anticipated and allowed production to continue at elevated levels during the first quarter of 2013, with waste discharges considerably below prior levels.
In May, we completed another major upgrade in the pulp mill modifying one of the digester lines to improve pulp quality and increase capacity, while during the September maintenance shutdown we completed the installation of a new drum washer which has further improved pulp quality and reduced our impact on the environment. Both of these complex projects were completed on time and in budget and each has delivered a measurable improvement in quality and an increase in production capacity.
During 2014, we will begin the next phase of our investment programme with a series of projects in the refining stage of the pulp mill and a number of important upgrades and modifications in the power plant.
Our management and workforce are critical to the continuing success of our business and throughout the year demonstrated a high degree of professionalism and commitment. I would like to take this opportunity to sincerely thank them for their efforts.
Summary and outlook
The Group has made significant progress over the last twelve months. We successfully completed a number of challenging projects and the returns from these are evident in our performance, which represents a marked improvement on the prior year. We have continued to strengthen our position as a leading producer of semi-chemical fluting and are confident that there is scope for further improvement. The Group has made a positive start to 2014, with volumes and prices well ahead of the same period of the prior year, and has a solid foundation from which to pursue development of its existing businesses and consider further strategic investments.
Revenue from continuing operations increased by 14% to €129.4 million (2012: €113.1 million) due to a combination of higher volumes and an improvement in average selling prices. EBITDA from operating activities increased by 41% to €17.4 million (2012: €12.3 million) and operating profit from continuing operations increased by 58% to €10.9 million (2012: €6.9 million), but is stated after charging advisory expenses of €1.2 million (2012: €0.6 million) relating to the investigation of potential acquisitions.
Packaging Papers enjoyed a very successful year with substantial increases in production volumes, deliveries, revenues and profits compared with the same period of the prior year. A number of technically demanding investment projects were successfully completed and the benefits of these are already being realised.
Market conditions remained broadly favourable for most of the year and demand was strong in all major markets. There was no real evidence of seasonal weakness during the traditionally slower winter and mid-summer months and this resulted in positive pricing momentum for much of the year. Average selling prices increased by 4% despite a 3% weakening of the US Dollar against the Euro, as prices for semi-chemical fluting were supported by strong underlying demand, continuing efforts of producers of RCP-based fluting to achieve further price recovery and elevated prices of other grades traditionally used as benchmarks.
We continued to focus our efforts on value-based selling and diversifying the sales mix away from traditionally more competitive markets, where margins are less attractive, and into developing economies where there are opportunities to grow substantial volumes at attractive prices. Despite this, we were still able to increase deliveries to most major customers within Europe, increase our share of the important Southern European fruit markets and further grow our share of sales in the Nordic region.
We continue to work hard to improve the technical performance and characteristics of our product and feedback from customers suggests that the performance advantage of Nordic semi-chemical fluting from Powerflute over competing RCP-based products has been increased. Recent investments should result in a further improvement in the effectiveness of pulp washing leading to the potential for further enhancements in product quality and consistency.
Production performed well throughout the year and output increased to 259,000 tonnes (2013: 234,000 tonnes). We were able to capitalise on previous investments and the two major projects planned for the year, major upgrades to the pulp digesters and installation of a new drum washer, were both completed on time and in line with budget. The annual maintenance stop in September was well managed and in marked contrast to the prior year, production restarted early and quickly stabilised at normal levels. There has been a significant improvement in quality, productivity and consistency compared with prior years and we look forward to further improvement in 2014.
Harvestia and wood supply
Harvestia faced a number of operational challenges during the year, but there were some notable achievements and significant progress was made to improve the focus of the business and strengthen its management and organisation. The year was challenging from a market perspective due to a tightening of the balance between wood supply and demand as economic recovery continued. Saw mills enjoyed a much stronger year due to healthy export demand and as pulp and paper mills returned to full production, and in some cases migrated from graphic to packaging grades, domestic demand for wood outstripped supply at various times during the year leading to significant cost pressure.
Unseasonal weather conditions caused difficulties with wood supply towards the end of 2012 and inventories at the mill had reduced to only two or three days of production by the end of the year. The low level of wood inventories created challenges throughout much of the first quarter and it was a considerable achievement to rebuild reserves and secure wood deliveries at the increased levels required by the higher production activity, particularly at a time when domestic birch was in relatively short supply. In order to avoid a recurrence of the same problem during the recent winter months, a decision was taken to increase wood inventories at the mill during the final quarter and to secure additional volumes in the forests by increasing advance payments. While this has the advantage of providing certainty of supply, it has adversely impacted on working capital.
Deliveries to Kotkamills continue and increased compared with the prior year. The relationship is working well and Harvestia has played an important role not only in securing the availability of wood and other fibre, but also in providing a pricing benchmark for discussions with other suppliers.
Kotkamills made considerable progress with improving operating efficiencies and productivity across all three of its business lines and reported a significant increase in profitability compared with the previous year. Although the structural decline in demand for publication papers continued to weigh heavily on overall performance, we are pleased with the progress that has been made under challenging circumstances.
The saw mill experienced strong demand from both domestic and export markets and was able to achieve a significant increase in volumes. This, together with favourable pricing momentum, translated into a greatly improved financial performance.
The laminating paper and films business continued to suffer from the general weakness in European construction markets, but despite this, performance improved considerably compared with the prior year. Operating efficiencies improved following a rationalisation of the product range and changes to the management and handling of raw materials benefited both quality and productivity.
In contrast, there was a marked deterioration in the performance of the publication papers activity. Although demand for Solaris range of high-bulk papers remained reasonably healthy and good progress was made improving operating efficiencies and reducing overheads, competition from other paper grades resulted in price erosion and a reduction in profitability.
Revenue from continuing operations increased by 14% to €129.4 million (2012: €113.1 million) due to a combination of higher volumes and an improvement in average selling prices. Demand was strong and production performed well throughout the period, resulting in a 10% increase in deliveries to 256,000 tonnes (2012: 234,000 tonnes). Average selling prices improved by 4% to €505 per tonne (2012: €484 per tonne). This was despite an adverse movement of 3% in the US Dollar exchange rate which applies to the 30% of the Group's revenues which are denominated in US Dollars.
EBITDA and Operating Profit
EBITDA from operating activities increased by 41% to €17.4 million (2012: €12.3 million), principally due to the increase in deliveries. The benefit of higher average selling prices was partially offset by an increase in variable costs. In particular, delivery costs increased by 6% due to both underlying cost inflation and changes in the geographical mix of sales, while wood costs increased by 6% due principally to a tight balance between supply and demand in Finland.
Operating profit from continuing operations increased by 58% to €10.9 million (2012: €6.9 million), but is stated after charging advisory expenses of €1.2 million (2012: €0.6 million) relating to the investigation of potential acquisitions.
Finance income and expenses
Net finance expenses were €0.9 million (2012: €0.6 million), consisting of finance income of €0.3 million (2012: €0.7 million) and finance expenses of €1.2 million (2012: €1.3 million) including amortisation of costs relating to the refinancing of the Group's borrowing facilities in 2012. The reduction in finance income of €0.4 million is attributable to a combination of lower cash balances and less favourable interest rates on cash deposits.
Profit before tax from continuing operations
Profit before tax from continuing operations increased by 59% to €10.0 million (2012: €6.3 million). On an underlying basis, the profit before tax from operating activities also increased by 58% to €11.0 million (2012: €7.0 million).
The income tax charge of €2.0 million (2012: €1.7 million) represents an effective tax rate of 19.5% (2012: 26.8%) and is based upon the weighted average annual tax rate for the year applied to the underlying profit before taxation after adjusting for the impact of disallowable items of income and expenditure. The underlying rate of tax on profits before taxation in Finland during the year was 24.5% (2012: 24.5%) and the difference between this and the effective rate arises principally as a result of the reassessment of deferred tax liabilities to reflect the lower corporate income tax rates that will apply in future years.
In May 2011, the Group disposed of its interests in the Graphic Papers business for consideration of €38.5 million before disposal costs. Although the initial period during which claims could be made by the purchaser under warranties and indemnities has expired, there remains the possibility of claims under certain circumstances and accordingly a provision against future claims of €0.7 million has been retained (2012: €0.8 million).
Dispute with Finnish Tax Administration
In preparing its financial statements for the year ended 31 December 2011, the Group assumed that gains arising on the sale of shares of the Graphic Papers business and Harvestia were exempt from corporate income taxes under the participation or substantial shareholder exemptions available to industrial companies.
During the year ended 31 December 2012, the Tax Administration division of Vero, the Finnish taxation authority determined that the Group was a venture capital company and confirmed tax assessments for the year ended 31 December 2011 which included €3.6 million of taxes relating to the gains realised on the share transactions. While these taxes were paid to avoid the risk of interest and other penalties, the Group strongly disagreed with the decision of the Tax Administration and did not recognise the taxes paid in its income statement but instead recorded the amount as a recoverable non-current financial asset in its balance sheet.
During the year ended 31 December 2013, the Group filed an appeal against the tax assessments with the Assessment Adjustment Board (AAB) of Vero and in December 2013, the appeal was upheld and the original assessments overturned. In March 2014, the Group received notification that the Tax Administration has filed a further appeal with the Administrative Court in Helsinki against the decision of the AAB to overturn the original assessments.
In the event that the Group does not prevail in its appeal against the assessment of taxes on the gains, then additional taxes of €3.6 million would need to be recognised within the results of discontinued operations. There would be no impact on the net cash position of the Group, or on the results of continuing operations.
Earnings per share and dividends
Basic earnings per share were 2.8 cents (2012: 1.9 cents). Basic earnings per share from continuing operations were also 2.8 cents (2012: 1.6 cents).
The directors intend to propose an increased dividend of 1.35 cents per share for the year ended 31 December 2013 at the Annual General Meeting of Shareholders to be held in Kuopio, Finland on 29 April 2014 (2012: 1.30 cents per share). The ex-dividend date for the proposed dividend would be Wednesday, 30 April 2014, the record date would be Monday, 5 May 2014 and the payment would be made on or about Friday, 23 May 2014.
The total assets and total equity and liabilities of the Group increased by €8.2 million to €122.9 million (2012: €114.7 million), while total equity increased by €4.3 million to €63.2 million (2012: €58.9 million). The Group experienced a significant increase in both inventories and trade receivables during the year as a result of the higher level of operating activity and this was only partly offset by an increase in trade payables, resulting in an increase in net working capital and a reduction in net cash. Retained profit for the period was higher than expenditure on dividends and this was the main reason for the increase in total equity.
Capital expenditure of €7.2 million (2012: €8.3 million) continued to be higher than depreciation due principally to the level of investment in the pulp mill as part of the continuing efforts to improve product performance and quality and increase capacity. The major projects completed during the year were an extensive upgrade of one of the two digester lines and the installation of a new drum washer.
Cash flow, borrowings and liquidity risk
The net cash outflow for the period was €5.8 million (2012: €8.2 million outflow).
At the start of the year, the Group had net cash of €10.9 million, consisting of cash and short term deposits of €35.1 million, less interest-bearing loans and borrowings of €24.2 million. The principal cash flows during the year were as follows:
- €6.1 million net cash inflow from operating activities (2012: €13.3 million)
- €7.2 million capital expenditure (2012: €8.3 million)
- €3.7 million dividends (2012: €3.8 million)
- €1.1 million interest (2012: €1.2 million)
The net cash inflow from operating activities was €6.1 million (2012: €13.3 million). Although the strong operational performance resulted in EBITDA of €16.2 million (2012: €11.7 million), there was an increase in net working capital of €7.3 million (2012: €3.4 million decrease) and payment of corporate income taxes of €3.3 million (2012: €1.7 million).
The increase in net working capital was due to a combination of recovery of wood inventories from the very low level that existed at the end of 2012, an increase in advance payments to forest owners to secure the required higher levels of wood deliveries in 2014 and activity related increases in finished goods inventories and trade receivables which were only partially offset by an increase in trade payables.
The net change in interest-bearing loans and borrowings was a decrease of €0.3 million (2012: €2.3 million decrease).The Group repaid a shareholder loan of €1.0 million and made repayments under other amortising term loan arrangements of €1.5 million (2012: €1.5 million). However, these repayments were offset by an increase in borrowings under revolving credit and other short term facilities.
At 31 December 2013, the Group had a net cash surplus of €5.1 million (2012: €10.9 million) consisting of cash and cash equivalents of €28.9 million (2012: €35.1 million) and borrowings of €23.8 million (2012: €24.2 million).
Borrowings and liquidity risk
On 12 March 2013, the Group entered into a new financing arrangement for the provision of up to €20.0 million of non-amortising borrowing facilities throughout the period to 31 March 2016. The facilities were utilised to refinance existing obligations and are subject to normal banking covenants including equity ratio, ratio of net debt to EBITDA, ratio of EBITDA to interest expense and minimum liquidity.
Other interest-bearing loans and borrowings include liabilities under revolving credit and invoice finance arrangements. While advances under certain of these facilities are classified as current liabilities due to their short-term nature, the facilities themselves remain available to the Group for a period in excess of one year.
At 31 December 2013, the Group had committed borrowing facilities of €23.0 million (2012: €24.5 million). The facilities were fully utilised (2012: €23.1 million) but the Group had cash and short-term deposits of €28.9 million (2012: €35.1 million).
Foreign currency risk
The functional and reporting currency of the Group is the Euro. The Group sells and distributes its products in international markets and has transactional exposure to a number of other currencies and in particular, to the US Dollar. Approximately 30% of the Group's sales by volume and value and up to 5% of its expenditure on raw materials, consumables and other expenses are denominated in US Dollars. The relative movement in the US Dollar against the Euro during 2013 when compared to 2012 was as follows:
- Movement in average exchange rate between 2012 and 2013 - 3% adverse
- Movement in exchange rate at balance sheet date between 2012 and 2013 - 4% adverse
It is the policy of the Group to hedge a portion of its foreign currency exposures for a maximum period of up to 12 months using forward exchange contracts. Where possible the Group takes advantage of natural hedges and only considers hedging the net exposure. Decisions on the implementation of the hedging policy are made by the senior management of the Group and are discussed with and reported to the Board on a regular basis. Amendment of the hedging policy itself is a matter reserved for the Board. The Group does not designate currency derivative contracts as hedges for the purpose of hedge accounting and does not engage in currency speculation.
Risks and uncertainties
The principal risks and uncertainties facing the business and the activities of the Group and the steps that are taken to mitigate these are summarised below.
The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report, as is the financial position of the Group, its cash flows, liquidity position and borrowing facilities. In addition, note 14 of the financial statements includes further information on the Group's objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities and its exposure to credit risk and liquidity risk.
Relative to its size, the Group has considerable financial resources and long term contracts and relationships with its key customers and suppliers. As a consequence, the Directors consider that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.
After making diligent enquiries, the Directors have a reasonable expectation that that Group has adequate resources to enable it to continue its activities for the foreseeable future, being a period of at least 12 months from the date of approval of the financial statements, and accordingly, continues to adopt the going concern basis in preparing the financial statements.
PRINCIPAL RISKS AND UNCERTAINTIES
The management of the Group's businesses and the execution of its strategy are subject to a number of risks attributable to both the specific operations of the business and to the macroeconomic environment. The following section comprises a summary of what the Board considers to be the principal risks and uncertainties which could potentially impact on the Group's operating and financial performance.
SUMMARY AND OUTLOOK
The Group has made significant progress over the last twelve months, delivering solid growth in revenues and a significant increase in operating margins and profitability. We successfully completed a number of challenging investment projects and the returns from these are evident in our performance, which represents a marked improvement on the prior year. Further progress was made in diversifying the customer mix and improving product performance and quality and the investments made during 2013 are expected to result in further increases in capacity into 2014 and beyond. We have continued to strengthen our position as a leading producer of semi-chemical fluting and are confident that there is scope for further improvement.
Market conditions have continued to be broadly favourable and the Group has made a positive start to the year, with volumes and prices both well ahead of the same period of the prior year. The Group has a solid foundation from which to pursue development of its existing businesses and to consider further strategic investments. We remain confident in our ability to create value for our shareholders.