Good progress in Vapo’s strategic transformation

Vapo Group 1 May 2018–30 April 2019 Interim report

CEO Vesa Tempakka: Good progress in Vapo’s strategic transformation

 

The past financial year was a time of major changes for Vapo. Vapo Group adopted a new strategy on May 1, 2018, along with a new organisational structure based on international divisions and shared Group support functions. The growth areas defined in the strategy included growth in the global growing media market, focusing on customised fuel solutions, providing remote operation and other digital services, increasing the sale of renewable fuels in the energy business as well as developing new products and services from peat and other natural materials.

In line with the new strategy, in October the Group announced a transaction that saw Kekkilä Oy and the Netherlands-based BVB Substrates join forces to become the leading player in its field in Europe. Kekkilä-BVB Oy began its operations on 4 January 2019. The effect of the merger is already clearly evident in the higher turnover and improved operating result of the recently concluded financial year.

In December 2018, Vapo Oy made another announcement of high strategic significance by confirming that an activated carbon production facility will be built in Ilomantsi. The Group’s first activated carbon production facility is scheduled to be completed in late 2020. The value of the investment is approximately EUR 25 million and it will directly and indirectly create tens of new jobs and, even more importantly, serve as a platform for a sustainable and high added value business based on the Group’s own research and resources.

The heating season was warmer than in the previous financial year, which reduced the demand for heating and fuels. The fuel production season of summer 2018 was a good one, with Vapo’s production targets being exceeded. This was reflected in an increase in inventories, lower unit costs in production and improved margins. Due to these factors and the positive start to the programme to improve operational efficiency, Vapo Group’s result for the financial year was quite satisfactory. Turnover increased by 10 per cent and comparable operating margin by nearly 30 per cent. In spite of investments doubling from EUR 31 million to EUR 62 million, including working capital investments, the Group maintained its equity ratio at 51 per cent. Return on invested capital improved from 4.3 per cent to 5.4 per cent.

CEO Vesa Tempakka comments on the result:

It is not possible to draw direct conclusions regarding future profitability based on Vapo Group’s result for the financial year. The Grow&Care division is seeing continued growth, but it should be noted that the consolidated figures are substantially influenced by the fact that BVB is only included for the period of the spring sales season.  The most significant investments associated with the Carbons production plant project are still ahead and production will not begin nearly 1.5 years from now, and the future of the energy sector is quite difficult to predict. It is impossible to predict the combined near-future impact of the public debate regarding Finland’s carbon sinks, the rising prices of emission rights and the energy policy outlined int he new Government Programme on the price of wood fuels and the production costs of district heating.

As a company, we are in a period of major transformation and we play a role in promoting the achievement of Finland’s climate targets. We are responsible for a significant proportion of Finland’s security of supply and the reliability of deliveries for our energy customers. We operate in a growing international market on the one hand and in the increasingly tight domestic fuel and energy market on the other hand. In our growth areas, namely the international growing media business and entirely new businesses, we are now investing in projects whose results will only become evident in the longer term.

In the energy business, we must be particularly careful in monitoring the price development of raw materials and tax-like payments and we need to adapt our operations in such a way as to simultaneously satisfy the requirements related to profitability, customer satisfaction and sustainability. We aim to achieve our profitability targets by improving the efficiency of operations and engaging in closer cooperation with our customers and partners. At the same time, we will strive to increase customer satisfaction by improving our services and investing in the competence of our employees. With regard to sustainability, our focus will be on the areas that have been empirically shown to have the most significant benefits to our operating environment.

Nevertheless, there are two major risks that we need to manage: weather risk and the risk of changes in the operating environment due to political decisions. The peat production season that has just begun can be characterised as weak so far. However, we have large inventories of high-quality energy peat from the previous production season, which ensures deliveries to our customers during the coming heating season in all circumstances.

The new Government Programme also introduced a much-needed long-term perspective, which is important for the energy sector. The decisions of the new Finnish government establish a controlled operating environment for Finland’s gradual shift to carbon neutrality.  Peat, burned in combination with wood chips, plays a significant role in this scenario. We are pleased that the Government Programme has incorporated the tax treatment of peat into the overall reform of energy taxation. It is also positive that the Government Programme aims to ensure that changes in taxation will not lead to the uncontrolled use of commercial timber for energy.

Consolidated key figures

Board of Directors’ proposal for the distribution of profits 

The Board of Directors proposes to the General Meeting to be convened on 5 September 2019 that Vapo Oy’s profit for the financial year, EUR 35,204,750.86, be added to retained earnings, after which the distributable funds available to the General Meeting amount to EUR 195,785,075.72. 

In line with its dividend policy, Vapo Oy distributes as dividends, on average, 50 per cent of the annual profit shown in the financial statements. There have been no substantial changes in the company’s financial position after the end of the financial year. The Board of Directors proposes to the General Meeting that EUR 12,3 million, or EUR 410,00 per share, be paid as dividend for the financial year 1 May 2018–30 April 2019.

Future outlook 

Vapo Group is one of the world’s largest producers of energy peat and environmental peat. The company holds an important role in ensuring Finland’s self-sufficiency in energy and the security of supply. Nevertheless, political decisions have a material impact on the profitability of nearly all of the company’s businesses and therefore affect the company’s ability to invest in higher added value production. 

Vapo will continue to implement measures in line with its strategy to increase the competence of its personnel and achieve market-leading customer service in the local energy value chain. This includes the development of new services and comprehensive solutions for our energy customers. At the same time, the company will continue to increase the efficiency of its business processes in order to improve profitability. The fuel market is not expected to see significant growth due to the low volume of electricity production from solid fuels. 

In the new financial year, the Kekkilä-BVB Group will invest in developing its product selection and the profitable growth of its international sales in the professional, consumer grower and landscaping businesses. 

Vapo will continue the commercialisation of new business operations in the Vapo Carbons business as well as the researching of further new business initiatives in the Vapo Refinery business area. The construction of Vapo Carbons’ first production facility for manufacturing technical carbons is progressing as planned in Ilomantsi. However, the new businesses will not yet generate turnover during the abbreviated financial year 2019. 

The figures presented in this financial statements release have been audited.  

More information:

- Vesa Tempakka, CEO, Vapo Oy, tel. + 358 400 726 727
- Jarmo Santala, CFO, Vapo Oy, tel. +358 40 801 9191
- Ahti Martikainen, Director, Communications and Public Affairs, Vapo Oy, tel. +358 40 680 4723