Raisio Yhtymä - Financial report 2004

Report of the Board Directors

Report of the Board Directors

Last year was a year of big changes in Raisio Group. Slow organic growth made it difficult to implement the strategy drawn up in 2001, resulting in a strategic reassessment by the Board of Directors. Analysing restructuring alternatives resulted in the decision to divest Raisio Chemicals, which was then sold to the Swiss company Ciba Specialty Chemicals. Previous investments had increased the value of Raisio Chemicals, and the deal was concluded quickly and on favourable terms. Raisio Group with its strong financial standing is now in a good position to proceed as an expert in plant-based foods and ensuring food safety.

Competition remained intense in most of Raisio's product areas, partly due to the pressure on prices created by new market participants. Although the food and feed markets showed weak growth, Raisio clearly improved its profitability thanks to several programmes aimed at enhancing operations. Increased consumer awareness of health-related issues boosted the demand for functional foods all around Europe. Raisio succeeded in considerably increasing both the sales and market share of the cholesterol-lowering Benecol ingredient.

Divestment of Raisio Chemicals

The divestment of Raisio Chemicals to the Swiss company Ciba Specialty Chemicals was concluded on 2 June 2004. The enterprise value amounted to EUR 475 million. It consisted of a cash payment and the transfer of debts. Sales profit totalled EUR 223.1 million.

The financial statements include Raisio Chemicals' figures for the January to May period in 2004. The turnover of Raisio Chemicals in January-May was EUR 183.7 million, and the operating profit EUR 3.6 million.

Strategic realignment

After the conclusion of the Raisio Chemicals' divestment, the Board of Directors and the Supervisory Board approved a new vision and strategy for Raisio Group in June. Raisio's vision is to be the leading specialist in plant-based products and in ensuring food safety.

Raisio Nutrition and Raisio Life Sciences represent the Group's business areas. Raisio Nutrition comprises two businesses - Food and Feed and malt - and, similarly, Raisio Life Sciences two - Ingredients and Food Diagnostics. The two business areas share research and development activities, which also include a unit focused on the development of new business operations. Service functions are now provided at the Group level.

Raisio Nutrition's strategic growth areas are Russia and Poland. The business area is expected to reach an annual organic growth of 2 per cent in Finland and approximately 5 per cent in Russia and Poland. Although the functional food ingredients and food diagnostics businesses seek growth especially in the European markets, their operations are global. Raisio Life Sciences is expected to grow organically by 15 to 20 per cent a year. Raisio Group's strong balance sheet also enables business development through acquisitions.

To improve profitability, Raisio Group aims to increase the degree of product upgrading and continue to enhance its operations. The objective is to raise the return on investment to 12 per cent.

Key Figures
	1–3/2004	4–6/2004	7–9/2004	10–12/2004	2004	2003
Turnover, EUR million	205.6	196.2	113.0	112.2	626.9	860.5
Operating result, EUR million	0.7	195.4	3.0	3.7	202.8	–14.3
Operating result, excluding one-off items, EUR million	0.7	4.4	3.0	2.2	10.4	1.2
Result before taxes, EUR million	–2.3	192.4	3.4	4.5	198.0	–27.2
Result before taxes excluding one-off items, EUR million	–2.3	3.4	3.4	3.0	7.6	–11.7
Earnings per share (EPS), EUR	–0.03	1.15	0.05	0.02	1.19	–0.16
EPS before one-off items, EUR	–0.03	0.02	0.05	0.01	0.05	–0.09
Equity ratio, %	31.3	65.8	70.6	76.8	76.8	32.2
Gearing, %	135.6	–41.1	–48.1	–42.9	–42.9	127.9
Cash flow from business operations, EUR million	2.3	13.4	23.0	4.8	43.5	77.0

Turnover

Turnover in 2004 amounted to EUR 626.9 million (EUR 860.5 million). The divested Raisio Chemicals accounted for EUR 183.7 million (EUR 422.3 million) of this amount. The turnover of Raisio Nutrition decreased, while that of Raisio Life Sciences increased.

Turnover from outside Finland represented 44.6 per cent (52.1%) of the total, or EUR 279.4 million (EUR 448.6 million). When calculating the figures for the new structure after the divestment of Raisio Chemicals, foreign turnover drops to some 35.9 per cent.

Result

Operating result was EUR 202.8 million (EUR -14.3 million), and EUR 10.4 million (EUR 1.2 million) excluding one-off items. The most notable one-off income was the sales profit of EUR 223.1 million from the divestment of Raisio Chemicals. Other sales profits amounted to EUR 4.4 million. During the work on its strategy, Raisio also updated its business plans and made a critical assessment of the valuation of balance sheet items in light of the new strategy and return expectations. Goodwill and other balance sheet items were written down by a total of EUR 33.7 million. The rationalisation provision was adjusted to EUR 1.4 million, and one-off financial expenses were EUR 2.0 million. The previous year's operating result was also weakened by one-off items of EUR 15.5 million.

One-off items
	2004	2003
Raisio Nutrition	–20.7	–6.9
Raisio Life Sciences	–8.6	-
Raisio Chemicals	-	–8.6
Group	+221.7	-
Total impact on operating result	+192.4	–15.5
Impact of financial expenses	–2.0	-

The operating result from the ongoing business operations, excluding one-off items, saw significant improvement, amounting to EUR 6.8 million (EUR -9.3 million).

The result before taxes was EUR 198.0 million (EUR -27.2 million), and net financial expenses totalled EUR 4.9 million (EUR 12.9 million). The profits from the divestment of Raisio Chemicals were used to repay loans, which has decreased interest rate expenses. Additionally, investing the profits has increased interest income.

Raisio Group considers the sales profit of EUR 223.1 million from the divestment of Raisio Chemicals to be tax-free concerning the shares in accordance with the new corporate and capital tax legislation.

Consequently, no tax on the sales profit of the Raisio Chemicals' shares was recorded in the financial statements. As for other assets, a total of EUR 2.7 million was recorded as taxes on sales profit. According to old legislation, sales profit tax would have amounted to EUR 70 million.

A total of EUR 10 million of previously unrecorded deferred tax assets were recorded under taxes as their recovery was confirmed.

The net result after taxes was EUR 195.8 million (EUR -26.7 million). The earnings per share was EUR 1.19 (EUR -0.16) and EUR 0.05 (EUR -0.09) excluding one-off items.

Cash flow from business operations totalled EUR 43.5 million (EUR 77.0 million).

Business areas

RAISIO NUTRITION

Central European manufacturers increased their supply in the Finnish food market and the share of private label products grew. However, Raisio's market share in foods stayed more or less the same in Finland and Poland but saw a slight increase in Russia. The Group invested in the development and market launch of new healthy and easy-to-use plant-based products.

Competition in the feed markets remained unchanged. Raisio's market position stayed the same in farm feeds, strengthening slightly in fish feeds. Owing to the exceptional weather conditions last summer, basic feeds show variable quality, which is why the feed business is investing in the high quality of supplement feeds on domestic markets and seeking growth from exports.

The oversupply of malt in the EU region and increased malting capacity in Russia intensified competition in the malt markets. However, Raisio maintained its market position both in Finland and its export markets. Stiff competition and a low price level are expected to characterise 2005 as well. The malting barley crop in 2004 was good in terms of volumes and quality. For the first time in years, malting barley imports will account for a very small share of overall raw material volumes.

Raisio Nutrition's turnover dropped by 4.4 per cent, amounting to EUR 399.6 million (EUR 417.9 million). This resulted from weak margarine sales in Sweden, the discontinuation of the grain starch business and steep drop in malt prices. Growth, however, was seen in the Polish margarine market and feed business.

Raisio Nutrition's operating result was EUR -15.1 million (EUR -11.7 million). The operating result includes a total of EUR 25.1 million in writedowns, targeting, for example, the goodwill of margarine business in Sweden. It also includes one-off income of EUR 4.4 million from the sale of the Risella rice brand and grain starch machinery.

Raisio Nutrition’s turnover, EUR million
	2004	2003
Food	218.4	232.2
Margarine	120.6	130.8
Milling	72.2	75.3
Food Potato	21.0	21.2
Others	12.3	14.4
Internal sales	–7.7	–9.5
Animal Feeds	165.2	163.8
Malt	24.7	26.4
Grain Starch	12.5	15.0
Internal Sales	–21.2	–19.5
Total	399.6	417.9

The operating profit excluding one-off items was EUR 5.6 million (EUR -4.8 million). Profitability improved thanks to enhancement programmes, withdrawal from loss-making operations and good development in Polish business operations. It was challenged by the unexpected and hefty changes in soybean prices, in particular, and by the low price of soy oil in Europe. Lower malt prices also weakened profitability.

Margarine production was centralised in the Finnish, Polish and Russian production facilities. A margarine plant in Istra, near Moscow, began operations in the early part of the year. Margarine production was discontinued in Sweden, and the facilities were sold in December. The loss-making grain starch business was discontinued at the end of August.
The catering organisations of Raisio and Lännen Tehtaat joined forces to form Ateriamestarit Oy, a 50/50 owned sales company that began operations in May.

Adding to its 20 per cent interest in Camelina Ltd, Raisio acquired the company's remaining share capital in October to further develop the productisation and marketing of omega-3 fatty acids extracted from the Camelina plant.

RAISIO LIFE SCIENCES

The market for functional foods grew especially in Europe, where Raisio further strengthened its market position. The market growth in functional foods is expected to continue due to the consumers' increasing awareness of health-related issues and an increase in lifestyle diseases. Raisio will focus on creating and identifying new product applications and market areas.

The fragmented food diagnostics markets have been characterised by strong centralisation in the past few years, which may lead to small companies quickly turning into significant players in the field. The fastest growing field in food diagnostics is that of rapid testing methods, which Raisio also focuses on.

The turnover for Raisio Life Sciences grew by 56.6 per cent and amounted to EUR 53.3 million (EUR 34.0 million) thanks to strong development in ingredients sales. The turnover of the food diagnostics business also increased, but it should be noted that Diffchamb, the food diagnostics company acquired in early 2003, is only included in the April-December figures for the comparison year.

Ingredients sales grew by 66.0 per cent, and new markets were won especially in Central and Southern Europe. Partners introduced 14 new products to the markets. Especially the Benecol yoghurt drink sold in mini-bottles enjoyed good success.

Raisio Life Sciences’ turnover, EUR million
	2004	2003
Ingredients	44.7	27.0
Diagnostics	8.6	7.0
Total	53.3	34.0

Raisio Life Sciences recorded an operating result of EUR -5.3 million (EUR -5.4 million). The operating result includes a EUR 4.1 million writedown on the Diffchamb goodwill and EUR 4.5 million write-downs on other balance sheet items.

Operating result one-off items excluded improved to EUR 3.3 million (EUR -5.4 million) boosted by strong growth and a rigorous cost regime. Enhancement measures were adopted to improve the profitability of the diagnostics business. Inputs were also made in product development.

Owing to the increase in ingredients deliveries, an expansion to the capacity of the stanol ester plant in Raisio was initiated at the end of the year.

The legal hearings for the sitostanolester patent continued in Munich in late September. The European Patent Office returned the case to the first instance, and Raisio estimates the final decision on patent coverage to be made within 3-5 years.

Several medical studies carried out last year, such as a doctoral thesis at the University of Helsinki in October, prove the effectiveness and safety of the Benecol ingredient in lowering cholesterol and sterol levels.

Research and development

Raisio Group's research and development expenses in 2004 amounted to EUR 14.2 million (EUR 21.1 million), or 2.3 per cent (2.5%) of turnover. This figure includes a total of EUR 6.3 million (EUR 14.6 million) of Raisio Chemicals' research and development costs.

Raisio Nutrition's research and development expenses totalled EUR 4.8 million (EUR 4.4 million), or 1.2 per cent (1.1%) of the business area's turnover. Raisio Life Sciences spent EUR 3.1 million (EUR 2.1 million), or 5.8 per cent (6.2%) of the business area's turnover, on research and development.

Research and development is one of Raisio's strategic priorities. It enables Raisio to renew itself and upgrade the product portfolio. The first steps in this respect were taken in 2004 with the inauguration of a food diagnostics research centre in Turku and a research centre for food and ingredients in Helsinki. Investments in research and development will increase in 2005 by some EUR 3 million.

Investments

The gross investments in 2004 amounted to EUR 33.1 million (EUR 63.7 million), or 5.3 per cent (7.4%) of turnover. The gross investments of Raisio Nutrition totalled EUR 15.3 million (EUR 12.3 million), and those of Raisio Life Sciences EUR 2.8 million (EUR 19.9 million). The main investments in ongoing business included a new production line in the food potato factory and the margarine plant in Russia.

Balance sheet and financial position

Raisio's balance sheet decreased significantly as a result of the divestment of Raisio Chemicals, repayment of debt, write-downs and an extra dividend payment. The balance sheet total was EUR 510.4 million (EUR 675.0 million), while shareholders' equity amounted to EUR 376.8 million (EUR 194.0 million).

The change in Raisio's financial position had a significant impact on the key financial figures and financial risk position. The syndicated loan agreement signed in 1998 was terminated, and the credit withdrawn was fully repaid in June.

The net interest-bearing debt was EUR -168.1 million (EUR 277.8 million) at the end of the period. The equity ratio was 76.8 per cent (32.2%), and the gearing ratio was -42.9 per cent (127.9%).

Working capital decreased to EUR 57.5 million (EUR 110.4 million), as a result of the divestment of Raisio Chemicals and the measures taken to enhance capital employment. Terminating the programme for true sales of receivables brought a EUR 14 million increase to working capital.

Governance, management and personnel

Raisio Group's Supervisory Board elected Juha Saura to act as Chairman for the period 23 November 2004-31 December 2005. Ola Rosendahl, who assumed the duties after Vesa Lammela resigned from the post in spring 2004, will continue as Vice Chairman.

In 2004 the Board of Directors of the Raisio Group consisted of Jörgen Grandell, Erkki Haavisto, Jaakko Ihamuotila, Rabbe Klemets, Matti Linnainmaa, Kaarlo Pettilä, Christoffer Taxell and Arimo Uusitalo. In November the Supervisory Board elected Michael Ramm-Schmidt to the Board of Directors for the period 2005-2006. Of the members whose terms came to an end, Jörgen Grandell, Christoffer Taxell and Arimo Uusitalo were re-elected. All of the members now elected are independent of the company.

Olavi Kuusela and Jukka Lavi were re-elected as deputy members, while Taru Narvanmaa and Jyrki Paappa, appointed Chief Financial Officer of the Group and a member of the Executive Committee as of 1 September 2004, were elected as new deputy members. All deputy members represent current management. Following the divestment of Raisio Chemicals, Jari Lehmusvaara, COO of Raisio Chemicals, resigned from his position as a deputy Board member in June 2004.

Raisio Group is in the process of reforming its corporate governance. The proposed amendments to the Articles of Association, approved at the Extraordinary General Meeting held on 30 September 2004, will not take effect until approved without changes to their content at a second general meeting. If the amendments are approved in the second proceeding, e.g. the term of Board members will be reduced to one year, and the duties of deputy members will be terminated.

Raisio Group employed 1,412 (2,735) people on 31 December 2004. Employees working abroad accounted for 32 per cent (45%) of the personnel at the end of the year. The reduction in personnel was a result of the divestment of Raisio Chemicals and streamlining programmes. The roll-out of the Russian margarine plant and recruiting in research and development increased the number of personnel. At the end of the year Raisio Nutrition employed 1,190 and Raisio Life Sciences 177 people.

Adoption of the IFRS accounting standards

The financial statements of the Raisio Group have been prepared in accordance with Finnish Accounting Standards (FAS). The interim report for the first quarter of 2005 will be prepared in compliance with the IFRS standards and published on 3 May 2005. In April at the latest, the figures for 2004 will be published in compliance with IFRS. This release will include, for example, the income statement and balance sheet, quarterly figures and a bridging statement on the transfer from Finnish accounting standards to IFRS-compliant accounting.

Based on the preparations carried out, the adoption of IFRS standards will not have a significant impact on Raisio's operating result or balance sheet. Raisio Chemicals will be treated as a discontinued operation as of the first quarter of 2004.

The opening balance sheet total for 2004 will increase by EUR 7.1 million, while shareholders' equity will decrease by EUR 4.5 million. The most significant changes in the balance sheet include leasing contracts of EUR 7.9 million and pension liabilities of EUR 4.3 million. However, the provision for defined benefit liabilities was nearly fully terminated in 2004.

Goodwill testing was carried out, and no need for further write-downs, in addition to those made according to the Finnish accounting standards in 2004, was detected.

Shares and shareholders

A total of 110.1 million (45.7 million) of Raisio's free shares were traded on the Helsinki Stock Exchange in 2004. The value of share trading was EUR 180.1 million and the average share price was EUR 1.64. The closing price in 2004 was EUR 1.90. The price of series V shares rose by 53.2 per cent from the beginning of the year.

The 2004 trading volume of restricted shares on the Helsinki Stock Exchange amounted to 1.5 million (633,302 million). The value of share trading was EUR 2.5 million and the average share price was EUR 1.69. The closing price in 2004 was EUR 1.85. The price of series K shares rose by 46.8 per cent from the beginning of the year.

On 31 December 2004, Raisio Group had 44,102 registered shareholders. Of all shares, 11.7 per cent (5.8%) were in foreign holding with the corresponding value for free shares being 14.8 per cent (7.4%).

The Board of Directors did not exercise the authorization to increase share capital issued by the Annual General Meeting on 26 March 2004.

The option programme 1998-2003 for the Board of Directors, management and key employees of the Group ended on 30 January 2004. No shares were subscribed with the option rights. Raisio has no share-based incentive systems at the moment.

Dividend proposal and share buy-back

It is Raisio's objective to generate added value for all of its shareholders by developing its business operations and improving business profitability, and by following a long-range dividend policy. The objective is to annually distribute half of the per-share earnings generated by the continuing business operations, provided the dividend payment does not compromise the company's ability to meet its strategic objectives.

The Board of Directors proposes a dividend of EUR 0.03 (EUR 0.01) per share for 2004, which represents 50 per cent of the operating result from ongoing business. The Board also proposes an extra dividend of EUR 0.18 (EUR 0.12) per share.

Raisio's Board of Directors has decided to request authorization to buy back company shares at the Annual General Meeting.

Events after rewiew period

Raisio will begin to produce oat and soy-based fresh products in Turku. The investment will pave the way for a product range upgrade in line with the Group's strategy. Investments in the production and packaging machinery needed for oat and soy-based fresh products amount to some EUR 5 million. The production facilities will employ 15-20 people. New products will be launched in early 2006.

To secure competitiveness, Raisio will continue to streamline its margarine production, which may lead to a staff reduction of 20 employees at the margarine plant in Raisio. The invitation to codetermination talks was issued at the end of January 2005. Furthermore, the margarine plant's maintenance operations and the slightly under 20 employees involved in them were outsourced to ABB Oy, Service.

Outlook for 2005

Strong growth is predicted to continue in ingredients sales, and some new food products will be launched. Also businesses in Poland and in Russia are expected to grow. In addition, growth will be boosted by enhanced networking in the food, feed and diagnostics businesses. However, the input in research and development in order to speed up organic growth is expected to increase the turnover only in 12 to 18 months. The business operations that were discontinued or divested in 2004 will decrease Raisio's turnover. Hence, the Group's turnover is not expected to show an upward trend in 2005.

The operating result for 2005 is expected to end higher than the comparable operating result in 2004.

Raisio's financial position will remain strong, and net financial expenses are expected to be clearly positive. Growth and production technology projects in line with Raisio's strategy will raise the level of investments substantially.

Equity ratio