Finland Post Corporation
Interim report for January–June 2007

Introduction

Finland Post Corporation changed its name to Itella Corporation on 1 June 2007 and, simultaneously, the entire Group became Itella Group. Consumer service provision continues in Finland under the name, ‘Posti’. The names of Itella’s subsidiaries were harmonised as well: at present, the Group’s logistics companies in various countries mainly operate under the name, ‘Itella Logistics’ and information logistics’ subsidiaries under the name, ‘Itella Information’.

 

Net Sales and Profit Performance

April–June

In April-June, consolidated net sales grew by 9 per cent, coming to EUR 408.2 million (EUR 376.0 million). Excluding company acquisitions, the increase was 5 per cent. With all business groups reporting improvements in their net sales, Itella Logistics recorded particularly strong growth. Consolidated net sales increased by 4 per cent in Finland and 25 per cent elsewhere, while international operations represented 25 per cent (22 per cent) of consolidated net sales.

Consolidated operating profit for the period improved by 37 per cent, to EUR 19.7 million (EUR 14.4 million), accounting for 4.8 per cent (3.8 per cent) of consolidated net sales. Net sales improved in Itella Mail Communication and Itella Information, and declined in Itella Logistics.

January-June

In January–June, consolidated net sales grew by 10 per cent, coming to EUR 839.7 million (EUR 760.9 million). Excluding company acquisitions, the increase was 6 per cent. With all business groups reporting improvements in their net sales, Itella Logistics recorded particularly strong growth. Consolidated net sales increased by 6 per cent in Finland and 28 per cent elsewhere, while international operations represented 25 per cent (21 per cent) of consolidated net sales.

Consolidated operating profit for the period improved by 26 per cent, to EUR 65.6 million (EUR 52.0 million), accounting for 7.8 per cent (6.8 per cent) of consolidated net sales. Operating profit improved in Itella Mail Communication and Itella Information, and declined in Itella Logistics. The profit for the period was affected by write-offs totalling EUR 3.1 million pertaining to IT system projects. As an exception to the previous year, the Group made an expense provision for Q1 and Q2, totalling EUR 4 million, for the employees’ profit-sharing scheme.

 

Market Overview

For Itella’s business, favourable economic development continued, reflected in sustained healthy demand for the Group’s services, thanks to economic and foreign-trade buoyancy. As yet, the economic boom has not affected the supply of production resources.

Competition is intensifying for all of Itella’s business groups:

  • Ever-toughening competition from electronic communications is affecting developments in addressed letter mail and printed newspapers. Simultaneously, targeted marketing communications is gaining significance.
  • In logistics, international operators are striving to capitalise on globalisation and enhance economies of scale. However, since the logistics sector remains fragmented, restructuring within the industry will probably continue.
  • In information logistics, Itella is operating both in mature and developing markets. The printing market is affected by excess capacity and price erosion, and in services related to electronic information flows, Itella’s main competitors are firms with an IT background.


Itella Group

Key Figures

4-6

4-6

Change

1-6

1-6

Change

1-12

2007

2006

%

2007

2006

%

2006

Net sales, EUR million

408.2

376.0

8.6

839.7

760.9

10.4

1,550.6

Operating profit (EBIT),

EUR million

19.7

14.4

36.8

65.6

52.0

26.2

89.0

Operating margin, %

4.8

3.8

7.8

6.8

5.7

Profit before income tax,

EUR million

21.4

15.8

35.4

69.6

54.5

27.7

94.4

Return on equity, %

11.8

9.4

10.1

Equity ratio, %

66.1

65.7

65.1

Gearing, %

-26.6

-24.0

-32.1

Gross capital expenditure,

EUR million

22.1

13.4

64.9

38.2

29.7

28.6

69.5

Average personnel

26,232

25,766

1.8

25,509

24, 618

3.6

25,294


Itella Mail Communication

In April-June, net sales rose by 2 per cent, to EUR 214.8 million (211.4). January-June net sales were EUR 447.5 million (433.9 million), showing an increase of 3 per cent.

April-June operating profit was EUR 17.5 million (10.2), accounting for 8.1 per cent (4.8) of net sales. January-June operating profit amounted to EUR 53.5 million (37.9), accounting for 12.0 per cent (8.7) of net sales. The profitability improvement that began in Q1 continued in Q2, due to the brisk demand for all of the business group’s services and more efficient use of its delivery network.

1st and 2nd class letter volumes decreased by 1 per cent in Q2, whereas January-June saw a 1 per cent increase in volumes due to the general election above else. Unaddressed DM delivery volumes grew by 37 per cent in April-June, and in January-June by 35 per cent, while price levels decreased. The volume of magazine deliveries rose by 2 per cent in April-June, and in January-June by 2 per cent. Delivery volumes of free papers decreased, and the number of newspaper copies delivered by Itella decreased by 2 per cent in April-June, and 1 per cent in January-June.

Q2 saw the decision to invest approximately EUR 150 million in the next few years in the further development of mail sorting and delivery services, constituting the largest investment by Itella (Finland Post) for decades. The first stage will involve modernisation of letter sorting machines approaching the end of their lifecycle. Instalments are due to begin in 2008, and the new system will be in full use during 2010. In addition to new sorting machines and information technology, the investments comprise real estate projects. The next stage of the investment scheme, scheduled for this autumn, involves decisions on the modernisation of the parcel and printed press sorting systems.

 

Itella Information

In April-June, net sales grew by 17 per cent, to EUR 48.1 million (41.0), while January-June net sales totalled EUR 99.1 million (85.4 million), showing an increase of 16 per cent. Net sales showed favourable developments in all countries, with the exception of Germany.

April-June operating loss was EUR 0.1 million (EUR 2.7 million operating loss), accounting for -0.2 per cent (-6.6) of net sales. January-June operating profit totalled EUR 4.2 million (EUR 0.4 million operating loss), accounting for 4.2 per cent (-0.5 %) of net sales. Favourable developments in document management services and electronic business improved profitability, whereas the declining volumes of printing services and price erosion present challenges for profit development in countries where printing operations constitute a significant part of operations and which, simultaneously, are investing in launching new electronic services. Q2 saw operational restructuring in Finland, the cost savings of which will begin to be effective in the second half of the year.

In Finland, Itella Information acquired electronic messaging business operations from Elisa Corporation, with net sales of around EUR 2 million. The acquisition was completed on 7 July. Early 2007 saw the acquisition in Sweden of Infologistics Scandinavia AB.

 

Itella Logistics

In April-June, net sales rose by 21 per cent, totalling EUR 155.7 million (128.9). January-June net sales were EUR 307.3 million (250.6 million), up by 23 per cent. Excluding company acquisitions, net sales grew by 10 per cent in April-June, and 12 per cent in January-June. Intensive demand for services continued and, in Finland, parcel services in particular developed strongly.

April-June operating profit was EUR 5.2 million (7.0), accounting for 3.3 per cent (5.4%) of net sales. January-June operating profit amounted to EUR 15.8 million (16.7), 5.1 per cent (6.7%) of net sales.

New logistics centres began operating in Moscow in March-April, and in Kaunas, Lithuania, in April. An agreement was concluded on a new logistics centre to be constructed in St. Petersburg signed in May. The premises are due for completion for operative use in early 2008.

In Finland, an agreement was concluded in Q2 on the acquisition of SHW Logistiikka Oy, a furniture logistics service provider posting net sales of approximately EUR 8 million in 2006, and employing a staff of 80. The company will be included in Itella accounts as of 1 June.

Roadlink AB of Sweden has been included in Group accounts since 1 March 2006 and Universal Spedisjon AS of Norway since 1 September 2006.
 

Itella Group

Key Figures of Business Groups, EUR million

 

4-6

4-6

Change

1-6

1-6

Change

1-12

 

2007

2006

%

2007

2006

%

2006

Itella Mail Communication

 

 

 

 

 

 

 

Net sales

214.8

211.4

1.6

447.5

433.9

3.1

869.6

Operating profit/loss

17.5

10.2

71.6

53.5

37.9

41.2

73.6

% of net sales

8.1

4.8

 

12.0

8.7

 

8.5

 

 

 

 

 

 

 

 

Itella Information

 

 

 

 

 

 

 

Net sales

48.1

41.0

17.3

99.1

85.4

16.0

171.3

Operating profit/loss

-0.1

-2.7

(..)

4.2

-0.4

(..)

-5.2

% of net sales

-0.2

-6.6

 

4.2

-0.5

 

-3.0

 

 

 

 

 

 

 

 

Itella Logistics

 

 

 

 

 

 

 

Net sales

155.7

128.9

20.8

307.3

250.6

22.6

530.0

Operating profit/loss

5.2

7.0

-25.7

15.8

16.7

-5.4

35.3

% of net sales

3.3

5.4

 

5.1

6.7

 

6.7

 

 

 

 

 

 

 

 

Other operations

 

 

 

 

 

 

 

Net sales

2.5

3.5

-28.6

6.5

8.3

21.7

21.6

Operating profit/loss

-2.9

-0.1

(..)

-7.9

-2.2

259.1

-14.7

% of net sales

-116.0

-2.9

 

-121.5

-26.5

 

-68.1

 

 

 

 

 

 

 

 

Intra-Group sales

-12.9

-8.8

46.6

-20.7

-17.3

19.7

-41.9

 

 

 

 

 

 

 

 

Itella Group

 

 

 

 

 

 

 

Net sales

408.2

376.0

8.6

839.7

760.9

10.4

1,550.6

Operating profit/loss

19.7

14.4

36.8

65.6

52.0

26.2

89.0

% of net sales

4.8

3.8

 

7.8

6.8

 

5.7


Financial Position and Capital Expenditure

In April-June, consolidated net cash flow from operating activities totalled EUR 62.3 million (EUR 29.2 million) before investing activities. Capital expenditure totalled EUR 22.1 million (EUR 13.4 million), company acquisitions accounting for EUR 4.4 million (EUR 4.6 million).

In January-June, consolidated net cash flow from operating activities totalled EUR 25.3 million (-7.5) before investing activities. As in the previous year, cash flow for the first part of the year was affected by pre-paid, full-year pension contributions of EUR 119.3 million (106.1). In January-June, capital expenditure totalled EUR 38.2 million (EUR 29.7 million), company acquisitions accounting for EUR 11.6 million (EUR 10.9 million). 40 per cent of consolidated capital expenditure was targeted at international operations.

On 30 June 2007, cash and cash equivalents stood at EUR 216.8 million (EUR 182.8 million) and interest-bearing liabilities were EUR 34.8 million (EUR 34.3 million). Equity ratio stood at 66.1 per cent (65.7 per cent) and gearing was -26.6 per cent (-24.0 per cent).

In Q2, Itella Corporation paid out EUR 27 million in dividends based on 2006 results, and EUR 4.2 million in bonuses into the Employee Fund.

 

Human Resources

The number of Itella Group employees for April–June averaged 26,232 (25,766), and for January-June, 25,509 (24,618). At period end, staff totalled 27,697 (27,137), including, as in previous years, around 3,000 seasonal workers. Year-on-year, the number of employees in Finland remained almost unchanged, but increased in excess of 500 in other countries, company acquisitions accounting for 320. On 30 June, Group staff numbers by country were 25,926 (94 %) in Finland, and a total of 1,771 (6%) in other countries. By segment, staff numbers were as follows: Itella Mail Communication 21,276, Itella Information 1,595, Itella Logistics 4,213 and other Group operations 613.

 

Changes in Corporate Structure

At the turn of 2006/2007, Itella Information business group purchased Infologistics Scandinavia AB of Sweden and the scanning operations of DigiDoc AB of Sweden. In Q2, Itella Logistics acquired SHW Logistiikka Oy of Finland.

 

Business risks and uncertainties

Risks related to Group operations are explained in connection with the 2006 financial statements. During the report period, no significant changes have occurred in terms of business risks and uncertainties. The entry into force of the Postal Directive proposed by the European Commission, which will possibly cause changes in competitive positions and the industry structure in the postal sector, is being postponed from 2009 to 2011.

 

Seasonal operations

Seasonal fluctuation is characteristic of Group business performance, for which reason business groups’ net sales and operating profit do not accumulate evenly throughout the year. In particular, Q1 is strong, especially for Itella Mail Communication, whereas the end of Q2 and Q3 are usually weaker in performance than the beginning and end of the year.

 

Events after the review period

Itella acquired PS Logistics AB of Sweden, a logistics company with net sales of around EUR 9 million and 22 staff. PS Logistics AB, providing freight, warehousing and contract logistics services, will transfer to Itella Logistics’ ownership on 1 August 2007.

 

Prospects towards the year-end

Prospects towards the end of the year remain favourable due to Finland’s brisk economic growth and lively foreign trade. The trend in conventional letter services making way for electronic services is projected to intensify.

Greater volume fluctuations in Itella Mail Communication are making management of production costs and allocation of resources more difficult. Moreover, the economic boom may complicate the supply of production resources for all business operations.

Itella expects its consolidated net sales to continue rising, while modernisation of the production structure will add to capital expenditure. There is every prospect of outperforming the previous year’s financial results.

Interim Report Q2/2007 (PDF)
Key Figures (PDF)
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