2006 Annual Report Contents Information to shareholders Review by the President and CEO Raute in brief Year 2006 Products and services Market review Strategy Strategic review for 2006 Business review for 2006 Corporate responsibility Financial statements 2006 Board of Directors' report Group Parent company Key ratios describing the financial development Calculation of key ratios Shares and shareholders Proposal for distribution of profits Auditor's report Board of Directors Executive Board Corporate governance Stock exchange releases and announcements 2006 Addresses 1 2 4 5 6 8 10 13 14 18 21 21 27 54 57 60 61 65 65 66 68 69 72 73 Information to shareholders Raute Corporation's series A shares are listed on the Nordic list of the Helsinki Stock Exchange. Share quotations can be followed online at www.raute.com. Dividend The Board of Directors will propose to the Annual General Meeting that a dividend of EUR 0.70 per share be paid for both series A and K shares. The date of payment is April 2, 2007 and the respective record date is March 26, 2007. Dividends will be paid to shareholders who are registered in the shareholders' register maintained by the Finnish Central Securities Depository Ltd on the record date. Series A share · Trading code: RUTAV · Number of shares: 3 013 597 · Votes/share: 1 vote Series K share · Number of shares: 991 161 · Votes/share: 20 votes Financial information This annual report is published in Finnish and English. Raute Corporation will publish three interim reports, in Finnish and English, in 2007: April 26 August 9 October 25 January­March 2007 January­June 2007 January­September 2007 Investor relations: Tapani Kiiski, President and CEO Arja Hakala, CFO tel. +358 3 829 11 email: ir@raute.com Annual General Meeting Raute Corporation's Annual General Meeting will be held on Wednesday, March 21, 2007 starting at 6:00 p.m. at Congress Center Fellmanni, Kirkkokatu 27, Lahti, Finland. To be entitled to attend the Annual General Meeting, shareholders must be registered in the shareholders' register maintained by the Finnish Central Securities Depository Ltd at the latest on March 9, 2007. Shareholders who wish to attend the Meeting must register for it by 4:00 p.m. on Thursday, March 15, 2007 by writing to Raute Corporation, P.O. Box 69, FI-15551 Nastola, Finland, by sending a fax to +358 3 829 3582 or by calling +358 3 829 3302 / Sirpa Väänänen. Any proxies should be supplied at the time of registration. Raute Corporation's Articles of Association do not specify special procedures for presenting initiatives to the Annual General Meeting. The annual report, interim reports, stock exchange releases, the complete consolidated financial statements, and other information on Raute Corporation are available in Finnish and English at www.raute.com. Raute's financial publications can be ordered in print or as printouts by phone from +358 3 829 11 or by email from ir@raute.com. 1 From record growth to record order book Raute's strategic choices have proved to be the right ones. Year 2005, preceding the report period, was a year of strong growth. While growth leveled off in the past year, we received a record number of new orders, which improves the outlook for the new year. The record number of four mill-scale orders is a sign of our strong market position, and of customers' trust in Raute's technology and delivery capacity. Year 2006 had two sides to it. On the one hand, the market situation continued to be good, we showed strong competitiveness, and received a big number of new orders. These positive factors strengthened our belief in the need to continue on our chosen strategic path. On the other hand, our profitability did not develop in line with the objectives set for 2006. Challenges in 2006 came from difficulties in the first deliveries of some new products, the cost pressure caused by the good general economic situation, and the rapidly weakening market situation in North America. This means that the implementation of our strategy is not yet finished. Difficulties in first deliveries and weak demand in North America Thanks to our strong focus on product development in recent years, we were able to launch several new technology solutions in 2006. Many of these were simultaneously at the first-delivery stage last year. Unfortunately, we had problems with the commissioning and finishing of these new products, and this caused harm to our customers and additional expenses to Raute. However, our solutions have already proved to be functional and will further strengthen our technology offering in the future. In other words, our investments have paid off. The North American housing market and housing construction, especially in the USA, have decreased significantly since the end of 2005. At the same time, significant amount of new capacity has been rolled out for the production of OSB board. OSB competes with plywood in construction applications, especially in North America. As a result, the prices of plywood grades used for construction decreased in some cases by over 40 percent over the year. Our customers reduced their investments markedly in the past year, as well as their emphasis on development oriented maintenance. Adjustment to economic fluctuations through structural changes The quality and efficiency of our operations, and the ability to flexibly and rapidly adapt to changes in investment demand caused by economic fluctuations are essential to our competitiveness and profitability. To answer these challenges we have developed our partner network, 2 as well as the work distribution and competence in our own organization. We have carried out significant structural changes in our operations in recent years. Although we have implemented most of the planned changes, this kind of development is a never-ending task, with the operating environment changing and competition growing stiffer. The changes have already had a positive impact on our delivery capacity, which has grown in two consecutive years. We now focus on improving our efficiency by making our new operating methods an established part of everyday activities in the organization. the use of raw material, additives, and energy also improves the competitiveness of our customers. Profitability as number one priority Our order book for this year contains fewer first-delivery risks compared to last year. Except for North America, our customer industries face a good market situation and active demand. Uncertainties are caused by the threat of a general weakening of the North American economy, and its possible impact elsewhere in the world and on our customers' investment activity. We have reorganized our operations in North America to direct our resources more efficiently and improve our customer service. I believe that our customers' willingness to invest will remain at a good level. The quotations level in the early part of the year lead me to believe that the structure of demand is evening out. While mill-scale projects are still in demand, the number of production line scale projects and modernizations is bigger than last year. Growth in contract-based preventive maintenance operations will continue as well. Our order book puts us in an excellent position to improve our profitability in the coming year. Succeeding in the deliveries of our high order book is our top priority in terms of customer satisfaction and our goal of improved profitability. The order book also creates a foundation for moderate growth in the new year. Improved profitability and moderate growth, in this order, will be our goals this year. I wish to thank our customers, personnel, shareholders, and all other partners and stakeholders for good and confidential co-operation and contribution to Raute's development. I hope and believe that our cooperation will continue and improve even further. The important role of co-operation with customers Our selected customer industries and the technologies needed in their production activities offer us both growth opportunities and synergy benefits. Our wideranging technology offering and emphasis on the further development of technology services raise us to a unique position in our markets. The markets of our customers are growing more challenging due to tougher product requirements and stiff competition. Raute's role is to use its technology to help customers improve their competitiveness and profitability. Efficient use of raw material, additives, energy, and workforce, high quality of end products, and sufficient capacity of production equipment are crucial to the success of our customers' operations. We understand our customers' processes and develop them jointly with the customers, which enables us to offer competitive solutions that lead to the achievement of these objectives. Continuous development in small steps, enabled by our technology services, has become increasingly important but is also more challenging due to continuously developing technology. Climate change and global environmental threats are of particular concern to everyone nowadays. Raute wants to actively contribute to reducing environmental loading. Our technologies help customer industries lessen the load that their operations put on the environment. Apart from environmental considerations, enhancing Tapani Kiiski President and CEO 3 Raute in brief Leading technology company in the sector Raute is a technology company that serves the wood products sector worldwide. Its core competence encompasses the manufacturing processes of selected wood products. The company is the world's leading supplier of mill-scale projects to these customer industries. It is also highly competitive in smaller-scale projects and technology services. ment deliveries, Raute also provides versatile services from raw material and market research to modernizations and production line maintenance to support its customers throughout the investments' life cycle. The key drivers: Construction, housing, and transportation Raute's customer industries are strongly influenced by fluctuations in construction, as well as trends related to housing and living, such as interior decorating trends. The transport industry also has an important impact on Raute's customer industries. As is characteristic of the investing business, activities usually reach their peak towards the end of economic cycles. Owing to the projectlike nature of the sector, fluctuations in sales volumes and adaptation to them are part of normal operations. Global market area Raute's sales network covers market areas all around the world. Most of Raute's customers operate close to their raw material sources: forests. Strongest growth is seen in the plantation forest areas of the southern hemisphere. Raute's customer industries include Co-operation throughout the life cycle of investments Raute's extensive technology offering covers the customers' entire production process, ranging from raw material processing to the finishing and packaging of end products. In addition to machinery and equip· the plywood and veneer industry · the LVL (Laminated Veneer Lumber) industry · the particleboard and MDF (Medium Density Fiber board) industries · the parquet industry · the decorative veneer industry. peeling drying Market-leading competence in wood products technology. layup composing pressing patching sawing sanding repair A mill supplied by Raute, for example a plywood mill, encompasses separate production lines. packing 4 Year 2006 The year in brief · Net sales (-2%) and operating profit (+2%) on last Key figures Net sales, m Operating profit, m Profit before income taxes, m Order book at Dec. 31, m Earnings per share, Dividend per share, ROI, % ROE, % Equity ratio, % Personnel at Dec. 31 2006 106.2 4.5 4.9 77 0.94 0.70 * 19 13 60 540 2005 108.6 4.4 5.5 55 1.09 0.60 21 16 56 533 year's level · Challenges in the first deliveries of new technologies · Demand focused at mill-scale projects · Four mill-scale project orders · Slack demand for large modernizations, the growth of technology services leveled off · Order book very strong *The Board of Directors' proposal to the Annual General Meeting Net sales by product area Others 2% LVL 3% Technology services 21% Net sales by market area 120 Net sales, EUR million Plywood 74% Others 38% Europe 29% 100 80 North America 16% Asia 5% Russia 12% 60 40 20 0 2002 2003 2004 2005 2006 Net sales quarterly, EUR million Order intake quarterly, EUR million Operating profit, EUR million 35 50 30 25 20 15 10 5 0 Q1 Q2 Q3 Q4 6 4 40 30 20 10 0 Q1 Q2 Q3 Q4 2 0 -2 -4 -6 -8 -10 2002 2003 2004 2005 2006 2006 2005 Technology services Project deliveries 5 Products and services Project deliveries Technologies Raute's core competence encompasses the manufacturing processes of selected wood products. Raute offers its customers production processes that optimize the use of raw materials and other resources. Project deliveries may comprise single machines, production lines, or complete mills. Raute's extensive competence in wood products technology benefits both the customer and the company. Benefits to one customer industry can be offered, for example, by applying practices found to be advantageous in an other customer industry. Raute gains synergy in the development of technologies and competence, in project activities, and in its customer base. Development of net sales from project deliveries, EUR million 90 80 70 60 50 40 30 20 10 0 2002 2003 2004 2005 2006 Competitive factors Raute, contrary to the majority of its competitors, operates worldwide and has a comprehensive offering. Most of its competitors are small or medium-sized companies that operate locally or regionally and often focus on only one or a few processes and technologies in Raute's customer industries. Most of them also focus on a limited number of wood species in their process technologies. As a result of the continuous development of technologies, further increase in recovery, quality, and capacity calls for the latest innovations in the field, increased automation, and development of production processes. In this respect Raute is at its best as the technology leader and a long-term partner for its customers. Raute sees to the efficiency of the customers' production processes and ensures that its customers remain leaders in their field also after equipment deliveries. Most of the results from Raute's product development can also be applied in previously delivered equipment. Markets Raute engages in global operations. While Europe was the single most important market in 2006, over half of the company's net sales were generated outside Europe. The biggest growth potential is found in the plantation forest areas of the southern hemisphere and in Russia. Europe and North America are traditional plywood production areas that rarely invest in new capacity. Investments are mostly focused on replacements and on enhancement of operations, for example, by increasing automation. New investments focus on specialty panels with a high degree of processing. Latest innovations in the field help the customers to improve their profitability. 6 Technology services Services Raute's objective is to serve its key customers locally and ensure that the customers' main competitive advantages are preserved throughout the life cycle of production equipment. This type of competitive advantages include good recovery of raw material, good and even quality of products, and superior productivity. Customer relationships may begin already at the engineering phase of a mill or new production line. In this case, customers are supported with various consulting services, such as market and raw material studies. Raute can act as a partner all the way until the day when the customer gives up its machinery and equipment. Raute's services comprise basic services, value-added services that offer fundamental improvements to equipment or operations, as well as partnership services based on close cooperation. The goal is to increase the share of continuous, close co-operation based on contracts. At present, contract based operations represent approximately one third of service sales. Development of net sales from technology services, EUR million 25 20 15 10 5 0 2002 2003 2004 2005 2006 Raute's project deliveries form the principal customer base for technology services. Raute believes that the sales of technology services may increase significantly in the near future. The estimate is based on enhancing existing customer relations and acquiring new customers. Advanced technology and the customers' tendency to focus on their core competence create new demand. Competitive factors Raute offers its extensive competence to customers in local settings. Its competitors are mainly small, local general maintenance companies that offer only basic services. Mills mostly use their own resources for maintenance tasks. Raute's strengths are a broad understanding of production technology and a versatile service offering, ranging from spare part services to maintenance based on close co-operation. The goal of co-operation is to develop the customer's whole production process. Customers can also benefit from the results of Raute's strong product development, since the latest technology can be partly applied to their previously purchased equipment in the form of modernizations. Obvious synergies can be found between project deliveries and technology services. Synergies that benefit customers arise from cumulative competence in the field. Since the services are based on Raute's own technologies, the leading products and latest innovations in the field can be offered to customers at a very early phase. Raute's technology services ensure the customers' competitiveness through the life cycle of the investment. Markets In the wood products industry, the outsourcing of maintenance services is still in its early phases. Present and potential machinery and equipment customers of 7 Market review Raute estimates the value of its machinery and equipment market to be approximately EUR 600­650 million a year. Markets are growing at a moderate pace on average, estimated at 3­4 percent annually in the next few years. Growth is strongest in the LVL industry, where the production volume is expected to increase by some 10 percent annually. Most of the growth will take place in North America, where LVL has a well-established position. LVL use is also expected to increase in Europe and Asia. Development is more moderate in the plywood industry, with demand predicted to diminish in North America. Investments focus on plantation forests areas in the southern hemisphere and on Russia. More and more wood resources in the plantation forests of South America, Oceania, and Asia will become available in the coming years. The emphasis in other parts of the world will be on improving the competitiveness of existing production capacity through modernizations. The parquet, particleboard, and MDF industries have traditionally been strongest in Europe. However, development has also been rapid in Asia and South America in recent years. Asian production volumes already beat those of traditional regions in many products. With its furniture industry showing strong growth, Asia is also an important market for the decorative veneer industry. Nearly half of the decorative veneer production is located in Asia, and much of the production line investments will take place also there in the future. Main factors affecting trends in demand Construction as the main driver Raute's customer industries are largely dependent on the economic cycles in construction- and housingrelated consumption and in international trade and transport. As is characteristic of the investing business, activities usually reach their peak towards the end of economic cycles. Thanks to good economic growth, both new construction and modernization have thrived for quite some time in many of the key market areas of Raute's customers. Equipment markets of Raute's customer industries Distribution Parquet industry 8% LVL industry 8% Decorative veneer industry 9% Secondary processing in particleboard and MDF industries 10% Plywood and veneer industry 65% Location and quality of raw materials Especially in the plywood industry, some of the production capacity is located unfavorably in terms of suitable wood raw material or has been designed for wood raw materials, which availability is decreasing. As a result, the investments in production machinery are bigger than those required by growth in production volumes alone. Apart from product demand, the construction of new capacity is also influenced by the availability and location of raw material. Strongest growth is seen in the plantation forest regions of the southern hemisphere and in Russia, which still has great amounts of wood resources that are not fully utilized. Growth estimate* Plywood and veneer industry LVL industry Secondary processing in particleboard and MDF industries Parquet industry Decorative veneer industry *Average annual market growth 2007­2009 3% 10% 5% 8% 4% The wood products' market is full of interesting opportunities. 8 Outsourcing of maintenance services Cost structure estimate of a plywood producer Consumables 5% Energy 10% Glue 10% Labour 25% Wood raw material 50% Customers' efforts to enhance operations also affect the demand for technology services. Especially in preventive maintenance services, production processes are systematically developed in co-operation with customers. New equipment is more versatile and calls for high-quality, skilled maintenance. Many predict that this, together with the drive to enhance operations, will lead to more and more customers outsourcing an increasing share of their maintenance activities in the future. In wood products technology, the outsourcing of services is only starting. By using the latest technology and automation to modernize their existing machinery and equipment, customers can surpass earlier production levels, improve output and quality, as well as reduce labor costs. Customers looking to enhance production Stiff competition forces Raute's customers to continuously improve the productivity of their manufacturing processes and the quality of their end products. Since raw material is by far the biggest single expense item, technological advances that improve raw material usage support customers in their drive to enhance production. Improvements that save energy, workforce and additives, such as glue, also help customers develop their operations. Customers aim to produce end products of even quality. Many products must meet specific requirements for rigidity, strength, and durability. It is important for these product properties to exhibit even quality: while products must meet the minimum requirements set for them, occasionally exceeding the requirements is of no benefit to customers. Instead, "too good", unintended raw material use may raise expenses. Photo: UPM Technological development Intense competition and product quality requirements lead to new demands on production technology. Compared to equipment featuring new technology, older devices are no longer competitive and have a shorter useful life. Thus, technological development as such creates new demand. 9 Strategy Raute's three key strategic objectives are continuous improvement of profitability, enhanced adaptation to cyclical, economic fluctuations, and controlled growth. Services covering the entire life cycle of investments Customer in focus Raute's technology and service offering is based on a profound understanding of the customers' business and processes, and the will and ability to solve problems related to the customers' operations. This is clearly visible in all of Raute's operations, but particularly so in the company's product development and its comprehensive product and service offering. PROJECT DELIVERIES TECHNOLOGY SERVICES Technology services complete co-operation Raute wants to be a long-term partner to its customers. The life cycle of machinery used in the wood products industry ranges from ten to as much as thirty years. Raute's technologies cover the customers' entire production process, ranging from raw material processing to the finishing and packaging of end products. Project deliveries comprise complete mills, production lines, or single machines. The development of technology services is one of the strategic focus areas. Raute offers its customers services ranging from raw material and market research to production line maintenance and modernizations. Project delivery customers are potential customers for technology services later on. The implementation and schedules of large mill-scale and production line deliveries are difficult to predict. Since the demand for technology services is steadier than that for projects, services even out the variations in project activities, which are more dependent on economic fluctuations. Big modernization projects, however, are similar in nature to project deliveries. Full-scope service offering Project deliveries · Complete mills, production lines and individual items of machinery and equipment · Automation, machine vision and measuring technology Technology services · Maintenance, modernizations and spare parts · Reconditioned machinery · Personnel training · Consulting and business development RAUTE'S FORMULA FOR SUCCESS + + } x = Product development responds to the need to enhance customers' operations Close co-operation with a wide clientele has provided Raute with valuable information about customer needs that benefits product development. The focus of technological development is to improve those aspects of the customers' production processes, whose development will best help customers to improve their profitability. The aspects that offer customers the biggest benefit are better raw material recovery, improved labor productivity, decreased use of energy and chemicals, higher quality of end products, and reduced environmental loading. Raute's technological innovations enable the company to provide added value to its customers. This is how product development affects sales volumes and raises the value of products. 10 Vision Raute's vision is to be the world's leading supplier of technology and services in its field. Mission Raute generates added value to its customers' businesses by supplying state-of-the-art technology and services to facilitate the profitable and environmentally sustainable manufacture of wood products. Competence is the key element Competence is one of the key elements with which Raute can ensure its strong market position also in the future. Understanding and anticipating customer needs calls for broad-based insight into customer processes. Raute must use its product development and engineering skills to identify the technologies and practical products that enable it to best meet the individual needs of its customers. High-quality implementation of project deliveries that last several months, even years, also require profound competence in project work. An increasingly important skill is the management of outsourcing work so that work is distributed among partners in an optimized, correctly timed, and efficient manner. the use of outside resources may erode relative profitability. Good management of the partner network and the company's own activities, as well as correctly defining the processes linking these two, all enhance the quality of operations. Customers experience quality operations as correctly timed activities and smooth deliveries and services. Financial goals Raute aims to · improve profitability and retain a good level over the entire economic cycle. Development of the partner network forms the foundation for efficiency Partner network development and focus on the company's core competences are essential to efficient operations. The objective is to improve profitability by using the network to acquire entities that are not part of Raute's core competence and that subcontractors can often produce more efficiently (strategic subcontracting). By using the partner network wisely, Raute can better adapt to the big fluctuations in demand characteristic of the field (subcontracting of capacity). Expenses can be flexibly decreased during the low phase of the economic cycle and, similarly, production capacity can be increased at times of peak demand. However, Profitable operations are based on correctly priced products offering good customer benefits and on efficient cost management. Profitability is closely linked to the phase of the economic cycle. As the share of turnover from technology services increases, fluctuations in profitability are evened out to some extent. Over shorter periods of time, however, the scheduling of large projects may still cause even big fluctuations. · increase sales by approximately 10 percent a year over the economic cycle. The markets are growing at a moderate rate. Raute estimates annual growth to be around 3­4 percent. 11 Raute's technological innovations create added value for the customers. Equity ratio, % 70 60 50 40 30 20 10 0 2002 2003 2004 2005 2006 The company can achieve faster growth by increasing its market share. The key to growth lies in Raute's strategic choices, but changes in the operating environment also strengthen Raute's position. Much of the new production capacity is located unfavorably in terms of suitable wood raw material or has been designed for wood raw materials, whose availability is decreasing. Some of the investments in the industry target production plants constructed in new areas. Raute has a proven track record especially in mill-scale projects and has a good position as a supplier to the rapidly growing LVL industry. Raute also has solid technological competence in the processing of small-diameter plantation wood raw material. * EPS and dividend, EUR 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 2002 EPS 2003 2004 Dividend 2005 2006 · maintain good financial solidity and offer investors competitive returns. Dividend policy Raute exercises an active dividend policy, aiming to ensure competitive returns to investors. When paying dividend, future investment needs and the goal of maintaining a solid equity ratio are considered. Due to the nature of project business, the dividend is not directly tied to the annual result. *The Board of Directors' proposal to the Annual General Meeting 12 Strategic review Growth In line with the objectives set for 2006, Raute's sales remained at the same level as in 2005, having increased by nearly 50 percent at the time. Raute made contracts on four mill-scale projects, which is proof of Raute's position as the leading supplier of mill-scale projects. In the smaller product groups Raute's market share fell short of targets. Technology services sales in 2006 were at the previous year's levels, having seen steep growth in 2005. for 2006 is to ensure flexible reaction to fluctuations in demand. Thanks to its extensive network, Raute has been able to satisfy the increased demand without considerably increasing its number of personnel. In 2005 and 2006, turnover was approximately 50 percent higher than that in 2004. However, the use of outside resources has eroded relative profitability. Strategic priorities in 2007 The main goal for 2007 is to improve profitability. To achieve this, Raute aims to raise prices in line with the rise in purchase and subcontracting prices and by further developing the partner network. Local operations in North America will focus on the development of technology services. Raute aims at moderate growth. The good market situation supports this objective. Raute's goal is to strengthen its position in potential growth markets, such as South America, Asia, and Russia. It will also seek growth by increasing the share of new products of overall sales. Profitability Profitability did not reach its target in the review period due to unexceptionally high expenses from first deliveries, a bigger than expected rise in expenses, and the weaker market situation in North America. Especially in the USA, the slowdown in construction reduced investments in the plywood industry, and operating profit in North America was negative. Balancing cyclical fluctuations Raute has developed co-operation with its partner network strongly in recent years. One of the goals Values The customer Our goal is to create lasting and profitable relationships with our customers and to be their preferred supplier. We know and understand our customers' needs. We operate in such a way that our customers find us a reliable company with high-quality products and services. Trust in people We trust that all our employees are fully committed to achieving our common goals and good results. We are responsible in our actions, we keep our promises, and we follow the agreed procedures. We show initiative, and are open, honest, and fair. Continuous development Our objective is to achieve profits, both today and tomorrow. We want to prosper and enjoy success. We do not hesitate to seize new opportunities, and we take responsibility for developing our work and operations, for achieving our goals, and for training ourselves and improving our skills to reach these objectives. The environment We aim at a continuously improving, profitable working environment. We operate globally as a good corporate citizen. We take into consideration the requirements of local cultures and societies in all our operations. We develop the environmental soundness of our products and services based on customers' needs. 13 Business review The demand for Raute's wood products technology and services was good in the past year, and the order book at the end of the year was at an excellent level. However, profitability improvement did not reach the targets set for it. Raute performed several first deliveries and installations of newly developed products, which resulted in higher than normal expenses due to additional finishing work of these new products. In addition, the strong economic development that continued in 2006 led to competition for subcontractors and other co-operation partners, which raised expenses. Owing to good demand, also the volume of subcontracting exceeded predictions. However, the market situa- for 2006 tion in North America weakened and result was in the red. Year of mill-scale orders Raute saw a record-breaking year in 2006 in terms of new mill-scale deals. Despite the weak demand for investments in North America, Raute received a millscale order for LVL technology from the USA. New orders for plywood mills were made in Chile, France, and Russia. The orders are proof of Raute's leading position as a supplier of mill-scale entities to the plywood and LVL industries. In August 2005 Raute obtained the rights for decorative veneer production technology. The company delivered the first decorative veneer dryer to Finland in 2006. Divided market situation A climate that enables fast forest growth, as well as reasonable labor costs, have made South America a growth area in plywood production. Raute has had a strong foothold in Chile for quite some time. In the past year the company also made two important deliveries to Brazil. The market is growing in terms of both new capacity and technology services sales. The sales of Raute's technology services are supported by the installed equipment base and the strong development phase that the industry is currently experiencing. Asia's strong economic growth and extensive raw material resources have made the region into a rapidly developing market, where Raute faces good growth prospects. The company's market position in the region has not been particularly strong in recent years, but after many quiet years Raute made several deliveries with important reference value to Indonesia and Malaysia in 2006. Raute aims to strengthen its market position in Asia in both project deliveries and technology services. Russia is a significant market for Raute: it already holds a lot of importance but is also a potential growth area. Russia has the world's largest underutilized raw material resources, low labor costs, and a growing economy. In late 2006 Raute signed a contract for a plywood mill delivery to Russia. The mill contract is the biggest in Raute's history. Europe is an established market, especially in the case of the plywood industry, which is important to Raute's operations. Investments in new capacity are rarely seen, which is why development in the past year was particularly positive. Future growth areas for wood products use include interior decoration, furniture, and construction. North America is also an established market. Investments there focus on enhancing operations. An exception to this was the significant LVL mill order that Raute received from the USA in the review period. Sales of spare parts and maintenance services developed well in the past year, but modernizations fell short of the previous year's figures. The focus in North America will be especially on technology services sales, the goal being a minimum growth of 10 percent. 14 In 2006 Raute received a record of four mill-scale project orders. Profitability as challenge First deliveries Raute's product development has been strong in recent years, resulting in an exceptional number of first deliveries of new products in 2006. Wide-ranging testing, carried out for the first time, may indicate a need to finish the results of product development in conjunction with the first customer deliveries. This will result in additional costs that are difficult to predict. However, first-delivery products have proved to be successful and will benefit future sales as planned. Flexibility to delivery capacity Raute has strengthened its partner network and outsourced operations outside its core competence in recent years. The strong growth in orders in 2005 called for a capacity increase at the time, which was carried out by developing co-operation with subcontractors and other co-operation partners and by continuing to enhance company's own operations. The goal of the changes was to find the most cost-effective manufacturer for each machine or machine component. Raute also outsourced some work phases characterized by a low level of processing, such as preprocessing, welding, and painting. The partner network has been developed in Finland, as well as the Baltic countries and Order book at the end of the year, EUR million 80 70 60 50 40 30 20 10 0 2002 2003 2004 2005 2006 Product development M 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 2002 2003 2004 2005 2006 % 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 EUR million % of net sales 15 China. In addition to the partner network, Raute has also made major efforts to develop its sourcing operations. New operating models were fully implemented in 2006 but development continues in the company. Productivity can be improved by further clarifying the distribution of work, enhancing logistics, and making better use of purchase volumes. Partner network development is a strategic choice that aims to reduce result fluctuations caused by wide demand variation in the field. The steep increase in prices of different steel grades, which began in 2004 and continued in the past year, raised the purchase prices of Raute's main raw materials, as well as those of components based on steel and other metals. The predicted purchase prices of materials for project deliveries include a risk between the time of bid and the time of contract, and this risk was partly realized in the past year. Weaker market in North America The North American housing market and housing construction saw a significant decrease in the past year. Meanwhile, the production capacity of OSB board, a competitor of plywood, was expanded. As a result, the prices of plywood grades used for construction decreased in some cases by over 40 percent over the year. Raute's customers made significant cuts to their investments as well as to inputs in enhancing maintenance. Improved delivery capacity in technology services Customer feedback and internal operations indicators showed good development in technology services as a whole. Service productization, which started in modernization services in 2004, continued in 2006. The productization targeted spare part services, as well as training and consulting services. The goal is to develop sales, achieve even quality in services, and deepen customer relations. Procurement activities were also developed to meet the needs of technology services in the past year. After the changes, spare part and maintenance sales people can purchase some of the products they sell or components needed in them directly from the agreed partners. Development aims at faster and more flex- Major project orders in 2006 · Plywood mill: Paneles Arauco S.A., Chile · LVL mill: Murphy Company, USA · Plywood mill: Thebault Plyland S.A.S., France · Plywood mill: Vjatsky Fanernyi Kombinat, Russia · Decorative veneer dryer: UPM-Kymmene, Project deliveries in 2006 · Plywood mill: Empresas CMPC S.A., Chile · Plywood mill expansion: A/S Latvijas Finieris, Latvia · Peeling line: Tawau Plywood Manufacturing SDN. BHD., Malaysia · Peeling line: P.T. Korindo Ariabima Sari, Indonesia · Peeling line: Industria de Compensados Lohja veneer mill, Finland Guararapes Ltda., Brazil · Peeling line: Industria de Compensados Sudati Ltda., Brazil 16 Product development in 2006 · In 2005, a new block optimization system based on laser curtain technology was introduced to the market. In 2006, the system was expanded with modules that add to automation, and productization was completed. · The market was introduced to a new high-capacity scarf-jointing line that increases capacity and improves recovery, as well as enhances the quality of the joint. The first delivery was made to Finland in 2006. · A new version of the core veneer composer was launched. The first machine was delivered at the end of 2006. · Two new face veneer composers were delivered in 2006. · The first foam gluing lines were delivered in 2005. The emphasis in 2006 was on the fine tuning of gluing equipment. · In the area of panel handling a new trimming saw line was developed for plywood. The first delivery was made in 2006. · Several new automation products were also developed. ible response, and reliable deliveries, all of which improved over the year. However, expectations were not fully met, and the operating model will be further developed in 2007. The level of service was also further developed by enhancing resource management. The goal is to analyze resources globally and increase product-orientation in operations by lowering boundaries between companies and countries. For example, the services provided by Raute's subsidiary RWS-Engineering Oy, which specializes in consulting, training, and the delivery of reconditioned machinery, are now a seamless part of Raute's overall offering. The integration of operations also strengthened Raute's position as a provider of services that cover the entire life cycle of investments. Future prospects Product development was active in 2005 and 2006, and the products have proved to be successful, offering good sales potential. New products, an order book that is at a good level and well suited to Raute's production capacity, a functional co-operation network, and good opportunities to further develop productivity provide a good foundation for successful project operations in 2007. Equipment delivered to countries all around the world, increasing outsourcing of maintenance, and rapid growth in the wood products sector in emerging markets offer numerous business opportunities also in service activities. Raute will develop operations at its latest sites in Shanghai and St. Petersburg, and will monitor the need to establish new offices. 17 Corporate responsibility Raute offers challenges Raute is the leading technology company in its field. Its success is based on a professional and innovative personnel with good co-operation skills. In recent years, the focus of operations has shifted to more demanding product and automation engineering, and the company has concentrated on the part of production that calls for special skills. This also makes special demands on the development and maintenance of competence. Since Raute engages in international operations, its employees need versatile language skills and good ability to co-operate with people from different cultures. It is important to secure competence, sufficient social skills, and language skills already at the recruiting phase. In 2006 Raute focused on both recruiting and work induction methods. The emphasis in personnel development was on customer service training offered to mechanics and maintenance staff, as well as on user training in new information systems and design applications. At the end of 2006 Raute employed 540 people. The structural changes resulting in Raute focusing on its core competence have stabilized the overall number of personnel. The increase in subcontracting calls for special work induction plans to ensure the competence of subcontractors. Raute employees like their work Personnel turnover is very low at Raute, and the company's image as an employer is good. Job satisfaction and well-being are emphasized in order to maintain the employees' ability to work. Occupational health care focuses on preventive operations in a number of ways. In 2006 employees were especially encouraged to take care of their physical health and condition. The work atmosphere survey conducted in late 2005 was analyzed in 2006, and the results indicated that employees were very satisfied. Respondents gave particularly positive answers to the statement "I like my work at Raute". According to the survey, employees consider their work to be challenging and understand the importance of their role as part of Raute's highquality operations. Raute has adopted a performance-based bonus system that covers the entire personnel. Employees can also be rewarded for achieving their individual objectives. A share-based incentive plan for the Executive Board and a group of key employees was approved in 2006. Raute is well-known in educational institutions in the field. The company co-operates actively with educational institutions and universities and offers traineeships and thesis work for students. Environmental management program guides operations Raute has been systematically developing the environmental soundness of its products and services and aims to reduce the environmental impact of its operations. Products that save raw materials and energy Raute's product development emphasizes solutions that save raw materials and energy and cut down consumption of chemicals. In many production processes, raw material savings have an indirect impact on energy efficiency. If the wood raw material that is unsuitable for the end product is taken aside early enough in the process, and the material fit for utilization is treated in the optimum way, energy is not used needlessly for the drying, processing, and transfer of unsuitable raw material. Characteristics such as these that promote environmental soundness often also enhance the profitability of customer operations, for example, by decreasing raw material, glue, and energy expenses. 18 Raute's R&D focuses on developing solutions for the customers that enable savings in raw materials, energy and chemical comsumption. Several environmentally sound products were developed in 2006. In the past year Raute introduced a condition monitoring product for the XY block optimizing system that enables inaccuracies caused by mechanical wear to be automatically eliminated also between annual service checkups. The product leads to annual raw material savings of up to 2 000­4 000 cubic meters in a single peeling line equipped with an XY optimizer. Raute also developed a new type of veneer scarf-jointing concept in 2006. Measurements indicate that the new technology saves raw material and reduces wood waste by 2­3 percent compared to traditional scarf-jointing lines. Raute also develops technologies that save additives used in processes. An example of such technology is the foam glue-based veneer layup line launched in 2005. It has reduced the use of glue by some 15 percent. Education* University 13% Basic education 21% Vocational school 35% College 31% Personnel* 700 600 500 400 300 200 100 0 2002 2003 2004 2005 2006 Environmental goals for company operations were achieved Raute aims to continuously reduce energy use, decrease the volume of waste, and make the working environment safer. Both the Nastola and Jyväskylä plants have valid ISO 9001 and ISO 14001 quality and environmental certificates. The operations and ethical principles of the partner and subcontractor networks are also subjected to systematic inspection. The targets and measures aimed at reducing the environmental impact of operations are defined annually in Raute's environmental management program, and the results are monitored regularly. *Current employment contracts at 31 Dec. Personnel* Number of personnel Women, % Average age Years at Raute 2006 534 12 45 14 8 2005 522 11 44 14 10 2004 536 11 45 14 10 Total turnover of employees, % *Current employment contracts at 31 Dec. 19 Financial statements 2006 Board of Directors' report Group Consolidated income statement Consolidated balance sheet Consolidated cash flow statement Consolidated statement of changes in shareholders' equity Notes to the financial statements Parent company Income statement, FAS Balance sheet, FAS Statement of changes in shareholders' equity, FAS Key ratios describing the financial development Calculation of key ratios Shares and shareholders Proposal for distribution of profits Auditor's report 21 27 28 29 30 31 54 55 56 57 60 61 65 65 The complete consolidated financial statements can be found on the company's website at www.raute.com. 19 Board of Directors' The Group's net sales in 2006, EUR 106.2 million (108.6 m), were down 2 percent. The Group's operating profit totaled EUR 4.5 million (4.4 m). Financial income and expenses were EUR 0.4 million (1.1 m). Profit before tax was EUR 4.9 million (5.5 m) and profit for the period EUR 3.6 million (4.0 m). Earnings per share amounted to EUR 0.94 (1.09), while return on equity was 13 percent (16%). The figures in parentheses in the Board of Directors' report refer to the corresponding figures in the previous report period 2005. report spare part services, modernizations, consulting, training, and sales of reconditioned machinery. The order intake in 2006 totaled EUR 132 million (132 m), of which project deliveries accounted for EUR 105 million (109 m). The most significant orders involved the machinery and equipment for three plywood mills in Chile, France and Russia, as well as key production machinery for an LVL mill in the USA. Raute's market position is generally speaking good and looks particularly strong in its traditional technology fields: the plywood and veneer industry, as well as the LVL industry. Proof of the company's leading market position as a full-service technology supplier came in the form of four mill-scale orders received in 2006. The company's competitive position is based on a comprehensive offering of technology and services, leading technology in the field that is maintained by strong product development, and solid references. Several deliveries with reference value were introduced into production use in 2006. New products will boost Raute's competitiveness in these technology and market areas. Markets The market situation in the plywood and veneer industry, the capacity utilization, order book, product prices, and investments were all at a good level throughout the year in the company's main market areas, with the exception of North America. In the USA, the waning confidence in overall economic development affected the demand for and prices of construction materials. In addition, the new production capacity for OSB board rolled out in 2006 competed with plywood in North America. In Asia and Russia, the market situation for plywood showed positive development. The demand for investments focused on mill-scale projects. Favorable development and investments in new production capacity continued in the LVL industry. The production capacity that has come on line in recent years has found demand on the market. In technology services, demand for spare part and maintenance services remained at a good level. Modernizations were in less demand in Europe compared to the previous year. Their demand in North America was also low due to the plywood industry's general unwillingness to make investments. Net sales and order book The Group's net sales (IFRS) EUR 106.2 million (2005: 108.6 m; 2004: 73.1 m) dropped by 2 percent compared to 2005, which was a year of steep growth. The drop in net sales was caused by lower net sales from modernizations and the scheduling of project deliveries. Project deliveries accounted for 79 percent (78%) of the Group's net sales. 93 percent (83%) of project deliveries were to the plywood industry and 4 percent (17%) to the LVL industry. Technology deliveries to the decorative veneer industry have started as planned, holding a share of 3 percent (0%). The first dryer for the decorative veneer industry was delivered in 2006. Technology services accounted for 21 percent (22%) of the Group's net sales. While growth in maintenance Order intake and market position Raute's business consists of project deliveries and technology services. Project deliveries encompass complete mills, production lines, and single machines and equipment. Technology services include maintenance, 21 and spare part services reached targets, overall net sales from technology services were down 7 percent from the previous year due to the market situation for modernizations in Europe. Technology services have grown by 26 percent since 2004. Europe's share of the Group's net sales dropped to 29 percent (40%) and North America's to 16 percent (27%). Russia's share was 12 percent (14%) and Asia's 5 percent (7%). Other market areas increased their share to 38 percent (12%), fueled by two mill-scale project deliveries to Chile. The order book grew strongly throughout the year, amounting to EUR 77 million (55 m) at the end of the year. Parent company Raute Corporation's net sales (FAS) in 2006 totaled EUR 91.1 million (2005: 87.1 m; 2004: 54.7 m). Parent company Raute Corporation's operating profit (FAS) amounted to EUR 4.0 million (2005: 5.5 m; 2004: 4.6 m), representing 4 percent of turnover (2005: 6%; 2004: 8%). Profit for the period was EUR 0.9 million in the red (3.8 m positive). Operating profit suffered from impairments worth EUR 1.2 million from the receivables of a subsidiary. Financial items include a loss of EUR 4.6 million related to the measurement of subsidiaries' loans. Development of operations Raute continued to develop its procurement activities by establishing a subsidiary in Shanghai, China. The new company will strengthen the Group's purchasing organization, handle subcontracting and materials purchases in China, and improve the Group's presence on the Chinese market. The ERP and financial administration systems of Raute's North American operations were harmonized to comply with the information systems used at the main production plant in Nastola. Harmonized systems will enhance quotation processes, project implementation, and co-operation between plants. Development also continued on the work distribution and co-operation among Raute's own operations, the goal being to improve customer service and operational efficiency. The consulting and reconditioned machinery services offered by RWS-Engineering Oy were made into an operational part of Raute's technology services managed from Finland. To deal with the weak demand for investments in North America, Raute strengthened its customer service and delivery capacity in technology services in the region, and made the resources related to project deliveries a part of its global project organization. Result and profitability The Group's operating profit in 2006 (IFRS) was EUR 4.5 million (2005: 4.4 m; 2004: 3.6 m), representing 4 percent of turnover (2005: 4%; 2004: 5%). Profitability development fell short of targets due to the unanticipated expenses related to the first deliveries of some new products, the cost pressure caused by the good overall economic situation, and North America's weak market situation. Operations in North America were unprofitable. The Group's financial income and expenses were EUR 0.4 million (1.1 m). The Group reached the income level set for asset management in 2006. Profit before tax was EUR 4.9 million (5.5 m) and profit for the period EUR 3.6 million (4.0 m). Earnings per share stood at EUR 0.94 (undiluted: 1.09 per share; diluted: 1.07 per share). Return on investment was 19 percent (21%) and return on equity 13 percent (16%). In 2006 net sales and profit benefited from a EUR 0.1 million (-0.7 m) IFRS-compliant recognition of currency hedges that were used for economic hedging purposes but fell outside the scope of hedge accounting. Profit for the previous year was improved by the release of excess cover totaling EUR 0.4 million in conjunction with the dissolution of the pension fund. The hedge accounting and other changes to accounting principles adopted in 2006 did not have an essential impact on the figures for 2006. Group structure Raute Corporation's subsidiary in China, Raute (Shanghai) Machinery Co., Ltd, obtained business permits in September. The dissolution of Eloc Oy, an associated company, was entered in the Trade Register on May 31, 2006. The dissolution of Raute Corporation's Pension Fund was entered in the Register of Foundations on July 25, 2006. Financing The Group's financial position remained strong. The equity ratio (IFRS) at the end of the period was 60.1 percent (2005: 55.7%; 2004: 56.8%). Gearing was 22 -80.3 percent (2005: -41.5%; 2004: -30.6%) at the end of the period, and the balance sheet total was EUR 68.5 million (2005: 55.4 m; 2004: 46.2 m). The rise in the balance sheet total came from an increase in prepayments received. The strong fluctuation in balance sheet items and the key ratios based on them results from differences in the timing of customer payments and the cost accumulation from project deliveries, which is typical of project business. The Group's liquid assets at the end of the period totaled EUR 24.0 million (11.4 m), while interest-bearing liabilities were EUR 0.5 million (0.5 m). Operating cash flow amounted to EUR 15.0 million (7.7 m) and investing cash flow to EUR -1.5 million (-3.0 m). The financing cash flow, EUR -0.8 million (-2.9 m), includes EUR 2.3 million from the payment of year 2005 dividends, as well as EUR 1.4 million in payments received from the stock issue of series A shares subscribed for with options. Raute Corporation has an EUR 10 million domestic commercial paper program, which allows it to issue commercial papers maturing in less than one year. The company also has bilateral non-current credit regulation agreements worth EUR 15 million. Parent company Raute Corporation's equity ratio (FAS) at the end of the period was 59.0 percent (2005: 63.1%; 2004: 68.1%). net sales). Investments amounted to EUR 1.8 million (2005: 2.9 m; 2004: 1.4 m). Personnel The Group's headcount at the end of 2006 was 540 (533) persons. Finnish companies accounted for 76 percent (77%), North American companies for 21 percent (21%) and other sales and maintenance companies for 3 percent (2%) of personnel. The number of personnel converted to full-time employees was approximately 547 (2005: 537; 2004: 556). The operations development projects carried out in 2006 had no significant impact on the headcount. The Group's salaries totaled EUR 22.0 million (2005: 21.1 m; 2004: 19.4 m). The Group has adopted profit-based bonus systems that cover the entire personnel. In the report period the company set up a share-based incentive plan for the strategy period 2006­2008. The system is described in greater detail in the financial statements under Shares and shareholders. The number of personnel at parent company Raute Corporation, converted to full-time employees, was on average 386 (2005: 379; 2004: 406). The parent company's salaries totaled EUR 14.8 million (2005: 14.7 m; 2004: 13.8 m). Shares Research and development costs and capital expenditure Raute aims at being the leading technology supplier in selected customer industries and to strongly emphasize continuous research and development of plywood and LVL technologies in particular. The Group's research and development expenditure remained high in 2006, amounting to EUR 3.8 million and representing 3.5 percent of net sales (2005: 3.6 m / 3.3% of net sales; 2004: 3.1 m / 4.2% of net sales). Overall investments in the report period, EUR 1.9 million, were low in terms of production investments (2005: 3.8 m; 2004: 2.1 m). Investments in 2006 included development costs worth EUR 0.5 million (2005: 0.2 m; 2004: 0.5 m). Other investments focused mainly on upgrading information technology. Parent company Raute Corporation's research and development costs (FAS) in the period totaled EUR 3.2 million, representing 3.5 percent of net sales (2005: 2.9 m / 3.3% of net sales; 2004: 2.5 m / 4.6% of The number of Raute Corporation's shares at the end of 2006 totaled 4 004 758, of which 991 161 were series K shares (ordinary share, 20 votes/share) and 3 013 597 series A shares (1 vote/share). Series K and A shares have an equal right to dividends and the company's assets. Series K shares can be converted to series A shares under the terms described in section 3 of the Articles of Association. If an ordinary share is transferred to a new owner who is not a shareholder of the series K shares, the transferee must immediately make this known in writing to the Board of Directors. Other shareholders of the series K shares have the right to redeem the share under the terms described in section 4 of the Articles of Association. The company did not possess company shares during the report period or hold them as security. Raute Corporation's series A shares are listed on the Nordic list of the Helsinki Stock Exchange. A total of 1 088 288 shares were traded in 2006, amounting to EUR 15.4 million. The traded amount represented 36 percent of the number of series A shares. The average 23 price of series A shares was EUR 14.03 (11.24). The highest quotation was EUR 17.60 and the lowest EUR 11.60. The company's market capitalization at the end of 2006 was EUR 51.5 million, with series K shares valued at the closing price on 31 December 2006 of series A shares, that is EUR 12.85. A total of 190 150 series A shares subscribed for through the exercise of B options pertaining to the 1998 option scheme were entered in the Trade Register in 2006. The option scheme expired on September 30, 2006. Corresponding share capital increases totaled EUR 380 300. The terms of the option scheme are described on the company's website. Raute Corporation has signed a market making agreement with Nordea Bank Finland plc in compliance with the Liquidity Providing (LP) requirements issued by the Helsinki Stock Exchange. Mr. Jarmo Rytilahti was elected Chairman of the Board, Ms. Sinikka Mustakallio was elected Vice-Chairman, and Mr. Mika Mustakallio, Mr. Panu Mustakallio, Mr. Pekka Paasikivi, and Mr. Jorma Wiitakorpi were elected Board members at the Annual General Meeting on March 22, 2006. The Board of Directors elects the President and CEO, and confirms the terms of his or her employment, including wage benefits. Mr. Tapani Kiiski, Licentiate in Technology, continued as President and CEO of Raute Corporation. He was appointed President and CEO on March 16, 2004. As agreed in the executive contract, the term of notice is six months and the severance pay equals six months' salary. The Articles of Association do not grant unusual authorizations to the Board of Directors or the President and CEO. Decisions on amendments to the Articles of Association and share capital increases are made in compliance with the regulations of the effective Companies Act. Authorization to acquire and dispose company shares The Annual General Meeting held on March 22, 2006 gave the Board of Directors a one-year authorization to decide on the acquisition of series A shares using distributable funds. The number of shares acquired may not exceed 10 percent of the company's overall shares or votes. The acquired shares may be used if a weighty reason thereto exists, such as the funding of acquisitions or other arrangements. The authorization was not exercised in 2006. Other management Mr. Tapani Kiiski continued as Chairman of Raute's Executive Board, and the Board's members included Ms. Arja Hakala, CFO; Mr. Petri Strengell, Vice President, Technology and Operations; Mr. Timo Kangas, Vice President, Technology Services; and Mr. Bruce Alexander, Vice President, North American Operations and President of Raute's North American companies. The President of Raute Corporation's subsidiary Mecano Group Oy is Mr. Pasi Kenola, M.Sc. (Eng.), eMBA, who has held the post since March 1, 2006. The President of Raute Corporation's subsidiary RWS-Engineering Oy is Mr. Timo Kangas, Vice President, Technology Services, who took up the post on March 10, 2006. Loans to related parties and other obligations In the financial statements dated December 31, 2006 parent company Raute Corporation had loan receivables from its subsidiaries Raute Canada Ltd. totaled CAD 3.2 million; Raute Group Asia Pte Ltd totaled SGD 90 thousand; and Raute Service LLC totaled EUR 30 thousand. Raute Corporation had a loan of EUR 110 thousand to Raute's sickness fund. Other obligations are presented in the notes to the financial statements. Auditors Raute Corporation's Annual General Meeting held on March 22, 2006 elected Mr. Kari Miettinen and Ms. Sari Airola, Authorized Public Accountants, as auditors, and PricewaterhouseCoopers Oy, an authorized public accounting company, as deputy auditor. Distribution of dividend Raute Corporation's Annual General Meeting on March 22, 2006 approved a dividend of EUR 0.60 per share. A total of EUR 2.3 million was paid in dividend on April 3, 2006. Business risks Management The Annual General Meeting elects the Chairman and Vice-Chairman for the Board of Directors, and 3­5 Board members. Impact of economic fluctuations on business operations Raute supplies technology and services to the wood products industry. Business is characterized by sensi- 24 tivity to economic fluctuations due to changes in the investment activity of customer industries. The impact that the cyclical nature of project deliveries has on the Group's performance is mitigated by systematically increasing the share of technology services, by developing the subcontracting network, and by focusing on core competence. In the long term, the Group's growth opportunities are increased and the impact of economic fluctuations balanced by developing operations in customer industries where the company's market share is still small, and by creating products for new customer groups, such as the decorative veneer industry. The Group is prepared for fluctuations in the working capital tied up in project operations. Raute Corporation has an EUR 10 million domestic commercial paper program, which allows it to issue commercial papers maturing in less than one year. The company also has bilateral non-current credit regulation agreements worth EUR 15 million. Delivery and technology risks The majority of Raute's business operations consists of different kinds of project deliveries, which always expose the company to risks caused by, for example, the customer's end product, production methods, or customer-specific solutions related to raw materials. At the quotation and negotiation phase, the company has to make estimates of the achievement of promised performance figures and of the costs of implementation. Contract, product liability, implementation, cost, and capacity risks are managed using project management procedures that comply with the company's certified quality system. Raute emphasizes product development and continuously develops new technology in order to offer solutions for customers' increasing needs. The functionality and capacity of new solutions cannot be fully verified until the solutions can be tested under production conditions in conjunction with first customer deliveries. Technology risks are reduced by the conditions of delivery contracts and by restricting the number of simultaneous first deliveries. Financial risks The main financial risks that Raute's international business operations are exposed to are credit, liquidity, and currency risks. Financial risks, the objectives of financial risk management, and management procedures are described in the notes to the financial statements. Accident risks The production, planning, financial, and ERP systems serving the Group's key technologies are centrally located at the Nastola main production plant. A fire or serious breakdown in machinery may result in considerable property or interruption damage. The Group hedges against such risks by assessing its facilities and processes in terms of risk management and by maintaining emergency plans. It regularly reviews its insurance policies as part of overall risk management. The objective is to use insurance policies to sufficiently hedge all risks that are reasonable to handle through insurance due to economical or other reasons. The Group has no ongoing legal proceedings or other disputes in progress that might materially affect the continuity of business operations, nor is the Board of Directors aware of any other legal risks related to the Group's operations that might have such an effect. Risk management Risk management is described in the Annual Report, under Corporate governance. Society and the environment The environment is one of the values that guide Raute's operations. Raute has been systematically developing the environmental soundness of its products and services and aims to reduce the environmental impact of its operations. The Group abides by the principles of good corporate citizenship, taking into consideration nature and its protection, as well as the operating methods of the surrounding society, and by showing respect to local cultures. Raute's operations mainly affect the environment indirectly when the company's technology is used in the production processes of the wood products industry. Raute's technology enables the wood products industry to substantially reduce the environmental load caused by its operations, for example, through more efficient use of raw materials, additives, and energy. The Group's own operations do not involve any considerable environmental risks that might have a direct impact on the Group's business operations or financial position. The Nastola and Jyväskylä plants manage environmental matters in compliance with a certified environmental system. At the Canadian plant, environmental surveys are carried out regularly by an outside assessor. The operations and ethical principles of the partner and subcontractor networks are also subjected to systematic inspection. 25 Raute aims to continuously reduce energy use, decrease the volume of waste, and develop the working environment. In 2006, a survey of potential soil contamination was conducted at the Canadian plant. According to the survey, the soil does not call for cleansing measures for the current industrial purposes. The Group's environmental management is described in more detail in the Annual Report, under Corporate responsibility. Outlook for 2007 The market situation in Raute's customer industries is expected to remain good, except in North America. However, developments in raw material and energy prices will keep competition tough in the wood products industry, forcing players in the field to focus on continuously developing their production. This will offer business opportunities to Raute. Investments in the wood products industry will continue at a good level in the near future. Several mill-scale projects are in the planning phase in different market areas. In addition, demand for smaller production line projects and modernizations is picking up after 2006, which was less active in this respect. Raute's competitiveness is good thanks to modern technology and the investments carried out. First deliveries account for a smaller share of the order book than the year before. The potential weakening of the US and Canadian dollars against the euro create challenges to the competitiveness of North American project deliveries. Thanks to a strong order book and good continued demand the outlook for 2007 is promising. Net sales are expected to grow moderately in 2007 and operating profit to improve over 2006. The Board of Directors' proposal for measures concerning the company's profit The parent company's distributable assets total EUR 14 007 thousand, of which EUR 854 thousand stands for the period's loss. The Board of Directors will propose to Raute Corporation's Annual General Meeting on March 21, 2007 that a dividend of EUR 0.70 per share be distributed on series A and K shares, that is, a total of EUR 2.8 million. Other distributable funds will be left in retained earnings. No essential changes have taken place in the company's financial position since the end of the report period. The company has good liquidity, and the proposed dividend does not risk it in the Board of Directors' view. 26 Consolidated income statement EUR 1 000 Note 2,3,4 5 NET SALES Other operating income Increase (+) or decrease (-) in inventories of finished goods and work in progress Materials and services Expenses from employee benefits Depreciation, amortization and impairment charges Other operating expenses Total operating expenses OPERATING PROFIT 13 13 Financial income Financial expenses PROFIT BEFORE TAX 14 Income taxes PROFIT FOR THE PERIOD 15 Breakdown Minority interest Share of profit that belongs to owners of the parent company 15 15 Undiluted earnings per share, EUR Diluted earnings per share, EUR Shares Adjusted average number of shares Adjusted average number of shares diluted 3 866 561 3 866 561 3 814 608 3 871 703 3 632 0.94 0.94 -114 4 152 1.09 1.07 1.1­31.12.2006 1.1­31.12.2005 106 206 199 -111 62 418 26 227 2 660 10 476 101 781 4 513 745 -371 4 887 -1 255 3 632 108 627 708 40 66 694 25 387 2 877 10 014 104 972 4 403 1 131 -73 5 461 -1 423 4 038 6 7 10,16,17 12 The notes form an essential part of the financial statements. FINANCIAL STATEMENTS 2006 / GROUP 27 Consolidated balance sheet EUR 1 000 Note ASSETS Fixed assets and other non-current assets 16 17 19 20 28 Intangible assets Tangible assets Available-for-sale investments Receivables Deferred tax assets Total Current assets Inventories Accounts receivable and other receivables Financial assets at fair value through profit or loss Cash and cash equivalents Total TOTAL ASSETS SHAREHOLDERS' EQUITY AND LIABILITIES Shareholders' equity 25 25 25, 26 25 25 Share capital Share premium Other funds Retained earnings Profit for the period Share of shareholders' equity that belongs to owners of the parent company Minority interest Total shareholders' equity 30 27 28 29 Long term liabilities Provisions Deferred tax liabilities Long term interest-bearing liabilities Total Current liabilities Provisions Short-term interest-bearing liabilities Pension obligations Advance payments received Current tax liabilities Trade and other payables Total Total liabilities TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 262 1 084 317 1 663 475 1 300 357 2 132 8 010 6 498 -201 11 370 3 632 29 309 29 309 7 629 5 429 14 8 699 4 152 25 923 224 26 147 2 924 12 542 395 487 16 348 2 757 13 939 395 48 210 17 349 31.12.2006 31.12.2005 21 4, 22 23, 24 24 4 933 23 184 10 195 13 812 52 124 68 472 5 026 21 666 8 975 2 419 38 086 55 435 2 30 28 31 32 33 33 1 726 150 335 19 726 113 15 450 37 500 39 163 68 472 1 927 176 380 8 500 105 16 068 27 156 29 288 55 435 28 FINANCIAL STATEMENTS 2006 / GROUP Consolidated cash flow statement EUR 1 000 1.1­31.12.2006 1.1­31.12.2005 CASH FLOW FROM OPERATING ACTIVITIES Proceeds from sales Proceeds from other operating income Payments of operating expenses Cash flow before financial items and taxes Interests and other operating financial expenses paid Interests and other income received Dividends received Income taxes paid NET CASH FROM (+) / USED IN (-) OPERATING ACTIVITIES (A) CASH FLOW FROM INVESTING ACTIVITIES Capital expenditure in tangible and intangible assets Purchases of available-for-sale as investments Acquisition of subsidiary shares Proceeds from sale of tangible and intangible assets Proceeds from other investments NET CASH FROM (+) / USED IN (-) INVESTING ACTIVITIES (B) CASH FLOW FROM FINANCING ACTIVITIES Repayments of long-term and short-term loan receivables Repayment of short-term liabilities Increase of long-term liabilities Repayment of long-term liabilities Proceeds from issuance of shares Dividends paid NET CASH FROM (+) / USED IN (-) FINANCING ACTIVITIES (C) 95 -1 537 -67 1 436 -2 290 -826 278 -66 -1 526 -2 851 -1 809 -49 292 20 -1 545 -3 554 -304 713 180 -2 965 116 046 155 -100 100 16 102 -190 660 24 -1 614 14 982 108 934 483 -99 840 9 577 -80 764 56 -2 636 7 681 NET CHANGE IN CASH AND CASH EQUIVALENTS (A+B+C) increase (+) / decrease (-) 12 611 1 865 CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR* CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR* CASH AND CASH EQUIVALENTS IN THE BALANCE SHEET Financial assets at fair value through profit or loss Cash and cash equivalents Total 11 395 24 006 9 530 11 395 10 195 13 812 24 006 8 975 2 419 11 395 *Cash and cash equivalents comprise trading assets as well as cash and bank receivables, which will be due under three months' period. The notes form an essential part of the financial statements. FINANCIAL STATEMENTS 2006 / GROUP 29 Consolidated statement of changes in shareholders' equity Share of shareholders' equity that belongs to the owners of the parent company Share premium Exchange rate differences Share capital Other funds Retained earnings Minority interests TOTAL 25 039 -1 435 17 -1 418 4 038 2 620 14 -1 526 26 147 26 147 -338 88 808 -224 334 3 632 3 966 1 436 -2 290 50 29 309 EUR 1 000 EQUITY Jan. 1, 2005 Exchange differences from net investments Taxes related to items recognized in equity or transferred from equity Translation differences Other increase/decrease Net income recognized directly in equity Profit for the period Total income and expenses recognized in the period Share capital increase (options) Dividend Equity-settled sharebased transactions EQUITY Dec. 31, 2005 7 629 5 429 902 10 726 24 686 353 -1 435 32 -1 435 32 -15 -1 435 32 4 152 -1 403 4 152 -15 -114 -1 435 14 4 184 -1 526 2 749 14 -1 526 -129 7 629 5 429 14 -533 13 384 25 923 224 EQUITY Jan. 1, 2006 Exchange differences from net investments Taxes related to items recognized in equity or transferred from equity Translation differences Other increase/decrease* Net income recognized directly in equity Profit for the period Total income and expenses recognized in the period Share capital increase (options) Dividend Equity-settled sharebased transactions EQUITY Dec. 31, 2006 *Dissolution of associate Eloc Oy. 7 629 5 429 14 -338 -533 13 384 25 923 -338 224 88 808 88 808 -224 -250 808 3 632 558 3 632 -224 -250 381 1 069 -14 808 3 632 -2 290 4 190 1 436 -2 290 50 29 308 -224 8 010 6 498 50 -201 274 14 726 The notes form an essential part of the financial statements. 30 FINANCIAL STATEMENTS 2006 / GROUP Notes to the consolidated financial statements General information Raute Group (`Group') is a globally operating technology corporation, whose core business consists of the production processes of veneer-based wood products. Project deliveries include complete mills, production lines, and single machines. Full-service technology services include spare part, maintenance, and modernization services, as well as services related to developing customers' businesses. The Group's parent company, Raute Corporation, is a Finnish public limited liability company established in accordance with Finnish law (Business ID FI01490726). Its series A shares are quoted on the Nordic list of the Helsinki Stock Exchange under Industrials. Raute Corporation is domiciled in Lahti, Finland. The address of its registered office is Rautetie 2, 15550 Nastola, Finland and its postal address is P.O. Box 69, 15551 Nastola, Finland. These financial statements were authorized for issue by Raute Corporation's Board of Directors at its meeting on February 8, 2007. According to the Finnish Companies Act, shareholders may approve or reject the financial statements at the shareholders' meeting arranged after the statements have been issued. The shareholders' meeting also has the opportunity to make changes to the financial statements. · available-for-sale investments · financial assets and liabilities recognized at fair value through profit or loss · derivative financial instruments · hedged items in fair value hedge · cash-settled share-based transactions. All of the figures presented in these consolidated financial statements are in thousand euro, unless otherwise stated. The Group has applied the following amended standards as of January 1, 2006: The Group has adopted the amendments to IAS 39 issued by IASB in 2004 and 2005. The adoption of the amended standard has not had any material impact on the figures for 2005 and 2006. The Group has applied the IFRS 2 standard to the share-based incentive plan set up for key employees on March 22, 2006. The Group has adopted hedge accounting in compliance with IAS 39. The Group has adopted the amendments to standard IAS 21, the Effects of Changes in Foreign Exchange Rates. The amendment to the standard has not had any material impact on the figures for 2005 and 2006. The preparation of financial statements in conformity with IFRS requires management to make certain critical accounting estimates and to exercise its judgment in applying the Group's accounting policies. Information about the estimates and judgment that the management has used and that are most critical to the figures in the financial statements are disclosed under "Critical accounting judgments and key sources of estimation uncertainty". Notes 1 ACCOUNTING PRINCIPLES Basis of preparation The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS). Preparations have complied with the IAS and IFRS standards, as well as SIC and IFRIC interpretations, effective on December 31, 2006. IFRS refer to the standards and their interpretations that have been approved for application in the EU in the Finnish Accounting Act and regulations issued under it in accordance with the procedures laid down in the EU regulation (EC) 1606/2002. The notes to the consolidated financial statements also comply with Finnish Accounting Legislation. The consolidated financial statements have been prepared under the historical cost convention, except for the following items measured at fair value: Segment reporting The Group's primary reporting format is by business segments and its secondary format by geographical segments. The business segments are based on the Group's internal organization structure and internal financial reporting. A geographical segment is identified as reportable if the market area it forms accounts for more than 10 percent of the Group's net sales and if its busi- FINANCIAL STATEMENTS 2006 / GROUP 31 ness risks and profitability differ from those found in the economic environments of other market areas. In the report periods 2005 and 2006 the Group's continuing operations as a whole were included in the wood products technology segment. Consolidated financial statements The consolidated financial statements include the parent company Raute Corporation and its subsidiaries in which the parent company holds, directly or indirectly, over 50 percent of the votes or in which it exercises control otherwise. Control means the right to decide on the company's financial and business principles to profit from the company's operations. Mutual shareholding has been eliminated using the purchase method. Subsidiaries are consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date that control ceases. Accounting policies of foreign subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group. All intra-Group transactions, receivables, liabilities and unrealized margins, as well as internal distribution of profit have been eliminated. The profit or loss for the period has been allocated to equity holders of the parent company and to minority interest in the income statement. In the balance sheet the minority interest is presented as a separate item under equity. The minority interest's share of accumulated losses recognized in the consolidated financial statements may not exceed the invested amount. Associates over which the Group has significant influence but not control, which generally means a holding of between 20 percent and 50 percent of the voting rights, are accounted for in the consolidated financial statements using the equity method. Unrealized gains on transactions between the Group and its associates are eliminated to the extent of the Group's interest in the associates. The Group's investment in associates includes goodwill identified on acquisition. The Group has made use of the exemption available under IFRS 1 not to restate the acquisitions that took place prior to January 1, 2004. functional currency using the exchange rates prevailing at the dates of the transactions. In practice the translation is often carried out using rates that approximately correspond to those prevailing at the dates of transactions. Foreign currency non-monetary items measured at fair value are translated into the functional currency using the rates prevailing at the date of measurement. Otherwise non-monetary items are measured using the rate prevailing at the date of transaction. Exchange differences arising from transactions are recognized in the corresponding accounts in the income statement before operating profit. Exchange differences arising from financial transactions are recognized in financial assets and liabilities, except for exchange differences arising from intraGroup loans which have been treated as net investments in foreign entities. Such exchange differences are recognized in translation differences under equity, and they are recognized in financial liabilities in the income statement on full or partial disposal of the net investment. The income statements of foreign subsidiaries are translated into euro using the weighted average exchange rates during the report period and balance sheets are translated at the average rate on the balance sheet date. Exchange differences arising from translation, as well as translation differences arising from equity, are recognized as a separate component of equity. On partial or full disposal of a subsidiary, the accumulated translation differences are recognized in the income statement as part of the gains or losses from disposal. According to the exemption allowed by IFRS 1, translation differences that have arisen prior to January 1, 2004, have been recognized in accumulated gains, and the translation differences that have arisen after the transition date are presented as a separate component of equity. The exchange rates used for the consolidation of subsidiaries are presented in the notes to the consolidated income statement and balance sheet no. 39. Revenue recognition Net sales include revenue from the sale of products and services, as well as raw materials and equipment, adjusted net of indirect taxes, discounts, and exchange differences from foreign currency sales. Revenue from the sale of spare parts and other goods, as well as small and short-term projects, are recognized in full when the significant risks and rewards have been transferred to the buyer. After this the Group no longer has control related to the product. This generally means the moment at which the goods have been delivered to the customer in accordance with the agreed delivery clause. Revenue from servic- Foreign currency translation Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (`functional currency'). The consolidated financial statements are presented in euro, which is the parent company's functional and presentation currency. Foreign currency transactions Foreign currency transactions are translated into the 32 FINANCIAL STATEMENTS 2006 / GROUP es are recognized in the period in which the service has been carried out. Revenue and costs from construction contracts (deliveries of project nature) are recognized based on the percentage of completion. Completion is measured on a cost-basis as the relation of actual project costs to the estimated overall project costs. When it is probable that the total costs needed to complete the contract will exceed total contract revenue, the expected loss is recognized as an expense immediately. If the result of a construction contract cannot be reliably estimated, the project costs have been recognized as an expenditure in the period in which they have incurred, and contract revenue is recognized only to the extent of contract costs that are likely to be recovered. Construction contracts are recognized as revenue in full when the risks and benefits related to ownership are transferred to the buyer. Costs related to projects that have not yet been recognized in revenue are recognized as construction contracts in progress under inventories. Net sales recognized on the basis of percentage of completion is allocated to prepayments from customers. If such net sales exceed the prepayments received, the difference is presented under trade and other receivables in the balance sheet. Deferred taxes are calculated for all temporary differences in accounting and taxation using the tax rates enacted by the reporting date. The principal temporary differences arise from the amortization of tangible fixed assets. Deferred tax receivables are recognized to the extent that it is probable that taxable profits will be available against which temporary differences can be utilized. Financial assets and liabilities Financial assets and liabilities are classified in accordance with IAS 39, Financial Instruments: Recognition and Measurement, into the following · financial assets at fair value through profit or loss · loan receivables · trade and other receivables · financial assets held for sale. All purchases and sales of financial assets are recognized on the transaction date. Classification is made based on the purpose of acquisition in conjunction with the original acquisition. An item in financial assets is assigned to the financial assets at fair value through profit or loss group if it is held for trading. Financial assets at fair value through profit or loss include shares and units, deposits with maturities under three months and other securities. Financial assets held for trading have mainly been acquired to generate profit from short-term changes in market price. Derivatives that do not meet the conditions for hedge accounting provided for in IAS 39 are classified as held for trading. Derivatives held for trading, as well as financial assets maturing within 12 months, are included in current assets. The items in this group are measured at fair value. Realized and unrealized gains and losses from changes in fair value are recognized in the income statement in the period in which they have arisen. Loan and other receivables are assets with fixed or determinable payments that are not quoted in an active market and which the company does not hold for trading. Loan and other receivables are measured at amortized cost using the effective interest method. They are included in non-current financial assets under trade and other receivables in the balance sheet if they mature over 12 months from the balance sheet date. Otherwise they are included in current financial assets. Sales and other revenue are recognized in trade receivables at the original receivable amount. The default risk related to overdue receivables is estimated on the basis of a comprehensive survey of receivables carried out at the balance sheet date, and estimated credit losses are recognized as an expense. Other operating income Other operating income includes revenue not included in net sales, such as lease income and gains on the disposal of fixed assets. Non-current assets held for sale and discontinued operations Non-current assets held for sale and discontinued operations are treated in compliance with IFRS 5. Assets held for sale and assets related to discontinued operations classified as held for sale are measured at the lower of the following: carrying amount of fair value less costs to sell. Depreciation of these assets has ended at the date of classification. Assets held for sale are presented as separate items in the balance sheet. A separate major line of business which can be clearly distinguished from other operations in terms of property and result and which is part of a single disposal plan is treated as a discontinued operation. Income taxes The taxes in the income statement include the estimated taxes corresponding to the Group companies' taxable profit for the period, as well as tax adjustments for previous periods and the change in deferred taxes. Tax expenses are recognized in the income statement, except for items recognized directly in equity. FINANCIAL STATEMENTS 2006 / GROUP 33 Available-for-sale financial assets are assets not included in derivatives that have been expressly assigned to this group or that have not been classified into any other group. They are included in non-current assets unless the intention is to hold them less than 12 months from the balance sheet date, in which case they are included in current assets. Available-forsale financial assets may consist of shares and interestbearing investments. They are measured at fair value or, where fair value cannot be reliably determined, at cost of acquisition. Impairment during ownership is directly recognized in the fair value reserve in equity, including the tax effects. When an investment is sold or disposed, the difference between the original cost and the realized price is recognized in the income statement. Permanent impairment of assets is always recognized directly in the income statement. Cash and cash equivalents Cash and cash equivalents comprise cash in hand, short-term bank deposits and other highly liquid short-term investments with original maturities of three months or less. Bank overdrafts are included in short-term interest-bearing liabilities. Credit accounts related to Group accounts are included in short-term interest-bearing liabilities and presented net if the Group has a contractual legal right of set-off concerning full or partial payment or elimination of an amount to the lender. Financial assets are de-recognized when the contractual right to cash flows expires or the Group has substantially transferred risks and income outside the Group. Financial liabilities Financial liabilities are recognized at fair value based on the purchase consideration at the grant date less transaction costs. Financial liabilities are included in current and non-current liabilities and they may be interest-bearing or non-interest-bearing. Measurement of financial instruments The fair values of all financial instruments in the balance sheet are based on market values. Impairment of financial assets At each reporting date the Group assesses whether there is objective evidence of impairment of a financial asset or a group of financial assets. The Group recognizes impairment loss for trade receivables if there is objective evidence that the receivable cannot be recovered in full. The impairment loss recognized in the income statement is measured as the difference between the carrying amount and the present value of estimated future cash flows discounted at the effective interest rate. If an in impair- ment loss decreases in a subsequent period, and the decrease can be objectively related to an event occurring after the impairment was recognized, the impairment is reversed through profit or loss. Derivative financial instruments Derivative financial instruments to which hedge accounting is not applied in compliance with IAS 39 are measured at fair value at the reporting date. The fair values of derivative financial instruments are presented in deferred income or receivables in the balance sheet, and changes in fair value are presented in the income statement. Impairment related to operating activities are presented as adjustments to net sales. Hedge accounting The Group has adopted hedge accounting in compliance with IAS 39. Derivative contracts hedging against currency risks are treated as either fair value hedges or economic hedges (excluded from the scope of hedge accounting). In fair value hedging, changes in the values of the hedged item and the hedging instrument are recognized in profit or loss. The result for economic hedges taken out against currency risks is recognized in net sales. When initiating hedge accounting, the relationship between the hedged item and the hedging instrument is documented, as are the objectives of the Group's risk management. The effectiveness of hedging is tested regularly and the effective portion is recognized in line with the hedged item against the change in its value in profit or loss. Hedge accounting is discontinued when the hedging instrument expires or is sold, or the contract is terminated or exercised. The fair values of hedged derivative financial instruments are presented in non-current assets or liabilities in the balance sheet when the remaining hedged item is more than 12 months from the reporting date, and in current assets or liabilities otherwise. Intangible assets An intangible asset is recognized in the balance sheet only if it is probable that the expected future benefit attributable to the asset will flow to the entity and the cost of the asset can be measured reliably. In other cases the expenditure from intangible assets is recognized as an expense when incurred. Intangible assets include goodwill, capitalized development costs and other intangible assets. Goodwill Goodwill represents the excess of the cost of acquisition over the fair value of the Group's share of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill is tested annually for impairment. Goodwill is measured at cost less impairment losses. The financial statements for 2006, including the comparison data, do not include goodwill. 34 FINANCIAL STATEMENTS 2006 / GROUP Research and development costs Research and development costs are recognized as an expense in the income statement. Development expenditure incurred in planning new or more advanced products are recognized as intangible assets in the balance sheet from the moment the product can be produced technologically, utilized commercially, and future financial benefit is expected from it. Capitalized development costs include the material, work and testing expenditure incurred directly from completing the asset for the intended purpose. Capitalized, in-progress development expenditure is tested annually for impairment. Development expenditure previously recognized as an expense is not capitalized at a later date. Development costs are depreciated from the time the product is ready for use. The useful life of development costs is three years, during which time capitalized assets are recognized as an expense on a straight line basis. Other intangible assets An intangible asset is recognized at cost if the cost of the asset can be reliably measured and it is probable that the economic benefits attributable to the asset will flow to the entity. Depreciation is not recognized for intangible assets with an indefinite useful life. They are tested annually for impairment. Intangible assets with a finite useful life are presented in the balance sheet and recognized as an expense based on the straight-line depreciation method over their useful life as follows: Patents Computer software Other intangible assets 10 years 5 years 3­10 years The depreciation of property, plant and equipment ceases when the asset is classified as held for sale in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Gains and losses on decommissioning and disposal of property, plant and equipment are presented in other operating income or expenses. Impairment of assets Tangible and intangible assets The Group's intangible assets with an indefinite useful life are tested annually for impairment. For other balance sheet assets, impairment is tested if there are indications of impairment. This involves measuring the recoverable amount of the asset. An impairment loss is recognized if the carrying amount exceeds the recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows. An impairment loss is recognized immediately in profit or loss. An impairment loss recognized for an asset other than goodwill is reversed when a change has taken place in the figures used to measure the recoverable amount of the asset. However, reversal of impairment shall not exceed the asset's carrying amount less impairment loss. Impairment loss for goodwill is not reversed. Leases Group as lessee Leases in which a significant portion of the risks and rewards incident to ownership are retained by the lessor are treated as operating leases. Payments made under operating leases are recognized as an expense over the lease period. Group as lessor Assets held under other than finance leases are included in property, plant and equipment. They are depreciated over the useful life, similar to property, plant and equipment in own use. Rental income is recognized in other operating income on a straight-line basis over the lease term. Property, plant and equipment All property, plant and equipment is measured at cost less accumulated depreciation and impairment. Ordinary repair and maintenance costs are recognized through profit or loss as incurred. Land is not depreciated. Depreciation of other assets is calculated using the straight-line method over their estimated useful lives: Buildings Machinery Other property, plant and equipment 25­40 years 4­12 years 3­10 years Inventories Inventories are measured at the lower of cost and net realizable value. Raw materials and supplies are measured using the weighted average cost method. The cost of finished goods and work in progress comprises direct material and production costs and the portion of indirect production costs and depreciation allocated to products at a normal capacity excluding interest expenses. The value of inventories includes impairment due to obsolescence. The residual value of property, plant and equipment, and the remaining useful lives are reviewed at each balance sheet date. If needed, they are adjusted to reflect changes in expectations of economic benefit. FINANCIAL STATEMENTS 2006 / GROUP 35 Provisions Provisions are recognized then the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Provision related to warranty obligation is recognized when revenue from a construction contract, service or spare part including a warranty clause has been recognized. The amount of the warranty provision is estimated at the beginning of the project based on past experience from warranty costs. The unused provision is recognized as income at the end of the warranty period. Provision for contract is recognized when the unavoidable direct costs and estimated indirect production costs and depreciation under the contract exceed the benefits from the contract. Restructuring provision is recognized when the Group has drawn up a detailed plan for restructuring and has started to implement the plan or has announced its main features to those affected by it. The financial statements for 2006, including the comparison data, do not include restructuring provisions. gains and losses have been recognized in profit or loss over the employees' average remaining working lives where they exceed the greater of the following: 10 percent of the defined benefit obligation or 10 percent of the fair value of plan assets. Employee benefits: share-based payments The Group has applied the IFRS 2 standard to the share-based incentive plan set up for key employees on March 22, 2006. The Group has a share-based incentive plan for the Executive Board and other key employees, as well as performance-based share remuneration and contingent share remuneration. The Group measures granted share-based payments in equity at the fair value at the grant date. Share- and cash-based payments are recognized as an expense on a straight-line basis over the vesting period. The amount paid in shares is based on the management's latest estimate at the grant date and each balance sheet date of the number of shares expected to vest at the end of the commitment period. Cash-settled payments are based on the latest estimate of outstanding shares and the fair value of shares at the balance sheet date. Costs from option schemes set up prior to November 7, 2002 have not been recognized in the income statement. Employee benefits: pension obligations Pension plans are classified into defined benefit and defined contribution plans. Under a defined contribution plan the Group pays fixed contributions to a separate entity. The Group has no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay retirement benefits. All other plans are defined benefit pension plans. Contributions to defined contribution pensions plans are recognized in profit or loss in the period in which they are due. The Finnish statutory employment pension scheme and the pension plans of foreign subsidiaries are classified as defined contribution plans. Defined benefit plans include Raute Corporation's voluntary supplementary pension plan and the disability pension included in the Finnish pension scheme TEL, which was withdrawn in 2005. The voluntary supplementary pension plan was transferred from the parent company's pension fund to an outside insurance company in 2005. The obligations from defined benefit plans are recognized as an expense separately for each plan based on calculations made by authorized actuaries. In accordance with the exemption allowed by IFRS 1, all actuarial gains and losses have been recognized in equity in the opening balance sheet on the date of transition January 1, 2004. Subsequent actuarial Share capital The nominal value of the outstanding series K and A shares is presented in share capital. Expenditure related to own equity issues or acquisitions are presented as allowance for equity. If the parent company repurchases own equity instruments, their acquisition cost is deducted from equity. Dividend The dividend proposed by the Board of Directors to the Annual General Meeting is recognized as a deduction from distributable equity, but not until approved by the Annual General Meeting. Operating profit IAS 1 Presentation of Financial Statements does not define the concept of operating profit. The Group uses the following definition: operating profit is the net sum calculated by adding other operating income to net sales; deducting purchase expenses that have been adjusted by changes in inventories of finished goods and work in progress and by expenses from production for own use; and by deducting expenses, depreciation and possible impairment losses from employee benefits, as well as other operating expenses. All other income statement items are presented under operating profit. Exchange differences and changes in the fair 36 FINANCIAL STATEMENTS 2006 / GROUP values of derivatives are included in operating profit if they have arisen from business-related items. In other cases they are recognized in financial items. warranty period, having regard to the special risks related to the product. Receivables The management's estimates of customers' solvency have been used in trade receivables for which the company has no security from the customer. The management has estimated the ability of Group companies to pay trade receivables owed to other Group companies and to handle payments related to loans. Deferred taxes The management has made estimates pertaining to deferred tax assets. Share-based reward expenses The share-based reward expenses are counted using the management's estimate of the Group's profit development and the achievement of the strategic goals in 2007 and 2008. Earnings per share Undiluted earnings per share are calculated by dividing the period's profit attributable to parent company equity holders by the weighted average of outstanding shares in the period. Diluted earnings per share are calculated using the treasury stock method. In addition to the weighted average of outstanding shares, the divisor includes additional shares from the presumed exercise of options. The exercise of options is not taken into account in the calculation of earnings per share if the exercise price of options exceeds the average market price of shares during the period. Options have a dilutive effect if the average market price of shares exceeds the exercise price of options. The calculation of other key ratios is presented in the notes to the consolidated financial statements on page 60. Comparatives The expense classification in the income statement for the comparison period has been adjusted by moving EUR 1 370 thousand related to project deliveries from other operating expenses to materials and services. The adjustment does not affect the key figures. Critical accounting judgments and key sources of estimation uncertainty When preparing the consolidated financial statements in compliance with IFRS, the company management must make certain estimates and assumptions. In addition, the management must exercise its judgment in applying the accounting policies. These may affect the assets and liabilities in the balance sheet, the disclosure of commitments and possible assets in the financial statements, and income and expenses for the period. Actual results may differ from the estimates. Intangible assets The Group's intangible assets are tested annually for impairment. Other balance sheet assets are assessed for indications of impairment as explained in the accounting principles above. The recoverable amounts of cash-generating entities have been determined based on value-in-use calculations, which require the use of estimates. Revenue recognition The percentage of completion method is based on estimates of expected project revenue and expenses, as well as on reliable measurement of project progress. Should the estimates of the project outcome change, the recognized revenue and profit will be adjusted in the period in which the change first becomes known and can be estimated. The warranty provisions are based on empirical estimates of the costs caused by the product during the Applying new or amended IFRS standards and IFRIC interpretations The standards, interpretations and their amendments presented below have been published, but they are not yet in effect, nor has the Group applied these provisions prior to their obligatory entry into force. The Group will adopt in 2007 or later the following new or amended standards and interpretations published by IASB in 2005 and 2006: · IFRS 7 Financial Instruments: Disclosures, adopted Jan. 1, 2007 · Amendment to standard IAS 1: Presentation of Financial Statements, adopted Jan. 1, 2007 · IFRIC 8: Scope of IFRS 2, adopted Jan. 1, 2007 · IFRIC 9: Reassessment of Embedded Derivatives, adopted Jan. 1, 2007 · IFRIC 10: Interim Financial Reporting and Impairment, adopted Jan. 1, 2007 · IFRIC 11, IFRS 2: Group and Treasury Share Transactions, adopted Jan. 1, 2008 · IFRIC 12: Service Concession Arrangements, adopted Jan. 1, 2008 · IFRS 8: Operating Segments, adopted Jan. 1, 2009 Of the abovementioned standards, interpretations and their amendments, the following have not yet been approved by the EU: IFRS 8, IFRIC 10, IFRIC 11, IFRIC 12. FINANCIAL STATEMENTS 2006 / GROUP 37 EUR 1 000 2006 % 2005 % 2 SEGMENT INFORMATION Primary reporting segment Raute's primary reporting segment is the business segment. Continuing operations belong to the wood products technology segment. Secondary reporting segment The secondary reporting segment is geographical. The geographical segment consists of market areas accounting for over 10 percent of the Group's net sales. Geographical reporting segment information: Net sales to external clients by clients' geographical location South America Europe North America Russia Rest of the world TOTAL Assets by geographical location South America Europe North America Russia Rest of the world TOTAL Capital expenditure by geographical location South America Europe North America Russia Rest of the world TOTAL 39 160 30 620 17 107 12 470 6 849 106 206 37 29 16 12 6 100 4 556 43 954 28 817 15 534 15 766 108 627 4 40 27 14 15 100 38 63 832 4 158 190 254 68 472 0 93 7 0 0 100 50 48 655 6 375 200 155 55 435 0 89 11 0 0 100 1 801 51 97 3 1 3 654 142 1 3 798 0 96 4 0 100 1 852 100 3 PROCEEDS FROM SALES The main part of the net sales is comprised of project deliveries related to wood products technology that are handled as construction contracts. The rest of the of net sales is comprised of technology services provided to the wood products industry (spare parts, maintenance and modernization services as well as services provided to the development of customers' business). Net sales by market area Finland North America Russia Rest of Europe Asia South America Oceania Rest of the world TOTAL 10 417 17 107 12 470 20 203 5 593 39 160 501 755 106 206 10 16 12 19 5 37 0 1 100 30 444 28 817 15 534 13 510 8 107 4 556 2 366 5 293 108 627 28 27 14 12 7 4 2 6 100 38 FINANCIAL STATEMENTS 2006 / GROUP EUR 1 000 2006 2005 4 CONSTRUCTION CONTRACTS Net sales Net sales by percentage of completion Other net sales TOTAL Project revenues entered as income from currently undelivered construction contracts recognized by percentage of completion Amount of construction contract revenues not yet entered as income Specification of combined asset and liability items Advances paid Advances wound up by percentage of completion Advances paid included in inventories Accrued income corresponding to revenues by percentage of completion Advances received from project customers Project receivables included in short-term receivables 90 464 15 742 106 206 93 021 15 606 108 627 77 607 45 578 74 281 53 691 1 180 1 180 76 989 -62 588 14 401 1 342 1 342 46 501 -34 211 12 290 5 OTHER OPERATING INCOME Capital gain on sale of fixed assets Other TOTAL 44 155 199 225 483 708 6 MATERIALS AND SERVICES Materials and supplies - Purchases during the period - Change in inventories External services TOTAL 55 907 -307 6 818 62 418 58 501 173 8 020 66 694 7 EXPENSES FROM EMPLOYEE BENEFITS Wages and salaries Pension contributions - Defined contribution plans - Defined benefit plans Share-based payments settled in shares Share-based payments settled in cash Other personnel costs TOTAL Information about management's employee benefits and loans is presented in the notes to the financial statements no. 34 Related party transactions. Information about the share-based incentive plan is presented in the notes to the financial statement no. 26. 22 024 2 541 -45 52 44 1 611 26 227 21 137 2 684 -401 1 967 25 387 8 PERSONNEL Employed at Dec. 31 Workers Office staff PERSONNEL, TOTAL - of which personnel working abroad Average Workers Office staff PERSONNEL, TOTAL - of which personnel working abroad 182 358 540 130 191 342 533 124 188 359 547 127 197 340 537 124 FINANCIAL STATEMENTS 2006 / GROUP 39 EUR 1 000 2006 2005 9 RESEARCH AND DEVELOPMENT COSTS ENTERED AS EXPENSES FOR THE PERIOD Total research and development costs Depreciation of capitalized development costs Recognized as assets in balance sheet Research and development costs entered as expenses for the period Research and development costs % of net sales Research and development costs have been recognized in operating expenses prior to operating profit. 3 765 228 -538 3 455 3 765 3.5 3 616 500 -242 3 874 3 616 3.3 10 DEPRECIATION, AMORTIZATION AND IMPAIRMENT CHARGES Depreciation Intangible assets - Capitalized development costs - Other intangible assets Tangible fixed assets - Buildings and structures - Machinery and equipment - Other tangible fixed assets TOTAL Impairment by class of assets - Buildings and structures TOTAL DEPRECIATION, AMORTIZATION AND IMPAIRMENT, TOTAL 228 593 517 1 093 6 2 437 500 660 515 1 202 2 877 222 222 2 660 2 877 11 ACQUISITIONS No business acquisitions were made in the report period 2006. In March 2005 Raute Corporation acquired 29 percent of real estate holding company Eloc Oy's capital stock from Raute Corporation's Pension Fund. After the acquisition Raute Corporation's shareholding of the company increased to 63 percent. In April 2005 Raute acquired the rest of the 50 percent in associated company Mecano Group. Mecano Group develops and delivers machine vision technology and measuring systems to the wood products industry. Sales and marketing occurs mainly through Raute's sales network. Total cash flow from acquisitions in 2005 was EUR 304 thousand. 12 OTHER OPERATING EXPENSES Indirect production expenses Sales and marketing expenses Administration expenses Other expenses TOTAL 1 644 2 293 2 874 3 665 10 476 1 472 2 536 2 854 3 152 10 014 40 FINANCIAL STATEMENTS 2006 / GROUP EUR 1 000 2006 2005 13 FINANCIAL INCOME AND EXPENSES Financial Income Interest income Dividend income Profit from sales of available-for-sale investments Exchange rate profit Profit from sales of trading assets Change in fair value of trading assets Other financial income TOTAL Financial expenses Interest expenses Losses from sales of available-for-sale investments Exchange rate losses Other financial expenses TOTAL Exchange rate differences entered in income statement Included in net sales Included in purchases and other expenses Included in financial income / expenses TOTAL 209 24 142 56 95 217 217 403 1 131 584 -94 22 745 -56 -13 -158 -144 -371 -40 -33 -73 -154 54 -158 -258 -518 32 217 -269 14 INCOME TAXES Current tax From operations, previous years Change in deferred taxes TOTAL Analysis of the relationship between realized tax expense and theoretical accounting result using Finnish tax rate of 26 percent. Profit before taxes Taxes calculated using the Finnish tax rate, 26% Effect of differences in taxes from other countries Non-deductible costs Taxes from the previous financial years Effect from unrecognized tax assets (from the losses of foreign subsidaries) Other items Consolidated tax expense Effective tax rate, % 4 887 -1 271 -78 -45 5 461 -1 420 -194 1 -1 488 -174 407 -1 255 -1 653 3 227 -1 423 157 -18 -1 255 26 190 -1 423 26 15 EARNINGS PER SHARE Share of profit that belongs to owners of the parent company Weighted average number of shares, 1 000 shares Effect of warrants issued in 1998, 1 000 shares Diluted weighted average number of shares, 1 000 shares Earnings per share, EUR Diluted earnings per share, EUR 3 632 3 867 3 867 0.94 0.94 4 152 3 815 57 3 872 1.09 1.07 FINANCIAL STATEMENTS 2006 / GROUP 41 16 INTANGIBLE ASSETS Development costs Long-term expenses and intangible rights* EUR 1 000 Intangible assets 2005 Carrying amount at Jan. 1, 2005 Exchange rate differences Additions Disposals Reclassifications of held-for-sale items Other reclassifications between items Carrying amount at Dec. 31, 2005 Accumulated depreciation and amortization at Jan. 1, 2005 Exchange rate differences Accumulated depreciations on disposals Accumulated depreciations on reclassifications to held-for-sale items Accumulated depreciations on other reclassifications between items Depreciation for the financial period Accumulated depreciation and amortization at Dec. 31, 2005 Book value at Jan. 1, 2005 Book value at Dec. 31, 2005 TOTAL 2 298 242 -141 2 400 5 725 745 8 023 987 -141 6 470 8 870 -1 000 -3 953 -4 953 -500 -1 500 1 298 900 -660 -4 613 1 772 1 857 -1 160 -6 113 3 070 2 757 Intangible assets 2006 Carrying amount at Jan. 1, 2006 Exchange rate differences Additions Disposals Reclassifications to held-for-sale items Other reclassifications between items Carrying amount at Dec. 31, 2006 Accumulated depreciation and amortization at Jan. 1, 2006 Exchange rate differences Accumulated depreciations on disposals Accumulated depreciations on reclassifications to held-for-sale items Accumulated depreciations on other reclassifications between items Depreciation for the financial period Accumulated depreciation and amortization at Dec. 31, 2006 Book value at Jan. 1, 2006 Book value at Dec. 31, 2006 2 400 539 6 470 309 8 870 848 2 939 140 6 919 140 9 858 -1 500 -4 613 -6 113 -228 -1 728 900 1 211 -593 -5 206 1 857 1 713 -821 -6 934 2 757 2 924 *Long-term expenditure and intangible rights include patents, computer software and product rights. 42 FINANCIAL STATEMENTS 2006 / GROUP 17 PROPERTY, PLANT AND EQUIPMENT Assets in progress and advance payments received EUR 1 000 Land and water Buildings and structures Machinery and equipment Other tangible assets TOTAL Property, plant and equipment 2005 Carrying amount at Jan. 1, 2005 Exchange rate differences Additions Disposals Reclassifications of held-for-sale items Other reclassifications between items Carrying amount at Dec. 31, 2005 Accumulated depreciation and amortization at Jan. 1, 2005 Exchange rate differences Accumulated depreciations on disposals Accumulated depreciations on reclassifications to held-for-sale items Accumulated depreciations on other reclassifications between items Depreciation for the reporting period Accumulated depreciation and amortization at Dec. 31, 2005 Book value at Jan. 1, 2005 Book value at Dec. 31, 2005 1 174 105 5 -50 14 412 405 159 -128 22 089 1 135 1 462 -60 417 566 -6 38 092 1 646 2 193 -244 1 234 14 849 24 627 411 566 41 687 -6 857 -390 256 -17 620 -1 050 -369 -24 846 -1 440 256 -515 -7 506 1 174 1 234 7 555 7 342 -1 202 -19 872 4 469 4 755 -369 48 42 566 -1 717 -27 747 13 246 13 939 Property, plant and equipment 2006 Carrying amount at Jan. 1, 2006 Exchange rate differences Additions Disposals Reclassifications to held-for-sale items Other reclassifications between items Carrying amount at Dec. 31, 2006 Accumulated depreciation and amortization at Jan. 1, 2006 Exchange rate differences Accumulated depreciations on disposals Accumulated depreciations on reclassifications to held-for-sale items Accumulated depreciations on other reclassifications between items Depreciation for the financial period Impairments Accumulated depreciation and amortization at Dec. 31, 2006 Book value at Jan. 1, 2006 Book value at Dec. 31, 2006 1 234 -65 5 -16 14 849 -486 42 -316 619 24 627 -845 601 -335 411 -34 566 313 41 687 -1 430 961 -667 -140 40 411 -759 24 048 377 120 1 158 14 708 -7 506 440 145 -19 872 824 274 -369 34 -27 747 1 298 419 -517 -222 -7 660 1 234 1 158 7 342 7 047 -1 093 -6 -1 616 -222 -27 868 566 120 13 939 12 542 -19 867 4 755 4 181 -341 42 36 FINANCIAL STATEMENTS 2006 / GROUP 43 EUR 1 000 2006 2005 18 INVESTMENTS IN ASSOCIATED COMPANIES Book value at Jan.1 Disposals and other deductions* Book value at Dec. 31 The dissolution of associate Eloc Oy was completed on May 31, 2006. *Eloc Oy became Raute Corporation's subsidiary in 2005 and was consolidated in group accounts on January 1, 2005 using the purchase method after holdings rose to 63 percent. 309 -309 19 AVAILABLE-FOR-SALE INVESTMENTS Balance sheet value at Jan.1 Additions Deductions Balance sheet value at Dec. 31 For the period's available-for-sale investments, a total of EUR 13 thousand of realized sales losses have been recognized in financial items (EUR 95 thousand gains). Available-for-sale investments include unquoted shares. These shares are recognized at cost deducted with possible impairments, since their fair value cannot be determined reliably. 395 49 -49 395 342 81 -28 395 20 LONG-TERM RECEIVABLES Loan receivables TOTAL The fair value of loan assets does not differ materially from the carrying amount. 48 48 21 INVENTORIES Materials and supplies Work in progress Finished products / goods Advance payments TOTAL In the year ended, EUR 184 thousand were recognized in expenses, reducing the carrying amount of inventories to correspond to the disposal price (EUR 571 thousand). 2 664 1 018 71 1 180 4 933 2 456 1 154 74 1 342 5 026 22 TRADE RECEIVABLES AND OTHER RECEIVABLES Short-term receivables - Trade receivables - Loan receivables - Accrued income and prepaid expenses - Other receivables TOTAL 5 519 1 000 15 174 1 491 23 184 7 021 1 050 13 091 504 21 666 Balance sheet values correspond best to the amount of money, that is the maximum amount of credit risk without taking into consideration the fair value of collaterals, in such a case where other contract parties are not able to fulfill their obligations related to financial instruments. Receivables do not include significant credit risk clusters. 44 FINANCIAL STATEMENTS 2006 / GROUP EUR 1 000 Significant items included in accrued income and prepaid expenses - Project receivables recognized according to percentage of completion - Other accrued income and prepaid expenses TOTAL For trade receivables, a total of EUR 5 thousand (62 thousand) was recognized in losses. 23 FINANCIAL ITEMS AT FAIR VALUE THROUGH PROFIT / LOSS Initially recognized as financial assets through profit / loss Fair valuation of cash and cash equivalents Financial items at fair value through profit / loss at the end of the financial period CASH AND CASH EQUIVALENTS Cash and bank accounts Bank deposits TOTAL Cash and cash equivalents in cash flow statement Financial items at fair value through profit / loss Cash and cash equivalents TOTAL 25 SHAREHOLDERS' EQUITY AND DISTRIBUTABLE FUNDS Notes to equity: Reconciliation of the number of shares (1 000) Number of shares Jan.1 Shares subscribed by warrants Number of shares Dec. 31 Nominal value, EUR Total shareholders' equity, EUR thousand Series K shares (20 votes/share) Series A shares (1 vote/share) 2006 2005 14 401 773 15 174 12 290 801 13 091 9 849 346 10 195 8 536 439 8 975 24 2 612 11 200 13 812 1 819 600 2 419 10 195 13 812 24 006 8 975 2 419 11 395 3 815 190 4 005 2.00 8 010 991 3 014 3 815 3 815 2.00 7 629 991 2 824 The minimum share capital is EUR 5 000 000 and the maximum share capital is EUR 20 000 000. All issued shares are paid in full. Other reserves include: - Granted share-based remuneration settled in shares - Exchange differences arising from intra-Group loans (net investment) - Payments for shares subscribed for with options, which have not been entered in the Trade Register on the reporting date. The share premium includes the value paid for shares in connection with a rights issue that exceeds the nominal value. After the balance sheet date, the Board of Directors has proposed to the Annual General Meeting that a dividend of EUR 0.70 per share be paid for the financial year 2006. FINANCIAL STATEMENTS 2006 / GROUP 45 26 SHARE-BASED PAYMENTS SHARE-BASED INCENTIVE PLAN 2006 The Board of Raute Corporation has on 22 March 2006 resolved to implement a share-based incentive plan. The share-based incentive plan offers the target group a possibility to earn Raute Corporation series A shares as reward for an earning period of three calendar years for attainment of the targets established for it. The earning period began on 1 January 2006 and will end on 31 December 2008. The amount of reward that shall be paid on the basis of the plan, has been bound to the Raute's operating profit (weight 75%) and the evaluation of the Board of Directors on e.g. the materialization of the strategy (weight +/- 25%). The maximum total reward is 65 000 Raute series A shares and a cash payment equivalent to the value of the shares, in the maximum. The attainment of the targets established for the earning period will determine the amount to be paid to the key personnel out of the maximum reward. The reward from the plan shall be paid to the key personnel as a combination of shares and cash payment, after the end of the earning period. No reward shall be paid if a key person's employment ends before the reward payment. In addition, a key person must own the earned shares at least for two years from the reward payment. The basic information on the share-based incentive plan has been collected in the table below: Share-based payments in 2006 Issue date Instrument Number of shares, max.* Share price upon grant Fair value of the share upon grant** Share price at the end of financial year Earning period begins, date Earning period ends, date Earnings criteria Pay-out assumption of earnings criteria, % Vesting date of shares Share ownership obligation, years Remaining binding period, years Target group (Dec. 31, 2006) March 22, 2006 Share-based payment 65 000 17.28 15.28 12.85 Jan. 1, 2006 Dec. 31, 2008 Operating profit and Board's evaluation on e.g. the materialization of the strategy 24 Jan. 1, 2009 2 2 18 Shares granted Shares returned Shares distributed Shares forfeited Shares total Number of shares Jan. 1, 2006 0 0 0 0 0 Changes during financial year 56 000 0 0 0 - Number of shares Dec. 31, 2006 56 000 0 0 0 56 000 * The numbers of shares presented in the table describe the numbers of shares to be distributed on the basis of the share-based incentive plan. In addition, the Company is committed to pay a cash amount that corresponds to the value of the shares in the maximum (proportion for taxes). **From the share price on the grant date of the shares have been deducted the expected dividends EUR 2.00 that the key people do not receive before the potential reward payment. Determination of the fair value Raute Corporation has used Alexander Corporate Finance Oy as an advisor when determining the fair value of the reward. As the reward will be paid as a combination of shares and cash payment, the determining of the fair value of the reward is divided into two proportions, in accordance with IFRS 2 standard: a proportion settled in shares and a proportion settled in cash. The proportion to be settled in shares will be entered in the equity and the proportion to be settled in cash will be entered in liabilities. The fair value of the share-based payment on the grant date was the market price of the Raute series A share, the dividends to be distributed before the reward payment deducted. The fair value of the share proportion was thus EUR 15.28 per share. Correspondingly, the fair value of the proportion to be settled in cash will further be evaluated every reporting day until the end of the earning period, and the fair value of the debt will thus change in accordance with Raute series A share price. At the end of the financial year, the fair value of the cash proportion was EUR 12.85 per share. The fair value of the rewards granted during the financial year was EUR 0.3 million in total. The effect of the rewards on the result of Raute Corporation is EUR 0.1 million during the financial year 2006 (0). 46 FINANCIAL STATEMENTS 2006 / GROUP Calculation of fair value of reward Number of shares granted Share price upon grant, EUR Assumed dividend before reward payment*, EUR Fair value (proportion in shares), EUR Share price Dec. 31, 2006 (proportion in cash), EUR Pay-out assumption of earnings criteria, % Estimate of shares to be returned, % Fair value of reward Dec. 31, 2006, EUR *Dividend assumption is an estimate on distributed dividends before reward payment. 56 000 17.28 2.00 15.28 12.85 24 10 340 260 OPTIONS 1 000 shares Exercise price as a weighted average per share, EUR In the beginning of the financial year Options exercised 7.63 Options expired Options available for exercise at the end of the financial year 2006 Exercise price as a weighted average per share, EUR 2005 The amount of options 212 500 -190 150 22 350 The amount of options 212 500 212 500 A total of 190 150 series A shares, worth EUR 1 450 thousand, were subscribed for with B warrants pertaining to Raute Corporation's 1998 bond issue. The share capital increase corresponding to the share subscriptions total EUR 380 thousand. EUR 1 000 27 PROVISIONS Warranty provisions Book value at the beginning of the financial year Additions Used Cancelled unused amounts Exchange rate differences Book value at the end of the financial year Losses from construction contracts in order book Book value at the beginning of the financial year Additions Decrease Book value at the end of the financial year Other provisions Provision for disputed warranty obligations to customer 2006 2005 1 741 1 984 -2 013 -735 -25 952 1 346 2 387 -1 367 -646 21 1 741 661 417 -412 666 661 661 370 Provisions in balance sheet from which - long-term - short-term 1 988 262 1 726 2 402 475 1 927 FINANCIAL STATEMENTS 2006 / GROUP 47 28 DEFERRED TAX LIABILITIES AND DEFERRED TAX ASSETS Items entered in income statement 1.1.2005 Items recognized in shareholders' equity 31.12.2005 EUR 1 000 Deferred tax assets Depreciation differences and other provisions Changes in fair value Effects of Group consolidation Other taxable temporary differences TOTAL 235 235 1.1.2006 -25 -25 210 210 31.12.2006 Depreciation differences and other provisions Changes in fair value Effects of Group consolidation Other taxable temporary differences TOTAL 58 210 210 219 276 58 429 487 Deferred tax liabilities Depreciation differences and other provisions Changes in fair value Effects of Group consolidation Other taxable temporary differences TOTAL 1.1.2005 451 120 393 588 1 552 1.1.2006 1 -6 -4 -243 -252 31.12.2005 452 114 389 345 1 300 31.12.2006 -69 -24 -63 26 -130 383 90 326 285 1 084 Depreciation differences and other provisions Changes in fair value Effects of Group consolidation Other taxable temporary differences TOTAL 452 114 389 345 1 300 -86 -86 Unrecognized tax assets from losses of foreign subsidiaries are in total EUR 769 thousand (929 thousand). Deferred tax liability is not recognized from undistributed earnings of Finnish subsidiaries and associated companies, since in most cases these earnings are transferred to the parent company without tax implications. EUR 1 000 29 LONG-TERM INTEREST-BEARING LIABILITIES Long-term interest-bearing liabilities - Other loans TOTAL 2006 2005 317 317 357 357 Non-current loans are Technology Funding Agency loans, with repayment scheduled for 2006­2011 and an interest rate of 1.0 percent. The loans have no collateral, and the Technology Funding Agency may, under certain conditions, demand a loan to be fully or partly repaid immediately without notice. 30 CARRYING VALUES AND FAIR VALUES OF LIABILITIES The majority of the Group's financial liabilities are short-term and their carrying value equals fair value. The fair value of long-term liabilities with the exception of partial payments are EUR 317 thousand (357 thousand) and their carrying value is EUR 317 thousand (357 thousand). 48 FINANCIAL STATEMENTS 2006 / GROUP EUR 1 000 31 SHORT-TERM INTEREST-BEARING LIABILITIES Partial payments of long-term debts Other short-term interest-bearing debts Total short-term interest-bearing liabilities Distribution of Group's short-term loans by currencies - EUR, % The weighted averages of effective interest rates of current interest-bearing liabilities were: Amortization of non-current loans, % Other current loans, % 32 2006 2005 40 110 150 66 110 176 100 100 1.00 2.30 1.00 1.75 PENSION OBLIGATIONS Raute Corporation's voluntary supplementary pension plan and in 2005 Disability pension included in Finnish TEL pension plan are treated as defined benefit plans. Raute Corporation's Pension Fund Raute Corporation's Pension Fund was dissolved on 17 May 2006. The liquidation has been entered in the fund register on 25 July 2006. Voluntary supplement to pension coverage for those employees that have had long-term employment with Raute Corporation was managed in Raute Corporation's Pension Fund that was closed on October 1, 1992. During the year 2005, Raute Corporation made an agreement to transfer the supplementary pensions insured in the Pension Fund to Sampo Life Insurance company. In the year 2005 overmargin of EUR 1.2 million has been refunded from the Pension Fund, which is distributed as income in IFRS financial statements among the years 2003­2005. EUR 1 000 Defined benefit pension plans Items recognized in balance sheet Present value of funded obligations Fair value of assets included in the plan Difference Present value of non-funded obligations Unrecognized actuarial losses Unrecognized costs based on retrospective work performance Net liabilities (receivables) in balance sheet (liability + / receivable -) Amounts in balance sheet Liabilities Assets Net liabilities in balance sheet (liability + / receivable -) Items entered in income statement Costs based on the work performance in the financial year Interest on obligation Expected income from the assets included in the plan Effect of changes in billing basis Net of recognized actuarial gains / losses in the financial year Costs based on retrospective work performance Profits / losses resulting from the reduction of the plan or fulfilling of the obligation Total, included in personnel expenses (expenses + / income -) Realized income from the assets included in the plan (expenses + / income -) 2006 2005 367 -328 39 205 91 335 335 -252 83 154 143 380 335 335 380 380 17 16 -13 48 77 -64 11 -52 -24 -45 -52 14 -129 -346 -401 373 FINANCIAL STATEMENTS 2006 / GROUP 49 EUR 1 000 Changes in net liabilities recognized in balance sheet Net liabilities at Jan.1 Net amount of income / expenses entered in income statement Contributions from the plan Net liabilities at Dec. 31 (liability + / receivable -) Key actuarial assumptions Discount interest, % - Finland Expected yield from the assets, % - Finland Yearly salary increase assumption, % - Finland Inflation assumption, % - Finland Personnel turnover assumption, % - Finland 2006 380 -45 335 2005 -419 -401 1 200 380 4.5 4.5 3.0 2.0 1.0 4.5­5.0 4.5 3.0­3.5 2.0 1.0­2.0 33 ADVANCE PAYMENTS RECEIVED, TRADE AND OTHER PAYABLES Advance payments received EUR 19 726 thousand (8 500 thousand) comprise of advances received from projects in progress. Short-term liabilities in balance sheet - Trade payables - Accrued expenses and prepaid income - Derivative liabilities - Other liabilities TOTAL Substantial items included in accrued expenses and prepaid income - Periodizing of project costs - Periodizing of personnel costs - Other accrued expenses and prepaid income TOTAL 6 085 8 472 57 836 15 450 6 572 8 823 145 528 16 068 3 860 3 927 685 8 472 3 468 4 312 1 043 8 823 34 RELATED PARTY TRANSACTIONS Raute Group's related parties consist of associated companies, Board members, President and CEO and Presidents of the subsidiaries and Raute Corporation's Sickness Fund and Raute's Pension Fund. Group management's employee benefits Salaries and other short-term employee benefits Share-based payments TOTAL Salaries and remunerations of Directors of the Parent company President and CEO Kiiski, Tapani The members of the Board of Directors Rytilahti, Jarmo, Chairman of the Board Mustakallio, Mika, Member of the Board Mustakallio, Panu, Member of the Board Mustakallio, Sinikka, Vice-Chairman of the Board Paasikivi, Pekka, Member of the Board Wiitakorpi, Jorma, Member of the Board Lehtonen, Heikki, Former Member of the Board Nihti, Markku, Former Member of the Board TOTAL 1 015 107 1 122 894 894 273 237 36 18 18 18 18 14 5 5 405 33 17 17 17 17 17 17 372 50 FINANCIAL STATEMENTS 2006 / GROUP The company's Board of Directors, President and CEO and Presidents of the subsidiaries owned a total of 81 838 series A shares and 98 990 series K shares. Management's ownership corresponds to 4.5 percent of the shares in the company and 9.0 percent of associated total voting rights. The figures include the holdings of their own, minor childern and control entities. Raute Corporation's Pension Fund See note number 32, Pension obligations. Sickness Fund Raute Group has an insurance fund, which pays its members additional benefits on top of compensations paid according to the Sickness Insurance Act. Raute's Sickness Fund covers personnel in Raute Corporation and its domestic subsidiaries as well as personnel in the former subsidiary Raute Precision Oy. Raute's Sickness Fund has deposited its assets in Raute Corporation. The amount of deposits was EUR 110 thousand at Dec. 31 (110 thousand) and 2.3 percent (1.75%) of interest was paid to it. No loans are granted to related parties of the Group. EUR 1 000 35 OTHER LEASES AND OPERATING LEASE LIABILITIES Group as lessee Minimum rents paid on the basis of other non-cancellable leases: - For the current accounting period - For subsequent accounting periods TOTAL Minimum rents paid on the basis of other non-cancellable leases: Under 1 year 1­5 years Over 5 years TOTAL Group as lessor The Group has rent out the office and plant facilities that it does not need. The facilities have been classified as tangible fixed asset in the financial statements. Lease income has been recognized in other operating income in the financial statements and totaled EUR 85 thousand (156 thousand). 2006 2005 169 470 639 126 76 202 49 57 106 53 46 99 36 CURRENCY DERIVATIVES Currency derivatives are used for hedging purposes. Nominal values of forward contracts in foreign currency Economic hedging - Related to financing - Related to hedging of net sales Hedge accountig - Related to hedging of net sales Fair values of forward contracts in foreign currency Economic hedging - Related to financing - Related to the hedging of net sales Hedge accountig - Related to the hedging of net sales Purchased currency options - Nominal values - Fair values 2 -8 -50 -41 -104 2 065 174 7 000 6 830 3 071 1 963 13 FINANCIAL STATEMENTS 2006 / GROUP 51 EUR 1 000 37 PLEDGED ASSETS AND CONTINGENT LIABILITIES Pledged assets Raute Group had long-term bilateral credit facilities to a total of EUR 15 000 thousand, of which nothing was used during 2006. Raute Corporation has an EUR 10 million domestic commercial paper plan, which is arranged by Nordea Bank Finland Oyj. Within the limits of the plan, the Corporation can issue commercial papers with maturity under one year. The debts and other contingent liabilities above have been secured by mortgages - Mortgages on real property - Business mortgages Contingent liabilities and other liabilities Security for Group's liabilities - Guarantees issued Other own obligations No money loans, pledges or other contingent liabilities have been given on behalf of the management, shareholders or associated companies. 2006 2005 1 134 10 000 1 134 10 000 646 4 111 Management of financial risks The main financial risks that Raute's international business operations are exposed to are credit, liquidity, and currency risks. The written financing policy, approved by Raute's Board of Directors, is based on the principle of cost-effective hedging against risks that have a negative effect on the Group's performance or cash flow. The financing policy defines the limiting values that guide operations, the adopted financial and hedging instruments, and the acceptable counterparties. Practical risk management is the responsibility of the parent company's financing unit. It identifies, assesses, and hedges financial risks in co-operation with operating units. The financing unit is also in charge of centrally handling external asset acquisition, managing financial assets, and taking care of the necessary hedging actions. Currency risks A significant share of the Group's net sales is generated outside the euro zone. The most important foreign currencies used in customer deliveries, and business transactions between Group companies are the US and Canadian dollars. The currency distribution varies yearly. As stated in the Group's financing policy, operating units hedge currency items in excess of EUR 100 thousand based on binding delivery and subcontracting agreements. The Group applies hedge accounting in compliance with IAS 39 to separately defined significant and long-term project deliveries. Currency clauses are used to hedge against currency risks during the bidding period. Depending on the case, currency risks related to preliminary agreements are hedged with currency options. The Group has foreign subsidiaries and is exposed to translation risks. Net investments and corresponding items in subsidiaries have not been hedged. Exchange rate differences for net investments are recognized in equity. Interest rate risks The Group has a strong financial position. Interest rate risks are mostly related to income from investment activities and to interest rate differences between currencies. Loans on the balance sheet date had fixed interest rates. Investments in interest funds have been made in short-term interest funds. 52 FINANCIAL STATEMENTS 2006 / GROUP Credit and other counterparty risks Investments and derivative agreements are only made with counterparties that meet the credit rating criteria defined in the financing policy. When making investments or derivative and loan agreements, the Group applies counterparty-specific upper limits to avoid risk concentrations. Trade-related credit risks are managed by demanding bank guarantees or confirmed letters of credit for customer receivables in project deliveries. Liquidity The minimum amounts of cash, current investments and available credit liabilities have been defined to ensure the Group's liquidity. In the long term, risks related to the availability and pricing of funding are managed by using a variety of sources for financing. The parent company has an EUR 10 million domestic commercial paper program, which allows it to issue commercial papers maturing in less than one year. The company also has bilateral non-current credit regulation agreements worth EUR 15 million. Most investment activities are carried out through mutual funds, which are required to exhibit good creditworthiness and sufficient liquidity. 38 SHARES AND PARTICIPATIONS OWNED BY THE GROUP Group's ownership interest and voting power, % 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Parent company's ownership interest and voting power, % 100.00 0.00 100.00 0.00 100.00 100.00 100.00 50.00 100.00 0.00 100.00 100.00 Group companies Raute Canada Ltd., New Westminster, B.C., Canada Raute Land Ltd, B.C., Canada Raute Inc., Delaware, USA Raute US, Inc., Rossville, Tennessee, USA RWS-Engineering Oy, Lahti, Finland Raute Group Asia Pte Ltd., Singapore Raute WPM Oy, Lahti, Finland Raute Wood Oy-Santiago Limitada, Chile Mecano Group Oy, Kajaani, Finland Mecano Group Inc., Oregon, USA Raute Service LLC, St. Petersburg, Russia Raute (Shanghai) Machinery Co., Ltd, Shanghai, China 2006 2005 39 EXCHANGE RATES USED IN CONSOLIDATION OF THE SUBSIDIARES Income statement USD CAD SGD CLP RUB CNY Balance sheet USD CAD SGD CLP RUB CNY EUR 1.2557 1.4242 1.9940 695.9000 34.1116 10.0090 EUR 1.3170 1.5281 2.0202 696.4292 34.68 10.333 EUR 1.2448 1.5097 2.0711 698.9770 35.1860 EUR 1.1797 1.3725 1.9628 609.4000 33.92 FINANCIAL STATEMENTS 2006 / GROUP 53 Parent company's income statement, FAS EUR 1 000 1.1­31.12.2006 1.1­31.12.2005 NET SALES Increase (+) or decrease (-) in inventories of finished goods and work in progress Other operating income Materials and services Personnel expenses Depreciation, amortization and impairment charges Other operating expenses Total operating expenses OPERATING PROFIT 91 092 307 396 58 453 18 110 1 769 9 470 87 802 3 993 87 084 -127 2 220 56 301 17 938 1 720 7 689 83 648 5 529 Financial income and expenses Income from investments in other non-current assets Interest and other financial income Impairments from investments in non-current assets Intrerest and other financial expenses Total financial income and expenses PROFIT BEFORE EXTRAORDINARY ITEMS Extraordinary items PROFIT / LOSS AFTER EXTRAORDINARY ITEMS Appropriations Income taxes PROFIT / LOSS FOR THE FINANCIAL YEAR 524 883 -4 581 -713 -3 887 106 222 328 265 -1 447 -854 56 1 206 -1 536 -76 -350 5 179 100 5 279 -32 -1 419 3 828 54 FINANCIAL STATEMENTS 2006 / PARENT COMPANY Parent company's balance sheet, FAS EUR 1 000 31.12.2006 31.12.2005 ASSETS Non current assets Intangible assets Tangible assets Investments Total Current assets Inventories Long-term receivables Short-term receivables Investments held as current assets Cash and cash equivalents Total TOTAL ASSETS LIABILITIES Shareholders' equity Share capital Equity issue Share premium Retained earnings Profit / loss for the financial year Total Appropriation reserve Provisions Liabilities Deferred tax liabilities Long-term liabilities Short-term liabilities Total TOTAL LIABILITIES 1 945 10 387 4 289 16 621 1 625 11 122 10 064 22 811 3 157 44 21 459 10 194 13 531 48 385 65 006 2 011 124 20 076 8 975 1 580 32 766 55 577 8 010 6 498 14 861 -854 28 515 1 475 1 818 7 629 14 5 429 13 322 3 828 30 222 1 740 2 141 130 277 32 791 33 198 65 006 130 277 21 067 21 474 55 577 The complete consolidated financial statements can be found on the company's website at www.raute.com. FINANCIAL STATEMENTS 2006 / PARENT COMPANY 55 Parent company's statement of changes in shareholders' equity, FAS EUR 1 000 Share capital Other funds Reserve Share fund premium Retained earnings TOTAL SHAREHOLDERS' EQUITY AT JAN. 1, 2005 Share capital increase (options) Dividend Transfer from reserve fund to the share premium fund Reductions in revalutations (inc. deferred tax) Profit for the period SHAREHOLDERS' EQUITY AT DEC. 31, 2005 SHAREHOLDERS' EQUITY AT JAN. 1, 2006 Share capital increase (options) Dividend Loss for the period SHAREHOLDERS' EQUITY AT DEC. 31, 2006 7 629 14 5 429 15 170 -1 526 28 228 14 -1 526 -5 429 5 429 -322 3 828 17 150 17 150 -2 290 -854 14 007 -322 3 828 30 222 30 222 1 436 -2 290 -854 28 515 7 629 7 629 381 14 14 -14 5 429 5 429 1 069 8 010 6 498 Distributable funds 2006 2005 Retained earnings at Dec. 31 Loss / profit for the period Capitalized development costs DISTRIBUTABLE FUNDS 14 861 -854 14 007 13 322 3 828 -38 17 112 The complete consolidated financial statements can be found on the company's website at www.raute.com. 56 FINANCIAL STATEMENTS 2006 / PARENT COMPANY Key ratios describing the financial development EUR 1 000 Net sales Overseas sales % of net sales Operating profit / loss % of net sales Profit / loss before income taxes, from continuing operations % of net sales Profit / loss attributable to equity holders of the parent company % of net sales Return on investment (ROI), % Return on equity (ROE), % Balance sheet total Interest-bearing net liabilities % of net sales Interest-free liabilities Equity ratio, % Quick ratio Gearing, % Gross capital expenditure % of net sales R&D costs % of net sales Order book Personnel at Dec. 31 Personnel, average Dividend 2006 106 206 95 789 90.2 4 513 4.2 2005 108 627 78 183 72.0 4 403 4.1 2004 73 116 65 136 89.1 3 647 5.0 2003* 97 608 84 419 86.5 -3 340 -3.4 2002* 88 908 73 708 82.9 -8 299 -9.3 4 887 4.6 3 632 3.4 18.6 13.1 68 472 -23 539 -22.2 38 696 60.1 2.7 -80.3 1 852 1.7 3 765 3.5 76 699 540 547 2 803** 5 461 5.0 4 152 3.8 20.7 15.8 55 435 -10 861 -10.0 28 755 55.7 2.0 -41.5 3 798 3.5 3 616 3.3 55 317 533 537 2 289 3 906 5.3 4 762 6.5 25.2 19.9 46 188 -7 670 -10.5 19 289 56.8 1.5 -30.6 2 060 2.8 3 093 4.2 35 417 543 556 1 526 -2 274 -2.3 -2 703 -2.8 -5.4 -10.7 63 510 -4 238 -4.3 30 922 41.3 1.2 -18.2 1 502 1.5 2 651 2.7 38 774 758 783 3 815 -8 951 -10.1 -7 329 -8.2 -18.5 -22.8 58 903 -4 450 -5.0 21 504 50.1 1.3 -16.3 2 793 3.1 3 611 4.1 25 387 801 835 1 907 * The years 2002­2003 have been reported according to Finnish Accounting Standards (FAS). **The Board of Directors' proposal to the Annual General Meeting. FINANCIAL STATEMENTS 2006 / GROUP 57 SHARE-RELATED DATA 2006 Earnings per share from continuing operations, EUR Earnings per share from discontinued operations, EUR Equity to share, EUR Dividend per share, EUR Dividend per profit, % Effective dividend yield, % Price/earnings ratio (P/E ratio) Development in share price (series A shares) Lowest, EUR Highest, EUR Average exchange rate for the accounting period, EUR Share price at Dec. 31, EUR Market value of capital stock at Dec. 31, EUR thousand*** Trading in the company's shares (series A shares) Shares traded during the fiscal year, 1 000 shares % of the number of series A shares Issue-adjusted number of share average Issue-adjusted number of share average at year-end 0.94 7.32 0.70 ** 74.5 5.5 13.68 2005 1.09 6.80 0.60 55.1 4.2 13.08 2004 0.71 0.54 6.47 0.40 32.0 5.2 6.16 2003* -0.71 6.11 1.00 -141.1 12.5 -11.3 2002* -1.92 7.18 0.50 -26.0 6.4 -4.1 11.60 17.60 14.03 12.85 7.60 16.42 11.24 14.24 7.10 8.90 8.14 7.70 6.20 9.50 8.12 8.00 7.80 10.30 9.18 7.80 51 461 54 320 29 372 30 517 29 754 1 088 36.1 3 866 561 4 004 758 1 530 54.2 3 814 608 3 814 608 569 20.1 3 814 608 3 814 608 323 11.5 3 814 608 3 814 608 845 30.5 3 814 608 3 814 608 The deferred tax liabilities have been included in the computation of the key ratios. * The years 2002­2003 have been reported according to Finnish Accounting Standards (FAS). ** The Board of Directors' proposal to the Annual General Meeting. *** Series K shares valued at the value of series A shares. 58 FINANCIAL STATEMENTS 2006 / GROUP DEVELOPMENT OF QUARTERLY RESULTS Total 2006 106 206 198 -99 231 -2 660 4 513 4 374 4 887 5 -1 255 3 632 3 Q4 2006 32 494 72 -29 396 -871 2 299 7 113 2 412 7 -717 1 696 5 Q3 2006 18 666 30 -18 404 -616 -324 -2 92 -233 -1 -66 -299 -2 Q2 2006 28 543 72 -26 629 -579 1 408 5 -51 1 357 5 -50 1 307 5 Q1 2006 26 503 25 -24 803 -595 1 130 4 220 1 350 5 -423 927 3 EUR 1 000 NET SALES Other operating income Operating expenses Depreciation, amortization and impairment charges OPERATING PROFIT / LOSS % of net sales Financial income and expenses PROFIT / LOSS BEFORE TAX % of net sales Taxes PROFIT / LOSS FROM CONTINUING OPERATIONS % of net sales BREAKDOWN Profit / loss attributable to minority interest Profit / loss attributable to equity holders of the parent company EARNINGS PER SHARE Earnings per share: - Basic, EUR - Diluted, EUR Equity issue-adjusted number of shares - Weighted average - Diluted 3 632 1 696 -299 1 307 927 0.94 0.94 0.44 0.44 -0.08 -0.08 0.34 0.33 0.24 0.24 3 867 3 867 3 867 3 867 3 834 3 957 3 822 3 931 3 816 3 925 FINANCIAL STATEMENTS 2006 / GROUP 59 Calculation of key ratios Return on investment (ROI), % = Profit before tax* + interest expenses + other financial expenses Balance sheet total ./. interest-free liabilities (average) Return on equity (ROE), % = Profit before tax* ./. taxes Equity + minority interests (average) Interest-bearing net liabilities = Interest-bearing liabilities ./. cash and cash equivalents + financial assets at fair value through profit / loss Equity ratio, % = Equity + minority interests Balance sheet total ./. advances received Quick ratio = Cash and cash equivalents + financial assets at fair value through profit / loss + current receivables Current liabilities ./. advances received Earnings per share (EPS) = Profit / loss for the period** Equity issue-adjusted average number of shares during the year Equity to share = Equity Equity issue-adjusted number of shares at the day of the financial satements Dividend per share = Distributed dividend for the year Equity issue-adjusted number of shares at the day of the financial statements Dividend per profit, % = Dividend per share Earnings per share Effective dividend return, % = Dividend per share Equity issue-adjusted closing share price at 31 Dec. Price/earnings ratio (P/E ratio) = Equity issue-adjusted closing share price at 31 Dec. Earnings per share Number of shares at year end (series A+K shares) x closed share price on the last day of the year Gearing, % = Interest-bearing liabilities ./. cash and cash equivalents + financial assets at fair value through profit / loss Equity + minority interest x 100 x 100 x 100 x 100 x 100 x 100 Market value of capital stock = * 2002­2003: profit before extraordinary items ** 2002­2003: profit before extraordinary items and taxes ./. taxes +/- minority interests 60 FINANCIAL STATEMENTS 2006 / GROUP Shares and shareholders Current information on Raute's shares and shareholders can be found on the company's website at www.raute.com. SHARE CAPITAL AT DECEMBER 31, 2006 Shares Series K shares (ordinary shares) Series A shares Total shares at Dec. 31, 2006 Voting rights 20 votes/share 1 vote/share Nominal value EUR/share 2.00 2.00 2.00 Number of 1 000 shares 991 3 014 4 005 Total nominal value EUR 1 000 1 982 6 027 8 010 CHANGES IN SHARE CAPITAL FROM JANUARY 1, 1994 TO DECEMBER 31, 2006 Share capital EUR 5 359 073 1 069 285 -12 648 1 213 506 -44 539 -4 900 380 300 8 009 516 991 161 44 539 4 900 190 150 3 013 597 Number of series K shares 1 054 600 -14 000 Number of series A shares 2 124 240 635 768 14 000 Share capital at January 1, 1994 Issue of share capital September 21, 1994 Change of series K shares into series A shares 1998 Decrease of share capital (premium fund) June 30, 2000 Increase of share capital, capitalization issue June 30, 2000 Change of series K shares into series A shares 2003 Change of series K shares into series A shares 2004 Shares registered for with options 1.1­31.12.2006 Share capital at Dec. 31, 2006 Board authorizations No decisions about new share issues were made during the report period, nor were any convertible bonds or stock options issued. Raute Corporation's Board of Directors had no valid authorizations to issue shares, convertible bonds, or stock options. The Annual General Meeting held on March 22, 2006 re-authorized the Board to decide about the acquisition of Raute's series A shares using distributable funds, as well as about the disposal of own shares. The maximum number of shares that the Board is authorized to purchase is defined as follows: after the purchase, the total nominal value of the shares or the votes that they offer, combined with company shares held by the company or its subsidiaries, may not exceed 10 percent of the company's registered share capital or the total votes of all shares. Shares and shareholders Raute Corporation's series A shares are listed on the Nordic list of the Helsinki Stock Exchange. The trading code is RUTAV. The shares have a nominal value of EUR 2. Raute Corporation has signed a market making agreement with Market value of capital stock at 31 Dec., EUR million Trading in series A shares 60 50 40 30 1 000 3 500 3 000 2 500 2 000 1 500 1 000 pcs 350 300 250 200 150 100 50 20 10 0 1 000 500 10/06 11/06 2002 2003 2004 2005 2006 Trading 1 000 Trading 1 000 pcs 12/06 2/06 3/06 4/06 5/06 6/06 7/06 8/06 9/06 1/06 0 0 FINANCIAL STATEMENTS 2006 / GROUP 61 Nordea Bank Finland plc in compliance with the Liquidity Providing (LP) requirements issued by the Helsinki Stock Exchange. The number of shares at the end of the report period totaled 4 004 758, of which 991 161 were series K shares and 3 013 597 series A shares. A total of 1 088 288 (1 529 700) shares were traded in 2006. The total value of trading was EUR 15.4 million (17.1 m). The highest share price was EUR 17.60 (16.42) and the lowest EUR 11.60 (7.60). At the end of the year, the share price was EUR 12.85 (14.24). The average price was EUR 14.03 (11.24). The company's market capitalization at the end of the report period was EUR 51.5 million (54.3 m), with series K shares valued at the closing price on December 29, 2006, of series A shares. cess of the strategy. The incentive plan encompasses the Group's Executive Board (5 members) and 13 other key employees. The rewards will be paid partly in shares and partly in cash. Decisions on the rewards will be made in 2009. The cash portion is meant for the payment of taxes and tax-related costs. The shares are subject to a two-year transfer prohibition. Option scheme Raute Corporation's 1998 option scheme expired on September 30, 2006, for B options. The scheme accounted for a total of 212 500 options, of which 190 150 were exercised. The highest trading price in 2006 for B options was EUR 9.58 (9.20) and the lowest EUR 4.48 (1.00). A total of 330 650 B options were exercised in 2006 (197 500). The total value of trading was EUR 2 452 176 (701 207). Insider issues The number of shareholders totaled 974 at the beginning of the year and 1 144 at the end of the report period. Raute Corporation follows the Guidelines for Insiders issued by the Helsinki Stock Exchange, the Central Chamber of Commerce, and the Confederation of Finnish Industry and Employers. In addition, the company applies separate insider instructions approved by the Board of Directors. The company's public insiders include the Board of Directors, the Group's President and CEO, the Executive Board, the Presidents of subsidiaries, and auditors. Incentive schemes Share-based incentive plan On March 22, 2006, the Board of Directors of Raute Corporation approved a share-based incentive plan for the strategy period 2006­2008. The potential reward from the plan will be based on the Group's operating profit and on the Board of Directors' assessment of the suc- DISTRIBUTION OF SHARES BY SHARE TYPE AT DEC. 31, 2006 Series A and K shares by shareholder groups Households Credit and insurance institutions Foreign shareholders Non-profit institutions Public institutions Companies Administrative registered Total Number of shareholders 1 039 4 8 8 3 78 4 1 144 Number of shares 3 263 501 110 425 54 250 34 201 212 133 277 808 52 440 4 004 758 Number of voting rights 22 095 560 110 425 54 250 34 201 212 133 277 808 52 440 22 836 817 % 90.9 0.3 0.7 0.7 0.3 6.8 0.3 100.0 % 81.5 2.8 1.4 0.9 5.3 6.9 1.3 100.0 % 96.9 0.5 0.2 0.1 0.9 1.2 0.2 100.0 DISTRIBUTION OF SERIES K SHARES BY SHARE TYPE AT DEC. 31, 2006 Series K shares by shareholder groups Households Total Number of shareholders 46 46 Number of shares 991 161 991 161 Number of voting rights 19 823 220 19 823 220 % 100.0 100.0 % 100.0 100.0 % 100.0 100.0 Series K shares by size of holding 1­1 000 1 001­5 000 5 001­10 000 10 001­50 000 50 001­100 000 Total Number of shareholders 2 2 14 24 4 46 % 4.3 4.4 30.4 52.2 8.7 100.0 Number of shares 580 7 429 92 653 668 619 221 880 991 161 % 0.1 0.8 9.4 67.5 22.4 100.0 Number of voting rights 11 600 148 580 1 853 060 13 372 380 4 437 600 19 823 220 % 0.1 0.8 9.4 67.5 22.4 100.0 62 FINANCIAL STATEMENTS 2006 / GROUP DISTRIBUTION OF SERIES A SHARES BY SHARE TYPE AT DEC. 31, 2006 Number of voting rights 2 272 340 110 425 54 250 34 201 212 133 277 808 52 440 3 013 597 Series A shares Number of by shareholder groups shareholders Households 1 037 Credit and insurance institutions 4 Foreign shareholders 8 Non-profit institutions 8 Public institutions 3 Companies 78 Administrative registered 4 Total 1 142 % 90.8 0.7 0.7 0.7 0.3 6.8 0.0 100.0 Number of shares 2 272 340 110 425 54 250 34 201 212 133 277 808 52 440 3 013 597 % 75.4 3.7 1.8 1.1 7.0 9.2 1.7 100.0 % 75.4 3.7 1.8 1.1 7.0 9.2 1.7 100.0 Series A shares by size of holding 1­1 000 1 001­5 000 5 001­10 000 10 001­50 000 50 001­100 000 100 001­ Total Number of shareholders 937 130 28 37 8 2 1 142 % 82.1 11.4 2.5 3.2 0.7 0.2 100.0 Number of shares 335 490 292 558 214 303 958 913 517 333 695 000 3 013 597 % 11.1 9.7 7.1 31.8 17.2 23.1 100.0 Number of voting rights 335 490 292 558 214 303 958 913 517 333 695 000 3 013 597 % 11.1 9.7 7.1 31.8 17.2 23.1 100.0 20 LARGEST SHAREHOLDERS AT DEC. 31, 2006 By number Number of Number of of shares series K shares series A shares 1 Sundholm, Göran 500 000 2 Varma Mutual Pension Insurance Company 195 000 3 Suominen, Jussi Matias 48 000 74 759 4 Suominen, Tiina Sini-Maria 48 000 74 759 5 Mustakallio, Kari Pauli 60 480 60 009 6 Kirmo, Kaisa Marketta 50 280 65 092 7 Suominen, Pekka Matias 48 000 64 159 8 Siivonen, Osku Pekka 50 640 59 539 9 Keskiaho, Leena 33 600 51 116 10 Särkijärvi, Riitta 60 480 22 009 11 Mustakallio, Risto 42 240 35 862 12 Mustakallio, Ulla Sinikka 47 240 30 862 13 Mustakallio, Mika 39 750 34 670 14 Op-Suomi Pienyhtiöt Mutual Fund 67 900 15 Mustakallio, Marja Helena 42 240 20 662 16 Mustakallio, Kai Henrik 47 240 12 000 17 Kirmo, Lasse 30 000 26 200 18 Särkijärvi, Timo Juha 12 000 43 256 19 Särkijärvi-Martinez, Anu Riitta 12 000 43 256 20 Suominen, Jukka Matias 24 960 27 964 Total 697 150 1 509 074 Total number % of total of shares shares 500 000 12.5 195 000 122 759 122 759 120 489 115 372 112 159 110 179 84 716 82 489 78 102 78 102 74 420 67 900 62 902 59 240 56 200 55 256 55 256 52 924 2 206 224 4.9 3.1 3.1 3.0 2.9 2.8 2.8 2.1 2.1 2.0 2.0 1.9 1.7 1.6 1.5 1.4 1.4 1.4 1.3 55.1 Total number % of voting of votes rights 500 000 2.2 195 000 1 034 759 1 034 759 1 269 609 1 070 692 1 024 159 1 072 339 723 116 1 231 609 880 662 975 662 829 670 67 900 865 462 956 800 626 200 283 256 283 256 527 164 15 452 074 0.9 4.5 4.5 5.6 4.7 4.5 4.7 3.2 5.4 3.9 4.3 3.6 0.3 3.8 4.2 2.7 1.2 1.2 2.3 67.7 FINANCIAL STATEMENTS 2006 / GROUP 63 20 LARGEST SHAREHOLDERS AT DEC. 31, 2006 Number of Number of By number of votes series K shares series A shares 1 Mustakallio, Kari Pauli 60 480 60 009 2 Särkijärvi, Riitta 60 480 22 009 3 Siivonen, Osku Pekka 50 640 59 539 4 Kirmo, Kaisa Marketta 50 280 65 092 5 Suominen, Jussi Matias 48 000 74 759 6 Suominen, Tiina Sini-Maria 48 000 74 759 7 Suominen, Pekka Matias 48 000 64 159 8 Mustakallio, Ulla Sinikka 47 240 30 862 9 Mustakallio, Kai Henrik 47 240 12 000 10 Mustakallio, Risto 42 240 35 862 11 Mustakallio, Marja Helena 42 240 20 662 12 Mustakallio, Mika 39 750 34 670 13 Keskiaho, Leena 33 600 51 116 14 Kirmo, Lasse 30 000 26 200 15 Keskiaho, Juha-Pekka 27 440 9 500 16 Suominen, Jukka Matias 24 960 27 964 17 Keskiaho, Marjaana 24 780 23 288 18 Sundholm, Göran 500 000 19 Molander, Sole 20 000 20 Kultanen, Leea Annika 19 789 4 050 Total 765 159 1 196 500 Total number of shares 120 489 82 489 110 179 115 372 122 759 122 759 112 159 78 102 59 240 78 102 62 902 74 420 84 716 56 200 36 940 52 924 48 068 500 000 20 000 23 839 1 961 659 % of total Total number % of voting shares of votes rights 3.0 1 269 609 5.6 2.1 1 231 609 5.4 2.8 1 072 339 4.7 2.9 1 070 692 4.7 3.1 1 034 759 4.5 3.1 1 034 759 4.5 2.8 1 024 159 4.5 2.0 975 662 4.3 1.5 956 800 4.2 2.0 880 662 3.9 1.6 865 462 3.8 1.9 829 670 3.6 2.1 723 116 3.2 1.4 626 200 2.7 0.9 558 300 2.4 1.3 527 164 2.3 1.2 518 888 2.3 12.5 500 000 2.2 0.5 400 000 1.8 0.6 399 830 1.8 49.0 16 499 680 72.3 The number of administratively registered shares at 31 December 2006 was 52 440 (49 310). Management interest at Dec. 31, 2006 The company's Board of Directors, President and CEO and Presidents of the subsidiaries owned a total of 81 838 series A shares and 98 990 series K shares. Management's ownership corresponds to 4.5 percent of the shares in the company and 9.0 percent of associated total voting rights. The figures include holdings of their own, minor children and control entities. Public insider ownership at Dec. 31, 2006 Public insiders owned a total of 81 838 series A shares and 98 990 series K shares. Management's ownership corresponds to 4.5 percent of the shares in the company and 9.0 percent of associated total voting rights. The figures include the holdings of their own, minor children and control entities. Changes in ownership related to the disclosure obligation as provided in the Securities market act, Chapter 2, Section 9 The holdings of Varma Mutual Pension Insurance Company dropped under the disclosure threshold of one-twentieth (1/20) when the increase in Raute Corporation's share capital was registered in the Trade Register on November 2, 2006. Varma Mutual Pension Insurance Company's holdings of Raute Corporation's share capital and voting rights was: 200 000 Raute Corporation series A shares, 4.99 percent of share capital, and 0.88 percent of voting rights. Performance of series A shares, EUR 20 15 10 5 12/2002 12/2003 12/2004 12/2005 12/2006 Raute Sectoral Index HEX Index Comparison Index 64 FINANCIAL STATEMENTS 2006 / GROUP The Board of Directors' proposal for distribution of profits The parent company's distributable profits total EUR 14 007 thousand, of which the loss for the period is EUR 854 thousand. The Board of Directors proposes to the Annual General Meeting that the distributable profits be used in the following way: - EUR 0.70 per share distributed as dividend, i.e., a total of - Retained in equity EUR 2 803 thousand EUR 11 204 thousand EUR 14 007 thousand No significant changes have taken place in the company's financial position after the end of the report period. The company has good liquidity, and the proposed profit distribution does not put liquidity at risk. Nastola, February 8, 2007 Jarmo Rytilahti Chairman of Board of Directors Mika Mustakallio Pekka Paasikivi Panu Mustakallio Jorma Wiitakorpi Tapani Kiiski President and CEO Sinikka Mustakallio Auditor's report To the shareholders of Raute Corporation We have audited the accounting records, the report of the Board of Directors, the financial statements and the administration of Raute Corporation for the period Jan. 1­Dec. 31, 2006. The Board of Directors and the President and CEO have prepared the consolidated financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the EU, as well as the report of the Board of Directors and the parent company's financial statements, prepared in accordance with prevailing regulations in Finland, containing the parent company's balance sheet, income statement, cash flow statement and notes to the financial statements. Based on our audit, we express an opinion on the consolidated financial statements, as well as on the report of the Board of Directors, the parent company's financial statements and the administration. We conducted our audit in accordance with Finnish Standards on Auditing. Those standards require that we perform the audit to obtain reasonable assurance about whether the report of the Board of Directors and the financial statements are free of material misstatement. An audit includes examining on a test basis evidence supporting the amounts and disclosures in the report of the Board of Directors and in the financial statements, assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. The purpose of our audit of the administration is to examine whether the members of the Board of Directors and the President and CEO of the parent company have complied with the rules of the Companies' Act. ing Standards as adopted by the EU, give a true and fair view, as defined in those standards and in the Finnish Accounting Act, of the consolidated results of operations as well as of the financial position. Parent company's financial statements and administration In our opinion the parent company's financial statements have been prepared in accordance with the Finnish Accounting Act and other applicable Finnish rules and regulations. The parent company's financial statements give a true and fair view of the parent company's result of operations and of the financial position. In our opinion the report of the Board of Directors has been prepared in accordance with the Finnish Accounting Act and other applicable Finnish rules and regulations. The report of the Board of Directors is consistent with the consolidated financial statements and the parent company's financial statements and gives a true and fair view, as defined in the Finnish Accounting Act, of the result of operations and of the financial position. The consolidated financial statements and the parent company's financial statements can be adopted and the members of the Board of Directors and the President and CEO of the parent company can be discharged from liability for the period audited by us. The proposal by the Board of Directors regarding the disposal of distributable funds is in compliance with the Companies' Act. Nastola 9 February 2007 Kari Miettinen, APA Sari Airola, APA Consolidated financial statements In our opinion the consolidated financial statements, prepared in accordance with International Financial Report- FINANCIAL STATEMENTS 2006 / GROUP 65 Board of Directors Jarmo Rytilahti b. 1944, M.Sc. (Econ. & Bus. Adm.) Chairman of the Board 2004­ Member of the Board 2003­ Principal occupation: President of Uponor Oyj (former Asko Oyj) 1991­2003 Main simultaneous position of trust: Member of the Board: Kemppi Oy 2003­ Renor Oy 2003­ Lahden Polttimo Oy 2005­ Raute shares: No holding of shares Remuneration in 2006: EUR 36.2 thousand Share-based remunerations: No share-based remunerations Sinikka Mustakallio b. 1952 Vice-Chairman of the Board 2004­ Member of the Board 1998­ Chairman of Raute Corporation's Supervisory Board 1996­1998 Principal occupation: President, WoM Oy 2001­ Main simultaneous position of trust: None Raute shares: 47 240 series K shares 30 862 series A shares Remuneration in 2006: EUR 18 thousand Share-based remunerations: EUR 26.4 thousand Mika Mustakallio b. 1964, M.Sc. (Econ. & Bus. Adm.), CEFA Member of the Board 2004­ Principal occupation: President, MORS Software Oy 2006­ Main simultaneous positions of trust: None Raute shares: 39 750 series K shares 34 670 series A shares Remuneration in 2006: EUR 18 thousand Share-based remunerations: No share-based remunerations Holdings of Raute shares on 31 December 2006. The figures include holdings of their own, minor children and control entities. Current Raute shareholdings of the members of the Board of Directors' can be found on the company's website at www.raute.com. 66 Panu Mustakallio b. 1971, M.Sc. (Eng.) Member of the Board 2003­ Principal occupation: Development Engineer, Halton Oy 2001­2005, Specialist, Indoor Climate Technology, Halton Oy 2005­ Main simultaneous positions of trust: None Raute shares: 12 000 series K shares 15 256 series A shares Remuneration in 2006: EUR 18 thousand Share-based remunerations: No share-based remunerations Pekka Paasikivi b. 1944, B.Sc. (Eng.) Member of the Board 2002­ Principal occupation: Chairman of the Board, Oras Invest Oy 2005­ Main simultaneous positions of trust: Chairman of the Board: Uponor Oyj 1999­ Erkki Paasikivi Foundation 1997­ Chairman of the Supervisory Board: Varma Mutual Pension Insurance Company 2005­ Member of the Board: Okmetic Oyj 1996­ Foundation of Economic Education 2003­ Raute shares: No holding of shares Remuneration in 2006: EUR 18 thousand Share-based remunerations: No share-based remunerations Jorma Wiitakorpi b. 1957, M.Sc. (Eng.) Member of the Board 2006­ Principal occupation: President and CEO, Patria Oyj 2001­ Main simultaneous positions of trust: Chairman of the Board: The Finnish Road Enterprise 2006­ Plenware Group Oy 2004­ Reka Oy 2004­ Member of the Board: Puulämpö Yhtiöt Oy 1997­ Raute shares: No holding of shares Remuneration in 2006: EUR 13.5 thousand Share-based remunerations: No share-based remunerations Expirations from the Board of Directors on 22 March 2006 Heikki Lehtonen, Member of the Board 1997­2005 Remuneration in 2006: EUR 4.5 thousand Share-based remunerations: No share-based remunerations Markku Nihti, Member of the Board 1997­2005 Remuneration in 2006: EUR 4.5 thousand Share-based remunerations: EUR 35 thousand Auditors Kari Miettinen, APA Sari Airola, APA Deputy Auditor PricewaterhouseCoopers Oy 67 Executive Board Tapani Kiiski b. 1962, Licentiate in Technology President and CEO, 16 March 2004­ With the company since: 2002­ Member of the Executive Board since: 16 March 2004 Raute shares: 1 000 series A shares Timo Kangas b. 1965, Engineer Vice President, Technology Services With the company since: 2004­ Member of the Executive Board since: 22 September 2004 Raute shares: No holding of shares Arja Hakala b. 1957, M.Sc. (Econ.), MBA Chief Financial Officer, Deputy to President and CEO With the company since: 1990­ Member of the Executive Board since: 1 January 2001 Raute shares: No holding of shares Bruce Alexander b. 1959, B.Sc. (For.), MBA Vice President, North American Operations, President of Raute's North American companies With the company since: 2000­ Member of the Executive Board since: 1 June 2004 Raute shares: No holding of shares Petri Strengell b. 1962, M.Sc. (Eng.) Vice President, Technology and Operations With the company since: 1987­ Member of the Executive Board since: 1 June 2004 Raute shares: No holding of shares Holdings of Raute shares on 31 December 2006. The figures include holdings of their own, minor children and control entities. Petri Strengell Tapani Kiiski Timo Kangas Bruce Alexander Arja Hakala Current Raute shareholdings of the members of the Executive Board can be found on the company's website at www.raute.com. 68 Corporate governance Raute Corporation follows the corporate governance recommendation for listed companies issued by HEX Oyj, the Central Chamber of Commerce, and the Confederation of Finnish Industry and Employers on July 1, 2004. The main elements of Raute's corporate governance are described below. The principles and information defined as public in the recommendation are presented on the company's website. nancial status monthly and draws up interim reports. The Board carries out an annual self-evaluation of the work of the Board members and the Chairman of the Board. Year 2006 Raute Corporation's Annual General Meeting on March 22, 2006 elected six members to the Board of Directors. Mr. Jarmo Rytilahti, M.Sc. (Econ. & Bus. Adm.), was elected Chairman of the Board, Ms. Sinikka Mustakallio, researcher, was elected Vice-Chairman, and Mr. Mika Mustakallio, M.Sc. (Econ. & Bus. Adm.), Panu Mustakallio, M.Sc. (Eng.), Mr. Pekka Paasikivi B.Sc. (Eng.), and Jorma Wiitakorpi, M.Sc. (Eng.) were elected Board members. All Board members are independent of the company. The Chairman (Jarmo Rytilahti) and two of the Board members (Pekka Paasikivi and Jorma Wiitakorpi) are independent of major shareholders. The Annual General Meeting of 2006 set the following remunerations for Board members in 2006: EUR 36 thousand to the Chairman of the Board and EUR 18 thousand to each Board member. The salaries and fees paid to the Chairman and Board members totaled EUR 131 thousand, and income from stock options EUR 61 thousand in 2006. The Board held 10 meetings in 2006, 2 of which were teleconferences. The Board members' average attendance at meetings was 92 percent. The attendance of individual members was as follows: Jarmo Rytilahti 9/10, Sinikka Mustakallio 9/10, Heikki Lehtonen 2/3, Mika Mustakallio 10/10, Panu Mustakallio 9/10, Markku Nihti 3/3, Pekka Paasikivi 10/10, and Jorma Wiitakorpi 6/7. The meetings handled the matters listed in the Charter of the Administrative Instructions. The Board carried out a selfevaluation in November 2006. According to the plan for 2007, the Board of Directors will convene eight times and hold teleconferences if necessary. The Board members' personal data, shareholdings on December 31, 2006, and remunerations for 2006 can be found on pages 66­67. Shares and shareholders Raute Corporation's shares are divided into ordinary shares (series K) and A shares (series A). The difference between the series is that a series K share entitles the holder to twenty (20) votes and a series A share to one (1) vote at shareholders' meetings. The series A shares have been quoted on the Nordic list of the Helsinki Stock Exchange since 1994. Year 2006 Detailed information on Raute Corporation's shares and shareholders is provided on pages 61­64. Annual General Meeting Raute Corporation's Annual General Meeting is held in March, but no later than six months from the end of the fiscal year. The Annual General Meeting elects the Chairman and Vice-Chairman for the Board of Directors, and 3­5 Board members. Year 2006 Raute Corporation's Annual General Meeting was held on March 22, 2006. The Meeting adopted the financial statements for 2005 and resolved to distribute a dividend of EUR 0.60 per share, elected the Board of Directors and the auditors, and decided on their remuneration. The Meeting authorized the Board to decide on the acquisition of the company's own series A shares using distributable funds, as well as on the disposal of own shares. Board of Directors The Board's term of office starts at the Annual General Meeting where the Board is elected, and ends at the following Annual General Meeting. The majority of the Board members must be independent of the company and at least two members in the said majority must be independent of the company's major shareholders. The Charter and tasks of the Board of Directors are described in the Administrative Instructions available on the company's website. In addition to statutory tasks and those defined in the Articles of Association, the Board confirms the company strategy and budget annually, and, based on management reports, monitors the Group's fi- The Company's Administrative Instructions On June 21, 2004, Raute Corporation's Board of Directors issued Administrative Instructions for the company. They comprise the Charter for the decision-making bodies; instructions on the division of responsibilities among the Board of Directors, the President and CEO, and the Executive Board; as well as guidelines for organizing internal control and risk management to complement the 69 provisions of the Companies Act and Raute's Articles of Association. The Administrative Instructions are available on the company's website. Board Committees The Audit Committee's tasks are handled by Raute Corporation's Board of Directors. In this capacity, the Board meets the external auditor at least once a year without the presence of any members of the management employed by the company. In the capacity of the Audit Committee, the Board's responsibilities include reviewing the company's financial statements and interim reports, monitoring the internal control system, and seeing to internal and external audits. For the preparation of matters of major importance, the Board of Directors appoints annually from among its members a Working Committee comprising the Chairman, Vice-Chairman, and one Board member. The Board annually elects an Appointments Committee, whose task is to prepare a proposal on Board members and auditors to the Annual General Meeting. The members of the Appointments Committee are Board members or representatives of major shareholders. The Board may also establish other committees, if necessary. Year 2006 The Chairman of the Working Committee is the Chairman of the Board, Mr. Jarmo Rytilahti, and its members are the Vice-Chairman, Ms. Sinikka Mustakallio, and Board member Pekka Paasikivi. The Working Committee convened once in 2006. The Chairman of the Appointments Committee is the Chairman of the Board, Mr. Jarmo Rytilahti, and its members are the Vice-Chairman, Ms. Sinikka Mustakallio, and a representative of a major shareholder, Mr. Ville Korhonen. The Appointments Committee convened twice in 2006. Year 2006 Mr. Tapani Kiiski, Licentiate in Technology, was appointed Raute Corporation's President and CEO on March 16, 2004. Ms. Arja Hakala, M.Sc. (Econ.), MBA, Chief Financial Officer, was appointed deputy to the President and CEO on March 16, 2004. According to the President and CEO Tapani Kiiski's executive contract, his annual salary and fringe benefits total approximately EUR 201 thousand. In addition, he has the possibility to receive a profit-related bonus amounting to six months' salary at the most. The contract does not include any special conditions concerning retirement or the amount of retirement allowance. The term of notice is six months, and the severance pay equals six months' salary. President and CEO, Mr. Tapani Kiiski, is covered by Raute Corporation's share-based incentive plan for key employees (2006­2008). His share of the incentive plan may be a maximum of 10 000 series A shares. The salaries and fees paid to Raute Corporation's President and CEO in 2006 amounted to EUR 308 thousand, of which salaries accounted for EUR 201 thousand, profit-related bonuses for EUR 72 thousand, and income from options for EUR 35 thousand. The personal data, as well as the shareholdings, of the President and CEO and his deputy are presented on page 68. Business organization Raute Group's Executive Board consists of the President and CEO, who acts as the Chairman, and of a variable number of members appointed by Raute Corporation's Board of Directors. The Executive Board prepares the Group's business strategy and is in charge of its implementation. The Executive Board deals with all major operational issues, and its decisions are confirmed by the President and CEO. The members of the Executive Board are in charge of the day-to-day management of the company in their respective areas of responsibility. Year 2006 The Group's Executive Board consisted of Mr. Tapani Kiiski, President and CEO (Chairman); Ms. Arja Hakala, CFO; Mr. Petri Strengell, Vice President, Technology and Operations; Mr. Timo Kangas, Vice President, Technology Services; and Mr. Bruce Alexander, Vice President, North American Operations and President of Raute's North American companies. The Executive Board members' personal data and shareholdings are presented on page 68. President and CEO Raute Corporation's Board of Directors appoints the President and CEO and confirms the terms of his or her employment. The Board evaluates the President and CEO's work annually. Raute Corporation's President and CEO also acts as the Group's President and CEO and as Chairman of the Group's Executive Board. The President represents the Group at the shareholders' meetings of subsidiaries and associates, and acts as Chairman of the subsidiaries' Boards of Directors, unless the Board decides otherwise in individual cases. Salaries and fees The company's remuneration system is divided into three components: the basic salary, a profit- and 70 performance-related bonus system, and a long-term incentive plan. Depending on the employee's position, different variations of the above-mentioned elements are applied. The Board of Directors confirms annually the principles of remuneration systems, and determines the profit-related bonuses of the President and CEO and other senior management. The Board of Directors prepares a proposal on and determines the President and CEO's annual remuneration and approves the remunerations of the Executive Board members, based on the President and CEO's proposal. An individual employee's remuneration is always approved by the superior of the employee's superior. The Chairman of the Board approves the remunerations of those of the President and CEO's immediate subordinates who are not members of the Executive Board. An employee is not entitled to separate remuneration for being a Board member in any of Raute Group's subsidiaries. The Board of Directors determines the Group's general attitude to risk and approves the risk management policy at a general level. The Executive Board determines the Group's general risk management principles and confirms various operating principles and boundaries of powers. The Chief Financial Officer is responsible for the co-ordination of risk management. The Group's President and CEO controls the implementation of risk management in the entire Group, while the Presidents of the Group companies are responsible for risk management in their respective companies. The members of the Executive Board are responsible for their own fields across company boundaries. The responsibility of the Group's Controller function is to develop risk management procedures jointly with the operational management and to control compliance with the risk management principles and powers. The principal product and operation liability risks, and property and personal damage risks are covered by insurance. The absence of an internal auditing organization is taken into account when drawing up the content of Group reporting and the internal audits of quality systems. The company's Board of Directors approves the auditing program. The management of financing risks is described in the notes to the consolidated financial statements on pages 52­53. Insider issues Raute Corporation follows the Guidelines for Insiders issued by the Helsinki Stock Exchange, the Central Chamber of Commerce, and the Confederation of Finnish Industry and Employers. In addition, the company applies separate insider instructions approved by the Board of Directors. Public insiders comprise the President and CEO, his or her deputy, the Board members, the auditors, the members of the Group's Executive Board, and the Presidents of Raute Group companies. Company-specific insiders comprise individuals who, as part of their duties, regularly deal with or obtain unpublished information that influences the share price. Raute also maintains a company-specific project register where project-specific insiders are entered. The Chief Financial Officer is in charge of insider issues in the company. The insider trading prohibition begins at the end of an interim reporting period or fiscal year and ends on the publication of the corresponding stock exchange release. The company aims to avoid investor communication meetings during insider trading prohibitions. The list of public insiders is published on the company's website. Audits According to the Articles of Association, the company shall elect two regular auditors and deputies for them. The shareholders' meeting may exercise its legal right and elect a public accountant company instead of two deputy auditors. The Board of Directors approves the audit plan and supervises its implementation. When the contents of the audit are being drawn up, the absence of a separate internal auditing organization shall be taken into account. In addition to their tasks defined in regulations, the auditors report to the Chairman of the Board when necessary, and at least once a year to the Board of Directors on any issues that have arisen during the audit. Year 2006 The Annual General Meeting held on March 22, 2006 re-elected Mr. Kari Miettinen and Ms. Sari Airola, Authorized Public Accountants, as auditors, and PricewaterhouseCoopers Oy, an authorized public accounting company, as deputy auditor. The remuneration paid to the principal accountants for the normal annual audit of year 2006 totaled EUR 68 thousand. Other remuneration paid to PricewaterhouseCoopers in 2006 amounted to EUR 61 thousand. Risk management The main risks in Raute Group's international business are financing, product liability, and contractual risks. The company has a risk management policy approved by the Board of Directors. The President and CEO and the Chief Financial Officer report to the Board regularly about any major strategic and business risks. 71 Stock exchange releases and announcements 2006 January 16 January 1 650 pcs of Raute Corporation's series A shares subscribed with warrants February 8 February 17 February 20 February 22 February Raute Corporation's financial statements for 2006 The appointment committee's proposal regarding composition of Raute Corporation's Board of Directors and authorized public accountants Summons to Raute Corporation's Annual General Meeting Raute has signed a letter of intent for a major order to Russia March 9 March 22 March 22 March Raute's annual report 2005 published The Board of Directors of Raute Corporation approved an incentive plan for key personnel Raute Corporation's Annual General Meeting April 26 April 27 April 20 000 pcs of Raute Corporation's series A shares subscribed with warrants Raute Corporation's interim report 1 January­31 March 2006 June 2 June 15 June Raute to deliver an expansion for a plywood mill in Chile Raute corrects information published by Kauppalehti Online July 3 July 1 000 pcs of Raute Corporation's series A shares subscribed with warrants August 3 August 10 August 10 August Raute receives an EUR 18 million order for a LVL mill in the USA Raute Corporation's interim report January 1­June 30, 2006 52 200 pcs of Raute Corporation's series A shares subscribed with warrants September 4 September 12 September 900 pcs of Raute Corporation's series A shares subscribed with warrants Raute receives an EUR 11 million order for a plywood mill in Europe October 5 October 24 October 25 October 25 October 25 October 114 400 pcs of Raute Corporation's series A shares subscribed with warrants Raute's operating profit remains on last year's level Raute Corporation's interim report January 1­September 30, 2006 115 300 pcs of Raute Corporation's series A shares subscribed with warrants Raute Corporation's financial reporting in 2007 November 10 November Notification pursuant to chapter 2, section 9 of the Securities Market Act concerning changes in ownership December 20 December Raute to receive an EUR 30 million order for a plywood mill in Russia Up-to-date information for investors is available in the Investor section on Raute's website at www.raute.com. The section contains information about the company as an investment, Raute Corporation's complete consolidated financial statements, the stock exchange releases published by the company as well as information on Raute's share and shareholdings. 72 Addresses Raute Corporation Head office and main production plant P.O. Box 69 (Rautetie 2) FI-15551 Nastola Finland Tel. +358 3 829 11 Fax +358 3 829 3200 firstname.lastname@raute.com www.raute.com Raute Corporation Jyväskylä plant Hakkutie 3 FI-40320 Jyväskylä Finland Tel. +358 14 445 4400 Fax +358 14 445 4429 RWS-Engineering Oy Tuhkamäentie 2 FI-15540 Villähde Finland Tel. +358 3 829 61 Fax +358 3 762 2378 Mecano Group Oy Syväojankatu 8 FI-87700 Kajaani Finland Tel. +358 8 877 6700 Fax +358 8 612 1982 info@mecanogroup.com Raute Canada Ltd. (former Raute Wood Ltd.) 5 Capilano Way New Westminster, B.C. Canada V3L 5G3 Tel. +1 604 524 6611 Fax +1 604 521 4035 Raute US, Inc. (former Raute Wood Inc.) 50 Commercial Loop Way Suite A, Rossville, TN USA 38066 Tel. +1 901 853 7290 Fax +1 901 853 4765 Raute Wood Oy-Santiago Limitada Hernando de Aguirre 162 Of. 704 Providencia Santiago Chile Tel. +56 2 233 4812 Fax +56 2 233 4748 Raute Group Asia Pte Ltd 35 Jalan Pemimpin # 06-02 Wedge Mount Industrial Building Singapore 577 176 Tel. +65 625 043 22 Fax +65 625 053 22 Raute Wood Indonesia Representative Office Jl. Kelapa Tiga / Joe No. 75 Jagakarsa, Jakarta 12620 Indonesia Tel. +62 21 7888 6461 Fax +62 21 7888 9867 Raute Wood Beijing Representative Office Office 969, Poly Plaza 14 Dongzhimen Nandajie Dongcheng District Beijing 100027 China Tel. +86 10 650 11698 Fax +86 10 650 11798 Raute (Shanghai) Machinery Co., Ltd 18 Building, No. 399, Xuanzhong Road Nanhui Industry Zone, Nanhui District Shanghai City, China P.C. 201300 Tel. +86 021 5818 6330 Fax +86 021 5818 6322 Raute Wood Moscow Arkhangelski per., 1 101934 Moscow Russia Tel. +7 495 207 8794 Fax +7 495 207 8794 Raute Service LLC V.O. Srednii prospect, 48 199178 St. Petersburg Russia Tel. +7 812 740 5386 (87) Fax +7 812 740 5387 Annual Report 2006 Graphic design and layout: Onnion Oy Content: Viestintä Oy Virtuoosi and Raute Photos: Kimmo Häkkinen, Timo Kauppila and Raute Printing house: Esa Print Oy Pictured Raute employees: Kaarle Espo, Marja Hurme, Markku Ikonen, Hannu Keskiväli, Tuija Leppänen-Tiukkanen, Krista Savolainen, Reijo Sinisalo and Antti Taavila Raute Corporation P.O. Box 69 (Rautetie 2), FI-15551 Nastola, Finland Tel. +358 3 82 911, fax +358 3 829 3200 www.raute.com