ANNUAL REPORT 2007 Contents Information to shareholders Review by the President and CEO Raute in brief Year 2007 Strategy Operating environment Business review Product development Personnel Environment Financial statements 2007 Board of Directors' report Group Parent company Key ratios describing the Group's financial development Calculation of key ratios Shares and shareholders The Board of Directors' proposal for distribution of profits, signatures for the Board of Directors' report and financial statements Auditors' report Development of quarterly results Board of Directors Executive Board Corporate governance Stock exchange releases and announcements 2007 Addresses 1 2 4 6 8 11 13 16 18 21 22 23 29 59 70 72 73 77 78 79 80 82 83 86 89 Information to shareholders Raute Corporation's series A shares are listed on the OMX Nordic Exchange, Helsinki. Share quotations can be followed online at www.raute.com. Series A share · Trading code: RUTAV · Number of shares: 3 013 597 · Votes/share: 1 vote paid for both series A and K shares. The date of payment is April 14, 2008 and the respective record date is April 7, 2008. 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. Financial information This annual report is published in Finnish and English. Raute Corporation will publish three interim reports, in Finnish and English, in 2008: April 29 August 5 October 28 January­March 2008 January­June 2008 January­September 2008 Series K share · Number of shares: 991 161 · Votes/share: 20 votes 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, April 2, 2008 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 20, 2008. Shareholders who wish to attend the Meeting must register for it by 4:00 p.m. on Thursday, March 27, 2008 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 / Ms. 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. Dividend The Board of Directors will propose to the Annual General Meeting that a dividend of EUR 1.00 per share be 1 Year of strong profit development The implementation of our strategy saw good progress last year. We returned to a moderate growth track, and 2007 was the fifth consecutive year of result improvement. Looking back on the previous years, we discern the following arc of development: 2005 was a time of heavy growth, 2006 was a record year in terms of order intake and order book, and 2007 was a period of strong profit development. We succeeded in delivering the machinery and equipment for the four mill-scale orders received in 2006 as scheduled. The year 2007 was characterized by its exceptional evenness. The monthly and quarterly fluctuations typical of project business, both in terms of net sales and results, were relatively small. This enabled us to make efficient use of resources. The order intake was distributed unevenly, most of it focusing on the latter part of the year. Our order book decreased in early 2007, because many customers postponed their decisions on project launch. The order intake and order book remained at a sustainable level thanks to the orders received in the fourth quarter. Our order book at the beginning of 2008 is good, although smaller than the previous year. Continuous development of productivity and cost-effectiveness is critical We have continued to develop our own operations in line with Raute's current strategy. Most of our operations and, consequently, our costs are in Finland. Expensive collective agreements, combined with the steep weakening of the US dollar, accentuate the challenges to our competitiveness. To meet this we will focus on our core competence and further develop our partner network outside Finland. We will also enhance our internal work distribution by taking advantage of the differences in the cost levels of different countries. A good example of this is our Shanghai unit, where operations started in earnest last year. In the future, we will continue to make investments aimed at better productivity in our core competence areas, also in Finland. Improved performance from quality and North America Several factors contributed to the strong improvement in performance. In addition to even loading, we improved the efficiency of our internal operations. In 2006, our profitability suffered from delays and cost overruns related to the first deliveries of some of our new products. We managed to clearly decrease the number of such problems in 2007. We introduced new products, but wizened by the problems experienced in the previous year, we improved our forecasting and reduced the risk of novelties in our order book. The changes made to our North American organization and procedures in the latter part of 2006 have proved to be appropriate. Despite a difficult situation we managed to clearly improve our profitability in North America. Although the housing market in North America is expected to continue very slow long into the future, we are committed to serving our customers also during this difficult period. 2 Enhanced productivity and cost-effectiveness are key challenges also to our customers, whose main cost factors are raw material (wood), workforce, energy, and glue. Raute's technology improves both productivity and cost-effectiveness in all of these cases. Close cooperation with customers in technology development is vital if we are to continuously offer new and better solutions. In recent years, the focus of this field of operations too has shifted increasingly to the emerging markets, and I believe that the trend will continue. Making as efficient use as possible of wood, energy, and glue also serves to reduce environmental loading. The issues that have long figured in Raute's technology strategy have now become increasingly relevant as efforts are made to prevent, or at least slow down, climate change ­ a topic that has received much attention in recent years. Throughout its history, Raute has introduced several innovative products, which have changed the entire industry. Technology services going strong In many respects, technology services represent the highest point of co-operation between Raute and its customers. They enable customers to develop their operations in small, gradual improvements that work towards the same goals as new investments. This enables considerable improvements to the capacity of existing production lines and their ability to produce quality, which, in turn, increases the lifetime of investments. This enhances the customer's competitiveness and saves the environment. Furthermore, upgrades carried out in the form of small improvements often cause less interruptions in our customers' production than does a full-scale renewal. Technology services continued to develop well in 2007. The sales of technology services were also more evenly distributed in terms of geography, time, customers and service products. launched in honor of the anniversary. The competition closely reflects Raute's operations. Throughout its history, Raute has introduced several innovative products, which have changed the entire industry. Were it not for its innovations, Raute would not have become the company it today is. The most important and best way to celebrate our one hundred years is to perform our work efficiently and with high quality, and this is what we will focus on primarily. We still face a good market outlook, except in North America. I believe that our customers will maintain their willingness and ability to make investments under favorable market conditions. Our order book is at a good level, providing a good start for 2008. I wish to thank our customers, personnel, partners, shareholders, and all other stakeholders for the past year and co-operation in 2007. Your efforts to ensure Raute's development and success have been invaluable. I hope and believe that our co-operation and mutual trust will continue and improve even further. New challenges for the anniversary The new year ­ 2008 ­ is an important one for Raute. Our company turns 100 this year, and we will celebrate the anniversary in many ways. The events will culminate in the main festivities in August, when we will present the awards for the Innovation competition Tapani Kiiski President and CEO 3 Raute in brief Overall expert in wood products technology Founded in 1908, Raute is today a technology company that serves the wood products sector worldwide. Its core competence comprises the manufacturing processes of wood products for the plywood and veneer, LVL, particleboard and MDF, and parquet and decorative veneer industries. The company is the world's leading supplier of mill-scale projects to selected customer industries. 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, spare part services, modernization, consulting, training, and reconditioned machinery. Raute's head office and main production unit are in Nastola, Finland. Its other production units are located in Vancouver, Canada; Shanghai, China; and Jyväskylä and Kajaani in Finland. The company's sales network has a global reach. Manufacture of plywood machinery begins. Lahden Rauta- ja Metalliteollisuustehdas Oy is entered in the Finnish Trade Register. 1908 Scales production starts. The furniture factory Sopenkorpi Oy is founded. New office building on Vesijärvenkatu street 23 completed. Sales office established in Portland, USA. Munitions manufacture for the Finnish army. 1931 1939­1944 1945 Sopekaluste Oy is established to market furniture made by Sopenkorpi Oy. 1954 1963 1974 Foundry operations ceased. 1976 1914 1930 1940 1908 1920 1950 1960 1911 1915­1916 Armaments deliveries for the Russian army. 1943 1944­1952 1960 Lahden Vaaka Oy, Sopenkorpi Oy and Sopekaluste Oy are merged with Lahden Rautateollisuus. 1968 1970 1975 Acquisition of a majority share of Infor Oy. Nastola mill completed. War reparations deliveries to the Soviet Union. Scales division takes the name Lahden Vaaka Oy. Name changed to Lahden Rautateollisuus Oy. 4 Raute's net sales in 2007 totaled EUR 111 million. The company had 570 employees in 8 countries. Furthermore, nearly 100 Raute employees worked on longterm customer projects around the world. The company's series A shares are listed on the OMX Nordic Exchange, Helsinki. in-depth knowledge of the processes and operations of its customers, leading-edge technologies, and solid project skills. As an expert in customer processes and operations, Raute provides solutions that support customers throughout the life-cycle of their investment, enabling them to develop their own business. An efficient production process enables optimal use of raw materials, energy, chemicals, and resources. This, in turn, improves the quality of end products and reduces environmental loading. Raute LLC, providing maintenance and spare parts services in Russia, is established in St. Petersburg. Raute Oy's series A shares are listed on the Helsinki Stock Exchange. Sope Interior sold. Mecano Group becomes a whollyowned subsidiary of Raute. Production technology for sliced veneer purchased from the Italian company Intercomer srl. Subsidiaries Raute (Shanghai) Machinery Co., Ltd. and Raute (Shanghai) Trading Co., Ltd established in China. 2005 2007 A partner that generates success Raute offers its customers competence that makes the manufacture of wood products more efficient, reliable, and profitable. The company's strengths include Company's name changed to Raute Oy. RWS-Engineering Oy founded. Lahden Vaaka renamed Raute Punnitus ja Automaatio. 1983 1985 The office of Raute Wood Processing Machinery is transferred from Lahti to Nastola. Raute's divisions consolidated: Raute Punnitus ja Auto- Raute Wood Promaatio renamed Raute cessing Machinery Precision. Oy, Raute Precision Oy and Sope Raute GmbH founded in Interior Oy. Germany and Raute do Brasil in Brazil. 1988 1992 Supervisory Board dissolved. Jymet Engineering Oy merged with Raute Corporation. 1994 1998 2003 1980 1990 2000 1979 1984 1990 The last frame saws delivered to customers. 1991 1995 Sales office established in Santiago, Chile. 2000 2004 Raute Precision sold. Raute acquires the business operations of the Durand Machine Company Ltd.: Durand ­ Raute Industries Ltd founded in Canada and Durand ­ Raute Corp. in the US. Sales office opened in Singapore. Sales office established in Quito, Ecuador (1979­1987). All production of machinery at Vesijärvenkatu plant in Lahti is transferred to Nastola. Expanding to OSB tecnology in North America, acquisition of PS&E Group (1995­2003). Acquisition of 49.9% of the Mecano Group Oy and the entire share capital of Jymet Engineering Oy. 2008 5 Year 2007 2007 in brief · Net sales were up 4.3% and operating profit nearly doubled. · Clearly improved profitability resulted from an even loading, the management of project and product risks, the reorganization of quality operations and the development of procurement operations. · Investment demand was brisk and was evenly spread over various-sized projects and different market areas, except for North America. · Order book decreased due to a quiet period in the first half of the year. · Technology services back to a strong growth track. · Order book at a good level. Key figures 2007 Net sales, MEUR 110.8 Change, % 4.3 Exported portion of net sales, MEUR 96.8 Change, % 1.0 Operating profit, MEUR 8.6 Change, % 90.7 Profit before income taxes, MEUR 9.0 ROI, % 29.2 ROE, % 21.1 Equity ratio, % 70.3 Order book at Dec. 31, MEUR 56 Order intake, MEUR 90 Earnings per share, EUR 1.65 Equity per share, EUR 8.29 Dividend per share, EUR 1.00* Dividend per profit, % 60.7 Personnel at Dec. 31 570 Personnel average 575 2006 106.2 -2.2 95.8 22.5 4.5 2.5 4.9 18.6 13.1 60.1 77 132 0.94 7.32 0.70 74.5 540 547 * The Board of Directors' proposal to the Annual General Meeting Net sales by product area 120 Net sales, EUR million Others 2% LVL 12% Technology services 26% Plywood 60% 100 80 60 40 20 0 2003* 2004 2005 2006 2007 * Comparison figure according to FAS including business operations of Raute Precision Oy and Raute Dry Mix Oy Net sales quarterly, EUR million 35 30 40 25 20 15 10 5 0 Q1 Q2 Q3 Q4 Order intake quarterly, EUR million 50 30 20 10 0 Q1 Q2 Q3 Q4 2006 2007 6 Raute returned to a moderate growth track, and 2007 was the fifth consecutive year of result improvement. Operating profit, EUR million 10 8 6 4 2 0 -2 -4 2003* 2004 2005 2006 2007 Consolidated cash flow, EUR million 15 12 9 6 3 0 -3 -6 -9 -12 -15 2003 2004 2005 2006 2007 * Comparison figure according to FAS including business operations of Raute Precision Oy and Raute Dry Mix Oy Dividend/share, EUR 2,0 1,5 1,0 0,5 0,0 -0,5 -1,0 2003 2004 2005 2006 2007 Return on investment, % 30 25 20 15 10 5 0 -5 -10 2003 2004 2005 2006 2007 Equity ratio, % 80 70 60 50 40 30 20 10 0 2003 2004 2005 2006 2007 Number of personnel at Dec. 31 800 700 600 500 400 300 200 100 0 2003 2004 2005 2006 2007 7 Strategy Mission Raute generates added value for its customers' businesses by supplying state-of-the-art technology and services to facilitate the profitable and environmentally sustainable production of wood products. Vision Raute's vision is to be the world's leading supplier of technology and services in its field. Main strategic objectives continuous improvement of profitability · enhanced adaptation to cyclical, economic fluctuations · controlled growth. · Controlled growth Raute seeks controlled growth in its selected customer industries. The company sees growth potential in customer industries and market areas in which it has not yet achieved a strong position. A focus on new growth sectors offers Raute opportunities to strengthen its global market position. Regional growth is sought especially in Asia and in North America in the field of technology services. Raute also aims to increase its business by continuously introducing innovations that enhance the customers' competitiveness. The added value that Raute's technology solutions offer customers has a direct impact on the companies' sales volume. Continuous improvement of profitability Raute improves its profitability by focusing on its core competence and creating long-term partnerships. To improve profitability Raute aims to enhance its operations, for example, by emphasizing quality and developing its partner network. It also improves profitability by intensifying existing customer relationships and focusing on the creation of customer relations in contract manufacturing. Enhanced adaptation to cyclical, economic fluctuations Raute's goal is to adapt to cyclical, economic fluctuations by developing its partner network, as well as the work distribution and competence of its own organization. The partner network enables costs to be decreased and production capacity to be adapted to economic cycles. Emphasizing the development of technology services also increases sales and balances cyclical fluctuations in project business. Financial goals Raute's financial goal is to: · improve profitability and retain a good level over the entire economic cycle. Profitable operations are based on correctly priced products offering good customer benefits and on efficient cost management. The increasing net sales from technology services even out fluctuations in profit- 8 ability. In the short term, however, the scheduling of large projects may have a significant impact on the company's profitability. · · maintain good financial solidity and offer investors competitive returns. Dividend policy increase sales by approximately 10 percent a year over the economic cycle. Raute exercises an active dividend policy, aiming to ensure competitive returns to investors. Dividend payment takes into account future investment needs and the goal of maintaining a solid equity ratio. Due to the nature of project business, the dividend is not directly tied to the annual result. Raute estimates annual market growth to be 3­4 percent. The company can achieve faster growth by increasing its market share. The key to growth lies in Raute's strategic choices. Raute has a proven track record in mill-scale projects and 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. Implementation of strategic objectives in 2007 Profitability Raute improved its profitability in the report period. The clear improvement resulted from the management People are behind the success of the company, also in the Board of Directors (photo on left). 9 Raute's strategy Strategic competitive advantages Mission Values The customer Trust in people · Continuous development · The environment · · Customer orientation Full-service concept · Commitment to research and development work · Quality · Superior competence · · Vision Main strategic objectives Continuous improvement of profitability Enhanced adaptation to cyclical, economic fluctuations · Controlled growth · · of project and product risks, reorganization of quality operations, improved profitability in the North American unit, and goal-oriented implementation of strategy. An example of this is the excellent rollout of operations in the China unit, established in 2006. Moreover, the considerable decrease in quality costs, especially over the latter part of 2006, contributed significantly to the improvement in profitability. Growth The growth targets set for 2007 were not quite reached. Sales increased moderately by 4.3 percent. In line with the company's objectives, growth was achieved especially in the emerging markets. The biggest growth was seen in Russia. Also in line with its strategy, Raute increased the net sales from technology services by 33 percent. Balancing economic fluctuations Developing and expanding the partner network has increased Raute's ability to react to fluctuations in economic cycles. Focusing on core competences and increasing the use of subcontractors enable flexible production in different economic cycles, which was also reflected in the results for the report period. An example of this is the improved profitability of North American operations despite an extremely challenging market situation. Strategical focus areas in 2008 The market area focus in 2008 will be on Russia and Asia. It is also important to adjust to the North American market situation, which continues to be weak. In 2008 the company will also continue to focus on improving its competitiveness, which is affected by the weak US dollar and the rise in cost levels. Product development also plays a key role as it increases the value of products. In 2008 Raute will invest in increasing production capacity. Our order book is at a good level, providing a good start for 2008. 10 Operating environment Raute serves the plywood, veneer and LVL industries with a comprehensive technology and service offering. Smaller customer industries for Raute are the particleboard, MDF, parquet and decorative veneer industries. Raute's customers manufacture investment commodities, which are mainly used in the construction, transport, furniture, and packaging industries. This makes Raute's customer industries dependent on fluctuations in the fields of construction, housing-related consumption, international trade, and transportation. The uncertainty factors seen in 2007 in the wood products industry markets, such as the weakening of the US dollar and the insecurity felt on the housing market, affect the prospects of Raute's customer industries. Problems related to wood supply restrict production in Europe, especially in the areas neighboring Russia. According to estimates, the demand for wood products will remain stable in other market areas, but revival in North America will not be seen until 2009 or later. Raute's extensive technology offering covers the customer industries' entire production process, ranging from raw material processing to the finishing and packaging of end products. Raute also supports customers throughout the life-cycle of their investment by supplying a wide range of technology services. Its strengths include leading technology based on continuous product development, a range of solutions that cover the customers' entire production process and process lifecycle, as well as good reference deliveries. Raute is traditionally competitive in major projects for the plywood, veneer, and LVL industries, all of which enjoyed brisk demand for investments. However, considering the large number of quotation requests in the beginning of 2007, relatively few investment projects were actually launched last year. The number of quotation requests for major projects increased toward the end of 2007, and technology services remained in good demand throughout the year. The machine markets of Raute's customer industries LVL industry 6% Plywood and veneer industry 70% Parquet industry 8% Decorative veneer industry 8% Secondary processing in particleboard and MDF industries 8% Net sales by market area South America 10% Others 2% Russia 35% North America 22% Europe 31% Raute's competitive position Raute's competitors are typically small or medium-sized companies that operate locally and often focus on only one or a few processes and technologies. Raute's competitive advantage lies in its focus on and commitment to exclusively serve the wood products sector, which enables it to offer customers unique competence to enhance processes and generate added value. The global machinery markets in the customer industries that Raute serves are estimated to total some EUR 800 million, of which Raute commands 10 to 15 percent. In the biggest customer industry, the plywood industry, Raute holds a 15­20 percent market share, which makes it the global market leader. Overall, the plywood industry machinery market amounts at an average to some EUR 500 million. Growth forecast* Parquet industry LVL industry Secondary processing in particleboard and MDF industries Decorative veneer industry Plywood and veneer industry * Average annual market growth 2008­2010 8% 6% 5% 4% 2% 11 Target markets of customer industries Raute's main markets in the plywood industry are Russia, Europe and South America. European plywood production is expected to continue its growth. South America also offers big potential. Raute already has a leading position in Chile, one of the continent's most advanced plywood producers. Growth is also expected in Russia and the Baltic countries. North America is the world's second largest plywood producer. The equipment market is controlled by local players, who command around 90 percent of the installed equipment base. Most of the investments in plywood production target smaller modernization projects. Raute aims to increase its market share in the region, especially in technology services. Around one-third of the world's plywood is produced in China, but so far the market has been controlled by small, local equipment suppliers. However, Raute believes that the region holds considerable market potential as quality requirements become more stringent. In South-East Asia, Australia, and New Zealand plywood production is increasing thanks to plantation forests. Companies in these countries are also expected to emphasize products with a high degree of processing also in the future. Raute's machines are used for around half of the world's LVL production. The LVL industry is a relatively new field. North America accounts for 90 percent of worldwide LVL production, followed by Japan, Finland, Australia, New Zealand, and Russia. LVL production is expected to continue to grow. Investments focus on building new and increasing existing production capacity. Future prospects The conditions in Raute's market areas differ from each other, but the company's customer industries face good prospects. The growth outlook especially in the construction and transport industries is expected to benefit the demand for Raute's products and services. Raute's customer industries are growing at a moderate pace worldwide, and their growth is forecast to continue at an annual rate of 2­8 percent depending on customer industry. Adding to market uncertainty is the slowdown in the North American housing market, which has spread insecurity and lengthened customers' decision-making. The greatest market potential is seen in the emerging markets of Russia, Asia and South America. In Russia, challenges are posed by the newly aggressive market entry shown by some competitors. In the wood products industry, service outsourcing is only now getting started. Maintenance outsourcing is expected to increase in the future. 12 Business review Raute's business consists of project deliveries and technology services to the wood products industry. Project deliveries encompass complete mills, production lines, and single machines and equipment. Raute serves its customers from the project's investment phase to possible redirection of production. Project delivery customers are potential customers for technology services later on. Technology services include maintenance, spare part services, modernization, consulting, training, and reconditioned machinery. As an expert in customer processes and operations, Raute provides solutions that support customers throughout the life-cycle of their investment, enabling them to develop their own business. The main benefits to customers are better raw material recovery, improved labor productivity, decreased use of energy and chemicals, higher quality of end products, and reduced environmental loading. Year 2007 Raute supplies complete mills, production lines, and single machines all around the world. The main market areas for project deliveries vary from year to year. The most important areas in 2007 were Russia and Europe. Demand for project deliveries was brisk in 2007 and was more versatile in terms of project size than in 2006. However, many projects proceeded slowly to the actual decision-making phase. Loading was even throughout the year, enabling a favorable cost structure and enhancing cost-effectiveness. Well-balanced loading resulted from the mill-scale orders received in late 2006, and their long delivery times, as well as from a product range that was optimal for the production. Sales prices continued to develop in much the same way as before. The increase in steel prices, for the fourth consecutive year, has affected the cost structure. Raute has succeeded in moderately transferring the rise in costs to sales prices. On the other hand, the company has cut costs by improving profitability, by using the new China unit and by developing its partner network. The primary goal of project deliveries in the report period was to improve profitability. This was achieved by focusing on the management of product and technology risks, and by developing the quality operations. The decrease in quality costs had a big positive influence on profitability. Procurement was directed into new areas with a lower cost level, and operations were enhanced by using the China unit for the company's own production and procurement. Project deliveries Raute's core competence encompasses the manufacturing processes of selected wood products. The net sales generated by project deliveries in 2007 totaled EUR 82 million (MEUR 84), which equals 74 percent of Raute's overall net sales. Project deliveries form the foundation of Raute's business. They pave the way for technology services sales and, through them, for the creation of long-term partnerships. The goal of project deliveries is to provide customers with added value and production technology that is superior to that offered by competitors. By supplying whole entities Raute ensures true added value to the customer at different stages of the production process. Raute actively aims to set up joint product development with its customers in order to improve recovery, capacity, and quality. As its operating method the company uses consulting sales, built on a solid foundation of continuous product development and longterm experience in various production processes. Order intake Raute received numerous requests for quotations throughout the year. Nevertheless, the number of new project orders, EUR 61 million, fell short of the previous year's figures. The majority of the orders were placed in the latter part of the year, putting the order book at a good level at the start of 2008. 13 Net sales from project deliveries, EUR million 100 80 60 40 20 0 The most important orders in 2007 included a parquet base layer veneer plant for Plyfa Plywood AB in Sweden, a birch veneer plant for Latvijas Finieris A/S in Lithuania, a mill modernization project in Riga, Latvia, also for Latvijas Finieris, and the modernization of Sveza Group's Novator plant in Russia. Future prospects Continued improvement of quality and profitability are the focal areas for 2008. Productivity will be improved, for example, by investing in production equipment at the Nastola plant. Measures taken to enhance profitability include developing the partner network, especially in Asia. In terms of project deliveries, the regional focus is on increasing sales in the emerging markets. Special emphasis will be put on the Russian and Asian markets. 2003 2004 2005 2006 2007 Technology services Net sales from technology services, EUR million 30 25 20 15 10 5 0 2003 2004 2005 2006 2007 Raute's technology services comprise basic services, value-added services that improve equipment or operations, as well as partnership services based on close co-operation. Raute supports the customer throughout the life-cycle of the investment with versatile services ranging from raw material and market research to production line maintenance and modernization. Customer relationships may begin at the engineering phase of a new mill or production line, and Raute aims to work as a partner until the day the customer gives up its machinery and equipment. Raute's objective is to serve its key customers locally and ensure that the customers' competitive advantages are preserved throughout the life-cycle of the production line. This type of competitive advantages includes good recovery of raw material, good and even quality of products, and superior productivity. 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 continuously develop the customer's whole production process. Customers can also benefit from Raute's strong product development, since the latest technology can be applied to old equipment in the form of modernizations. The net sales generated by technology services in 2007 totaled EUR 29 million (MEUR 22), which equals 26 percent of Raute's overall net sales. Year-end order book, EUR million 80 70 60 50 40 30 20 10 0 2003 2004 2005 2006 2007 14 Both working and working methods have changed significantly during hundred years. Year 2007 The demand for technology services increased over the year. The biggest growth was registered in Finland and Russia. Net sales also rose slightly in Europe, North America, and Asia, where the demand for modernization services saw strongest growth. In the report period Raute intensified existing customer relationships and increased the number of maintenance contract customers. The company signed significant Group-level partnership deals, which encompass all of the mills of the corporations in question. Raute expanded its operations into new market areas, such as Chile, where it began to offer local maintenance services in 2007. shifting the strong order intake, traditionally seen at the beginning of the year, as well as the late-summer peak in net sales, a few months forward. The main orders and agreements in 2007 were made with UPMKymmene, the Metsäliitto Cooperative, Latvijas Finieris, CMPC, and Arauco. Future prospects High technology increases the purchase and partial outsourcing of services in Raute's customers' operations. On the other hand their goals also include raising the capacity of existing production lines, improving quality, and expanding the useful life of production lines. Raute's strength is its comprehensive product and service offering, which helps customers to improve productivity, profitability, and competitiveness. In the near future, focus will be on the emerging markets, especially on developing the service network in Chile and the spare parts logistics in Asia. Order intake The technology service order intake in 2007 totaled EUR 29 million. The timing of orders was atypical, 15 Product development Raute aims to be the leading supplier of technology and services in its chosen fields of wood products technology. To reach this goal it emphasizes product development, which is based on market and customer needs. New products and production processes are developed, simulated, and tested in close co-operation with customers to ensure optimum results. The goal of product development is to help customers improve their profitability and competitiveness. A large customer base and close co-operation with customers provide Raute with important information about customer needs, which it can use in product development. By helping its customers succeed and by enhancing the competitiveness of veneer-based products compared to other board materials, Raute also improves its own cost-effectiveness and competitiveness on the market. In recent years, product development has accounted for 3­4 percent of Raute's net sales, and 3.6 percent in 2007. For Raute, product development means more than designing new products. It also involves improving existing products, as well as developing technology services, such as maintenance and modernization products. Product development is mainly carried out in specialist groups for each technology sector. Raute also has a product development and research group that designs product innovations on a longer time span and supports R&D and customer projects at different phases. Furthermore, the group acquires and maintains special competence, for example, in simulation and strength calculations. Added value to customers Technology development concentrates on aspects in the customers' production processes which have the most impact on customers' competitiveness and profitability. Since Raute's technological innovations provide added value to customers, product development also affects sales volumes and raises the value of products. Product development focuses on improved raw material recovery and labor productivity, energy efficiency, reduced use of chemicals, and higher quality of end products. Development work also aims to reduce the environmental impact of customer operations and to improve working conditions. Raute considers its products and services to be longterm investments for customers. Product improvements made at different life-cycle stages, as well as regular maintenance, are important ways to keep up Raute's formula for success recovery + quality + productivity x capacity = profitable production 16 the profitability of production. Considerable improvements in the level and quality of production can be achieved by modernizing the machine base. Product development projects in 2007 Raute worked on several significant product development projects in 2007. New products developed in co-operation with customers include among others a decorative veneer slicer and composers for face and core veneer. Benefits of the new composers are higher capacity and better identification of veneer defects by machine vision. One of the main goals was to improve energy efficiency. In 2007 Raute made a survey on the energy consumption of products and developed energy-saving solutions, for example, in veneer layup lines. To improve wood raw material recovery Raute has turned to automation products, among other things. In the reporting year, auto-calibration was launched for the XY charger, while the recovery of the veneer composer and the scarf-jointing line was improved with new machine vision technology. The company also made big inputs in enhancing machine safety, work ergonomics, the work environment, and well-being at work. Robotic patching, automated layup, and machine vision can be used to improve the efficiency of production and work ergonomics. Raute's own operations focused on developing engineering systems and simulation, as well as putting technology service productization to efficient use. Product development is a critical success factor for Raute. Safety aspects were also developed in co-operation with VTT Technical Research Centre Finland, for example, in the KOTOTU project aiming to pay closer attention to safety regulations in everyday operations and to anticipate future amendments to legislation. Raute also participates in general development projects in its field of business. Future Raute's product development will continue to be active in the future. As the price of energy rises, one of the main objectives will be to develop energy-efficient solutions. Further improvement of factors that help to maintain the price competitiveness of products and services, to manage labor costs and the workforce, as well as to save wood raw material and glue will become increasingly important. Product development MEUR % 4.5 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 2003 2004 2005 2006 2007 Co-operation partners Product development projects involve subcontractors, schools, universities, and research institutes. By co-operating with educational institutions Raute develops product innovations and trains young engineers for demanding design tasks. New ideas for the improvement of safety and ergonomics have been sought from industrial design. In 2007 Raute worked with several partners to make machines safer to use and easier to service. 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 0.0 EUR million % of net sales 17 Personnel A professional and committed personnel guarantees Raute's success. Human resources management supports the company's goal to be a leading technology company in its sector. The objective of HR management is to ensure competence development, well-being at work, and the availability of professionals also in the future. In 2007 operations focused on developing key competencies, strengthening the company's employer image, enhancing recruiting processes, and developing processes related to HR administration. Competence development At Raute, competence is mainly developed on the job. Networking inside and outside the company is also important. Employees are offered both internal and external training, and Raute supports independent education, such as postgraduate degrees and further education. Training took up 1.3 percent of working hours in 2007. In the reporting year, training was arranged in Raute's technologies, safety, information systems, and language skills. Also education to promote understanding of different cultures was organized. External training in wood products technology processes is limited, because the sector is one of narrow niche competence. In contrast, internal training in the field is active thanks to a professional personnel. In 2007 competence development mainly focused on management. A two-year development project was launched in the end of the year, the goal being to enhance the management skills of superiors and experts and to promote good management at Raute. The project includes the Raute Leader program, in which a personal management development plan is tailored to each participant. Competence development also focused on technology, where the challenge is to ensure future competence and the transfer of tacit knowledge from experienced to younger employees. During the year, for example, a new operating model for mentoring was created, which enables new employees to work in pairs with experienced employees and benefit from their expertise. New professionals were also actively recruited in 2007. They were also sought through apprenticeship training, and co-operation with schools and universities was active. Personnel profile In 2007 Raute employed an average of 575 people (547) and recruited employees especially for the China unit. Of the total headcount, 435 worked in Finland, 101 in North America, 34 in Asia, 2 in South America, and 3 in Russia. Project deliveries employed 343, Technology services 134, management and administration 52, and sales and marketing 46 people. The employment relationships are long, on average 14.3 years. Personnel turnover in 2007 was 13.1 percent. As an international company, Raute offers interesting and challenging duties and good prospects for development in Finland and abroad. The personnel is expected to understand customer needs, have insight into the wood products industry and technology, as well as possess social and language skills. As an international company, Raute offers interesting and challenging duties and good prospects for development in Finland and abroad. Internal atmosphere and rewarding To support the development of operating methods and the targeting of measures a personnel survey was carried out, which examined, among other things, the work situation, superior and team activities, and work 18 at Raute in general. An equality review was conducted as part of the survey. Also the personnel's views on the realization of Raute's values was examined. According to the survey, employees found the work situation to be very positive: employees like their work, find their duties to be challenging, and consider the balance between work and family life to be good. Furthermore, the personnel appreciates freedom to carry out their duties. Development measures based on the survey results will focus on managerial activities ­ especially on the provision of feedback, career and personal development planning, and on increasing inter-departmental co-operation. The company's performance-based pay system covers the whole personnel, in addition to which employees can also be rewarded for achieving their personal Ensuring future competence and the transfer of tacit knowledge from experienced to younger employees are challenges. 19 Personnel* Number of personnel Net sales/employee, EUR 1 000 Average age Women, % Years of experience at Raute Number of new employment contracts Total turnover of employees, % Training days/employee 2007 548 202 47 12 14 71 13 3 2006 522 204 45 12 14 44 8 2 2005 536 203 44 11 14 39 10 2 A professional and committed personnel guarantees Raute's success. targets. Raute also has a share-based incentive plan for the Executive Board and key employees. Well-being at work and work safety The personnel's well-being and ability to work are maintained through occupational health care, as well as through activities focusing on well-being at work and on occupational health and safety. The emphasis in occupational health care is on preventive measures that maintain the ability to work. In 2007 special emphasis was put on physical well-being. Raute also supports recreational activities that maintain the ability to work. These include different kinds of events, as well as sports and exercise courses and clubs. Absences due to illness correspond to the average in the field, while those due to accidents at work are slightly lower than average. In the reporting year, Raute initiated an work safety risks assessment project, which aimed to identify risks and determine the measures to be taken in a risk situation. The goal of the risk analysis is to raise the level of work safety. Personnel by country* Others 38 persons Finland 409 persons North America 101 persons Education of personnel* University 10% University of Applied Sciences 14% Vocational school 37% Future The retirement of big age groups and the transfer of competence are challenges also to Raute. The company will ensure future competence by emphasizing competence development, good management, wellbeing at work, and commitment of the personnel. It is important to maintain an attractive employer image as the competition for the best professionals grows tougher. There is particular demand for experienced professionals with competence in technology, good social and language skills, and interest in international duties. Basic education 15% College 24% *Current employment contracts at Dec. 31 20 Environment Raute has been systematically developing the environmental soundness of its products and services and aims to reduce the environmental impact of its operations. Concerns about climate change and the deteriorating state of the environment have made the wood products industry and its customers more environmentally aware. Energy efficiency plays an important part in curbing climate change. It is also considered a way to improve competitiveness. Energy and material efficiency and the minimization of environmental impacts are common objectives to Raute and its customers. The environmental impacts that most affect customers are related to the use, of natural resources, or recovery, as well as the use of energy, chemicals, and additives. By developing environmentally sound technologies Raute also promotes the success of its own business. Raute has focused especially on developing raw material-saving solutions, as well as more efficient technologies and production processes. Recent product development results, such as new peeling technology, glue application in the form of foam and related layup technology, and robotic patching, have enhanced recovery in customer operations and reduced the use of glue. being on environmental and safety aspects. The survey results are discussed by management. Raute has systematically improved recycling, which should account for at least 90 percent of the overall waste amount. The goal is to reduce the ratio of waste amount and net sales by 2 percent a year. In 2007 Raute invested in improving the energy efficiency of its own buildings and industrial sites and in developing the work environment, especially through the management of safety risks. Plants carried out a risk survey, which dealt with all of the onsite operations and also included outside employees. In addition, the company is conducting a long-term safety management project. It aims to create safety management procedures that can be adapted to individual sites and that deal with safety considerations in work carried out by the customer and Raute and between co-operation partners. The project is carried out jointly with the Tampere University of Technology. Good results have been achieved by increasing employees' awareness of their own work safety and its development. For example, the number of accidents dropped to half of the previous year. Environmental impact of operations Raute's own operations mainly affect the environment through the waste management, energy use, and safety of its industrial sites. Raute uses environmental and management systems to handle the environmental impacts of its operations. These systems in both Nastola and Jyväskylä units have valid ISO 9001 and ISO 14001 quality and environmental certificates. The operations and ethical principles of the partner and subcontractor network are also evaluated according to standardized criteria all around the world. Raute regularly monitors the environmental impacts of its own operations. The environmental aspects of operations, as well as the targets and measures concerning the reduction of environmental impacts, are annually recorded in the company's environmental management program, and the results are reviewed by management four times a year. Field surveys are arranged at the industrial sites twice a year, the focus Saving natural resources is a common objective of Raute and its customers. 21 Financial statements 2007 Board of Directors' report Group financial statements, IFRS Consolidated income statement Consolidated balance sheet Consolidated cash flow statement Consolidated statement of changes in shareholders' equity Notes to the consolidated financial statements Parent company financial statements, FAS Income statement Balance sheet Cash flow statement Notes to the financial statements Group key ratios Calculation of key ratios Shares and shareholders The Board of Directors' proposal for distribution of profits, signatures for the Board of Directors' report and financial statements Auditors' report Development of quarterly results 23 29 30 31 32 33 59 60 61 62 70 72 73 77 78 79 The complete consolidated financial statements can be found on the company's website at www.raute.com. 2 Board of Directors´ report The Group's net sales in 2007 totaled EUR 110.8 million (MEUR 106.2), up 4.3 percent. The Group's operating profit was EUR 8.6 million (MEUR 4.5). Financial income and expenses totaled EUR 0.4 million (MEUR 0.4). Profit before tax was EUR 9.0 million (MEUR 4.9) and profit for the report period was EUR 6.6 million (MEUR 3.6). Earnings per share were EUR 1.65 (EUR 0.94), and return on equity was 21 percent (13%). In this report, figures in parentheses refer to corresponding figures for the previous year 2006. equipment. Technology services include maintenance, spare part services, modernizations, consulting, training, and reconditioned machinery. The order intake in 2007 amounted to EUR 90 million (MEUR 132), of which project deliveries accounted for EUR 61 million (MEUR 105), realized mostly in late 2007. The most significant new orders were log handling, peeling and drying lines for the production of base layer parquet veneer in Sweden, as well as different types of plywood production lines in Russia and Latvia. On the whole, Raute's competitive position is good. The company's position is based on industry-leading technology maintained by strong product development, a comprehensive service and product offering, as well as a broad range of solid references. Several deliveries with reference value were introduced into production use in 2007. The deliveries will further strengthen Raute's competitive position in the corresponding technology and market areas. Raute's price competitiveness was undermined in 2007 by the rapid weakening of the US dollar against the euro and the Canadian dollar, currencies in which Raute's costs are mainly incurred. The challenge posed by the declining US dollar was further heightened by the expensive collective agreements signed in Finland in fall 2007. Raute has sought to meet these challenges by further developing its partner network and procurement especially in China. Markets The market situation and investment demand in Raute's customer industries were good in all main market areas except for North America. Investment demand was particularly brisk in Russia. The investment demand was spread more evenly over projects of various sizes than in the previous year. Several mill-scale projects are being planned in different market areas, but none of them were launched in 2007. The price of wood raw material was high in most market areas. Problems related to the availability of wood raw material hindered production in Europe, especially in areas neighboring Russia. The increasing global economic uncertainty originating from the subprime mortgage crisis in the US was reflected in other regions in late 2007, and the continued rise in the cost of wood-based panel products settled down. In North America, the rapid decrease in housing construction weakened the demand for plywood and LVL used in construction. Low production capacity utilization rates and the closing of several plywood mills have affected investments as well as the demand for spare parts and basic maintenance services. The low demand for plywood and LVL is expected to continue at least until 2009. Net sales and order book The Group's net sales (IFRS) totaled EUR 110.8 million (2006: MEUR 106.2; 2005: MEUR 108.6), up 4.3 percent from 2006. The portion of project deliveries in the Group's net sales was 74 percent (79%). The plywood industry's share of the project deliveries was 82 percent (93%), the LVL industry's 16 percent (5%), and that of other, smaller customer industries 2 percent (2%). The portion of technology services in the Group's net sales was 26 percent (21%). New orders and market position Raute's business consists of project deliveries and technology services. Project deliveries encompass complete mills, production lines, and single machines and 23 Deliveries related to the four mill-scale orders received in 2006 were reflected in the net sales distribution by market area. Russia took over as the biggest market area in 2007, accounting for 35 percent (12%) of net sales. Europe's share of net sales rose to 31 percent (29%) and North America's to 22 percent (16%). The share of other market areas fell to 12 percent (43%). Finland's share of net sales was 13 percent (10%). The order book decreased in 2007, totaling EUR 56 million (MEUR 77) at the end of the year. In 2007, the net sales (FAS) of the Parent company Raute Corporation amounted to EUR 93.0 million (2006: MEUR 91.1; 2005: MEUR 87.1). ties and equipment. The number of personnel in China at the end of the year was 24 (4). The ERP and financial administration systems of Mecano Group Oy, a Kajaani-based company specialized in machine vision, were renewed to comply with the systems used at Raute Corporation. The harmonized systems will enhance the management of Mecano's project deliveries as well as the co-operation between different units. Group structure At the end of 2007, Raute Corporation established a subsidiary, Raute (Shanghai) Trading Co., Ltd, in Shanghai, China. With a focus on trading, the new company started operations in the beginning of 2008. Established at the end of 2006, Raute (Shanghai) Machinery Co., Ltd focuses on delivering products manufactured by the company. Result and profitability The Group's operating profit (IFRS) was EUR 8.6 million in 2007 (2006: MEUR 4.5; 2005: MEUR 4.4). The operating profit accounted for 8 percent (2006: 4%; 2005: 4%) of net sales. The improved performance resulted from growth in net sales, successful implementation of projects, improved productivity, and the lower costs provided by a more even load distribution and subcontracting in China. The Group's financial income and expenses totaled EUR 0.4 million (MEUR 0.4). The Group's profit before tax was EUR 9.0 million (MEUR 4.9) and profit for the report period was EUR 6.6 million (MEUR 3.6). Earnings per share were EUR 1.65 (EUR 0.94). Return on investment was 29 percent (19%) and return on equity was 21 percent (13%). In 2007, net sales and profit benefited from a EUR 0.3 million (MEUR +0.1) IFRS-compliant recognition of currency hedges that were used for economic hedging purposes but fell outside the scope of hedge accounting. The operating profit (FAS) of the Parent company Raute Corporation was EUR 7.8 million (2006: MEUR 4.0; 2005: MEUR 5.5). The operating profit accounted for 8 percent (2006: 4%; 2005: 6%) of net sales. The profit for the report period (FAS) was EUR 7.4 million (MEUR -0.9). Financing The Group's financial position remained strong. At the end of 2007, the Group's equity ratio (IFRS) was 70.3 percent (2006: 60.1%; 2005: 55.7%). Gearing was -32.5 percent (2006: -80.3%; 2005: -41.5%) and the balance sheet totaled EUR 54.8 million (2006: MEUR 68.5; 2005: MEUR 55.4). 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. At the end of the report period, the Group's liquid assets stood at EUR 11.3 million (MEUR 24.0) and interest-bearing liabilities amounted to EUR 0.5 million (MEUR 0.5). Operating cash flow was EUR 10.2 million negative (MEUR 15.0), and investment cash flow was EUR 0.7 million negative (MEUR -1.5). The financing cash flow was EUR 1.8 million negative (MEUR -0.8) and includes EUR 2.8 million in dividend payments for 2006 (MEUR 2.3). Raute Corporation has a 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. At the end of 2007, the equity ratio (FAS) of the Parent company Raute Corporation was 72.2 percent (2006: 59.0%; 2005: 63.1%). Development of operations The delivery capacity of the unit in China that became operational at the end of 2006 has been raised during 2007 by allocating more personnel in procurement and production, and by increasing production facili- 24 Research and development costs and capital expenditure Raute's goal is to be the leading technology supplier in its selected customer industries, and to invest strongly in the continuous research and development of applications especially in the areas of plywood and LVL technology and machine vision. In 2007, the Group's research and development costs, EUR 4.0 million, remained at a high level, representing 3.6 percent of net sales (2006: MEUR 3.8 / 3.5% of net sales; 2005 MEUR 3.6 / 3.3% of net sales). The total amount of investments made was low at EUR 1.9 million (2006: MEUR 1.9; 2005: MEUR 3.8). The largest single investment involved the development of operations at the mill located in China. The investments made in 2007 include development costs in the amount of EUR 0.2 million (2006: MEUR 0.5; 2005: MEUR 0.2). Other investments consisted of information system and replacement investments. In 2007, the research and development costs (FAS) of the Parent company Raute Corporation were EUR 2.9 million, representing 3.2 percent of net sales (2006: MEUR 3.2 / 3.5% of net sales; 2005 MEUR 2.9 / 3.3% of net sales). Investments totaled EUR 1.6 million (2006: MEUR 1.8; 2005: MEUR 2.9). Shares The number of Raute Corporation's shares at the end of 2007 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 grant equal rights to dividend and company 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 does not previously hold series K shares, the new owner shall report this to the Board of Directors in writing and without delay. Other owners of 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 or hold them as security during the report period. Raute Corporation's series A shares are listed on the OMX Nordic Exchange, Helsinki. A total of 981 095 shares worth EUR 13.7 million were traded in 2007. The number of shares traded represents 33 percent of all series A shares. The average price of a series A share was EUR 13.85 (EUR 14.03). The highest rate of the year was EUR 15.45 and the lowest EUR 12.40. The company's market capitalization at the end of 2007 totaled EUR 57.5 million, with series K shares valued at the closing price of series A shares on December 31, 2007, that is EUR 14.35. Raute Corporation has signed a market making agreement with Nordea Bank Finland plc in compliance with the Liquidity Providing (LP) requirements issued by the OMX Nordic Exchange, Helsinki. Personnel The Group's headcount at the end of 2007 was 570 (540). Finnish Group companies accounted for 76 percent (76%) of employees, North American companies for 18 percent (21%), Chinese companies for 4 percent (0%), and other sales and maintenance companies for 2 percent (3%). Converted to full-time employees, the number of Group employees was approximately 566 (2006: 546; 2005: 533). Salaries paid by the Group totaled EUR 24 million (2006: MEUR 22.0; 2005: MEUR 21.1). The Group uses performance-based pay systems covering the entire personnel. In addition, the Group has a share-based incentive plan for the strategic period 2006­2008. The plan is described in detail in the section Shares and Shareholders of the financial statements. Converted to full-time employees, the number of personnel employed by the Parent company Raute Corporation in 2007 was approximately 393 (2006: 386; 2005: 379). Salaries paid by the Parent company totaled EUR 16.3 million (2006: MEUR 14.8; 2005: MEUR 14.7). Authorization for repurchase and disposal of own shares The Annual General Meeting held on March 21, 2007 authorized the Board of Directors to decide on the repurchase of a maximum of 400 000 Raute Corporation series A shares with the company's distributable assets. Repurchased shares may be disposed of for important financial reasons, such as funding acquisitions or other arrangements. The authorization was not exercised in 2007. Loans to related parties and other liabilities On December 31, 2007, the Parent company Raute Corporation had loan receivables from its subsidiaries Raute Canada Ltd in the amount of CAD 4.7 million and Raute Service LLC in the amount of EUR 27 thousand. Raute Corporation had a loan of EUR 110 thousand 25 to the Raute Sickness Fund. Other obligations are described in the notes to the financial statements. Distribution of dividend On March 21, 2007, the Annual General Meeting decided to distribute a dividend of EUR 0.70 per share. A total of EUR 2.8 million was paid in dividend on April 2, 2007. 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. Raute Corporation's Articles of Association do not grant any unusual authorizations to the Board of Directors, or the President and CEO. Any decisions on changes to the Articles of Association or an increase in share capital are made in compliance with the regulations of the effective Companies Act. Management The Annual General Meeting elects the Chairman and Vice-Chairman for the Board of Directors, and 3­5 Board members. On March 21, 2007, the Annual General Meeting reelected Mr. Jarmo Rytilahti as Chairman of the Board, Ms. Sinikka Mustakallio as Vice-Chairman, and Mr. Mika Mustakallio, Mr. Panu Mustakallio, Mr. Pekka Paasikivi, and Mr. Jorma Wiitakorpi as Board members. The Board of Directors appoints the President and CEO and approves his or her employment, including wage benefits. Mr. Tapani Kiiski, Licentiate in Technology, continued as Raute Corporation's President and CEO. He was 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 Business Operations and President of North American companies. Auditors On March 21, 2007, the Annual General Meeting elected Authorized Public Accountants Ms. Anna-Maija Simola and Mr. Antti Unkuri as auditors, and Ernst& 26 Young Oy, an authorized public accounting company, as deputy auditor. Business risks Impact of economic fluctuations on business operations Raute supplies technology and services to the wood products industry. Business is characterized by sensitivity 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 a 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 the 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. The financial risks, as well as the risk management objectives and 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 loss. 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 policy and organization The Group 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. 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 coordination 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. 27 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. A comprehensive risk assessment was carried out for business operations in 2007. The assessment identified and evaluated risks of different types, defined areas for development, and specified measures to be taken immediately. In addition, the risk assessment increased and harmonized risk awareness among key employees. age 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. Raute aims to continuously reduce energy use, decrease the volume of waste, and develop the working environment. The Group's environmental management is described in more detail in the Annual Report, under Environment. The Board of Directors' proposal for measures concerning the company's profit The parent company's distributable assets total EUR 18 232 thousand, of which EUR 7 385 thousand stands for the period's profit. The Board of Directors will propose to the Annual General Meeting on April 2, 2008, that a dividend of EUR 1.00 per share be paid on series A and K shares, totaling EUR 4.0 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 pose a risk to solvency in the Board of Directors' view. 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 own 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 the industry's operations, for example, through more efficient use of raw materials, additives, and energy. The Group's own operations do not involve considerable environmental risks that might have a direct impact on the Group's business operations or financial position. The Nastola and Jyväskylä plants man- Outlook 2008 Based on the positive market outlook of Raute's customer industries, investments and demand for services in the wood products industry are expected to remain at a good level, with the exception of North America. Thanks to a strong order book and brisk demand, Raute is well positioned to continue its growth also in 2008. The biggest threat to the good development is an unexpectedly strong and rapid decline in the global economy. 28 Consolidated income statement EUR 1 000 Note 2, 3, 4 5 1.1­31.12.2007 1.1­31.12.2006 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 110 799 461 42 60 999 28 875 2 654 10 166 102 695 8 607 660 -291 8 976 -2 375 6 601 106 206 199 -111 62 418 26 227 2 660 10 476 101 781 4 513 745 -371 4 887 -1 255 3 632 6 7 10, 16, 17 12 OPERATING PROFIT 13 13 Financial income Financial expenses PROFIT BEFORE TAX 14 Income taxes PROFIT FOR THE PERIOD Attributable to Equity holders 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 6 601 1.65 1.65 3 632 0.94 0.94 4 004 758 4 004 758 3 866 561 3 866 561 FINANCIAL STATEMENTS 2007 / GROUP 29 Consolidated balance sheet EUR 1 000 Note 31.12.2007 31.12.2006 ASSETS Non-current assets Intangible assets Tangible assets Other financial assets Deferred tax asset Total Current assets Inventories Accounts receivable and other receivables Financial assets at fair value through profit or loss Cash and cash equivalents Total 16 17 18 27 2 546 10 993 449 275 14 263 2 924 12 542 395 487 16 348 20 4, 21 22 23 4 515 24 739 2 144 9 140 40 537 54 800 4 933 23 184 10 195 13 812 52 124 68 472 TOTAL ASSETS SHAREHOLDERS' EQUITY AND LIABILITIES Shareholders' equity Share capital Share premium Other funds Retained earnings Profit for the financial year Share of shareholders' equity that belongs to owners of the parent company Total shareholders' equity 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 24 24 8 010 6 498 161 11 924 6 601 33 194 33 194 8 010 6 498 -201 11 370 3 632 29 309 29 309 26 27 28, 36 286 676 277 1 239 262 1 084 317 1 663 26 29, 36 30 31 31 971 213 260 7 590 851 10 481 20 367 21 605 54 800 1 726 150 335 19 726 113 15 450 37 500 39 163 68 472 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 30 FINANCIAL STATEMENTS 2007 / GROUP Consolidated cash flow statement EUR 1 000 1.1­31.12.2007 1.1­31.12.2006 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) 96 117 114 -104 963 -8 732 -394 639 115 -1 843 -10 214 116 046 155 -100 100 16 102 -190 660 24 -1 614 14 982 CASH FLOW FROM INVESTING ACTIVITIES Capital expenditure in tangible and intangible assets Purchases of assets-for-sale as investments Proceeds from sale of tangible and intangible assets Proceeds from other investments NET CASH FROM (+) / USED IN (-) INVESTING ACTIVITIES (B) -1 964 -74 1 310 0 -728 -1 809 -49 292 20 -1 545 CASH FLOW FROM FINANCING ACTIVITIES Repayment of long-term and short-term loan receivables Increase of short-term liabilities Repayment of long-term liabilities Proceeds from issuance of shares Dividends paid NET CASH FROM (+) / USED IN (-) FINANCING ACTIVITIES (C) NET CHANGE IN CASH AND CASH EQUIVALENTS (A+B+C) increase (+) / decrease (-) 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 1 000 63 -40 0 -2 803 -1 780 -12 723 95 0 -67 1 436 -2 290 -826 12 611 24 006 11 284 11 395 24 006 2 144 9 140 11 284 10 195 13 812 24 006 *Cash and cash equivalents comprise trading assets as well as cash and bank receivables, which will due under three months' period. FINANCIAL STATEMENTS 2007 / GROUP 31 Consolidated statement of changes in shareholders' equity Share of shareholders´equity that belongs to the owners of the Parent company Retained earnings Minority interest Share premium Exchange rate differences Share capital Other funds EUR 1 000 EQUITY Jan. 1, 2006 Exchange differences from net investments Taxes related to items recognized in equity or transferred from equity Translation differences Dissolution of associate Eloc Oy Net income recognized directly in equity Profit for the period 7 629 5 429 14 -338 88 -533 13 384 25 923 -338 88 808 224 26 147 -338 88 808 -224 808 -224 0 0 -250 808 0 3 632 558 3 632 -224 TOTAL 334 3 632 0 3 966 1 436 -2 290 50 29 309 0 29 309 264 12 -238 -48 0 -10 6 601 0 0 6 591 0 -2 803 98 33 194 Total income and expenses recognized in the period 0 Share capital increase (options) 381 Dividend Equity-settled share-based transactions EQUITY Dec. 31, 2006 8 010 0 1 069 -250 -14 50 -201 808 3 632 -2 290 6 498 274 14 726 4 190 1 436 -2 290 50 29 309 -224 EQUITY Jan. 1, 2007 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 8 010 6 498 -201 264 12 274 14 726 29 309 264 12 -238 -48 -238 -48 0 0 228 -238 0 6 601 -10 6 601 Total income and expenses recognized in the period 0 Share capital increase (options) Dividend Equity-settled share-based transactions EQUITY Dec. 31, 2007 8 010 0 228 -238 6 601 -2 803 6 498 98 125 36 18 524 6 591 0 -2 803 98 33 194 32 FINANCIAL STATEMENTS 2007 / 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 OMX Nordic Exchange, Helsinki, under Industrials. Raute Corporation is domiciled in Lahti, Finland. The address of its registered office is Rautetie 2, FI-15550 Nastola, Finland, and its postal address is P.O. Box 69, FI-15551 Nastola, Finland. A copy of the consolidated financial statements is available online at www.raute.com or at the head office of the Parent company, Rautetie 2, FI-15551 Nastola, Finland. These financial statements were authorized for issue by Raute Corporation's Board of Directors at its meeting on February 12, 2008. 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, 2007: IFRS 7 Financial instruments: Presentation of the financial statements According to the standard, the corporation must present data in its financial statements that help users to estimate the impact of financial instruments on the performance of the corporation and its financial position. In addition, the nature and the scope of risks caused by financial instruments and the corporation's risk management in regard to these risks must be described. IAS 1 Presentation of Financial Statements: Amendment to the standard The amendment concerns the notes to the capital. According to the amendment, the corporation must present information with which the users of the financial statements can base their assessment of the corporation's objectives, principles, and processes regarding capital management. IFRIC 10 Interim financial reporting and impairment The corporation must evaluate on each reporting day whether the goodwill or the value of available for sale financial assets has decreased and, if necessary, recognize the impairment. The following standards have taken effect during the fiscal year, but according to the management's view, they do not affect the profit or loss or the balance of the company: IFRIC 8 Scope of IFRS 2 IFRIC 9 Reassessment of embedded derivates. 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 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, 2007. With IFRS referred to the standards and their interpretations that have been approved for application within 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: FINANCIAL STATEMENTS 2007 / GROUP 33 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". 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. 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 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 income and expenses, except for exchange differences arising from intra-Group 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 expenses 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 retained earnings, 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 number 38. 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 business risks and profitability differ from those found in the economic environments of other market areas. In the report periods 2006 and 2007 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 in order 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. 34 FINANCIAL STATEMENTS 2007 / GROUP 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, is recognized in full when the significant risks and rewards have been transferred to the buyer. After this the Group no longer has control over 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 services is recognized in the period in which the service has been carried out. Revenue and costs from long-term projects (deliveries of project nature) are recognized based on the percentage of completion. Percentage of 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 long-term projects cannot be reliably estimated, the project costs have been recognized as an expenditure in the period in which they have incurred, and project revenue is recognized only to the extent of project costs that are likely to be recovered. Longterm projects 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 long-term projects 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 short-term receivables in the balance sheet. 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. Current tax based on the taxable income is calculated on taxable income using the tax rate in force in each country. Tax expenses are recognized in the income statement, except for items recognized directly in equity. 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 assets. Deferred tax is recognized in balance sheet in its entirety. 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 · loans and other receivables · available-for-sale financial assets · financial liabilities at fair value through profit or loss · other financial liabilities. Other operating income Other operating income includes revenue not included in net sales, such as lease income, insurance compensations and gains on the disposal of fixed assets. Interests and dividends Interest income is recognized as income in the period in which they have arisen. Dividend income is recognized when the company paying dividends pays it. 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. 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 or fair value less FINANCIAL STATEMENTS 2007 / GROUP 35 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 accounts receivables 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 accounts 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. 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-for-sale financial assets may consist of shares and interest-bearing 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, shortterm 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 derecognized 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 long-term 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. Fair values are presented according to IAS 39 standard in note number 37. 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 impairment 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 currency forward contracts are determined by using the market values at the balance sheet 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 applies 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 36 FINANCIAL STATEMENTS 2007 / GROUP or is sold, or the contract is terminated or exercised. The Group did not apply hedge accounting in compliance with IAS 39 at December 31, 2007. 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. 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. Property, plant and equipment All property, plant and equipment is measured at original 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 and equipment Other tangible assets 25­40 years 4­12 years 3­10 years. 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 original cost less impairment losses. The financial statements for 2007, including the comparison data, do not include goodwill. 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 original 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 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. 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 or 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 income statement. 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. FINANCIAL STATEMENTS 2007 / GROUP 37 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. tion 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 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. 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. Provisions Provisions are recognized when 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 long-term project, 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 2007, including the comparison data, do not include restructuring provisions. 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. Employee benefits: Pension obligations Pension plans are classified into defined benefit and defined contribution plans. Under a defined contribu- 38 FINANCIAL STATEMENTS 2007 / GROUP Costs from option schemes set up prior to November 7, 2002 have not been recognized in the income statement. 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. Long-term projects 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. Warranty provisions Warranty provisions are estimated on the basis of experience in warranty period costs caused by the product with regard to special product risks. Receivables The management has estimated customers' ability to remit the payment of such trade receivables, about which the company has not received any securities. The Group's companies' ability to settle the trade receivables and payments related to the loans has been estimated by the management. Deferred taxes The management has also made estimates pertaining to deferred tax assets. Share-based remuneration costs The share-based remuneration costs have been calculated by using the management's estimations from year 2008 about the Group's result development and achieving of targets set in the strategy. Share capital Outstanding series K and A shares are 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 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. Earnings per share Undiluted earnings per share is 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 is 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 72. FINANCIAL STATEMENTS 2007 / GROUP 39 Application of new or amended IFRS standars and IFRIC interpretations The following standards, interpretations, and their amendments have been published, but they are not yet in effect, or they will take effect on January 1, 2008 at the earliest, nor has the Group applied these provisions prior to their obligatory entry into force. The Group will adopt in 2008 or later the following new or amended standards and interpretations published by IASB: · IFRIC 11, IFRS 2: Group and Treasury Share · IFRIC 12, Service Concession Arrangements, effective on January 1, 2008 · IFRIC 13, Customer Loyalty Programmes, effective on July 1, 2008 · IFRS 8, Operating Segments, effective on January 1, 2009 · IAS 1, Presentation of Financial Statements: Amendment to the standard, effective on January 1, 2009 · IAS 23, Borrowing Costs, effective on January 1, 2009, if the amendment will be approved in the EU. Transactions, effective on January 1, 2008 EUR 1 000 2007 % 2006 % 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 Russia Europe North America South America Others TOTAL Assets by geographical location Russia Europe North America South America Others TOTAL Capital expenditure by geographical location Russia Europe North America South America Others TOTAL 38 314 34 117 24 047 11 485 2 836 110 799 35 31 22 10 3 100 12 470 30 620 17 107 39 160 6 849 106 206 12 29 16 37 6 100 1 048 48 822 3 275 34 1 621 54 800 2 89 6 0 3 100 190 63 832 4 158 38 254 68 472 0 93 6 0 0 100 0 1 411 74 4 380 1 869 0 75 4 0 20 100 0 1 801 51 0 0 1 852 0 97 3 0 0 100 40 FINANCIAL STATEMENTS 2007 / GROUP EUR 1 000 2007 % 2006 % 3 PROCEEDS FROM SALES The main part of the net sales is comprised of project deliveries related to wood processing technology that are handled as construction contracts. The rest of the 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 Russia North America Rest of Europe Finland South America Asia Oceania Others TOTAL 38 314 24 047 20 077 14 040 11 485 915 979 942 110 799 35 22 18 13 10 1 1 1 100 12 470 17 107 20 203 10 417 39 160 5 593 501 755 106 206 12 16 19 10 37 5 0 1 100 4 LONG-TERM PROJECTS Net sales Net sales by percentage of completion Other net sales TOTAL Project revenues entered as income from currently undelivered long-term projects recognized by percentage of completion Amount of long-term projects revenues not yet entered as income Specification of combined asset and liability items Advances paid Advances wounded 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 current assets 94 905 15 894 110 799 90 464 15 742 106 206 120 722 53 474 77 607 74 281 513 513 120 942 -102 601 18 341 1 180 1 180 76 989 -62 588 14 401 5 OTHER OPERATING INCOME Capital gain on sale of fixed assets Other TOTAL 346 114 461 44 155 199 6 MATERIALS AND SERVICES Materials and supplies - Purchases during the period - Change in inventories External services TOTAL 54 993 -883 6 889 60 999 55 907 -307 6 818 62 418 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 24 028 3 161 -75 98 97 1 566 28 875 22 024 2 541 -45 52 44 1 611 26 227 FINANCIAL STATEMENTS 2007 / GROUP 41 EUR 1 000 Information about management's employee benefits and loans is presented in the notes to the financial statements number 32 Related party transactions. Information about the share-based incentive plan is presented in the notes to the financial statement number 25 Share-based payments. 2007 2006 8 NUMBER OF PERSONNEL Employed at Dec. 31, persons Workers Office staff TOTAL - of which personnel working abroad Average, persons Workers Office staff TOTAL - of which personnel working abroad 187 383 570 140 182 358 540 130 196 379 575 140 188 359 547 127 9 RESEARCH AND DEVELOPMENT COSTS ENTERED AS EXPENSES FOR THE PERIOD Total research and development costs Depreciation of previously capitalized development costs Recognized as assets in balance sheet Research and development costs entered as expenses for the period Total research and development costs % of net sales Research and development costs have been recognized in operating expenses prior to operating profit. 3 969 363 -233 4 103 3 969 3.6 3 765 228 -538 3 455 3 765 3.5 10 DEPRECIATION, AMORTIZATION AND IMPAIRMENT CHARGES Depreciation and amortization by class of assets Intangible assets - Capitalized development costs - Other intangible assets Tangible assets - Buildings and structures - Machinery and equipment - Other tangible assets TOTAL Impairments by class of assets - Buildings and structures TOTAL DEPRECIATION, AMORTIZATIONS AND IMPAIRMENTS TOTAL 367 626 506 1 150 5 2 654 228 593 517 1 093 6 2 437 0 0 2 654 222 222 2 660 11 ACQUISITIONS No business acquisitions were made during the financial year 2007 and during the comparision year. 12 OTHER OPERATING EXPENSES Indirect production expenses Sales and marketing expenses Administration expenses Other expenses TOTAL 1 570 2 222 2 517 3 857 10 166 1 644 2 293 2 874 3 665 10 476 42 FINANCIAL STATEMENTS 2007 / GROUP EUR 1 000 2007 2006 13 FINANCIAL INCOME AND EXPENSES Financial Income Interest income on loans and receivables Dividend income of available-for-sale investments Sales profit of financial assets through profit or loss Change in fair value of financial assets through profit or loss Other financial income TOTAL Financial expenses Interest expenses on loans from financial institutions Losses from sales of available-for-sale investments Exchange rate losses of loans 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 and expenses TOTAL 276 115 446 -245 68 660 209 24 584 -94 22 745 -17 0 -198 -76 -291 -56 -13 -158 -144 -371 9 -12 -198 -201 -154 54 -158 -258 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 income Non-deductible costs Taxes from the previous financial years Unrecognized tax assets from the losses of foreign subsidiaries Other items Consolidated tax expense Effective tax rate, % 8 976 -2 334 -111 -333 222 -27 173 36 -2 375 26.5 4 887 -1 271 -78 0 -45 0 157 -18 -1 255 25.7 -2 379 -176 180 -2 375 -1 488 -174 407 -1 255 15 EARNINGS PER SHARE Share of profit that belongs to owners of the Parent company Weighted average number of shares, 1 000 shares Diluted weighted average number of shares, 1 000 shares Earnings per share, EUR Diluted earnings per share, EUR 6 601 4 005 4 005 1.65 1.65 3 632 3 867 3 867 0.94 0.94 FINANCIAL STATEMENTS 2007 / GROUP 43 16 INTANGIBLE ASSETS Development costs Long-term expenses and intangible rights* EUR 1 000 Intangible assests 2006 Carrying amount at Jan. 1, 2006 Additions Other reclassifications between items Carrying amount at Dec. 31, 2006 TOTAL 2 400 538 2 938 -1 500 -228 -1 728 900 1 211 6 470 309 140 6 919 -4 613 -593 -5 206 1 857 1 713 8 870 847 140 9 857 -6 113 -821 -6 934 2 757 2 924 Accumulated depreciation and amortization at Jan. 1, 2006 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 Intangible assets 2007 Carrying amount at Jan. 1, 2007 Additions Other reclassifications between items Carrying amount at Dec. 31, 2007 Accumulated depreciation and amortization at Jan. 1, 2007 Depreciation for the financial period Accumulated depreciation and amortization at Dec. 31, 2007 Book value at Jan. 1, 2007 Book value at Dec. 31, 2007 2 938 236 3 174 -1 728 -367 -2 095 1 211 1 079 6 919 298 112 7 329 -5 206 -658 -5 864 1 713 1 465 9 857 534 112 10 503 -6 934 -1 025 -7 959 2 924 2 545 *Long-term expenditure and intangible rights include patents, computer software and product rights. 17 PROPERTY, PLANT AND EQUIPMENT Land and water Buildings and structures Machinery and equipment Assets in Other progress and tangible advance assets payments EUR 1 000 TOTAL Property, plant and equipment 2006 Carrying amount at Jan. 1, 2006 1 234 Exchange rate differences -65 Additions 5 Disposals -16 Other reclassifications between items Carrying amount at Dec. 31, 2006 1 158 Accumulated depreciation and amortization at Jan. 1, 2006 Exchange rate differences Accumulated depreciations on disposals 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 14 849 -486 42 -316 619 14 708 24 627 -845 601 -335 24 048 411 -34 566 313 -759 120 377 41 687 -1 430 961 -667 -140 40 411 0 -7 506 440 145 -517 -222 -7 660 7 342 7 047 -19 872 824 274 -1 093 -369 34 -6 0 -27 747 1 298 419 -1 616 -222 -27 868 13 939 12 542 0 -19 867 4 755 4 181 -341 42 36 0 566 120 1 234 1 158 44 FINANCIAL STATEMENTS 2007 / GROUP EUR 1 000 Property, plant and equipment 2007 Carrying amount at Jan. 1, 2007 Exchange rate differences Additions Disposals Other reclassifications between items Carrying amount at Dec. 31, 2007 Accumulated depreciation and amortization at Jan. 1, 2007 Exchange rate differences Accumulated depreciations on disposals Depreciation for the financial period Impairments Accumulated depreciation and amortization at Dec. 31, 2007 Book value at Jan.1, 2007 Book value at Dec. 31, 2007 Land and water Buildings and structures Machinery and equipment Assets in Other progress and tangible advance payments assets TOTAL 1 158 4 -122 1 040 14 708 130 -1 433 140 13 545 24 048 6 832 -3 3 24 886 377 -2 120 298 -255 162 375 40 111 4 1 263 -1 558 -112 40 008 0 -7 660 -50 -447 444 -7 714 7 047 5 830 -19 867 -341 2 -5 0 -1 122 33 33 1 158 1 073 -27 868 2 -50 -1 574 477 -29 014 12 542 10 993 -20 989 4 181 3 897 -344 36 31 0 120 162 EUR 1 000 2007 2006 18 OTHER FINANCIAL ASSETS Publicly quoted share investments Not-listed share investments Available-for-sale investments at year end TOTAL Realized sales losses have not been recognized during the financial year from available-for-sale investments (EUR -13 thousand). Unquoted shares are recognized at cost deducted with possible impairments, since their fair value cannot be determined reliably. 19 430 449 449 395 395 395 19 LONG-TERM RECEIVABLES Deferred tax receivable TOTAL 275 275 487 487 20 INVENTORIES Materials and supplies Work in progress Finished products/goods Advance payments TOTAL 2 357 692 953 513 4 515 2 664 1 018 71 1 180 4 933 In the year ended, EUR 78 thousand were recognized in expenses, reducing the carrying amount of inventories to correspond to the disposal price (EUR 184 thousand). FINANCIAL STATEMENTS 2007 / GROUP 45 EUR 1 000 2007 2006 21 ACCOUNTS RECEIVABLES AND OTHER RECEIVABLES Short-term receivables - Accounts receivables - Loan receivables - Accrued income from customers recognized according to percentage of completion - Accrued income and prepaid expenses - Other receivables TOTAL 4 449 0 18 341 687 1 262 24 739 5 519 1 000 14 401 773 1 491 23 184 The current values of receivables are presented in the notes to the financial statements number 37. 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. For accounts receivables there were no losses recognized during the financial year (EUR 5 thousand). EUR 1 000 2007 2006 22 FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Held for trading Fair valuation of cash and cash equivalents Financial assets at fair value through profit or loss at the end of the financial period 2 043 101 2 144 9 849 346 10 195 23 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 or loss Cash and cash equivalents TOTAL 1 740 7 400 9 140 2 612 11 200 13 812 2 144 9 140 11 284 10 195 13 812 24 006 24 SHAREHOLDERS' EQUITY AND DISTRIBUTABLE FUNDS Notes to equity Reconciliation of the number of shares (1 000 pcs) Number of shares Jan. 1 Shares subscribed with 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) 4 005 0 4 005 2.00 8 010 991 3 014 3 815 190 4 005 2.00 8 010 991 3 014 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) The share premium includes the value paid for shares in connection with a rights issue that exceeds the nominal value. 46 FINANCIAL STATEMENTS 2007 / GROUP Dividend After the balance sheet date, the Board of Directors will propose to the Annual General Meeting that a dividend of EUR 1.00 per share be paid from the financial year 2007. 25 SHARE-BASED PAYMENTS SHARE-BASED INCENTIVE PLAN 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 January 1, 2006 and will end on December 31, 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 2007 Issue date March 22, 2006 Instrument Share-based payment Number of shares, max* 65 000 Share price upon grant, EUR 17.28 Fair value of the share upon grant**, EUR 15.28 Share price at the end of financial year, EUR 14.35 Earning period begins, date Jan. 1, 2006 Earning period ends, date Dec. 31, 2008 Earnings criteria Operating profit and Board's evaluation on e.g. the materialization of the strategy Pay-out assumption of earnings criteria, % 24 Vesting date of shares Jan. 1, 2009 Share ownership obligation, years 2 Remaining binding period, years 1 Target group (Dec. 31, 2007) 18 Number of shares Jan.1, 2007 56 000 0 0 0 56 000 Changes during financial year 2 000 -2 000 0 0 0 Number of shares Dec. 31, 2007 58 000 -2 000 0 0 56 000 Shares granted Shares returned Shares distributed Shares forfeited Shares total * 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). **The expected dividends of EUR 2.00, that the key people do not receive before the potential reward payment, have been deducted from the share price on the grant date. 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. Corre- FINANCIAL STATEMENTS 2007 / GROUP 47 spondingly, 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 14.35 per share. The fair value of the rewards granted during the financial year was EUR 0.5 million in total. The effect of the rewards on the profit of Raute Corporation is EUR 0.2 million during the financial year 2007 (MEUR 0.1). 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, 2007 (proportion in cash), EUR Pay-out assumption of earnings criteria, % Estimate of shares to be returned, % Fair value of reward Dec. 31, 2007, EUR *Dividend assumption is an estimate on distributed dividends before reward payment. 56 000 14.35 2.00 15.28 14.35 31 10 459 456 OPTION SCHEME 1 000 shares Exercise price as a weighted average per share, EUR In the beginning of the financial year Options exercised 0.00 Options expired Options available for exercise at the end of the financial year 2007 Exercise price as a weighted average per share, EUR 7.47 2006 The amount of options 0 0 0 0 The amount of options 212 500 -190 150 22 350 0 EUR 1 000 2007 2006 26 PROVISIONS Warranty provisions Book value at the beginning of the financial year Additions Used amounts Cancelled unused amounts Exchange rate differences Book value at the end of the financial year Losses from long-term projects in order book Book value at the beginning of the financial year Additions Decrease Book value at the end of the financial year Other provision Provision for disputed warranty obligations to customer Provisions in balance sheet from which - long-term - short-term 952 1 331 -886 -325 8 1 080 1 741 1 984 -2 013 -735 -25 952 666 0 -489 177 661 417 -412 666 0 1 257 286 971 370 1 988 262 1 726 48 FINANCIAL STATEMENTS 2007 / GROUP 27 DEFERRED TAX LIABILITIES AND DEFERRED TAX ASSETS EUR 1 000 Deferred tax assets Changes in fair value Other taxable temporary differences TOTAL Jan. 1, 2006 0 210 210 Jan. 1, 2007 58 429 487 Items entered in income statement Items recognized in shareholders' equity Dec. 31, 2006 58 429 487 Dec. 31, 2007 0 275 275 58 219 277 0 Changes in fair value Other taxable temporary differences TOTAL -58 -154 -212 0 Deferred tax liabilities Jan. 1, 2006 Depreciation differences and other provisions 452 Changes in fair value 114 Effects of Group consolidation 389 Other taxable temporary differences 345 TOTAL 1 300 Jan. 1, 2007 Depreciation differences and other provisions 383 Changes in fair value 90 Effects of Group consolidation 326 Other taxable temporary differences 285 TOTAL 1 084 -69 -24 -63 26 -130 -86 -86 Dec. 31, 2006 383 90 326 285 1 084 Dec. 31, 2007 507 25 93 51 676 124 -65 -233 -104 -278 -130 -130 Unrecognized tax assets from losses of foreign subsidiaries are in total EUR 173 thousand (EUR 769 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 2007 2006 28 LONG-TERM INTEREST-BEARING LIABILITIES Long-term interest-bearing-liabilities - Other liabilities TOTAL Non-current loans are Technology Funding Agency loans, with repayment scheduled for 2008­2013 and an interest rate of 1.0 percent. The loans have no collaterals, and the Technology Funding Agency may, under certain conditions, demand a loan to be fully or partly paid immediately without notice. 277 277 317 317 29 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 the Group's short-term loans by currencies - EUR, % 63 150 213 40 110 150 100 100 FINANCIAL STATEMENTS 2007 / GROUP 49 EUR 1 000 The weighted averages of effective interest rates of current interest-bearing liabilities were: Amortization of non-current loans, % Other current loans, % Fair values of financial liabilities are presented in the notes number 37. 2007 2006 1.00 2.30 1.00 2.30 30 PENSION OBLIGATIONS Voluntary supplement to pension coverage has treated in accounting as a defined benefit plan. The supplementary pensions insurances has been arranged through the Pension Fund to Sampo Life Insurance company. 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 -) Changes in net liabilities recognized in balance sheet Net liabilities at Jan. 1 Net amount of income/expenses entered in income statement Net liabilities at Dec. 31 (liability +/receivable -) 353 -364 -11 232 39 260 367 -328 39 205 91 335 260 0 260 335 0 335 15 17 -15 -15 -52 -25 -75 -16 17 16 -13 11 -52 -24 -45 -52 335 -75 260 380 -45 335 50 FINANCIAL STATEMENTS 2007 / GROUP EUR 1 000 Key actuarial assumptions Discount interest, % - Finland Expected yield from the assets, % - Finland Yearly salary increase assumption, % - Finland Inflation assumption, % - Finland Personnel turnover assumption, % - Finland 2007 2006 4.5 4.5 2.5 2.0 1.0 4.5 4.5 3.0 2.0 1.0 31 ADVANCE PAYMENTS RECEIVED, TRADE AND OTHER PAYABLES Advance payments received EUR 7 590 thousand (EUR 19 726 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 2 495 6 912 0 1 074 10 481 6 085 8 472 57 836 15 450 1 003 3 821 2 087 6 912 3 860 3 927 685 8 472 32 RELATED PARTY TRANSACTIONS Raute Group's related parties consist of associated companies, Board members, President and CEO, Presidents of the subsidiaries and Raute Corporation's Sickness Fund. Group's ownership interest and voting power, % 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Parent company's ownership interest and voting power, % 100.00 100.00 100.00 100.00 100.00 100.00 100.00 50.00 100.00 100.00 0.00 100.00 100.00 Group companies Raute Corporation, Lahti, Finland (Parent company) Raute Canada Ltd., New Westminster, 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 Chile Ltda. (former Raute Wood 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 Raute (Shanghai) Trading Co., Ltd, Shanghai, China EUR 1 000 Group management's employee benefits Salaries and other short-term employee benefits Share-based payments TOTAL 2007 913 0 913 2006 1 015 107 1 122 FINANCIAL STATEMENTS 2007 / GROUP 51 EUR 1 000 Salaries and remunerations of the management of the Parent company President and CEO Kiiski, Tapani 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 2007 2006 224 273 36 18 18 18 18 18 0 0 350 36 18 18 18 18 14 5 5 405 The contracts of the management do not include any special conditions concerning retirement or the amount of retirement allowance. The company's Board of Directors, President and CEO and Presidents of the subsidiaries owned a total of 89 788 series A shares and 98 990 series K shares. Management's ownership corresponds to 4.7 percent of the shares in the company and 9.1 percent of associated total voting rights. The figures include the holdings of their own, minor children and control entities. 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 (EUR 110 thousand) and 3.4 percent (2.3%) of interest was paid to it. No loans are granted and no pledges or other contigent liabilities have been given on behalf of the related parties of the company. EUR 1 000 2007 2006 33 OTHER LEASES AND OPERATING LEASE LIABILITIES Group as lessee Minimum rents paid on the basis of other non-cancellable leases: - Within 1 year - After the period of more than 1 and less than 5 years TOTAL The Group has rented in a part of office premises. The rental agreements are made for the time being. Minimum direct leasing rents paid on the basis of non-cancellable direct leasing contracts: - Under 1 year - 1­5 years - Over 5 years TOTAL 127 370 497 169 470 639 60 60 0 120 49 57 0 106 Group as lessor The Group has rented out the office and plant facilities that it does not need. The facilities have been classified as tangible fixed assets in the financial statements. Lease income has been recognized in other operating income in the financial statements and totaled EUR 77 thousand in 2007 (EUR 85 thousand). 52 FINANCIAL STATEMENTS 2007 / GROUP EUR 1 000 2007 2006 34 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 accounting - Related to the hedging of net sales Fair values of forward contracts in foreign currency Economic hedging - Related to financing - Related to hedging of net sales Hedge accounting - Related to the hedging of net sales Purchased currency options - Nominal values - Fair values -30 360 0 2 -8 -50 3 277 2 481 0 2 065 174 7 000 0 0 1 963 13 35 PLEDGED ASSETS AND CONTINGENT LIABILITIES Pledged assets Raute Group had on Dec. 31, 2007 long-term bilateral credit facilities worth EUR 15 million (MEUR 15), which were unused during 2007. Raute Corporation has a EUR 10 million (MEUR 10) domestic commercial paper program, which is arranged by Nordea Bank Finland plc. Within the limits of the program, the company can issue commercial papers maturing in less than 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 For own debt - Mortgages on real property - Business mortgages Security for Group's liabilities - Bank guarantees Other own liabilities Leasing and rent liabilities - For the current accounting period - For subsequent accounting periods No money loans, pledges or other contingent liabilities have been given on behalf of the management or shareholders. 134 10 000 1 134 10 000 134 10 000 1 134 10 000 17 584 14 116 187 430 218 527 FINANCIAL STATEMENTS 2007 / GROUP 53 36 MANAGEMENT OF FINANCING RISKS The most significant financial risks that Raute Group is exposed to are liquidity, currency, and credit and counterparty risks. The Group may also be exposed to price and interest rate risks. The Group's written financing policy, approved by the 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. The Parent company's financing unit is responsible for the practical risk management. It identifies, assesses, and hedges financial risks in co-operation with operating units. Financial assets The items included in the Group's financial assets have been described by balance sheet item in note number 37. Financial assets include the percentage of completion receivables of the balance sheet that have arisen from work performed related to binding sales contracts, and are a balance sheet item comparable to accounts receivables. Liquidity risks 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. Most investment activities are carried out through mutual funds, which are required to exhibit good creditworthiness and sufficient liquidity. The Parent company has a EUR 10 million (MEUR 10) 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 (MEUR 15). Unused credit limits totaled EUR 15 million (MEUR 15) on December 31, 2007. The Group's financial liabilities consist of trade payables, derivative payables and interest-bearing debts. Trade payables are due in less than a month on average. Interest-bearing liabilities are Technology Funding Agency loans with repayments scheduled for 2008­2013 and an interest rate of 1.0 percent, as well as short-term bank loans of foreign subsidiaries. The share of long-term loans is minor. Currency risks A significant share of the Group's net sales is generated outside the euro zone. The most important currencies, which are used in customer deliveries, and transactions between the Group companies, are euro, and US and Canadian dollars. The currency distribution varies yearly. The Group hedges itself against currency exchange risks related to business payments by using each Group company's functional currency as the primary trading currency. As stated in the Group's financing policy, operating units hedge single currency items of over EUR 100 thousand based on binding sales contracts and procurement contracts with the Group's financing unit when the contracts take effect. Forward contracts are mainly used in external hedging related to the currency risk of sales contracts. The Group's unhedged currency flow and forward contracts are mainly used for hedging against currency risks related to procurement contracts. The forward contract receivables and liabilities related to business payments and denominated in foreign currency, to which hedge accounting is not applied, arises the currency risk to the Group at reporting date. This currency risk is recognized in profit or loss when value of forward contracts exceed the income recognizion of the respective binding sales contracts. The measurement of the forward contracts and the percentage of completion receivables in compliance with IFRS improved the company's net sales and operating profit by EUR 0.3 million (MEUR 0.1) when compared to the Finnish Accounting Standards. Currency clauses are used to hedge against currency risks during the quotation period. Depending on the case, currency risks related to preliminary sales contracts are hedged with currency options. 54 FINANCIAL STATEMENTS 2007 / GROUP The Group's internal loans, other than equity loans, are hedged with forward contracts. Forward contracts related to the economic hedging of the Group's internal financing in Canadian dollars had a nominal value of EUR 3 million at the end of the financial year (MEUR 2). The coverage of currency risk hedging is verified quarterly by reviewing the Group's net currency position in the main currency pairs USD/EUR, CAD/EUR, and USD/CAD. Currency flows related to binding contracts, and derivate contracts used for their hedging, are taken into account in the position from the reporting date onwards despite of which year's profit or loss, or equity the currency risk will effect. For the currency pair USD/EUR, the net currency position at the reporting date was EUR -97 thousand (EUR -108 thousand), for the currency pair CAD/EUR, EUR 11 thousand (EUR 242 thousand), and for the currency pair USD/CAD EUR 532 thousand (EUR -278 thousand). For the currency pair USD/EUR the Group's net currency position related to financial assets at the reporting date was EUR 38 thousand (EUR 76 thousand), for the currency pair CAD/EUR, EUR 76 thousand (EUR 379 thousand), and for the currency pair USD/CAD, EUR 753 thousand (EUR 822 thousand). The sensitivity analysis of the exchange rate's transaction risk, i.e., the impact that a moderate, possible change in the exchange rate would have on equity and the Group's performance before taxes, is shown in the main currency pairs USD/EUR, CAD/EUR, and USD/CAD in the following table. Accounts and percentage of completion receivables, trade payables, internal loans, and derivative contracts have been taken into account when estimating the impact of the changes in the exchange rate. Sensitivity analysis of the transaction risk Increase/decrease in CAD/EUR, % 2007 5 -5 Increase/decrease in USD/EUR, % 2007 5 -5 Increase/decrease in USD/CAD, % 2007 5 -5 Effect on profit before tax, EUR 1 000 4 -4 Effect on profit before tax, EUR 1 000 2 -2 Effect on profit before tax, EUR 1 000 37 -37 Effect on equity, EUR 1 000 0 0 Effect on equity, EUR 1 000 0 0 Effect on equity, EUR 1 000 0 0 Increase/decrease in CAD/EUR, % 2006 5 -5 Increase/decrease in USD/EUR, % 2006 5 -5 Increase/decrease in USD/CAD, % 2006 5 -5 Effect on profit before tax, EUR 1 000 19 -19 Effect on profit before tax, EUR 1 000 4 -4 Effect on profit before tax, EUR 1 000 29 -29 Effect on equity, EUR 1 000 0 0 Effect on equity, EUR 1 000 0 0 Effect on equity, EUR 1 000 0 0 The Group has foreign subsidiaries and is exposed to translation risks. Net investments and corresponding items in subsidiaries have not been hedged. The total equity of Group companies outside the euro area was EUR 755 thousand (EUR -553 thousand) at the end of the fiscal year. Net investments or corresponding items were EUR 1 million (MEUR 2) in US dollars, and EUR -8 million (MEUR -7) in Canadian dollars. Exchange rate differences for net investments EUR 264 thousand (EUR -646 thousand), are recognized in equity. The following table includes a sensitivity analysis on translation risks related to the possible changes in the exchange rate of US and Canadian dollars, and euro and the impact of the changes on the Group's profit or loss before tax, and equity. The impacts of +5/-5 percent changes in exchange rates on the fair values of foreign net investments have been taken into account in the sensitivity analysis. FINANCIAL STATEMENTS 2007 / GROUP 55 Sensitivity analysis on translation Increase/decrease in CAD/EUR, % 2007 5 -5 Increase/decrease in USD/EUR, % 2007 5 -5 Effect on profit before tax, EUR 1 000 4 -4 Effect on profit before tax, EUR 1 000 3 -3 Effect on equity, EUR 1 000 574 -574 Effect on equity, EUR 1 000 -59 59 Increase/decrease in CAD/EUR, % 2006 5 -5 Increase/decrease in USD/EUR, % 2006 5 -5 Effect on profit before tax, EUR 1 000 99 -99 Effect on profit before tax, EUR 1 000 12 -12 Effect on equity, EUR 1 000 800 -800 Effect on equity, EUR 1 000 -43 43 Credit and counterparty risks The most significant credit and counterparty risks are related to the counterparties of project business and investment activities. Credit risks related to trade receivables of project deliveries are managed by expecting bank guarantees or confirmed letters of credit for customer payments, and by accelerated payment terms with long-term customers approved by the Board of Directors. Technology service related credit risks are managed by regularly following customer-specific payment behavior and credit limits. The age analysis of accounts receivables, and invoiced advance payments of binding sales contracts which are recorded in the percentage of completion receivables in the financial assets, is shown in the following table. Accounts receivables Accounts receivables, EUR 1 000 Dec. 31, 2007 Dec. 31, 2006 4 449 5 519 Advances invoiced, EUR 1 000 6 048 7 207 Total, EUR 1 000 10 497 12 726 Age analysis of receivables Neither past due nor impaired 9 088 9 561 <30 days 1 205 984 30­60 days 125 653 >60 days 79 1 528 Dec. 31, 2007 Dec. 31, 2006 The amount of received bank guarantees was EUR 14.0 million (MEUR 14.1) at the end of the financial year. Received bank guarantees and letters of credit covered 83 percent (48%) of the receivables recorded in the balance sheet, at the end of the financial year. 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. During the financial year, there were no recognized credit losses. Investments related to the Group's cash management have been made to money market instruments with a low credit risk. At the end of the financial year, the maximum amount of credit risk is the book value of financial assets, EUR 11.3 million (MEUR 24.0). 56 FINANCIAL STATEMENTS 2007 / GROUP Price risk At the balance sheet date, in the consolidated financial statements there were no derivatives hedging price risk that would affect the profit or loss. The raw materials used by the Group are reprocessed steel products, other raw materials, components, and commodities; it is not possible to actively hedge against their market price risk with derivatives, and their price risk is a part of the business risk. The price risk of steel is managed by regularly analyzing and following the price fluctuation. The price risk of components is reduced by making blanket agreements with suppliers. The Group's production processes use electric power. The price risk of electric power is followed and managed through fixed-price contracts. The price risk of financial instruments is analyzed as part of fair value risk. At the balance sheet date, there were no significant investments held for sale, the change of which in fair value price would essentially affect the Group's profit or loss, and equity. Interest risks Due to the strong financing position, the Group's interest risks are minor. The interest risk related to financial liabilities arises from the interest differences between derivative contract currencies, and from loans. At the balance sheet date, short- and long-term interest-bearing liabilities totaling EUR 490 thousand (EUR 467 thousand) had fixed interest rates. The Group's cash and cash equivalents include interest-bearing investments in funds and deposits whose profit levels include an interest risk. At the balance sheet date, a total of EUR 9.5 million (MEUR 11.2) was invested in deposits and other interest-bearing investments. Interest fund investments have been made in short-term interest funds. Capital structure management The objective of the Group's capital structure management is an effective capital structure that secures the Group's operational preconditions on the capital market. The rating of the Group's Parent company was the highest AAA throughout 2007. The Group's capital structure is followed by equity ratio, which has a strategic target value. During the financial year 2007 the target value of eguity ratio was over 40 percent. Equity ratio on December 31, 2007, was 70.3 percent (60.1%). 37 OTHER FINANCIAL INSTRUMENT DATA The following table shows a comparision by category of carrying amounts and fair values, that are carried in the balance sheet. Carrying amount Dec. 31, 2007 Carrying Fair value amount Dec. 31, 2007 Dec. 31, 2006 Fair value Dec. 31, 2006 EUR 1 000 Financial assets Financial assests at fair value through profit or loss Held for trading Loans and other receivables Trade and other receivables Cash and cash equivalents Available-for-sale financial assests TOTAL Financial liabilities Financial liabilities at fair value through profit or loss Bank loans Trade and other payables TOTAL Notes 22 21, 23 23 2 144 30 350 1 740 449 34 683 2 144 30 350 1 740 449 34 683 10 195 16 719 2 612 395 29 921 10 195 16 719 2 612 395 29 921 28­29 31 63 3 047 3 110 63 3 047 3 110 0 6 553 6 553 0 6 553 6 553 FINANCIAL STATEMENTS 2007 / GROUP 57 EUR 1 000 Aggregated by measurement category Financial assests held for trading Loans and receivables Available-for-sale financial assests Financial liabilities held for trading measured at amortized cost TOTAL Notes Carrying amount Dec. 31, 2007 2 144 30 350 2 189 3 110 37 793 Carrying Fair value amount Dec. 31, 2007 Dec. 31, 2006 2 144 30 350 2 189 3 110 37 793 10 195 16 719 3 007 6 553 36 474 Fair value Dec. 31, 2006 10 195 16 719 3 007 6 553 36 474 2007 2006 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 38 EXCHANGE RATES USED IN CONSOLIDATION OF THE SUBSIDIARIES Income statement USD CAD SGD CLP RUB CNY Balance sheet USD CAD SGD CLP RUB CNY EUR 1.3706 1.4689 2.0636 714.9118 35.0199 10.4186 EUR 1.4721 1.4449 2.1163 727.6318 35.9860 10.7404 EUR 1 000 39 ADJUSTMENTS TO OPERATING CASH FLOW Non-cash transactions in operating activities Depreciations and amortizations Employee benefits Impairments Exchange rate differences Profit or loss from change in fair value of financial assests through profit or loss TOTAL -2 654 -120 477 -201 201 -2 298 -2 660 -51 -222 -258 490 -2 701 40 EVENTS AFTER THE BALANCE SHEET DATE According to Raute Corporation's management, no such events have occurred after the balance sheet date, which would have had effects on annual financial statements. 58 FINANCIAL STATEMENTS 2007 / GROUP Parent company's income statement, FAS EUR 1 000 Note 2, 3 1.1­31.12.2007 1.1­31.12.2006 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 92 977 104 755 56 063 20 061 1 832 8 126 86 082 7 755 91 092 307 396 58 452 18 110 1 769 9 470 87 802 3 993 4 5 6 8, 14 9 OPERATING PROFIT 10 10 10 10 Financial income and expenses Income from investments in other non-current assets Interest and other financial income Impairments from investments in non-current assets Interest and other financial expenses Total financial income and expenses 114 700 0 -238 576 8 331 885 9 216 709 -2 541 7 385 524 883 -4 581 -713 -3 887 105 222 327 265 -1 447 -854 PROFIT BEFORE EXTRAORDINARY ITEMS 11 Extraordinary items PROFIT BEFORE APPROPRIATIONS AND TAXES 12 13 Appropriations Income taxes PROFIT/LOSS FOR THE FINANCIAL YEAR FINANCIAL STATEMENTS 2007 / PARENT COMPANY 59 Parent company's balance sheet, FAS EUR 1 000 Note 31.12.2007 31.12.2006 ASSETS Non current assets Intangible assets Tangible assets Investments Non current assets total Current assets Inventories Long-term receivables Short-term receivables Investments held as current assets Cash and cash equivalents Current assets total 14 14 15 1 851 8 321 5 903 16 075 1 945 10 387 4 289 16 621 3, 16 17 17 18 2 853 0 24 098 2 144 8 214 37 308 53 383 3 157 44 21 459 10 194 13 531 48 385 65 006 TOTAL ASSETS LIABILITIES Shareholders' equity Share capital Share premium Retained earnings Profit/loss for the financial year 19 19 19 19 Shareholders' equity total 20 21 Appropriation reserve Provisions Liabilities Deferred tax liabilities Long-term liabilities Short-term liablities Liabilities total 8 010 6 498 10 847 7 385 32 739 765 1 067 8 010 6 498 14 861 -854 28 515 1 475 1 818 22 23 23 0 277 18 534 18 811 53 383 130 277 32 791 33 198 65 006 TOTAL LIABILITIES 60 FINANCIAL STATEMENTS 2007 / PARENT COMPANY Parent company's cash flow statement, FAS EUR 1 000 1.1­31.12.2007 1.1­31.12.2006 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 Cash flow before extraordinary items NET CASH FROM (+) / USED IN (-) OPERATING ACTIVITIES (A) 79 095 409 -87 224 -7 719 -347 743 114 -1 579 -8 788 -8 788 99 774 352 -86 030 14 095 -194 -194 843 524 -1 593 13 675 13 675 CASH FLOW FROM INVESTING ACTIVITIES Capital expenditure in tangible and intangible assets Purchase of assets-for-sale as investments Acquisition of subsidiary shares Proceeds from disposal of tangible and intangible assets Proceeds from subsidiary shares Proceeds from other investments Loans granted NET CASH FROM (+) / USED IN (-) INVESTING ACTIVITIES (B) -1 230 -74 -343 1 310 0 0 0 -337 -1 571 -49 -160 261 381 20 244 -875 CASH FLOW FROM FINANCING ACTIVITIES Increase (+) / decrease (-) of short-term liabilities Increase (-) / decrease (+) of long-term and short-term receivables Proceeds from issuance of shares Dividends paid Group contributions, paid and received NET CASH FROM (+) / USED IN (-) FINANCING ACTIVITIES (C) NET CHANGE IN CASH AND CASH EQUIVALENTS (A+B+C) increase (+) / decrease (-) CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR -1 576 -163 0 -2 803 300 -4 243 -13 367 1 306 82 1 436 -2 290 -165 369 13 169 23 725 10 358 10 556 23 725 FINANCIAL STATEMENTS 2007 / PARENT COMPANY 61 Notes to the Parent company's financial statements 1 ACCOUNTING PRINCIPLES The accounting principles of the Parent company's financial statements are presented only for those parts that differ from the accounting principles of the consolidated financial statements. The Parent company's financial statements have been prepared in accordance with the Finnish Accountancy Act (FAS). Goodwill Other intangible assets Buildings and structures Machinery and equipment Other fixed assets 5 years 3­10 years 25­40 years 4­12 years 3­10 years. Gains and losses on decommissioning and disposal of property, plant and equipment are presented in other operating income or expenses. Pensions Foreign currency items Other than euro denominated transactions are recognized at the exchange rate effective on the transaction date. Receivables and liabilities denominated in other currencies are translated into euro at the average rate of the balance sheet date, except for hedged items that are valued at the agreed contract rate. Advances paid and received are entered in the balance sheet at the exchange rate effective on the payment date. The exchange rate gains resulting from the extension of protection contracts related to sales receivables will be capitalized into accrued expenses or receivables. Other exchange rate gains and losses are handled according to their impact on profit. Statutory pension coverage of the Parent company has been arranged through an external pension insurance company. Pension expenses are recorded as expenses in the year which they are are incurred. Extraordinary items Extraordinary items include significant and exceptional income and expenses that are not a part of the usual business operations. Group contributions received and paid are also recognized as extraordinary items. Income taxes Income taxes recognized in the income statement include direct taxes for the period and tax adjustments for previous periods. Current tax is calculated on taxable income using the tax rate that is in force. Deferred tax assets and liabilities have not been recognized in the balance sheet for other than revaluations. The deferred tax liability included in the depreciation difference is presented in the notes item Appropriation reserve. Fixed assets Fixed assets are stated at cost less accumulated depreciation, with the exception for some property items and revaluated shares. Only variable costs arising from the acquisition and production of a product are included in the carrying amount. Depreciations of tangible and intangible assets are recorded with the straight-line method over the expected economic lives of the assets as follows: EUR 1 000 2007 % 2006 % 2 NET SALES BY MARKET AREA Finland Russia Rest of Europe North America South America Asia Oceania Others TOTAL 13 367 38 456 19 772 7 550 11 226 701 963 942 92 977 14 41 21 8 12 1 1 1 100 9 983 11 774 19 467 4 142 39 143 5 424 466 693 91 092 11 13 21 5 43 6 1 1 100 62 FINANCIAL STATEMENTS 2007 / PARENT COMPANY EUR 1 000 2007 2006 3 REVENUE RECOGNITION METHOD BASED ON PERCENTAGE OF COMPLETION Net sales by percentage of completion Other net sales TOTAL Project revenues entered as income from currently undelivered long-term projects recognized by percentage of completion Amount of long-term project revenues not yet entered as income (order book) Specification of combined asset and liability items Advances paid Advance payments included in inventories Accrued income corresponding to revenues by percentage of completion Advances received from project customers Balance sheet project receivables included in non-current receivables 811 811 108 301 -91 245 17 056 1 229 1 229 72 061 -58 217 13 844 82 218 10 759 92 977 81 005 10 087 91 092 105 898 52 718 72 061 68 115 4 OTHER OPERATING INCOME Capital gain on sale of fixed assets Other TOTAL 346 409 755 44 352 396 5 MATERIALS AND SERVICES Materials and supplies - Purchases during the period - Change in inventories External services TOTAL 50 318 1 5 743 56 063 52 522 -370 6 300 58 453 6 PERSONNEL EXPENSES Personnel expenses in income statement Wages and salaries Pension costs Other statutory personnel contributions TOTAL Salaries and remunerations of the management Kiiski, Tapani, President and CEO 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 16 279 2 598 1 184 20 061 14 844 2 134 1 132 18 110 224 273 36 18 18 18 18 18 0 0 350 36 18 18 18 18 14 5 5 405 7 PERSONNEL Employed at Dec. 31, persons Workers Office staff TOTAL - of which personnel working abroad 156 242 398 3 141 245 386 5 FINANCIAL STATEMENTS 2007 / PARENT COMPANY 63 EUR 1 000 Average, persons Workers Office staff TOTAL - of which personnel working abroad 2007 2006 157 245 402 3 145 245 390 5 8 DEPRECIATION, AMORTIZATION AND IMPAIRMENT CHARGES Depreciation and amortization from tangible and intangible assets TOTAL 1 832 1 832 1 769 1 769 9 OTHER OPERATING EXPENSES Indirect production costs Losses on Group companies' trade receivables Sales and marketing costs Administration costs Other costs TOTAL Auditors' remunerations Annual audit, statutory Other audit related services under audit law Tax services Other services TOTAL 1 285 0 2 142 1 704 2 995 8 126 1 593 1 190 2 045 2 519 2 124 9 470 31 2 8 10 51 10 FINANCIAL INCOME AND EXPENSES Income from investments in other non-current assets Dividends from Group companies Dividends TOTAL Other interest and financial income Group companies Dividends and yield on investment funds from others Other interest and financial income from others TOTAL Impairments from investments in non-current assets Group companies Interest and other financial expenses Group companies Other than associates or Group companies TOTAL Total financial income and expenses Exchange rate gains (+) / losses (-) included in total financial items 11 EXTRAORDINARY ITEMS Extraordinary income Contributions from Group companies TOTAL 12 APPROPRIATIONS Difference in planned and taxed depreciations TOTAL 0 114 114 500 24 524 166 201 333 700 181 0 702 883 0 4 581 33 205 238 576 186 0 713 713 -3 887 491 885 885 300 300 709 709 265 265 64 FINANCIAL STATEMENTS 2007 / PARENT COMPANY EUR 1 000 13 INCOME TAXES From operations, current financial year Tax impact of extraordinary items From operations, previous financial years TOTAL 2007 2006 -2 251 -230 -59 -2 541 -1 351 78 -174 -1 447 14 NON-CURRENT ASSETS INTANGIBLE ASSETS Capitalized product development costs Intangible rights Other intangible assets EUR 1 000 Carrying amount at Jan. 1, 2007 Additions Transfers between items Carrying amount at Dec. 31, 2007 Accumulated depreciation at Jan. 1, 2007 Depreciation for the accounting period Accumulated depreciation at Dec. 31, 2007 TOTAL 5 016 340 112 5 468 398 167 0 565 910 73 0 983 3 707 100 112 3 920 0 -20 -20 -387 -165 -553 -2 683 -361 -3 044 -3 070 -546 -3 617 Book value at Dec. 31, 2007 Book value at Dec. 31, 2006 545 398 431 523 876 1 025 1 851 1 945 TANGIBLE ASSETS Land and water Buildings and structures Machinery and equipment Other tangible assets Assets in progress and advance payments EUR 1 000 Carrying amount at Jan. 1, 2007 Additions Disposals Transfers between items Carrying amount at Dec. 31, 2007 Accumulated depreciation at Jan. 1, 2007 Depreciation for the accounting period Accumulated depreciation at Dec. 31, 2007 Revaluations at Jan. 1, 2007 Revaluations wound up Revaluations at Dec. 31, 2007 TOTAL 27 730 890 -1 058 -122 27 450 406 4 -109 0 301 9 554 130 -946 140 8 879 17 314 545 -2 3 17 859 336 0 0 0 336 120 211 0 -255 75 -4 159 -318 0 13 -13 0 -4 477 487 -487 0 -13 380 -964 -14 344 0 0 0 -304 -4 -308 0 0 0 0 0 0 0 -17 843 -1 286 -19 129 500 -500 0 Book value at Dec. 31, 2007 Book value at Dec. 31, 2006 Book value for production machinery Dec. 31, 2007 Dec. 31, 2006 301 419 4 402 5 883 3 515 3 933 28 32 75 120 8 321 10 387 2 998 3 467 FINANCIAL STATEMENTS 2007 / PARENT COMPANY 65 15 NON-CURRENT INVESTMENTS EUR 1 000 Carrying amount at Jan. 1, 2007 Additions Disposals Carrying amount at Dec. 31, 2007 Revaluations at Jan. 1, 2007 Disposals Revaluations at Dec. 31, 2007 Book value at Dec. 31, 2007 Book value at Dec. 31, 2006 SHARES Group companies Others RECEIVABLES Group companies TOTAL 7 975 343 0 8 318 -6 166 0 -6 166 2 152 1 809 384 74 -11 447 0 0 0 447 384 2 096 1 208 0 3 304 0 0 0 3 304 2 096 10 455 1 625 -11 12 069 -6 166 0 -6 166 5 903 4 289 Shares owned by the company are presented in the notes number 25. EUR 1 000 16 INVENTORIES Materials and supplies Work in progress Finished products/goods Advance payments TOTAL 17 SPECIFICATION OF RECEIVABLES Non-current receivables Non-current receivables from Group companies - Loan receivables Total from Group companies TOTAL Current receivables Current receivables from Group companies - Accounts receivables - Accrued income and prepaid expenses Total from Group companies Current receivables from others - Accounts receivables - Loan receivables - Accrued income and prepaid expenses - Other receivables Total from others TOTAL Substantial items included in accrued income and prepaid expenses - Contribution receivables from Group companies - Project receivables entered according to percentage of completion - Other accrued income TOTAL 2007 2006 1 396 534 112 811 2 853 1 388 540 0 1 229 3 157 0 0 0 44 44 44 1 911 1 103 3 013 299 300 599 3 262 0 17 193 630 21 085 24 098 3 969 1 000 14 571 1 320 20 860 21 459 885 17 056 355 18 295 135 10 460 948 11 543 66 FINANCIAL STATEMENTS 2007 / PARENT COMPANY EUR 1 000 18 FINANCIAL ASSETS AT FAIR VALUE THROUGH INCOME STATEMENT Replacement cost Book value Difference Financial assets at fair value through income statement are fund units held for trading. 19 SHAREHOLDERS' EQUITY Share capital at Jan. 1 Share issue Share capital at Dec. 31 Share issue reserve at Jan. 1 Share issue Share issue reserve at Dec. 31 Premium fund at Jan. 1. Share premium fund Share premium fund at Dec. 31 Retained earnings at Jan. 1 Changes during the financial year - Loss/profit from the previous year - Dividends - Reductions in revaluations Retained earnings at Dec. 31 Profit/loss for the financial year Shareholders' equity at Dec. 31 Distributable funds Retained earnings at Dec. 31 Profit/loss for the financial year Distributable funds Share capital of Parent company Shares, 1 000 pcs Nominal value, EUR Total nominal value, 1 000 EUR Series K shares (ordinary shares, 20 votes/share), 1 000 pcs Series A shares (1 vote/share), 1 000 pcs 20 APPROPRIATION RESERVE The untaxed reserve consists of accumulated depreciation difference of EUR 933 thousand (EUR 1 475 thousand), including deferred tax liabilities for EUR 243 thousand (EUR 383 thousand). 21 PROVISIONS Estimated warranty accruals at Jan. 1 Amendment during the financial year Estimated warranty accruals at Dec. 31 Provision for disputed warranty obligations to customer 2007 2006 2 144 2 043 101 10 194 9 848 346 8 010 0 8 010 0 0 0 6 498 0 6 498 14 861 -854 -2 803 -357 10 847 7 385 32 740 7 629 381 8 010 14 -14 0 5 429 1 069 6 498 13 322 3 828 -2 289 0 14 861 -854 28 515 10 847 7 385 18 232 14 861 -854 14 007 4 005 2.00 8 010 991 3 014 4 005 2.00 8 010 991 3 014 782 108 890 0 1 480 -698 782 370 FINANCIAL STATEMENTS 2007 / PARENT COMPANY 67 EUR 1 000 Provision for loss/overheads from long-term projects in order book at Jan. 1 Change in period Provision for loss/overheads from long-term projects in order book at Dec. 31 TOTAL 22 DEFERRED TAX LIABILITIES - From revaluations TOTAL 23 SPECIFICATION OF LIABILITIES Non-current liabilities Non-current tax liabilities - Non-current deferred tax liabilities (specification in note number 22) Non-current liabilities to others TOTAL Current liabilities Current liabilities to Group companies - Advances received - Accounts payable - Accrued expenses and prepaid income - Other current liabilities Total to Group companies Current liabilities to others - Advances received - Accounts payable - Accrued expenses and prepaid income - Other current liabilities Total to others TOTAL Interest-bearing debts - Non-current - Current TOTAL Substantial items included in accrued expenses and prepaid income - Income taxes - Accrued project expenses - Accrued employee related expenses - Other TOTAL 2007 2006 666 -489 177 1 067 661 5 666 1 818 0 0 130 130 0 277 277 130 277 407 0 1 531 140 1 637 3 308 3 773 571 89 3 212 7 645 7 002 1 978 5 696 550 15 226 18 534 12 894 4 877 6 793 582 25 146 32 791 277 1 747 2 024 277 3 322 3 599 850 981 2 715 1 291 5 836 0 3 476 3 101 305 6 882 68 FINANCIAL STATEMENTS 2007 / PARENT COMPANY EUR 1 000 24 PLEDGED ASSETS AND CONTINGENT LIABILITIES Pledged assets Debts secured by mortgages At Dec. 31, 2007, Raute Group had long-term bilateral credit facilities worth EUR 15 million (MEUR 15), which were unused in 2007. Raute Corporation has a EUR 10 million (MEUR 10) domestic commercial paper program, which is arranged by Nordea Bank Finland plc. Within the limits of the program, the company can issue commercial papers maturing in less than one year. Debts and other contingent liabilities above have been secured by mortgages - Mortgages on real property - Business mortgages Contingent liabilities and other liabilities - Guarantees issued Leasing and rent liabilities - For the current accounting period - For subsequent accounting periods Nominal values of forward contracts in foreign currency - Fair value of forward contracts, external - Fair value of forward contracts, internal - Fair value, external - Fair value, internal Purchased currency options - Nominal values - Fair values 2007 2006 134 10 000 1 134 10 000 328 646 5 2 2 4 5 758 568 -30 360 9 239 380 -56 5 0 0 1 963 13 The nominal value is the value of underlying instruments converted into euro using the exchange rate of balance sheet date. The market value is the profit generated, if the derivatives position would have been closed to the market price on the balance sheet date. Other own obligations Letters of Guarantee engagements have been issued on behalf of certain subsidiaries. No money loans, patents or other contingent liabilities have been given on behalf of the management or shareholders. 25 SHARES OWNED BY THE COMPANY Subsidiaries Holding and voting right, % Raute Canada Ltd., New Westminster, B.C., Canada 100.00 Raute Inc., Delaware, USA 100.00 RWS-Engineering Oy, Lahti, Finland 100.00 Raute Group Asia Pte Ltd., Singapore 100.00 Raute WPM Oy, Lahti, Finland 100.00 Raute Chile Ltda. (former Raute Wood Santiago Limitada), Chile 100.00 Mecano Group Oy, Kajaani, Finland 100.00 Raute Service LLC, St. Petersburg, Russia 100.00 Raute (Shanghai) Machinery Co., Ltd, Shanghai, China 100.00 Raute (Shanghai) Trading Co., Ltd, Shanghai, China 100.00 Other shares Other shares total Book value, EUR 1 000 84 17 203 0 9 15 1 331 0 398 95 Book value, EUR 1 000 447 FINANCIAL STATEMENTS 2007 / PARENT COMPANY 69 Key ratios describing the Group's financial development EUR 1 000 Net sales Change in net sales, % Exported portion of net 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 Research and development costs % of net sales Order book Order intake, MEUR Personnel at Dec. 31 Personnel, average Dividend 2007 110 799 4.3 96 759 87.3 8 607 7.8 2006 106 206 -2.2 95 789 90.2 4 513 4.2 2005 108 627 48.6 78 183 72.0 4 403 4.1 2004 73 116 -25.1 65 136 89.1 3 647 5.0 2003* 97 608 9.8 84 419 86.5 -3 340 -3.4 8 976 8.1 6 601 6.0 29.2 21.1 54 800 -10 794 -9.7 21 116 70.3 2.8 -32.5 1 869 1.7 3 969 3.6 56 217 90 570 575 4 005 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 76 699 132 540 547 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 55 317 109 533 537 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 68 543 556 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 99 758 783 3 815 * The year 2003 has been reported according to Finnish Accounting Standards (FAS). **The Board of Directors' proposal to the Annual General Meeting. 70 FINANCIAL STATEMENTS 2007 / GROUP SHARE-RELATED DATA 2007 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 1 000*** Trading in the company's shares (series A shares) Shares traded during the financial year, 1 000 pcs % of the number of series A shares Issue-adjusted number of share average Issue-adjusted number of share average at year-end 1.65 8.29 1.00 60.7 7.0 8.71 2006 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 -11.29 12.40 15.45 13.85 14.35 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 57 468 51 461 54 320 29 372 30 517 981 32.5 4 004 758 4 004 758 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 The deferred tax liabilities have been included in the computation of the key ratios. * The year 2003 has 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. FINANCIAL STATEMENTS 2007 / GROUP 71 Calculation of key ratios Return on investment (ROI), % = (Profit before tax * + interest expenses + other financial expenses) Balance sheet total ./. non-interest bearing liabilities (average) Return on equity (ROE), % = (Profit before tax * ./. taxes) Shareholders' equity + minority interest (average) Interest-bearing net liabilities = Interest-bearing liabilities ./. cash and cash equivalents + financial assets at fair value through profit or loss Equity ratio, % = (Shareholders' equity + minority interest) Balance sheet total ./. advances received Quick ratio = (Cash and cash equivalents + financial assets at fair value through profit or loss + current receivables) Current liabilities ./. advances received Earnings per share (EPS), EUR = Profit for the financial year ** Equity issue-adjusted average number of shares during the year Equity to share, EUR = Shareholders' equity Equity issue-adjusted number of shares at the day of the financial statements Dividend per share, EUR = Distributed dividend for the financial 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 Dec. 31 Price/earnings ratio (P/E ratio) = Equity issue-adjusted closing share price at Dec. 31 Earnings per share The trend in turnover of shares is given as the number of shares traded during the financial year and as the percentage of traded shares relative to issued share stock during the year. Number of shares at year-end (series A + series K shares) x closing price of the share on the last day of the year Gearing, % = Interest-bearing liabilities ./. (Cash and cash equivalents + financial assets at fair value through profit or loss) Shareholders' equity + minority interest * 2003: profit before extraordinary items **2003: profit before extraordinary items and taxes ./. taxes +/- minority interests x 100 x 100 x 100 x 100 x 100 x 100 Trend in share turnover, in volume and percentage figures (series A shares) Market value of capital stock = 72 FINANCIAL STATEMENTS 2007 / 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 DEC. 31, 2007 Shares Series K shares (ordinary shares) Series A shares Total shares at Dec. 31, 2007 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 JAN. 1, 1994 TO DEC. 31, 2007 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 Jan. 1, 1994 Issue of share capital Sept. 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 Registration of shares with options Jan. 1­Dec. 31, 2006 Share capital at Dec. 31, 2007 Board authorizations No decisions on share issues were made during the report period, nor were any convertible bonds or stock options issued. Raute Corporation's Board of Directors has been authorized by the Annual General Meeting held on 21 March 2007 to decide on the buyback and directed issue of a maximum of 400 000 of the company's series A shares. The authorizations are effective until the next Annual General Meeting. The Board of Directors has not exercised this authorization. Shares and shareholders Raute Corporation's series A shares are listed on the OMX Nordic Exchange, Helsinki. The trading code is RUTAV. Raute Corporation has signed a market making agreement with Nordea Bank Finland plc in compliance with the Liquidity Providing (LP) requirements issued by the OMX Nordic Exchange, Helsinki. The number of shares at the end of the reporting year 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). The shares have a nominal value of EUR 2.00. Market value of capital stock at Dec. 31, EUR million EUR 1 000 60 50 40 Trading in series A shares 1 000 pcs 350 300 250 200 150 100 7 000 6 000 5 000 4 000 30 3 000 2 000 1 000 20 10 50 10/07 11/07 12/07 1/07 2/07 3/07 4/07 5/07 6/07 7/07 8/07 9/07 0 0 0 2003 2004 2005 2006 2007 Trading EUR 1 000 Trading 1 000 pcs FINANCIAL STATEMENTS 2007 / GROUP 73 Series K shares can be converted to series A share under the terms described in Section 3 of the Articles of Association. If a series K share is transferred to a new owner who does not previously hold series K shares, 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. A total of 981 095 (1 088 288) shares were traded in 2007. The total value of trading was EUR 13.7 million (MEUR 15.4). The highest share price was EUR 15.45 (EUR 17.60) and the lowest EUR 12.40 (EUR 11.60). At the end of the year, the share price was EUR 14.35 (EUR 12.85). The average price was EUR 13.85 (EUR 14.03). The company's market capitalization at the end of the report period was EUR 57.5 million (MEUR 51.5), with series K shares valued at the closing price on December 31, 2007, of series A shares. The number of shareholders totaled 1 144 at the beginning of the year, and 1 312 at the end of the financial year. Series K shares were owned by 46 (46) private individuals. The management held 4.7 percent (4.5%) of company's shares and 9.1 percent (9.0%) of votes. Administratively registered shares accounted for 2.8 percent (1.3%) of shares. The company did not possess company shares during 2007 or hold them as security. No flagging notifications were given to the company in 2007. 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 success 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 has no valid option scheme. Insider issues Raute Corporation follows the Guidelines for Insiders issued by the Helsinki Stock Exchange (nowadays OMX Nordic Exchange, Helsinki), 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. DISTRIBUTION OF SHARES BY SHARE TYPE AT DEC. 31, 2007 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 1 201 3 7 8 3 86 4 1 312 Number of shares 3 440 261 80 665 73 502 25 531 62 350 225 157 97 292 4 004 758 Number of voting rights 22 272 320 80 665 73 502 25 531 62 350 225 157 97 292 22 836 817 % 91.6 0.2 0.5 0.6 0.2 6.6 0.3 100.0 % 85.9 2.0 1.8 0.6 1.6 5.6 2.4 100.0 % 97.5 0.4 0.3 0.1 0.3 1.0 0.4 100.0 DISTRIBUTION OF SERIES A SHARES BY SHARE TYPE AT DEC. 31, 2007 Series A shares by shareholder groups Households Credit and insurance institutions Foreign shareholders Non-profit institutions Public institutions Companies Administrative registered Total Number of shareholders 1 199 3 7 8 3 86 4 1 310 Number of shares 2 449 100 80 665 73 502 25 531 62 350 225 157 97 292 3 013 597 Number of voting rights 2 449 100 80 665 73 502 25 531 62 350 225 157 97 292 3 013 597 % 91.5 0.2 0.5 0.6 0.2 6.6 0.3 100.0 % 81.3 2.7 2.4 0.8 2.1 7.5 3.2 100.0 % 81.3 2.7 2.4 0.8 2.1 7.5 3.2 100.0 74 FINANCIAL STATEMENTS 2007 / GROUP 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 1 105 142 21 30 10 2 1 310 % 84.4 10.8 1.6 2.3 0.8 0.2 100.0 Number of shares 368 690 317 350 158 521 823 841 638 295 706 900 3 013 597 % 12.2 10.5 5.3 27.3 21.2 23.5 100.0 Number of voting rights 368 690 317 350 158 521 823 841 638 295 706 900 3 013 597 % 12.2 10.5 5.3 27.3 21.2 23.5 100.0 DISTRIBUTION OF SERIES K SHARES BY SHARE TYPE AT DEC. 31, 2007 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 4.3 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 9.3 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 9.3 67.5 22.4 100.0 20 LARGEST SHAREHOLDERS AT DEC. 31, 2007 Number of series K shares Number of series A shares 525 000 181 900 74 759 73 759 60 009 64 052 64 159 53 539 51 116 22 009 42 670 35 862 30 862 63 042 20 662 12 000 26 200 43 256 43 256 27 964 1 516 076 Total number of shares 525 000 181 900 122 759 121 759 120 489 114 332 112 159 104 179 84 716 82 489 82 420 78 102 78 102 63 042 62 902 59 240 56 200 55 256 55 256 52 924 2 213 226 Total number of votes 525 000 181 900 1 034 759 1 033 759 1 269 609 1 069 652 1 024 159 1 066 339 723 116 1 231 609 837 670 880 662 975 662 63 042 865 462 956 800 626 200 283 256 283 256 527 164 15 459 076 % of voting rights 2.3 0.8 4.5 4.5 5.6 4.7 4.5 4.7 3.2 5.4 3.7 3.9 4.3 0.3 3.8 4.2 2.7 1.2 1.2 2.3 67.7 By number of shares 1 Sundholm, Göran 2 Hietala, Pekka Tapani 3 Suominen, Jussi Matias 48 000 4 Suominen, Tiina Sini-Maria 48 000 5 Mustakallio, Kari Pauli 60 480 6 Kirmo, Kaisa Marketta 50 280 7 Suominen, Pekka Matias 48 000 8 Siivonen, Osku Pekka 50 640 9 Keskiaho, Kaija Leena 33 600 10 Särkijärvi, Riitta 60 480 11 Mustakallio, Mika 39 750 12 Mustakallio, Risto 42 240 13 Mustakallio, Ulla Sinikka 47 240 14 Sr Arvo Finland Value 15 Mustakallio, Marja Helena 42 240 16 Mustakallio, Kai Henrik 47 240 17 Kirmo, Lasse Antti 30 000 18 Särkijärvi, Timo Juha 12 000 19 Särkijärvi-Martinez, Anu Riitta 12 000 20 Suominen, Jukka Matias 24 960 Total 697 150 % of total shares 13.1 4.5 3.1 3.0 3.0 2.9 2.8 2.6 2.1 2.1 2.1 2.0 2.0 1.6 1.6 1.5 1.4 1.4 1.4 1.3 55.3 FINANCIAL STATEMENTS 2007 / GROUP 75 20 LARGEST SHAREHOLDERS AT DEC. 31, 2007 Number of series K By number of votes shares 1 Mustakallio, Kari Pauli 60 480 2 Särkijärvi, Riitta 60 480 3 Kirmo, Kaisa Marketta 50 280 4 Siivonen, Osku Pekka 50 640 5 Suominen, Jussi Matias 48 000 6 Suominen, Tiina Sini-Maria 48 000 7 Suominen, Pekka Matias 48 000 8 Mustakallio, Ulla Sinikka 47 240 9 Mustakallio, Kai Henrik 47 240 10 Mustakallio, Risto 42 240 11 Mustakallio, Marja Helena 42 240 12 Mustakallio, Mika 39 750 13 Keskiaho, Kaija Leena 33 600 14 Kirmo, Lasse Antti 30 000 15 Suominen, Jukka Matias 24 960 16 Sundholm, Göran 17 Särkijärvi, Timo Juha 12 000 18 Särkijärvi-Martinez, Anu Riitta 12 000 19 Hietala, Pekka Tapani 20 Sr Arvo Finland Value Total 697 150 Number of series A shares 60 009 22 009 64 052 53 539 74 759 73 759 64 159 30 862 12 000 35 862 20 662 42 670 51 116 26 200 27 964 525 000 43 256 43 256 181 900 63 042 1 516 076 Total number of shares 120 489 82 489 114 332 104 179 122 759 121 759 112 159 78 102 59 240 78 102 62 902 82 420 84 716 56 200 52 924 525 000 55 256 55 256 181 900 63 042 2 213 226 Total number of votes 1 269 609 1 231 609 1 069 652 1 066 339 1 034 759 1 033 759 1 024 159 975 662 956 800 880 662 865 462 837 670 723 116 626 200 527 164 525 000 283 256 283 256 181 900 63 042 15 459 076 % of voting rights 5.6 5.4 4.7 4.7 4.5 4.5 4.5 4.3 4.2 3.9 3.8 3.7 3.2 2.7 2.3 2.3 1.2 1.2 0.8 0.3 67.7 % of total shares 3.0 2.1 2.9 2.6 3.1 3.0 2.8 2.0 1.5 2.0 1.6 2.1 2.1 1.4 1.3 13.1 1.4 1.4 4.5 1.6 55.3 The number of administratively registered shares at December 31, 2007 was 93 025 (52 440). Management interest at Dec. 31, 2007 The company's Board of Directors, President and CEO, and Presidents of the subsidiaries owned a total of 89 788 series A shares and 98 990 series K shares. Management's ownership corresponds to 4.7 percent of the shares in the company and 9.1 percent of associated total voting rights. The figures include the holdings of their own, minor children and control entities. Public insider ownership at Dec. 31, 2007 Public insiders owned a total of 89 788 series A shares and 98 990 series K shares. Public insiders' ownership corresponds to 4.7 percent of the shares in the company and 9.1 percent of associated total voting rights. The figures include the holdings of their own, minor children and control entities. Performance of series A shares, EUR EUR Raute OMX Helsinki Industrials Index OMX Helsinki Index OMX Helsinki Benchmark CAP Index 76 FINANCIAL STATEMENTS 2007 / GROUP The Board of Directors' proposal for distribution of profits, signatures for the Board of Directors' report and financial statements The Parent company's distributable equity totals EUR 18 232 thousand, of which the profit for the financial year is EUR 7 385 thousand, and the balance sheet amounts to EUR 53 383 thousand. The Board of Directors proposes to the Annual General Meeting that the distributable funds be used in the following way: - EUR 1.00 per share distributed as dividend, i.e., a total of - Retained in equity EUR 4 005 thousand EUR 14 227 thousand EUR 18 232 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 12, 2008 Jarmo Rytilahti Chairman of Board of Directors Mika Mustakallio Panu Mustakallio Sinikka Mustakallio Pekka Paasikivi Jorma Wiitakorpi Tapani Kiiski President and CEO FINANCIAL STATEMENTS 2007 / GROUP 77 Auditors' 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, 2007. 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. Consolidated financial statements In our opinion the consolidated financial statements, prepared in accordance with International Financial Reporting 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, report of the Board of Directors 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, February 12, 2008 Anna-Maija Simola APA Antti Unkuri APA 78 FINANCIAL STATEMENTS 2007 / GROUP DEVELOPMENT OF QUARTERLY RESULTS Total 2007 110 799 461 42 60 999 28 875 2 654 10 166 102 695 8 607 8 660 -291 8 976 9 -2 375 6 601 7 Q4 2007 25 683 386 -252 11 910 8 103 654 2 709 23 376 2 441 10 159 -129 2 470 10 -844 1 626 6 Q3 2007 26 466 17 103 14 653 6 397 684 2 412 24 146 2 440 9 -1 -57 2 382 9 -536 1 845 7 Q2 2007 29 769 19 -54 17 439 7 369 663 2 427 27 898 1 836 6 191 -53 1 973 7 -478 1 495 5 Q1 2007 28 882 38 246 16 997 7 007 653 2 618 27 276 1 891 7 312 -51 2 151 7 -517 1 634 6 EUR 1 000 NET SALES Other operating income Increase (+) or decrease (-) in inventories of 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 % of net sales Financial income Financial expenses PROFIT BEFORE TAX % of net sales Income taxes PROFIT FOR THE PERIOD % of net sales Attributable to Equity holders of the Parent company Earnings per share, EUR - Undiluted earnings per share - Diluted earnings per share Shares, 1 000 pcs Adjusted average number of shares Adjusted average number of shares diluted 6 601 1 626 1 845 1 495 1 634 0.46 0.46 0.41 0.41 0.46 0.46 0.37 0.37 0.41 0.41 4 005 4 005 4 005 4 005 4 005 4 005 4 005 4 005 4 005 4 005 79 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 2007: EUR 36 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 pcs series K shares 30 862 pcs series A shares Remuneration in 2007: EUR 18 thousand Share-based remunerations: No share-based remunerations Mika Mustakallio Sinikka Mustakallio Jarmo Rytilahti Mika Mustakallio b. 1964, M.Sc. (Econ. & Bus. Adm.), CEFA Member of the Board 2004­ Principal occupation: President, MORS Software Oy 2006­ Main simultaneous position of trust: None Raute shares: 39 750 pcs series K shares 42 670 pcs series A shares Remuneration in 2007: EUR 18 thousand Share-based remunerations: No share-based remunerations Holdings of Raute shares on 31 December 2007. 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. 80 Jorma Wiitakorpi Panu Mustakallio Pekka Paasikivi Pekka Paasikivi b. 1944, B.Sc. (Eng.) Member of the Board 2002­ Principal occupation: Chairman of the Board, Oras Invest Oy 2005­ Main simultaneous position of trust: Chairman of the Board: Kemira Oyj 2007­ 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 2007: 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 position of trust: Chairman of the Board: Destia Oy 2006­ Neomarkka Oyj 2007­ Suomen Laatukeskus 2006­ Member of the Board: Kemppi Oy 2008­ Raute shares: No holding of shares Remuneration in 2007: EUR 18 thousand Share-based remunerations: No share-based remunerations 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 position of trust: None Raute shares: 12 000 pcs series K shares 15 256 pcs series A shares Remuneration in 2007: EUR 18 thousand Share-based remunerations: No share-based remunerations Auditors Anna-Maija Simola, APA Antti Unkuri, APA Deputy Auditor Ernst&Young Oy 81 Executive Board Tapani Kiiski b. 1962, Licentiate in Technology President and CEO, 16 March 2004­ With the company: 2002­ Member of the Executive Board: 16 March 2004 Raute shares: 1 000 pcs series A shares Timo Kangas b. 1965, Engineer Vice President, Technology Services With the company: 2004­ Member of the Executive Board: 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: 1990­ Member of the Executive Board: 1 January 2001 Raute shares: No holding of shares Bruce Alexander b. 1959, B.Sc. (For.), MBA Vice President, North American Business Operations President of Raute's North American companies With the company: 2000­ Member of the Executive Board: 1 June 2004 Raute shares: No holding of shares Petri Strengell b. 1962, M.Sc. (Eng.) Vice President, Technology and Operations With the company: 1987­ Member of the Executive Board: 1 June 2004 Raute shares: No holding of shares Holdings of Raute shares on 31 December 2007. The figures include holdings of their own, minor children and control entities. Tapani Kiiski Arja Hakala Bruce Alexander Petri Strengell Timo Kangas Current Raute shareholdings of the members of the Executive Board can be found on the company's website at www.raute.com. 82 Corporate governance Raute Corporation follows the Corporate Governance Recommendation for listed companies issued by the Helsinki Stock Exchange (nowadays OMX Nordic Exchange, Helsinki), 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. ally, and, based on management reports, monitors the Group's financial 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 2007 Raute Corporation's Annual General Meeting on March 21, 2007 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 2007 set the following remunerations for Board members in 2007: 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 126 thousand in 2007. The Board held ten meetings in 2007, two of which were teleconferences. The Board members' average attendance at meetings was 95 percent. The attendance of individual members was as follows: Jarmo Rytilahti 10/10, Sinikka Mustakallio 9/10, Mika Mustakallio 10/10, Panu Mustakallio 9/10, Pekka Paasikivi 10/10, and Jorma Wiitakorpi 9/10. The meetings handled the matters listed in the Charter of the Administrative Instructions. The Board will carry out a self-evaluation of the term of office 2007 in spring 2008. According to the plan for 2008, the Board of Directors will convene eight times and hold teleconferences if necessary. The Board members' personal data, share and option holdings on December 31, 2007, and remunerations for 2007 can be found on pages 80­81. 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 in OMX Nordic Exchange, Helsinki since 1994. Year 2007 Detailed information on Raute Corporation's shares and shareholders is provided on pages 73­76. Annual General Meeting Raute Corporation's Annual General Meeting is held in March, but no later than six months from the end of the financial year. The Annual General Meeting elects the Chairman and Vice-Chairman for the Board of Directors, and 3­5 Board members. Year 2007 Raute Corporation's Annual General Meeting was held on March 21, 2007. The Meeting adopted the financial statements for 2006 and resolved to distribute a dividend of EUR 0.70 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 and the repurchase of a maximum of 400 000 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 annu- 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 83 Executive Board; as well as guidelines for organizing internal control and risk management to complement the provisions of the Companies Act and Raute's Articles of Association. The Administrative Instructions are available on the company's website. Year 2007 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 EUR 223 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 2007 amounted to EUR 224 thousand, of which salaries accounted for EUR 204 thousand, profit-related bonuses for EUR 20 thousand. The personal data and share and option holdings on December 31, 2007, of the President and CEO and his deputy are presented on page 82. 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, estimating of additional auditing services, 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 2007 The Working Committee and the Appointments Committee continued in the composition set up in fall 2004. 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 Mr. Pekka Paasikivi. The Working Committee convened once in 2007. 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 2007. 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 2007 The Group's Executive Board consists 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. The Executive Board members' personal data and share and option holdings on December 31, 2007 are presented on page 82. 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 performance-related bonus system, and a long-term incentive plan. Depending on the employee's position, dif- 84 ferent 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. 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 page 54­57. Insider issues Raute Corporation follows the Guidelines for Insiders issued by the Helsinki Stock Exchange (nowadays OMX Nordic Exchange, Helsinki), 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 Rau-te 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 projectspecific 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 financial year and ends in two hours following 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 and their shareholding 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 2007 The Annual General Meeting held on March 21, 2007 elected Ms. Anna-Maija Simola and Mr. Antti Unkuri, Authorized Public Accountants, as auditors, and Ernst& Young Oy, an authorized public accounting company, as deputy auditor. The remuneration paid to the auditors, elected by the Annual General Meeting, for the normal annual audit of year 2007 totaled EUR 56 thousand. Other remuneration paid to PricewaterhouseCoopers and Ernst&Young Oy in 2007 amounted to EUR 65 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. 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 85 Stock exchange releases and announcements 2007 February 8 February 12 February 26 February 28 February Raute Corporation ­ 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's year 2006 releases March 9 March 21 March Raute's Annual report and Financial statements for 2006 published Raute Corporation's Annual General Meeting April 26 April Raute Corporation ­ Interim report 1 January­31 March August 9 August Raute Corporation ­ Interim report 1 January­30 June September 9 August Raute Corporation's financial releases in 2008 October 25 October Raute Corporation ­ Interim report 1 January­30 September December 3 December 5 December Raute receives an EUR 6.7 million order from Sweden Raute receives orders worth approx. EUR 15 million from 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. 86 Notes Addresses Raute Corporation Head office and main production plant Rautetie 2 P.O. Box 69 FI-15551 Nastola Finland Tel. +358 3 82911 Fax +358 3 829 3200 www.raute.com Raute Corporation Jyväskylä plant Hakkutie 3 FI-40320 Jyväskylä Finland Tel. +358 3 14 445 4400 Fax +358 3 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 www.mecanogroup.com Raute Canada Ltd. 5 Capilano Way New Westminster, B.C. Canada V3L 5G3 Tel. +1 604 524 6611 Fax: +1 604 521 4035 Raute US, Inc. 50 Commercial Loop Way Suite A, Rossville, TN USA 38066 Tel. +1 901 853 7290 Fax +1 901 853 4765 Raute Chile Ltda. 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 # 06­02 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 (Shanghai) Machinery Co., Ltd 18 Building, No. 399, Yuan Zhong Road Nan Hui District, Shanghai City, China P.C. 201300 Tel. +86 021 5818 6330 Fax +86 021 5818 6322 Raute (Shanghai) Trading Co., Ltd 17 Building, No. 399, Yuan Zhong Road Nan Hui 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. +7 495 628 3482 Fax +7 495 628 3482 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 2007 Graphic design and layout: Onnion Ltd. Content: Pohjoisranta and Raute Photos: Kimmo Häkkinen, Timo Kauppila and Raute Cover photo: Veli-Matti Lepistö, pictured Raute employees Markus Halmetoja and Marjo Leinonen Printing house: Esa Print Oy 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