BOARD OF DIRECTORS' REPORT

BOARD OF DIRECTORS' REPORT

Shortened version


The new Ahlstrom Corporation

On June 30, 2001, A. Ahlstrom Corporation was demerged into three new companies, which officially started their operations on July 1, 2001. The split of the company will provide opportunities for creating shareholder value as each of the new companies can concentrate on developing its own business with the appropriate strategy. Ahlstrom Corporation will focus on high performance fiber based materials and intends to be listed on the stock exchange within the next few years.

Despite the difficult business environment, Ahlstrom Corporation continued in 2001 its strategic direction established in 2000. Central to this strategy is the clarification of the company's business portfolio, which was completed by divesting most of the flexible packaging business of Åkerlund & Rausing and selling the American energy company ADC's power plant interests in the US.

Ahlstrom also continued to reorganize its internal business structure. In addition to major cost reduction measures initiated and implemented in 2001, the company concentrated on ramping up investment projects designed to improve productivity. The global market for high performance fiber-based materials offers interesting opportunities for profitable growth and value creation. Ahlstrom aims to become a global leader in the business by focusing on cost efficient manufacturing, customer-driven innovations and leadership development.

The July 1 - December 31, 2001 figures of this Annual Report are actual figures of the new Ahlstrom Corporation. To facilitate the comparison of the company's business activities, the Board also comments on the pro forma figures of 2001 and 2000 in this report.


The operating environment and its impacts

During 2001, the weak market situation that started in the USA also spread to Ahlstrom's other main operating areas in Europe and Asia. This led to a considerable amount of production downtime as well as a reduction in shifts and personnel at some plants.

The weakness of the euro against the US dollar still had a negative impact on the result development at the facilities that purchase raw materials in US dollars and sell their products mainly in euros. The impact of the financial crisis in Argentina could be seen in the South American markets, as well as Ahlstrom's business activities at the Louveira plant in Brazil.

The global uncertainty in the economic development continues and it is difficult to predict the future market demand. Ahlstrom has initiated several projects to improve the situation by cutting structural costs and improving productivity. The results of these actions will be seen fully during the coming years.


Changes in Ahlstrom Corporation's business activities

A major investment program at the Windsor Locks, CT, plant was completed in early December, 2001. The new product line will produce nonwoven materials that use composite technologies to combine many properties into one material. The value of the investment is approx. USD 50 million or EUR 55 million. The product line was installed in a purpose-built building, and it employs 40 persons.

In September, Ahlstrom purchased the product technology and related equipment from FiberMark Inc.'s Rochester, MI, plant. FiberMark is a US based producer of engine filtration and other fiber-based materials. The annual net sales of engine filter media at the plant have been approx. USD 20 million. The purchase price was USD 13.3 million or EUR 14,9 million.

Ahlstrom's filtration media facilities in Taylorville, IL, and Madisonville, KY, will continue production as before. Their current capacity is sufficient for both the existing demand and future growth needs of the customers. The engine filtration media plant in Chattanooga, TN, was closed and the Taylorville and Madisonville plants absorbed its production activities. There were approx. 70 production employees at the Chattanooga facility.

The Bousbecque plant in France will concentrate its business on genuine vegetable parchment. It has been decided to close down the B4 paper machine's production of one-side coated paper. This together with the reorganization of the plant's operations will lead to a reduction of 130 employees.

During 2001, Ahlstrom Corporation also continued to reorganize its internal structure. Label & Packaging and Self-Adhesive divisions were combined, excluding the Chantraine and Saint-Séverin plants, which are now part of the Specialties division. These changes took effect September 1, 2001. Furthermore, FiberComposites and Filtration divisions were combined effective January 1, 2002. The new names of the divisions are LabelPack, Specialties and FiberComposites.

The functions of Ahlstrom's international administrative headquarters in Amsterdam were moved to Helsinki and Paris. A number of other actions aimed at lowering administrative costs are also underway. As a result of negotiations according to the Finnish Act on Cooperation in Enterprises, which ended in early January 2002, the number of employees in the Helsinki Head Office will be reduced by the equivalent of 20 full-time positions during 2002-2004.


Financial Results

Ahlstrom Corporation's results July 1 - December 31, 2001

Ahlstrom Corporation's net sales in July-December 2001 were EUR 928.1 million. Operating income for the period was EUR 0.9 million, or 0.1 percent of net sales. The figure includes EUR 25.3 million one-time costs caused by structural changes. Without these costs, the operating income would have been EUR 26.3 million, or 2.8 percent of net sales.

Income before extraordinary items and taxes in July-December was EUR -12.1 million, or -1.3 percent of net sales. The result for the period was EUR -11.1 million, or -1.2 percent of net sales.

Net sales of FiberComposites division were EUR 326.0 million, and operating income was EUR 20.5 million. Net sales of LabelPack division were EUR 275.3 million, and operating income was EUR 13.9 million. Net sales of Specialties division were EUR 182.0 million, and operating income was EUR 1.8 million.

The other businesses' share of the company's net sales was EUR 172.4 million, and the share of operating result was EUR -10.1 million.

The return on net assets (RONA) was 0.2 percent, without one-time items 2.0 percent. The company's RONA target is 15 percent. The return on equity (ROE) was -0.5 percent.

Earnings per share were -0.11 euros and equity per share was 19.39 euros.


Ahlstrom Corporation's results in 2001 pro forma

The figures of Ahlstrom Corporation for 2001 and 2000 are pro forma, due to the split of A. Ahlstrom Corporation on June 30, 2001.

The 2001 figures include Åkerlund & Rausing until the end of May and the American energy company Ahlstrom Development Corporation (ADC) until the end of June. Both companies were divested in the summer of 2001. Ahlstrom Machinery is included in the year 2000 figures until the end of March and Ahlstrom Pumps until the end of May.

Dexter Corporation's nonwovens business, purchased by Ahlstrom in the summer of 2000, is included in the 2001 figures for the whole year. In the year 2000, the Dexter figures were included only as of September.

Ahlstrom Corporation's net sales in 2001 were EUR 2,050.3 million (2,057.5), 0.4 percent less than the previous year.

Operating income in 2001 was EUR 18.6 million (94.3), or 0.9 percent (4.6) of net sales. The figure includes EUR 30.4 million in one-time costs and restructuring provisions. The most important of these are related to the reorganization of operations and close-down of the paper machine B4 at the Bousbecque plant, the Chattanooga plant and the international office in Amsterdam, as well as personnel reductions in corporate administration.

The figure also includes write-downs by EUR 11.4 million, related to the Bousbecque plant, the Warche plant in Belgium and the Italian plant Åkerlund & Rausing S.p.A., former Tecno Jolly.

The operating income also includes EUR 12.8 million one-time gains, the most important being the profit from sales of the real estate divestment in Lund, Sweden.

Operating income without one-time items was EUR 47.6 million (71,5), or 2.3 percent of net sales.


Exceptional charges and income pro forma

EUR million
1/II 2001
2/II 2001 actual
2001
Restructuring of operations
- 3,0
-27,4
-30,4
Write-downs of fixed assets
- 2,8
-8,6
-11,4
Gains on sales of shares
-
+ 7,8
+ 7,8
Other exceptional charges and income
+ 2,1
+ 2,9
+ 5,0
Total
- 3,7
-25,3
-29,0

The main charges on the restructuring of operations were the write-downs and provisions for the reorganization and close-down of the paper machine B4 at the Bousbecque plant, totaling EUR 20.1 million.

Operating income per business pro forma

EUR million
1/II 2001
2/II2001 actual
2001
2000
FiberComposites
15,4
20,5
35,9
29,8
LabelPack
4,7
13,9
18,6
14,6
Specialties
5,5
1,8
7,3
16,7
Divisions total
25,6
36,2
61,8
61,1
Other businesses
-2,0
-10,1
-12,1
-10,3
Divested businesses
-2,2
0,1
-2,1
20,7
One-time items
-3,7
-25,3
-29,0
22,8
Corporation total
17,7
0,9
18,6
94,3

Income before extraordinary items and taxes in 2001 was EUR -11.1 million (57.6), or -0.5 percent (2.8) of net sales.

Net income for the fiscal year 2001 pro forma was EUR -8.1 million (64.5), or -0.4 percent (3.1) of net sales.

The extraordinary items that are included in the net income of 2001 reflect the net capital gains obtained from the divestitures of Åkerlund & Rausing and the energy company ADC, as well as provisions related to the American construction and installation service company Kamtech Inc.'s businesses. Net income the year for 2000 included net capital gains on the sale of the first 50 percent of Ahlstrom Machinery and the Ahlstrom Pumps businesses.

Return on net assets (RONA) was 2.3 percent (8.4). Without one-time items it was 4.4 percent. The return on equity (ROE) was -1.0 percent (4.5).

Earnings per share were -0.23 euros (0.95) and equity per share was 19.39 euros (20.18).


Performance of the businesses

FiberComposites division's net sales 2001 pro forma were EUR 665.2 million (445.2). Operating income was EUR 35.9 million (29.8) or 5.4 percent (6.7) of net sales. The figures also include the earlier Filtration division, combined with FiberComposites as of the beginning of 2002.

Demand for nonwoven materials was weak throughout the year and fell short of expectations, especially in the US markets, and no rapid improvement is foreseeable. In Europe the situation is clearly better. The new product line for nonwoven materials in Windsor Locks, CT, brings opportunities for launching new products in the markets during 2002.

The demand, production and profitability for glassfibre products remained favorable throughout the year. The market situation softened during the fall, however, and the year 2002 has not brought any changes thus far.

The weak demand situation in the US market reflected strongly on the production of engine filtration media. The order backlog started to grow towards the year end and the results for the whole year were satisfactory. The restructuring of filtration media production will improve efficiency and profitability at the US facilities.

LabelPack division's net sales in 2001 were EUR 584.8 million (598.0). Operating income was EUR 18.6 million (14.6), or 3.2 percent (2.4) of net sales. The figures include the former Label & Packaging and Self-Adhesive divisions, which were merged on September 1, 2001.

The weakening in demand led to a decrease in inventories in the industry and thereby reduced sales in both the USA and Europe. The demand for self-adhesive laminates increased, and market expectations for release base papers are good. Also the market for metalized paper is growing. The demand for paper based flexible packaging decreased approx. 5 percent during 2001.

The reduction of raw material prices improved the margins compared with previous year. The technical difficulties at the Ascoli plant in Italy were solved by the year end, and its results are expected to improve in 2002. The reorganization and close-down of the paper machine B4 in Bousbecque will reduce production costs and improve profitability.

Specialties division's net sales in 2001 were EUR 386.9 million (384.6). Operating income was EUR 7.3 million (16.7) or 1.9 percent (4.3) of net sales.

The net sales growth was below expectations in most business areas. E.g. the demand for impregnated and coated papers decreased 10 percent in the German markets in 2001. Furniture foils and industrial vegetable parchement continued their solid growth. Crepe papers expanded their geographical presence by entering new markets in Asia and in the USA in cooperation with FiberComposites division.

The Nordic core plants and core board units reached their targets but the demand was following the slowdown in the paper industry's rate of growth. During 2001, the division opened core facilities in the Netherlands and in St. Petersburg, Russia.


Other businesses

Ahlstrom Corporation's other businesses contributed EUR 320.3 million (278.4) to the company's net sales for 2001. Operating result without one-time items was EUR -12.1 million (-10.3), or -3.8 percent (-3.6) of the other businesses' share of the company's net sales.

A major part of the net sales can be attributed to Kamtech Inc. that exceptionally, compared to previous years, incurred losses in 2001. The figures also include the loss making, former Tecno Jolly plant in Italy and the Kuban plant in Russia, which remained in Ahlstrom's ownership upon conclusion of the Åkerlund & Rausing divestment.

A major part of the operating income for year 2000 came from the profits of interests in power plants, owned by the American energy company ADC, divested during summer 2001.


Divested businesses

Ahlstrom Group reorganized its structure during the first half of 2001 by divesting non-core businesses.

In April 2001, Ahlstrom sold the Åkerlund & Rausing flexible packaging business to a new company, whose other shareholders, apart from Ahlstrom Corporation, are Amcor Limited of Australia and Danisco A/S of Denmark. The transaction took effect June 29, following approval from the EU Commission.

The enterprise value of the divested business was EUR 86.4 million, which includes an 8 percent share in the new company, with an option to sell this holding at a later date. The former Tecno Jolly plant in Italy and the Kuban plant in Russia remained under the ownership of Ahlstrom. Amcor has an option to acquire the Italian business within an agreed period. Some real estate in e.g. Lund, Sweden, and Hochheim, Germany, were not included in the transaction.

In late December 2001, Ahlstrom divested its remaining 50 percent share of ÅR House KB, owner of the former real estate of Åkerlund & Rausing in Lund to the Swedish Kungsleden AB. The sales price was SEK 85 million or approx. EUR 9.2 million.

In June 2001, Ahlstrom sold its energy company ADC, which owned interests in several American power plants, to Golden Power Acquisition, a subsidiary of the Texas-based El Paso Corporation. The sales price was USD 103.9 million, or approx. EUR 115,7 million. The transaction came into effect on June 29, 2001 after approval by the US competition authorities.

On June 29, 2001 Ahlstrom also sold its 50 percent holding in Andritz-Ahlstrom to Andritz AG of Austria for EUR 57.5 million. In accordance with A. Ahlstrom Corporation's demerger plan, the sales price obtained for the Andritz-Ahlstrom shares belonged to Ahlström Capital Oy, which was established on July 1, 2001. Therefore, the net sales and operating income of the associated company Andritz-Ahlstrom are not included in Ahlstrom Corporation's pro forma figures.

Net sales of the divested businesses for the period they are included in Ahlstrom Corporation's pro forma figures for 2001 and 2000 are EUR 93.1 million (352.3). The equivalent operating result was EUR -2.1 million (20,7).


Financing

Despite weak results, Ahlstrom Corporation's interest-bearing net liabilities could be reduced by EUR 142.7 million and they totaled in the end of 2001 EUR 536.9 million (679.7). The liabilities were mainly reduced by the proceeds from the Åkerlund & Rausing and ADC divestments. The equity ratio was 38.1 percent (33.7) and gearing 75.9 percent (92.3). Net interest expense was EUR 29.1 million (33.8).

The company's cash flow before financing items was EUR 236.4 million. With the cash flow, the company was able to finance a large investment program, EUR 194.5 million in 2001.


Capital expenditures

Ahlstrom Group's gross capital expenditures for 2001 totaled EUR 194.5 million (485.5), or 9.5 percent (23.6) of net sales.

In addition to the new type of capacity at Windsor Locks, CT, completed in early December, FiberComposites division's major investments include a rebuild of the damaged glass melting furnace at the Karhula glassfibre plant in Finland during the summer 2001. The value of the investment in Windsor Locks is approx. EUR 55 million and the one in Karhula EUR 7 million. Both investments were completed on schedule and within budget.

The division also invested in a solvent-based saturation process at the plant in Taylorville, IL, to complement the earlier water-based process, in order to provide a full service to the American filtration markets. After initial technical difficulties, production is running well and the customer base has increased due to the acquisition of FiberMark's Rochester plant business activities in December.

LabelPack division's La Gère plant in France invested in a second supercalender to increase production. The value of the investment is approx. EUR 25 million. In addition, a biological wastewater treatment plant, valued over EUR 2 million, was completed at the Turin plant in Italy.

Specialties division's new cotton processing facility at the Altenkirchen plant in Germany will improve its efficiency of fiber processing as well as working conditions at the plant. At Osnabrück in Germany, investments were made to increase efficiency for wallpaper production and to start up the production of new grades of heavy abrasive base paper. The total value of the Osnabrück investments was EUR 9 million.

Ahlstrom invested in 2001 also in data systems and common IT-environment development. The aim is to improve the tools for business management and control, as well as to save costs. The resources invested in data systems and infrastructure were equivalent of approx. 100 full-time positions.

The common system for economic and material management is based on SAP R/3. The new data system was phased in during 2001 at Ahlstrom's facilities in Germany, Finland, France, Italy, the Netherlands and Sweden, and in early 2002 in Great Britain.

The Optimill system, developed for management of sales, production and distribution processes, was launched at the Ascoli plant in Italy in early January 2002. The usability of the system has been improved based on the experiences from eight other facilities. The maintenance of Optimill and its technical development according to the needs of the Ahlstrom system have been outsourced.


Research & Development

During 2001, Ahlstrom invested approx. EUR 29.2 million, or 1.4 percent of net sales, in research and development.


Personnel

Ahlstrom Corporation's average payroll during 2001 was 7,671 (9,511) and the number of employees at the end of the year was 6,933 employees (8,619) The reduction was due primarily to structural changes and the measures taken to improve operational activities.


Outlook for the future

The markets are expected to stay uncertain during 2002. However, the financial performance of Ahlstrom is expected to improve in 2002 due to structural changes and cost saving measures already in place, as well as improved margins for products.

Board of Directors
Ahlstrom Corporation
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