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IMPORTANT NOTICE
THIS OFFERING IS AVAILABLE ONLY TO INVESTORS WHO ARE EITHER (1) QUALIFIED
INSTITUTIONAL BUYERS (‘‘QIBs’’) WITHIN THE MEANING OF RULE 144A (‘‘RULE 144A’’) UNDER
THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE ‘‘U.S. SECURITIES ACT’’), OR
(2) PERSONS WHO ARE NOT U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE U.S.
SECURITIES ACT) AND WHO ARE OUTSIDE THE UNITED STATES IN ACCORDANCE WITH
REGULATION S (‘‘REGULATION S’’) UNDER THE U.S. SECURITIES ACT (AND, IF INVESTORS ARE
RESIDENT IN A MEMBER STATE OF THE EUROPEAN ECONOMIC AREA, A QUALIFIED
INVESTOR).
IMPORTANT: You must read the following before continuing. The following applies to the offering
memorandum following this notice, and you are therefore advised to read this carefully before reading,
accessing or making any other use of the offering memorandum. In accessing the offering memorandum,
you agree to be bound by the following terms and conditions, including any modifications to them any time
you receive any information from us as a result of such access.
NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES
FOR SALE IN ANY JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. THE SECURITIES
HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE U.S. SECURITIES ACT OR
THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER
JURISDICTION AND THE SECURITIES MAY NOT BE OFFERED OR SOLD WITHIN THE
UNITED STATES EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION
NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE U.S. SECURITIES ACT
AND APPLICABLE STATE OR LOCAL SECURITIES LAWS.
THE FOLLOWING OFFERING MEMORANDUM MAY NOT BE FORWARDED OR
DISTRIBUTED TO ANY OTHER PERSON AND MAY NOT BE REPRODUCED IN ANY
MANNER WHATSOEVER. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF
THIS DOCUMENT, IN WHOLE OR IN PART, IS UNAUTHORIZED. FAILURE TO COMPLY WITH
THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE U.S. SECURITIES ACT OR THE
APPLICABLE LAWS OF OTHER JURISDICTIONS.
Confirmation of your representation: In order to be eligible to view the offering memorandum or make an
investment decision with respect to the securities described therein, investors must be either (1) QIBs or
(2) persons who are not U.S. persons (as defined in Regulation S) and who are outside the United States in
an offshore transaction outside the United States in reliance on Regulation S; provided that investors
resident in a member state of the European Economic Area are qualified investors (within the meaning of
Article 2(1)(e) of Directive 2003/71/EC and any relevant implementing measure in each member state of
the European Economic Area). The offering memorandum is being sent at your request. By accepting the
e-mail and accessing the offering memorandum, you shall be deemed to have represented to each of the
Initial Purchasers (as defined in the attached offering memorandum), being the sender or senders of the
offering memorandum, that:
(1) you consent to delivery of such offering memorandum by electronic transmission,
(2) either:
(a) you and any customers you represent are QIBs, or
(b) the e-mail address that you gave us and to which the e-mail has been delivered is not located in
the United States, its territories and possessions (including Puerto Rico, the U.S. Virgin Islands,
Guam, American Samoa, Wake Island and the Northern Mariana Islands), any state of the
United States or the District of Columbia, and
(3) if you are resident in a member state of the European Economic Area, you are a qualified investor.
Prospective purchasers that are QIBs are hereby notified that the seller of the securities will be relying on
the exemption from the provisions of Section 5 of the U.S. Securities Act pursuant to Rule 144A.
You are reminded that the offering memorandum has been delivered to you on the basis that you are a
person into whose possession the offering memorandum may be lawfully delivered in accordance with the
laws of the jurisdiction in which you are located and you may not, nor are you authorized to, deliver the
offering memorandum to any other person.
The materials relating to the offering do not constitute, and may not be used in connection with, an offer
or solicitation in any place where offers or solicitations are not permitted by law. If a jurisdiction requires
that the offering be made by a licensed broker or dealer and the Initial Purchasers or any affiliate of the
Initial Purchasers is a licensed broker or dealer in that jurisdiction, the offering shall be deemed to be
made by the Initial Purchasers or such affiliate on behalf of the issuer in such jurisdiction. Under no
circumstances shall the offering memorandum constitute an offer to sell or the solicitation of an offer to
buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale
would be unlawful.
The offering memorandum has been sent to you in electronic form. You are reminded that documents
transmitted via this medium may be altered or changed during the process of electronic transmission and
consequently neither the Initial Purchasers, the Adviser nor any person who controls the Initial Purchasers
or the Adviser, nor any of their directors, officers, employees or agents, accepts any liability or
responsibility whatsoever in respect of any difference between the offering memorandum distributed to
you in electronic form and the hard copy version available to you on request from the Initial Purchasers.
STRICTLY CONFIDENTIAL
NOT FOR GENERAL DISTRIBUTION
IN THE UNITED STATES
23APR201422035675
Paroc Group Oy
E430,000,000
E200,000,000 6.250% Senior Secured Notes due 2020
E230,000,000 Floating Rate Senior Secured Notes due 2020
Paroc Group Oy, a private limited liability company (‘‘osakeyhtiö’’) incorporated under the laws of Finland (the ‘‘Issuer’’), is offering (the
‘‘Offering’’) A200 million aggregate principal amount of its 6.250% senior secured notes due 2020 (the ‘‘Fixed Rate Notes’’) and
A230 million aggregate principal amount of its floating rate senior secured notes due 2020 (the ‘‘Floating Rate Notes,’’ and together with
the Fixed Rate Notes, the ‘‘Notes’’).
The Issuer will pay interest on the Fixed Rate Notes semi-annually on each May 15 and November 15, commencing on November 15,
2014. The Fixed Rate Notes will mature on May 15, 2020. The Issuer may redeem some or all of the Fixed Rate Notes at any time on or
after May 15, 2016 at the redemption prices set forth herein. Prior to May 15, 2016, the Issuer may redeem some or all of the Fixed Rate
Notes at a price equal to 100% of the principal amount of the Fixed Rate Notes redeemed plus accrued and unpaid interest and
additional amounts, if any, plus the applicable ‘‘make-whole’’ premium set forth herein. At any time prior to May 15, 2016, the Issuer may
redeem up to 40% of the Fixed Rate Notes with the net cash proceeds from certain equity offerings at the redemption price set forth
herein. In addition, at any time prior to May 15, 2016, the Issuer may on one or more occasions redeem during each 12-month period
commencing with the Issue Date up to 10% of the aggregate principal amount of the Fixed Rate Notes outstanding at a redemption price
equal to 103% of the principal amount of Fixed Rate Notes redeemed plus accrued and unpaid interest and additional amounts, if any.
The Issuer may also redeem all, but not less than all, of the Fixed Rate Notes in the event of certain changes in applicable tax law. Upon
the occurrence of certain events constituting a change of control, the Issuer may be required to offer to repurchase the Fixed Rate Notes
at a purchase price of 101% of the principal amount thereof plus accrued and unpaid interest and additional amounts, if any. However, a
change of control will not be deemed to have occurred if specified consolidated leverage ratios are not exceeded in connection with such
event.
The Issuer will pay interest on the Floating Rate Notes quarterly on each February 15, May 15, August 15 and November 15,
commencing on August 15, 2014. The Floating Rate Notes will mature on May 15, 2020. The Issuer may redeem some or all of the
Floating Rate Notes at any time on or after May 15, 2015 at the redemption prices set forth herein. Prior to May 15, 2015, the Issuer may
redeem some or all of the Floating Rate Notes at a price equal to 100% of the principal amount of the Floating Rate Notes redeemed
plus accrued and unpaid interest and additional amounts, if any, plus the applicable ‘‘make-whole’’ premium set forth herein. The Issuer
may also redeem all, but not less than all, of the Floating Rate Notes in the event of certain changes in applicable tax law. Upon the
occurrence of certain events constituting a change of control, the Issuer may be required to offer to repurchase the Floating Rate Notes
at a purchase price of 101% of the principal amount thereof plus accrued and unpaid interest and additional amounts, if any. However, a
change of control will not be deemed to have occurred if specified consolidated leverage ratios are not exceeded in connection with such
event.
The Notes will be general senior obligations of the Issuer and will be guaranteed (the ‘‘Note Guarantees’’) on a senior secured basis by
Paroc Sverige AB, Paroc AB, Paroc Oy Ab, Paroc Panel System Oy Ab, Paroc Polska Sp. z o.o., UAB Paroc and ZAO Paroc (together,
the ‘‘Guarantors’’).
The Notes will be secured by first-ranking security interests over substantially the same assets (the ‘‘Collateral’’) that secure the New
Revolving Credit Facility (as defined herein). Under the terms of the Intercreditor Agreement (as defined herein) to be entered into in
connection with the Offering, the New Revolving Credit Facility and certain hedging obligations will be secured on a ‘‘super-priority’’
basis, and in the event of an enforcement of the security granted in the Collateral, the lenders under the New Revolving Credit Facility
and counterparties to certain hedging obligations will receive the proceeds from such enforcement in priority to the holders of the Notes.
The Note Guarantees and the security interests in the Collateral will be subject to legal and contractual limitations. In addition, the Note
Guarantees and the security interests in the Collateral may be released under certain circumstances.
There is currently no public market for the Notes. Application will be made to the Irish Stock Exchange for the Notes to be admitted to
the official list of the Irish Stock Exchange (the ‘‘Official List’’) and to be admitted to trading on the Irish Stock Exchange’s Global
Exchange Market. The Global Exchange Market of the Irish Stock Exchange is not a regulated market within the meaning of Directive
2004/93/EC on markets in financial instruments. There can be no assurance that the listing application will be accepted or that the Notes
will be listed, or will remain listed, and admitted to trading on the Global Exchange Market.
The Notes will be represented on issue by one or more global notes, which we expect will be delivered in book-entry form through the
facilities of Euroclear Bank SA/NV (‘‘Euroclear’’) and Clearstream Banking, société anonyme (‘‘Clearstream’’) on or about May 14, 2014
(the ‘‘Issue Date’’).
Investing in the Notes involves risks. See ‘‘Risk Factors’’ beginning on page 24.
The Notes and the Note Guarantees have not been, and will not be, registered under the U.S. Securities Act of 1933, as amended (the ‘‘U.S.
Securities Act’’), or the securities laws of any other jurisdiction and may not be offered or sold within the United States except pursuant to
an exemption from, or in a transaction not subject to, the registration requirements of the U.S. Securities Act. Accordingly, the Offering is
being made inside the United States only to ‘‘qualified institutional buyers’’ (‘‘QIBs’’) as defined in Rule 144A under the U.S. Securities Act
(‘‘Rule 144A’’) in accordance with Rule 144A and outside the United States only to certain non-U.S. persons in offshore transactions in
accordance with Regulation S under the U.S. Securities Act (‘‘Regulation S’’). Prospective purchasers that are QIBs are hereby notified that
the Initial Purchasers (as defined herein) may be relying on the exemption from the provisions of Section 5 of the U.S. Securities Act
provided by Rule 144A. For further details about eligible offerees and resale restrictions, see ‘‘Notice to Investors.’’
Issue price of the Fixed Rate Notes: 100% (plus accrued interest, if any, from the Issue Date).
Issue price of the Floating Rate Notes: 100% (plus accrued interest, if any, from the Issue Date).
Joint Physical Bookrunners
Goldman Sachs International
ING
Joint Bookrunners
Danske Bank
Nordea
The date of this offering memorandum is May 9, 2014.
J.P. Morgan
23APR201422035675
1MAY201412551097
1MAY201412552176
1MAY201412550315
Prospective investors should rely only on the information contained in this offering memorandum. None of
the Issuer, the Guarantors, the Initial Purchasers (as defined herein) or the Adviser (as defined herein) has
authorized anyone to provide prospective investors with different information, and prospective investors
should not rely on any such information. None of the Issuer, the Guarantors, the Initial Purchasers or the
Adviser is making an offer of the Notes in any jurisdiction where this offer is not permitted. Prospective
investors should not assume that the information contained in this offering memorandum is accurate as of
any date other than the date on the front of this offering memorandum. This offering memorandum may
only be used for the purposes for which it has been prepared.
TABLE OF CONTENTS
Contents
Page
NOTICE TO INVESTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FORWARD-LOOKING STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INDUSTRY AND MARKET DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PRESENTATION OF FINANCIAL AND OTHER INFORMATION . . . . . . . . . . . . . . . . .
CERTAIN DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EXCHANGE RATE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SELECTED FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INDUSTRY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
REGULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS . . . . . . . . . . . . .
DESCRIPTION OF OTHER INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DESCRIPTION OF THE NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BOOK-ENTRY, DELIVERY AND FORM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CERTAIN TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CERTAIN INSOLVENCY LAW AND LOCAL LAW LIMITATIONS . . . . . . . . . . . . . . . . .
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TRANSFER RESTRICTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SERVICE OF PROCESS AND ENFORCEMENT OF CIVIL LIABILITIES . . . . . . . . . . . .
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
INDEPENDENT AUDITORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
WHERE PROSPECTIVE INVESTORS CAN FIND MORE INFORMATION . . . . . . . . . .
LISTING AND GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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F-1
NOTICE TO INVESTORS
THE NOTES HAVE NOT BEEN REGISTERED UNDER THE U.S. SECURITIES ACT AND MAY
NOT BE OFFERED OR SOLD IN THE UNITED STATES UNLESS THE NOTES ARE
REGISTERED UNDER THE U.S. SECURITIES ACT, OR AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE U.S. SECURITIES ACT IS AVAILABLE. SEE ‘‘PLAN
OF DISTRIBUTION’’ AND ‘‘TRANSFER RESTRICTIONS.’’ INVESTORS SHOULD BE AWARE
THAT THEY MAY BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT
FOR AN INDEFINITE PERIOD OF TIME. PROSPECTIVE PURCHASERS ARE HEREBY
NOTIFIED THAT THE SELLER OF ANY SECURITY MAY BE RELYING ON THE EXEMPTION
FROM THE PROVISIONS OF SECTION 5 OF THE U.S. SECURITIES ACT PROVIDED BY RULE
144A UNDER THE U.S. SECURITIES ACT.
No dealer, salesperson or other person has been authorized to give any information or to make any
representation not contained in this offering memorandum and, if given or made, any such information or
representation must not be relied upon as having been authorized by the Issuer, the Guarantors, Goldman
Sachs International, ING Bank N.V., London Branch, J.P. Morgan Securities plc, Danske Bank A/S and
Nordea Bank Danmark A/S, as initial purchasers of the Notes (the ‘‘Initial Purchasers’’) or Lazard & Co.,
Limited, as financial adviser to the Issuer (the ‘‘Adviser’’). This offering memorandum does not constitute
an offer of any securities other than those to which it relates or an offer to sell, or a solicitation of an offer
to buy, to any person in any jurisdiction where such an offer or solicitation would be unlawful. Neither the
delivery of this offering memorandum nor any sale made under it shall, under any circumstances, create
any implication that there has been no change in the affairs of the Issuer or the Guarantors since the date
of this offering memorandum or that the information contained in this offering memorandum is correct as
of any time subsequent to that date.
By receiving this offering memorandum, investors acknowledge that they have had an opportunity to
request for review, and have received, all additional information they deem necessary to verify the accuracy
and completeness of the information contained in this offering memorandum. Investors also acknowledge
that they have not relied on the Initial Purchasers in connection with their investigation of the accuracy of
this information or their decision whether to invest in the Notes. The contents of this offering
memorandum are not to be considered legal, business, financial, investment, tax or other advice.
Prospective investors should consult their own counsel, accountants and other advisors as to legal,
business, financial, investment, tax and other aspects of a purchase of the Notes. In making an investment
decision, investors must rely on their own examination of the Issuer and the Group, the terms of the
Offering and the merits and risks involved.
This Offering is being made in reliance upon exemptions from registration under the U.S. Securities Act
for an offer and sale of securities that does not involve a public offering. The Notes have not been
registered with, recommended by or approved by the U.S. Securities and Exchange Commission (the
‘‘SEC’’) or any other U.S. federal, state or foreign securities commission or regulatory authority, nor has
any such commission or regulatory authority reviewed or passed upon the accuracy or adequacy of this
offering memorandum. Any representation to the contrary is a criminal offense.
The Initial Purchasers reserve the right to withdraw this Offering at any time and to reject any
commitment to subscribe for the Notes, in whole or in part. The Initial Purchasers also reserve the right to
allot less than the full amount of Notes sought by investors. The Initial Purchasers and certain related
entities may acquire a portion of the Notes for their own account.
The laws of certain jurisdictions may restrict the distribution of this offering memorandum and the offer
and sale of the Notes. Persons into whose possession this offering memorandum or any of the Notes come
must inform themselves about, and observe any such restrictions. None of the Issuer, the Initial
Purchasers, the Adviser or their respective representatives are making any representation to any offeree or
any purchaser of the Notes regarding the legality of any investment in the Notes by such offeree or
purchaser under applicable investment or similar laws or regulations. For a further description of certain
restrictions on the Offering and sale of the Notes and the distribution of the offering memorandum, see
‘‘Notice to Certain European Investors’’ and ‘‘Transfer Restrictions.’’
To purchase the Notes, investors must comply with all applicable laws and regulations in force in any
jurisdiction in which investors purchase, offer or sell the Notes or possess or distribute this offering
memorandum. Investors must also obtain any consent, approval or permission required by such jurisdiction
for investors to purchase, offer or sell any of the Notes under the laws and regulations in force in any
ii
jurisdiction to which investors are subject. None of the Issuer, the Initial Purchasers, the Adviser or their
respective affiliates will have any responsibility therefor.
No action has been taken by the Initial Purchasers, the Issuer, the Adviser or any other person that would
permit an Offering or the circulation or distribution of this offering memorandum or any offering material
in relation to the Issuer or the Notes in any country or jurisdiction where action for that purpose is
required.
The Initial Purchasers and the Adviser make no warranty, express or implied as to, and assume no
responsibility for, the accuracy or completeness of the information contained in this offering
memorandum. Nothing contained in this offering memorandum is, or shall be relied upon as, a promise or
representation by the Initial Purchasers or the Adviser as to the past, the present or the future.
Lazard & Co., Limited, which is authorized and regulated in the United Kingdom by the Financial
Conduct Authority, is acting as independent financial adviser to the Issuer in connection with the Offering
and will not be responsible to any other person for providing the protections afforded to its clients nor for
providing advice in relation to the Offering.
The Notes will only be issued in fully registered form and in denominations of A100,000 and integral
multiples of A1,000 in excess thereof. Notes sold to qualified institutional buyers in reliance on Rule 144A
will be represented by one or more global notes in registered form without interest coupons attached (the
‘‘144A Global Notes’’). Notes sold to non-U.S. persons outside the United States in reliance on
Regulation S under the U.S. Securities Act (‘‘Regulation S’’) will be represented by one or more global
notes in registered form without interest coupons attached (the ‘‘Regulation S Global Notes’’ and, together
with the 144A Global Notes, the ‘‘Global Notes’’). The Global Notes will be deposited with, or on behalf of,
a common depositary for the accounts of Euroclear and Clearstream and registered in the name of the
nominee of the common depositary. See ‘‘Book-Entry, Delivery and Form.’’
The Issuer and the Guarantors accept responsibility for the information contained in this offering
memorandum. The Issuer and the Guarantors, and not the Initial Purchasers or the Adviser, have ultimate
authority over the statements contained in this offering memorandum, including the content of these
statements and whether and how to communicate them. To the best of the knowledge and belief of the
Issuer and the Guarantors (having taken reasonable care to ensure that such is the case), the information
contained in this offering memorandum is in accordance with the facts in all material respects and does not
omit anything likely to affect the import of such information in any material respect.
IN CONNECTION WITH THIS ISSUE, J.P. MORGAN SECURITIES PLC (THE ‘‘STABILIZING
MANAGER’’) (OR PERSONS ACTING ON ITS BEHALF) MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WITH A VIEW TO SUPPORTING THE MARKET PRICE OF THE NOTES AT A
LEVEL WHICH MIGHT NOT OTHERWISE PREVAIL FOR A LIMITED PERIOD AFTER THE
ISSUE DATE. HOWEVER, THERE IS NO OBLIGATION ON THE STABILIZING MANAGER (OR
PERSONS ACTING ON ITS BEHALF) TO DO THIS. SUCH STABILIZING, IF COMMENCED,
MAY BE DISCONTINUED AT ANY TIME AND MUST BE BROUGHT TO AN END NO LATER
THAN THE EARLIER OF 30 DAYS AFTER THE ISSUE DATE AND 60 DAYS AFTER THE DATE
OF THE ALLOTMENT OF THE NOTES. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
‘‘PLAN OF DISTRIBUTION.’’
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE
HAS BEEN FILED UNDER CHAPTER 421-B (‘‘RSA 421-B’’) OF THE NEW HAMPSHIRE REVISED
STATUTES WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS
EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE
CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF THE STATE OF NEW HAMPSHIRE
THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING.
NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE
FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE OF THE STATE
OF NEW HAMPSHIRE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR
RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY, OR TRANSACTION. IT IS
UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER,
CUSTOMER, OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF
THIS PARAGRAPH.
iii
NOTICE TO U.S. INVESTORS
Each purchaser of the Notes will be deemed to have made the representations, warranties and
acknowledgements that are described in this offering memorandum under ‘‘Transfer Restrictions.’’ The
Notes have not been and will not be registered under the U.S. Securities Act or the securities laws of any
state of the United States and are subject to certain restrictions on transfer. Prospective purchasers are
hereby notified that the seller of any note may be relying on the exemption from the provisions of Section 5
of the U.S. Securities Act provided by Rule 144A. For a description of certain further restrictions on resale
or transfer of the Notes, see ‘‘Transfer Restrictions.’’
NOTICE TO CERTAIN EUROPEAN INVESTORS
European Economic Area
This offering memorandum has been prepared on the basis that this Offering will be made pursuant to an
exemption under the Prospectus Directive as implemented in member states of the European Economic
Area (‘‘EEA’’) from the requirement to produce and publish a prospectus which is compliant with the
Prospectus Directive, as so implemented, for offers of the Notes. Accordingly, any person making or
intending to make any offer within the EEA or any of its member states which have implemented the
Prospectus Directive (each a ‘‘Relevant Member State’’) of the Notes which are the subject of the placement
referred to in this offering memorandum must only do so in circumstances in which no obligation arises for
the Issuer, any of the Initial Purchasers or the Adviser to produce and publish a prospectus which is
compliant with the Prospectus Directive, including Article 3 thereof, as so implemented for such offer. For
EEA jurisdictions that have not implemented the Prospectus Directive, all offers of the Notes must be in
compliance with the laws of such jurisdictions. None of the Issuer, the Initial Purchasers or the Adviser
have authorized, nor do they authorize, the making of any offer of the Notes through any financial
intermediary, other than offers made by the Initial Purchasers, which constitute a final placement of the
Notes.
In relation to each Relevant Member State, each Initial Purchaser has represented and agreed that with
effect from and including the date on which the Prospectus Directive is implemented in that Relevant
Member State (the ‘‘Relevant Implementation Date’’) it has not made and will not make an offer of the
Notes which are the subject of the Offering contemplated by this offering memorandum to the public in
that Relevant Member State other than:
(i) to any legal entity which is a qualified investor as defined in the Prospectus Directive;
(ii) to fewer than 100 natural or legal persons or, if the Relevant Member State has implemented the
relevant provision of the 2010 PD Amending Directive, 150 natural or legal persons (other than
qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus
Directive subject to obtaining the prior consent of the relevant Initial Purchaser or Initial Purchasers
nominated by the Issuer for any such offer; or
(iii) in any other circumstances falling within Article 3(2) of the Prospectus Directive;
provided that no such offer of the Notes referred to in (i) to (iii) (inclusive) above shall require the Issuer,
the Initial Purchasers or the Adviser to publish a prospectus pursuant to Article 3 of the Prospectus
Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.
For the purposes of this provision, the expression an ‘‘offer of notes to the public’’ in relation to any Notes
in any Relevant Member State means the communication in any form and by any means of sufficient
information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to
purchase or subscribe for the Notes, as such expression may be varied in the Relevant Member State by
any measure implementing the Prospectus Directive in that Relevant Member State. For the purposes of
this provision, the expression ‘‘Prospectus Directive’’ means Directive 2003/71/EC (and amendments
thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member
State), and includes any relevant implementing measure in the Relevant Member State; and the expression
‘‘2010 PD Amending Directive’’ means Directive 2010/73/EU.
Each subscriber for, or purchaser of, the Notes in the Offering located within a Relevant Member State
will be deemed to have represented, acknowledged and agreed that it is a ‘‘qualified investor’’ within the
meaning of Article 2(1)(e) of the Prospectus Directive. The Issuer, each Initial Purchaser and their
iv
affiliates, and others will rely upon the truth and accuracy of the foregoing representation,
acknowledgment and agreement.
United Kingdom
This offering memorandum is directed only at persons (the ‘‘Relevant Persons’’) who (i) fall within
Article 19(5) (investment professionals) of the Financial Services and Markets Act 2000 (Financial
Promotion) Order 2005, (ii) fall within Article 49(2)(a) to (d) (high net worth companies, unincorporated
associations etc.) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 or
(iii) are persons to whom an invitation or inducement to engage in investment activity (within the meaning
of section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of any
Notes may otherwise lawfully be communicated or caused to be communicated.
This offering memorandum must not be acted on or relied on by persons who are not Relevant Persons.
Any investment or investment activity to which this offering memorandum relates is available only to
Relevant Persons and will be engaged in only with Relevant Persons. Recipients of this offering
memorandum are not permitted to transmit it to any other person. The Notes are not being offered to the
public in the United Kingdom.
Finland
This offering memorandum does not constitute a public offer or an advertisement of securities to the
public in the Republic of Finland. The Notes will not and may not be offered, sold, advertised or otherwise
marketed in Finland under circumstances that would constitute a public offering of securities under
Finnish law. Any offer or sale of the Securities in Finland will be made pursuant to a private placement
exemption as defined under Article 3(2) of the Prospectus Directive and the Finnish Securities Markets
Act (2012/746, Arvopaperimarkkinalaki) and any regulation made thereunder, as supplemented and
amended from time to time. This offering memorandum is not a prospectus and has not been prepared in
accordance with the prospectus requirements under the Prospectus Directive or the Finnish Securities
Market Act or any other Finnish regulation. This offering memorandum has not been approved by or
dispatched to the Finnish Financial Supervisory Authority.
Sweden
This offering memorandum is not a prospectus and has not been prepared in accordance with the
prospectus requirements provided for in the Swedish Financial Instruments Trading Act (lagen (1991:980)
om handel med finansiella instrument) nor any other Swedish enactment. Neither the Swedish Financial
Supervisory Authority (Finansinspektionen) nor any other Swedish public body has examined, approved or
registered this offering memorandum or will examine, approve or register this offering memorandum.
Accordingly, this offering memorandum may not be made available, nor may the Notes otherwise be
marketed or offered for sale, in Sweden other than in circumstances that constitute an exemption from the
requirement to prepare a prospectus under the Swedish Financial Instruments Trading Act.
Poland
The Notes may not be offered or sold in or into Poland except under circumstances that do not constitute a
public offering of securities under the Polish Law on Public Offer, Conditions Governing the Introduction
of Financial Instruments to Public Trading and Public Companies of July 29, 2005 (as amended). This
offering memorandum is not a prospectus and it has not been and will not be approved by the Komisja
Nadzoru Finansowego, the Polish Financial Supervision Authority. Therefore, any offer or sale of the
Notes in Poland can only be made pursuant to the exemptions as defined under Article 3(2) of the
Prospectus Directive and the Polish Law on Public Offer, Conditions Governing the Introduction of
Financial Instruments to Public Trading and Public Companies of July 29, 2005 and any regulation made
thereunder, as supplemented and amended from time to time. This offering memorandum is intended for
‘‘qualified investors’’ (Polish: klient profesjonalny), as defined in the Polish Law on Trading in Financial
Instruments of July 29, 2005 (as amended) and a limited number (less than 150) of unqualified identified
investors in Poland.
Lithuania
This offering memorandum does not constitute a public offer or an advertisement of securities to the
public in the Republic of Lithuania. The Notes will not and may not be offered, sold, advertised or
v
otherwise marketed in Lithuania with the exception that an offer or sale may be made at any time under
the exemptions as defined under Article 3(2) of the Prospectus Directive and Article 5 of the Lithuanian
Law on Securities (X-1023, Vertybini˛
u popieri˛
u ˛istatymas) and any regulation made thereunder, as
supplemented and amended from time to time. This offering memorandum has not been approved by or
dispatched to the Bank of Lithuania (Lietuvos Bankas).
Russia
This offering memorandum does not constitute a public offer or an advertisement of securities to the
public in the Russian Federation. The Notes will not and may not be offered, sold, advertised or otherwise
marketed in Russia under circumstances that would constitute a public offering or public circulation of
securities under the Federal Act on Securities Market (Russian Securities Act), unless the Notes are
properly admitted to such offering or circulation in accordance with the Russian Securities Act. Any offer
or sale of the Notes in Russia will only be possible if such Notes may be qualified as bonds under the
Russian Securities Act and are offered and sold to qualified investors in compliance with the Russian
Securities Act. This offering memorandum has not been approved by or dispatched to the Central Bank of
the Russian Federation 23APR201423595247.
vi
FORWARD-LOOKING STATEMENTS
This offering memorandum includes forward-looking statements within the meaning of applicable
securities laws. These forward-looking statements include, but are not limited to, all statements other than
statements of historical fact contained in this offering memorandum, including, without limitation, those
regarding:
•
our strategy, outlook and growth prospects, including our operational and financial targets;
•
the economic outlook in general and, in particular, economic conditions in the western, central and
eastern European and Russian markets;
•
the competitive environment in the markets in which we operate;
•
the expected growth of the markets and industry in which we operate;
•
growth in demand for our products, increases in the penetration of our products into their respective
markets, substitution of, or by, other building materials, or similar measures;
•
our expansion plans, including planned expansion into and growth in mature and emerging markets
and potential acquisitions;
•
our cost-savings plans and programs;
•
our ability to obtain necessary regulatory approvals for our products; and
•
our ability to develop, market and launch attractive new products and services.
In some cases, you can identify forward-looking statements by terminology such as ‘‘aim,’’ ‘‘anticipate,’’
‘‘believe,’’ ‘‘continue,’’ ‘‘could,’’ ‘‘estimate,’’ ‘‘expect,’’ ‘‘forecast,’’ ‘‘intend,’’ ‘‘may,’’ ‘‘plan,’’ ‘‘potential,’’
‘‘predict,’’ ‘‘project,’’ ‘‘should’’ or ‘‘will’’ or the negative of such terms or other comparable terminology.
The forward-looking statements used herein are based on a number of assumptions and estimates and are
subject to known and unknown risks, uncertainties and other factors that may or may not occur in the
future. As such, we caution you that forward-looking statements are not guarantees of future performance
and that our actual results of operations, including our financial condition and liquidity and the
development of the industry in which we operate, may differ materially from those expressed or implied by
our forward-looking statements. Important risks, uncertainties and other factors that could cause these
differences include those listed under the captions ‘‘Risk Factors,’’ ‘‘Management’s Discussion and Analysis
of Financial Condition and Results of Operations,’’ ‘‘Industry’’ and ‘‘Business’’ and relate to, among others:
•
global or regional economic conditions in the markets in which we produce or sell our products;
•
the general cyclicality and seasonality of the construction industry;
•
competitive trends in our industry, including use of substitute products;
•
local business risks in the markets in which we operate;
•
our ability to successfully manage future growth;
•
risks associated with emerging markets, including our expansion into Russia;
•
interruptions in operations at our production facilities;
•
the closure of our Lappeenranta production facility;
•
loss of key suppliers or change in the availability or cost of raw materials or components used in
production processes;
•
fluctuations in demand or a decrease or increase in production capacity;
•
the suspension, amendment, early termination or failure to renew our licenses;
•
increases in energy prices or disruptions in energy supplies;
•
availability and cost of transportation for our finished products;
•
inadequate protection of our intellectual property rights;
•
our ability to successfully exploit our existing stone resources that are difficult to source from third
parties and acquire and develop further stone raw material resources at competitive costs;
vii
•
changes to or enforcement of environmental regulations, health and safety regulations, technical
standards and other regulations;
•
regulations regarding carbon dioxide emissions;
•
obligations arising from environmental conditions at our production facilities;
•
litigation we may be involved in from time to time;
•
our level of indebtedness and capital structure and the terms of the Notes and our other financing
instruments; and
•
other factors discussed under ‘‘Risk Factors.’’
These risks and others described under ‘‘Risk Factors’’ are not exhaustive. We urge you to read the sections
of this offering memorandum entitled ‘‘Risk Factors,’’ ‘‘Management’s Discussion and Analysis of Financial
Condition and Results of Operations,’’ ‘‘Industry’’ and ‘‘Business’’ for a more complete discussion of the
factors that could affect our future performance and the markets in which we operate. The forwardlooking statements herein speak only as of the date on which the statements were made. We undertake no
obligation, and do not intend, to update or revise any forward-looking statement, whether as a result of
new information, future events or developments or otherwise.
viii
INDUSTRY AND MARKET DATA
We operate in certain segments of the building materials sector for which it is difficult to obtain precise
industry and market information. Market data and certain economic and industry data and forecasts used,
and statements regarding our position in the industry made, in this offering memorandum were estimated
or derived based upon assumptions we deem reasonable, from internal estimates and surveys, market
research, government and other publicly available information, reports prepared by consultants and
independent industry publications. These include information published by Euroconstruct as well as
research performed exclusively for our Group. The information has been accurately reproduced and, as far
as we are aware and have been able to ascertain from information published by those sources, no facts
have been omitted which would render the reproduced information inaccurate or misleading. While we
believe these statements to be reliable, they have not been independently verified, and we do not make any
representation or warranty as to the accuracy or completeness of such information set forth in this offering
memorandum. Additionally, industry publications and such reports generally state that the information
contained therein has been obtained from sources believed to be reliable, but that the accuracy and
completeness of such information is not guaranteed and in some instances state that they do not assume
liability for such information.
STONE QUARRY RESOURCES
Information contained in this offering memorandum relating to estimates of our available stone quarry
resources is based on internal geological data, as well as third-party analyses of such data, which we have
reviewed. You should be aware that any discussion of our stone quarry resources in this offering
memorandum is based on estimates of stone resources as at the reference dates stated in ‘‘Business—
Divisions—Base Production—Raw materials—Stone and quarries,’’ and such estimates have not been
updated for any extraction since such reference dates.
Our stone quarry resources and resources data are not calculated or reported pursuant to or in accordance
with the Australasian Joint Ore Reserves Committee Code (the ‘‘JORC Code’’), and may also differ from
those generally disclosed in filings with the SEC in accordance with SEC Industry Guide 7. There are no
requirements under Finnish law relating to the classification or quantification of stone quarry resources.
Estimates of our stone quarry resources depend significantly on the interpretation of geological data
obtained from drill holes and other sampling techniques, which is extrapolated to produce estimates of the
size, shape, depth and quality of mineral deposits. In addition, the calculation of our available stone quarry
resources is based on estimates and assumptions regarding a number of economic and technical factors,
such as production rates, mineral quality, production and transportation costs and prices. These economic
and technical estimates and assumptions may change in the future in ways that affect the quantity of our
resources. We generate additional geological data as we quarry, which may not be consistent with the data
on which our stone quarry resources estimates were based, resulting in changes to those estimates. No
assurance can be given that the stone quarry resources presented in this offering memorandum will be
recovered at the quality or yield presented.
See ‘‘Risk factors—Risks Related to Our Business and Our Industry—The stated stone resources included in
this offering memorandum are estimates based on our, and a third party contractor’s knowledge, experience and
industry practice, and the volume and quality of our actual resources could be substantially lower than such
estimates, and may also differ from those generally disclosed in filings with the U.S. Securities and Exchange
Commission in accordance with SEC Industry Guide 7. Our stated resources are not calculated or reported
pursuant to or in accordance with the JORC Code.’’
ix
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Financial Information
This offering memorandum contains the audited consolidated financial statements of Paroc Group Oy, the
Issuer of the Notes, which comprise the consolidated statements of income, the consolidated statements of
comprehensive income, the consolidated statements of changes in equity and the consolidated statements
of cash flows for the years ended December 31, 2011, 2012 and 2013, and the consolidated statements of
financial position as of December 31, 2012 and 2013, together with the notes to the consolidated financial
statements, which have been prepared in accordance with International Financial Reporting Standards, as
adopted by the European Union (‘‘IFRS’’), and audited by PricewaterhouseCoopers Oy, as set forth in
their audit report included elsewhere herein. These consolidated financial statements have been prepared
solely for inclusion in this offering memorandum in connection with the issuance of the Notes by the
Issuer, and cannot be used for any other purpose. Due to the special purpose of these consolidated
financial statements, no Board of Directors’ report or standalone financial statements of Paroc Group Oy
have been included herein. These consolidated financial statements are not the statutory financial
statements of Paroc Group Oy.
Unless otherwise indicated, the financial information presented herein has been derived from the audited
consolidated financial statements and the accompanying notes thereto of Paroc Group Oy as of and for the
years ended December 31, 2011, 2012 and 2013 included elsewhere herein.
Historically, we have not been required under IFRS to present segment information in our audited
consolidated financial statements. However, in connection with the Offering, we have adopted segment
reporting going forward and therefore we have presented certain segment information herein for each of
the years ended December 31, 2011, 2012 and 2013.
For these purposes, our three segments under IFRS are:
•
Insulation, which corresponds to our BI division and TI division;
•
Panel System, which corresponds to our PPS division; and
•
Base Production, which corresponds to our Base Production division.
We also present in this offering memorandum certain eliminations and allocations, which provide for
eliminations in respect of intercompany trading and other transactions between our operating divisions, as
well as allocation of central overhead and management charges among our operating divisions, for
purposes of Group consolidation.
For further information regarding our presentation of segment information, see ‘‘Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Segment Reporting’’ and our audited
consolidated financial statements included elsewhere in this offering memorandum.
This offering memorandum presents certain unaudited consolidated pro forma financial information
adjusted to give pro forma effect to the Transactions. The unaudited pro forma financial information
presented herein is based on available information and certain assumptions and estimates that we believe
are reasonable and may differ materially from actual amounts. The unaudited consolidated pro forma
financial information presented herein has been included for informational purposes only, and does not
purport to present what our results would actually have been had the Transactions occurred on January 1,
2013 for purposes of the pro forma statement of income information or on December 31, 2013 for
purposes of the pro forma statement of financial position information, nor is it necessarily indicative of our
results that may be achieved in the future. See ‘‘Summary—Summary Financial and Operating Information.’’
Certain numerical figures set forth in this offering memorandum, including data presented in millions or
thousands, as well as percentages, have been subject to rounding adjustments. Accordingly, the totals of
certain data presented in this offering memorandum may vary slightly from the actual arithmetic totals of
such data. Percentages and amounts reflecting changes over time periods relating to financial and other
data set forth in ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’
are calculated using the numerical data in the audited consolidated financial statements of Paroc Group
Oy contained in this offering memorandum, as applicable, and not using the numerical data in the
narrative description thereof.
x
In this offering memorandum, unless otherwise indicated, all revenue, net sales and income data presented
with respect to any particular operating division includes revenue, net sales and income of that operating
division generated by internal sales to other operating divisions.
In this offering memorandum, unless otherwise indicated, all sales, total sales and total division sales
represent net sales.
In this offering memorandum, unless otherwise indicated, energy cost has been presented excluding the
cost of coke, which we instead present as part of raw materials cost.
We present our consolidated financial statements in euro. For certain information regarding rates of
exchange between euro and U.S. dollars, see ‘‘Exchange Rate Information.’’
Non-IFRS Measures
We include certain financial measures in this offering memorandum, including EBITDA, EBITDA margin,
Adjusted EBITDA and Adjusted EBITDA margin, as defined by us, which are supplemental measures of
our performance and our ability to service our indebtedness that are not required by, recognized or
presented in accordance with IFRS or U.S. generally accepted accounting principles.
We define these non-IFRS measures as follows:
•
EBITDA: We define EBITDA as profit/(loss) for the period from continuing operations before
income tax expense, finance income and costs, depreciation and amortization and impairments;
•
EBITDA margin: We define EBITDA margin as EBITDA for the applicable period divided by
revenue for the same period;
•
Adjusted EBITDA: We define Adjusted EBITDA as EBITDA excluding items of a non-recurring or
unusual nature, including in respect of our Russian expansion (including both our construction phase
and our pre-commercial production phase), redundancies and restructuring, our transfer pricing case
and the closure of our Lappeenranta site. See ‘‘Summary—Summary Financial and Operating
Information—Summary Other Financial Information’’ for a reconciliation of Adjusted EBITDA to
EBITDA; and
•
Adjusted EBITDA margin: We define Adjusted EBITDA margin as Adjusted EBITDA for the
applicable period divided by revenue for the same period.
We present the non-IFRS measures described above in order to enhance the understanding of our
financial performance and our ability to service our indebtedness, including the Notes. Although the
non-IFRS measures described above are not necessarily measures of our ability to fund our cash needs, we
understand that such non-IFRS measures are used by certain investors as measures of financial
performance and to compare our performance with the performance of other companies that also report
such non-IFRS measures. EBITDA, EBITDA margin, Adjusted EBITDA and Adjusted EBITDA margin
are not measurements determined in accordance with IFRS, are unaudited and should not be considered
as alternatives to, or more meaningful than, (i) operating profit or profit for the period (as determined in
accordance with IFRS) as a measure of our operating performance, (ii) cash flows from operating,
investing and financing activities as a measure of our ability to meet our cash needs or (iii) any other
measures of performance or liquidity under IFRS.
EBITDA, EBITDA margin, Adjusted EBITDA and Adjusted EBITDA margin may not be comparable to
other similarly titled measures of other companies and have limitations as analytical tools, and you should
not consider them in isolation or as a substitute for an analysis of our results as reported under IFRS.
Some of these limitations are:
•
they do not reflect our cash expenditures or future requirements for capital expenditures or
contractual commitments;
•
they do not reflect changes in, or cash requirements for, our working capital needs;
•
they do not reflect the significant interest expense, or the cash requirements necessary, to service
interest or principal payments, on our debts;
•
although depreciation and amortization are non-cash charges, the assets being depreciated and
amortized will often need to be replaced in the future and such non-IFRS measures do not reflect any
cash requirements that would be required for such replacements;
xi
•
some of the exceptional items that we eliminate in calculating such non-IFRS measures reflect cash
payments that were made, or will in the future be made; and
•
the fact that other companies in our industry may calculate such non-IFRS measures differently than
we do, which limits its usefulness as a comparative measure.
For a reconciliation of profit for the period from continuing operations to EBITDA for the periods
presented herein, see ‘‘Summary—Summary Financial and Operating Information—Summary Other
Financial Information.’’
The non-IFRS measures presented herein may be defined differently than the corresponding terms under
the Indenture.
Operating Data
Except as otherwise indicated, in this offering memorandum the amounts or percentages, as the case may
be, of our production volumes, capacity utilization rates, the number of our employees and the proportion
of fixed and variable costs in our business divisions or units are based on management estimates and are
unaudited. Actual amounts and percentages may differ from the amounts and percentages presented based
on such management estimates.
Currency Presentation
In this offering memorandum, all references to:
•
‘‘Danish krone’’ or ‘‘DKK’’ are to the Danish krone, the lawful currency of the Kingdom of Denmark;
•
‘‘euro,’’ ‘‘EUR’’ and ‘‘A’’ are to the single currency of the member states of the European Union
participating in the third stage of economic and monetary union pursuant to the Treaty on the
Functioning of the European Union, as amended or supplemented from time to time;
•
‘‘GBP,’’ ‘‘sterling’’ or ‘‘£’’ are to the British pound, the lawful currency of the United Kingdom;
•
‘‘litas’’ or ‘‘LTL’’ are to the Lithuanian litas, the lawful currency of Lithuania;
•
‘‘Norwegian krone’’ or ‘‘NOK’’ are to the Norwegian krone, the lawful currency of the Kingdom of
Norway;
•
‘‘rouble’’ or ‘‘RUB’’ are to the Russian rouble, the lawful currency of Russia;
•
‘‘Swedish krona’’ or ‘‘SEK’’ are to the Swedish krona, the lawful currency of Sweden;
•
‘‘U.S. dollars,’’ ‘‘USD’’ and ‘‘$’’ are to the lawful currency of the United States of America; and
•
‘‘zloty’’ or ‘‘PLN’’ are to the Polish zloty, the lawful currency of Poland.
xii
CERTAIN DEFINITIONS
In this offering memorandum, the terms ‘‘Group,’’ ‘‘Paroc Group,’’ ‘‘Paroc,’’ ‘‘we,’’ ‘‘us’’ and ‘‘our’’ refer
collectively to Paroc Group Oy and its direct and indirect subsidiaries.
Unless otherwise specified or the context requires otherwise in this offering memorandum:
•
‘‘Adjusted EBITDA’’ means EBITDA excluding items of a non-recurring or unusual nature, including
in respect of our Russian expansion (including both our construction phase and our pre-commercial
production phase), redundancies and restructuring, our transfer pricing case and the closure of our
Lappeenranta site.
•
‘‘Baltic States’’ means Estonia, Latvia and Lithuania.
•
‘‘BI’’ means our Building Insulation division.
•
‘‘Clearstream’’ means Clearstream Banking, société anonyme.
•
‘‘Collateral’’ means the rights, property and assets securing the Notes and the Note Guarantees as
described in the section entitled ‘‘Description of the Notes—Security’’ and any rights, property or assets
over which a lien has been granted to secure the obligations of the Issuer and the Guarantors under
the Notes, the Note Guarantees and the Indenture.
•
‘‘EBITDA’’ means profit/(loss) for the period from continuing operations before income tax expense,
finance income and costs, depreciation and amortization and impairments.
•
‘‘EEA’’ means European Economic Area.
•
‘‘EED’’ means the EU Directive 2012/27/EU on energy efficiency.
•
‘‘EPBD’’ means the EU Directive 2010/31/EU on the energy performance of buildings.
•
‘‘EU’’ means the European Union.
•
‘‘EU ETS’’ means the European Trading System for CO2 emission allowances.
•
‘‘EU Insolvency Regulation’’ means the Council of the European Union regulation (EC) No 1346/2000
of May 29, 2000 on insolvency proceedings.
•
‘‘Euroclear’’ means Euroclear Bank SA/NV.
•
‘‘Eurozone’’ means the 18 Member States that have adopted and retained the euro as their common
currency and sole legal tender.
•
‘‘Existing Issuer Senior Notes’’ means the A299.2 million aggregate principal amount of senior notes due
2015 issued by the Issuer under the Existing Senior Notes Trust Deed, which will be redeemed in full
on the Issue Date using the proceeds of the Offering. See ‘‘Use of Proceeds.’’
•
‘‘Existing Junior Notes’’ means the A100 million aggregate principal amount of junior notes due 2015
issued by Safari Finco 1 Oy under the Existing Junior Notes Trust Deed, which Existing Junior Notes
are held by the Lender-Owner Syndicate. A portion of the proceeds of the Offering, together with
cash on hand, will be used to (i) partially redeem, and pay accrued and unpaid interest on, the Existing
Junior Notes and (ii) fund the purchase by Safari Luxco 2 S.A. of Existing Junior Notes from the
Lender-Owner Syndicate. See ‘‘Use of Proceeds.’’
•
‘‘Existing Junior Notes Trust Deed’’ means the junior note trust deed and conditions dated
December 23, 2009, as amended, among, inter alios, Safari Finco 1 Oy and the trustee thereunder,
providing for the issuance of junior notes by Safari Finco 1 Oy. The Existing Junior Notes Trust Deed
will be amended and restated on or before the Issue Date to amend the terms of the Existing Junior
Notes so that they constitute unsecured subordinated notes. See ‘‘Description of Other Indebtedness—
Shareholder Loans of Safari Finco 1 Oy.’’
•
‘‘Existing Oy Ab Senior Notes’’ means the A50.8 million aggregate principal amount of senior notes due
2015 issued by Paroc Oy Ab under the Existing Senior Notes Trust Deed, which will be redeemed in
full on the Issue Date using the proceeds of the Offering. See ‘‘Use of Proceeds.’’
•
‘‘Existing Senior Facility’’ means the super senior secured revolving credit facilities under the Existing
Senior Facility Agreement, which will be canceled on the Issue Date.
xiii
•
‘‘Existing Senior Facility Agreement’’ means the super senior secured revolving credit facilities
agreement dated December 23, 2009, as amended, among, inter alios, Paroc Oy Ab as borrower, the
Issuer, as guarantor, the other guarantors party thereto and the lenders and the other parties named
therein, governing the Existing Senior Facility.
•
‘‘Existing Senior Indebtedness’’ means the Existing Senior Facility and the Existing Senior Notes.
•
‘‘Existing Senior Notes’’ means the Existing Issuer Senior Notes and the Existing Oy Ab Senior Notes.
•
‘‘Existing Senior Notes Trust Deed’’ means the senior note trust deed and conditions dated
December 23, 2009 among, inter alios, the Issuer, Paroc Oy Ab, certain subsidiaries of the Issuer as
guarantors and the trustee thereunder, providing for the issuance of senior notes by the Issuer, Paroc
Oy Ab and Paroc Sverige AB, as well as for a SEK 70 million letter of credit facility.
•
‘‘Fixed Rate Notes’’ means the A200 million aggregate principal amount of the Issuer’s 6.250% senior
secured notes due 2020 offered hereby.
•
‘‘Floating Rate Notes’’ means the A230 million aggregate principal amount of the Issuer’s floating rate
senior secured notes due 2020 offered hereby.
•
‘‘Guarantors’’ means Paroc Sverige AB, Paroc AB, Paroc Oy Ab, Paroc Panel System Oy Ab, Paroc
Polska Sp. z o.o., UAB Paroc and ZAO Paroc.
•
‘‘HVAC’’ means heating, ventilation and air conditioning.
•
‘‘IED’’ means the EU Directive 2010/75/EC on industrial emissions.
•
‘‘IFRS’’ means the International Financial Reporting Standards of the International Accounting
Standards Board, as adopted by the European Union.
•
‘‘Indenture’’ means the indenture governing the Notes.
•
‘‘Initial Purchasers’’ means Goldman Sachs International, ING Bank N.V., London Branch,
J.P. Morgan Securities plc, Danske Bank A/S and Nordea Bank Danmark A/S.
•
‘‘Intercreditor Agreement’’ means the intercreditor agreement dated on or before the Issue Date,
between, among others, the Issuer, the Guarantors, the Security Agent, the Trustee, the facility agent
and the lenders under the New Revolving Credit Facility Agreement and the other parties named
therein, as amended, restated or otherwise modified or varied from time to time.
•
‘‘Issue Date’’ means May 14, 2014.
•
‘‘Issuer’’ means Paroc Group Oy, a private limited liability company (‘‘osakeyhtiö’’) incorporated under
the laws of Finland with registered offices at Energiakuja 3, 00180 Helsinki and registered in the
commercial register kept by the National Board of Patents and Registration of Finland under business
identity code 2303371-0.
•
‘‘Lender-Owner Syndicate’’ means the syndicate of over 30 financial institutions that gained control of
Safari Luxco 2 S.A. after a restructuring of Paroc Group indebtedness in 2009. See ‘‘Principal
Shareholders.’’
•
‘‘Member State’’ means countries that are members of the EU.
•
‘‘New Revolving Credit Facility’’ means the A60 million super senior secured revolving credit facility
under the New Revolving Credit Facility Agreement.
•
‘‘New Revolving Credit Facility Agreement’’ means the super senior secured credit revolving facility
agreement to be entered into on or before the Issue Date among Paroc Oy Ab, as borrower, the
Issuer, as a guarantor, the other Guarantors and the lenders and the other parties named therein,
pursuant to which the New Revolving Credit Facility will be made available.
•
‘‘Nordic’’ means of, or relating to, Finland, Sweden, Norway and Denmark.
•
‘‘Note Guarantees’’ means the senior secured guarantees of the Notes provided by the Guarantors
pursuant to the Indenture.
•
‘‘Notes’’ means the Fixed Rate Notes and the Floating Rate Notes.
•
‘‘OEM’’ means original equipment manufacturers.
xiv
•
‘‘Pensions L/C’’ means the SEK 35 million letter of credit currently in place with ING Bank N.V.,
London Branch, with respect to certain unfunded pension liabilities in Sweden, which will be rolled
into our New Revolving Credit Facility as a letter of credit issued under an ancillary facility thereunder
on or about the Issue Date. See ‘‘Management’s Discussion and Analysis of Financial Condition and
Results of Operations—Contractual Obligations—Pension obligations.’’
•
‘‘PPS’’ means our Panel System division.
•
‘‘REACH’’ means the EU Regulation (EC) No. 1907/2006 on Registration, Evaluation, Authorization
and Restriction of Chemicals.
•
‘‘Security Agent’’ means ING Bank N.V., London Branch, as security agent under the Indenture and
the New Revolving Credit Facility Agreement.
•
‘‘Security Documents’’ means the Security Documents as defined under ‘‘Description of the Notes—
Certain Definitions.’’
•
‘‘TI’’ means our Technical Insulation division.
•
‘‘tonnes’’ means metric tonnes.
•
‘‘Transactions’’ means the issuance of the Notes offered hereby and the use of proceeds therefrom as
described in ‘‘Use of Proceeds.’’
•
‘‘Trustee’’ means The Bank of New York Mellon, London Branch, in its capacity as trustee under the
Indenture.
•
‘‘U.S. Securities Act’’ means the U.S. Securities Act of 1933, as amended.
Information contained on any website named in this offering memorandum is not incorporated by
reference in this offering memorandum and is not part of this offering memorandum.
xv
EXCHANGE RATE INFORMATION
The following table sets forth, for the periods set forth below, the high, low, average and period end
Bloomberg Composite Rate (New York) expressed as U.S. dollars per A1.00. The Bloomberg Composite
Rate is a ‘‘best market’’ calculation, in which, at any point in time, the bid rate is equal to the highest bid
rate of all contributing bank indications and the ask rate is set to the lowest ask rate offered by these banks.
The Bloomberg Composite Rate is a mid-value rate between the applied highest bid rate and the lowest
ask rate. The rates may differ from the actual rates used in the preparation of the consolidated financial
statements and other financial information appearing in this offering memorandum. We make no
representation that the euro or U.S. dollar amounts referred to in this offering memorandum have been,
could have been or could, in the future, be converted into U.S. dollars or euro, as the case may be, at any
particular rate, if at all.
The average rate for a year means the average of the Bloomberg Composite Rates on the last business day
of each month during the relevant year. The average rate for a month, or for any shorter period, means the
average of the Bloomberg Composite Rates on each business day for the relevant month, or shorter
period, as the case may be.
The Bloomberg Composite Rate of the euro on May 8, 2014 was $1.38 per A1.00.
U.S. dollars per E1.00
Period end Average
High
Year
2009 . . . . . . . . . . . . . . . . .
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Month
November 2013 . . . . . . . . .
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January 2014 . . . . . . . . . . .
February 2014 . . . . . . . . . .
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April 2014 . . . . . . . . . . . . .
May 2014 (through May 8)
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1.43
1.34
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1.37
1.40
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1.29
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1.51
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1.37
1.38
1.38
1.39
1.36
1.38
1.38
1.38
1.39
1.39
1.39
1.34
1.35
1.35
1.35
1.37
1.37
1.38
xvi
SUMMARY
This summary highlights selected information contained elsewhere in this offering memorandum. This
Summary is not complete and does not contain all the information that may be important to prospective
investors. Prospective investors should carefully read this offering memorandum in its entirety, including the
audited consolidated financial statements of Paroc Group Oy and the notes thereto included elsewhere in this
offering memorandum, as well as the ‘‘Description of the Notes’’ and the other considerations that are
important to their decision to invest in the Notes outlined under ‘‘Risk Factors.’’
Overview
We are a producer of premium stone wool insulation, and we believe that we are a market leader in
Finland, Sweden and the Baltic States by market share, which according to our estimates has remained
stable overall over the past three years. Our other important markets include Norway, Denmark, Poland,
Germany and the United Kingdom. Our stone wool products are used for both building insulation and
technical insulation, and are known for their high product quality and superior fire resistance, as evidenced
by customer and market surveys. We have significantly broadened our geographic sales reach since 2009
through the expansion and leveraging of our strategically located manufacturing network, allowing for an
increasing sales presence in western Europe and Russia, which we view to be potential growth markets. As
of March 31, 2014, we operated nine production plants in five different countries with 13 Base production
lines, 18 Technical Insulation production lines and one Panel System production line. As of the same date,
we also had sales and representative offices in 14 European countries and sales to over 40 countries. For
the year ended December 31, 2013, we generated total sales of A433.1 million (with Finland, Sweden and
the Baltic States accounting for 20.2%, 25.1% and 8.6% of our total sales, respectively) and Adjusted
EBITDA of A82.8 million.
Our business is organized in four divisions:
•
Building Insulation (‘‘BI’’). Our Building Insulation division markets and distributes a range of
insulation productions and solutions for residential and commercial buildings in both new-build and
renovation construction markets. Products in the BI division range from general building insulation to
more specialized acoustic or fire protection insulation products. General building insulation is the
largest business segment within BI. The majority of the BI division’s stone wool products are
manufactured by our Base Production division, with the exception of some more specialized acoustics
and roofing products, which are produced by our Technical Insulation division. The BI division does
not have its own production lines or manufacturing capacity. The BI division also sells panel wool
internally to our Panel System division and sells insulation for pre-fabricated panels to third parties
across Europe. For the year ended December 31, 2013, our Building Insulation division generated
sales of A256.7 million (with external sales of A242.0 million, or 55.9% of our total sales).
•
Technical Insulation (‘‘TI’’). Our Technical Insulation division produces high-quality stone wool
products used in specialized industrial and technical applications. Because the TI division’s products
are tailored for specific customer applications, including meeting regulatory requirements, the TI
division has its own manufacturing capacity. It uses stone wool from the Base Production division to
produce more customized TI products through its own production lines and specialized machinery.
There are 18 TI production lines at four plants. Products in the TI division are primarily used to
provide insulation from heat, fire, condensation and sound, and are supplied to four key end-markets:
heating, ventilation and air conditioning (‘‘HVAC’’), process industries, marine and offshore and
original equipment manufacturers (‘‘OEM’’). The TI division also sells specialized acoustics and
roofing products to the BI division. For the year ended December 31, 2013, our Technical Insulation
division generated sales of A150.9 million (with external sales of A133.5 million, or 30.8% of our total
sales).
•
Panel System (‘‘PPS’’). Our Panel System division manufactures sandwich façade panels—lightweight
steel-faced panels with an insulating core of stone wool. The main application of these panels are in
the industrial and commercial construction of warehouses, municipal buildings and offices. The PPS
division buys its stone wool from the BI division. For the year ended December 31, 2013, our Panel
System division generated sales of A56.2 million (with external sales of A56.2 million, or 13.0% of our
total sales).
•
Base Production (‘‘Base’’). Our Base Production division is responsible for producing all of the stone
wool for our BI, TI and PPS divisions, developing proprietary production technology and managing
1
capacity utilization across the Paroc Group. As of March 31, 2014, we operated eight production
plants in five different countries with 13 Base production lines producing stone wool. Production sites
are managed as a network with production costs allocated to the most cost-efficient plant, taking into
account distribution costs. For the year ended December 31, 2013, our Base division generated sales
of A207.8 million (including internal sales of A207.3 million and external sales of A0.5 million). All of
our internal sales are at a fixed cost agreed at the beginning of each year.
Our Strengths
We believe the following strengths have contributed to our success historically and are key factors in our
efforts to deliver profitable future growth:
Market-leading positions in our home markets, underpinned by strength of brand and reputation for high
product and service quality
We believe that we are a market leader based on market share in our home markets of Finland, Sweden
and the Baltic States in both stone wool building insulation and stone wool technical insulation. We seek to
differentiate ourselves from our competitors through our portfolio of high-quality stone wool products
offered under our distinctive, widely-recognized brand, together with our ability to provide innovative,
customer-specific solutions through our full-service sales and technical support offering. Over our 75 years
of operations, we have built strong, often long-term customer relationships, particularly with dealers
(which comprise insulation wholesalers as well as DIY stores) in our home markets, which are the primary
distribution channel for our building and technical insulation products. We believe that the superior quality
of our products and services has reinforced the strength of our brand and resulted in a high degree of
customer loyalty and retention.
Increasingly diversified business across geographies, end-markets and product mix
We sell our products through multiple sales channels in over 40 countries to various end-markets, which we
believe reduces our dependency on any single market and positions us to capture additional opportunities
to expand our business. Our largest markets are Finland and Sweden, which represented 20% and 25%,
respectively, of our revenues for the year ended December 31, 2013, and no other country represented
more than 10% of our revenues for the year ended December 31, 2013. We have strong relationships with
our customers and have multiple sales channels including dealers, construction contractors, industrial
companies and equipment manufacturers (for example, prefabricated house and panel manufacturers, and
specialist original equipment manufacturers).
We have also diversified our end-market footprint and product mix in recent years with the growth of our
TI division, which now represents a significant part of our business, having reached external revenues of
A133.5 million for the year ended December 31, 2013. Our TI division displays a greater resilience and
higher gross profit margins than our other divisions. This is primarily due to the fact that we sell our TI
products to a more diversified set of end markets across Europe, as well as the higher value-added nature
of our TI products, which typically require a greater degree of customization and additional manufacturing
refinements to meet more specialized applications. Although our TI division relies to some extent on the
residential and commercial construction sectors (primarily for the sale of HVAC products), we also supply
our various TI products to diverse end markets, such as the oil and gas, petrochemical, power generation,
pulp and paper, marine and offshore and OEM industries.
Given the growth of our TI business and the associated higher margins and broader set of end-market
drivers compared to our other construction-focused divisions, we believe that the Group today has a more
robust, resilient financial profile than in the past.
Established position through well-invested manufacturing base, branded products and strong customer
relationships
We have a broad manufacturing base, consisting of nine production facilities in five countries. Our network
of plants, located in Finland, Sweden, Lithuania, Poland and Russia, provides a stable platform to enable
us to meet our high quality standards consistently across our markets and to supply products to our
customers on a localized and cost-efficient basis, reducing transport costs, delivery times and import tariffs.
Our proprietary technology, including our proprietary recipe and manufacturing process for the
production of our stone wool products, also supports the manufacture of our high specification products.
This allows us to produce a high-quality, differentiated product with strong brand value and corresponding
2
pricing. We have made significant investments to develop, and to continuously improve our facilities, as
well as our product specifications and our manufacturing processes and technologies. We review our
operations on an ongoing basis to ensure that our stone wool products meet the strict safety,
environmental and efficacy standards in the markets in which we operate. We believe it would take
considerable time and substantial investment to replicate our manufacturing base and product portfolio
due to the proprietary technology, high levels of capital expenditure, regulatory requirements,
maintenance costs, complex supply chain and strict quality standards needed to operate in the stone wool
market.
We also benefit from the partial vertical integration of our supply chain and, for the year ended
December 31, 2013, were able to supply approximately 30% of our raw stone needs through our ownership
of rights or concessions to quarry stone from eight quarries in Finland. As a result, we have the ability to
supply a majority of our requirements of certain stones that are difficult to source from third parties
internally, leading to lower raw materials input costs (through a reduction in transportation logistics costs),
assuring the quality of our stone wool products, and reducing our dependence on third-party suppliers.
In addition, we have strong, and often longstanding, customer relationships, as well as the brand awareness
amongst dealers and contractors. Based on a recent customer differentiation survey conducted by
BrandWorxx in 2013, over 90% of customers surveyed view Paroc as their preferred partner relative to
competitors. The survey also highlighted Paroc as efficient, reliable and innovative, as well as the most
socially responsible provider. We believe that this brand recognition translates into strong customer loyalty.
Attractive financial profile with strong cash generation and flexible cost base
We have a strong financial track record with net sales of A404.8 million, A430.4 million and A433.1 million
for the years ended December 31, 2011, 2012 and 2013, respectively, reflecting a compound annual growth
rate of 3.4%. We have also demonstrated an ability to improve Adjusted EBITDA during periods of
macroeconomic volatility, with Adjusted EBITDA of A61.2 million, A75.1 million and A82.8 million for the
years ended December 31, 2011, 2012 and 2013, respectively, reflecting a compound annual growth rate of
15.8%.
While we have made significant strategic growth investment capital expenditures in each of the last three
years (particularly in Russia), our maintenance capital expenditure requirements are relatively low and
manageable, with expenditures of A15.8 million, A10.3 million and A10.6 million for the years ended
December 31, 2011, 2012 and 2013, respectively. This attractive capex profile, in combination with our
continued focus on working capital optimization, has translated into a consistently positive cash conversion
over the past three fiscal years.
We also have a flexible cost base with an ability to effectively increase and decrease the number of
employees and number of shifts at our manufacturing plants depending on customer demand levels. For
the year ended December 31, 2013, approximately 83% of our cost of sales was variable, comprising,
among other things, raw materials cost, energy cost, direct production wages and distribution cost, which
generally move in-line with changes in volume. Furthermore, our well-invested manufacturing platform
and ability to increase capacity utilization provides operating leverage to drive potential profitability when
volumes increase.
Growth profile is well supported by insulation trends and favorable regulatory dynamics
We believe that our markets stand to benefit from a favorable regulatory environment in the medium-term,
driven by a Europe-wide governmental commitment to improve energy efficiency standards and reduce
energy consumption and costs, which should lead to an increase in the intensity of insulation use. In recent
years there has been an increased political focus throughout the European Union on climate change,
which, in combination with rising energy costs, has resulted in the implementation of tighter regulations
concerning energy efficiency both at the EU and the individual country level. Current EU directives, for
example, impose energy efficiency requirements on new and renovated buildings in connection with a
targeted 20% reduction in energy consumption by 2020. Given that insulation can dramatically reduce heat
loss and energy consumption in buildings and also has the added benefit of being one of the most
cost-effective of all the available technologies to reduce carbon dioxide emissions, the implementation of
more stringent energy efficiency requirements has affected demand for our products in our various
geographic markets.
3
At the national level, individual countries put in place their own specific requirements from time to time
that can drive market demand for insulation products. While the Nordic region has traditionally had
relatively more comprehensive energy efficiency measures in place than our other focus markets,
continued tightening of certain specific regulations (for example, the recent implementation in Finland and
Sweden of new regulations requiring greater thicknesses for technical insulation) has recently fuelled
demand for the higher margin, more specialized products offered by our Technical Insulation division. In
addition, increased fire safety regulations in many of our markets (particularly in central Europe) in recent
years has increased demand for our stone wool products, which are known for their superior fire resistance
qualities compared with other insulation materials, particularly foam insulation.
Highly experienced and committed management team
Our experienced and committed management team led by Kari Lehtinen, our Chief Executive Officer, and
Anders Dahlblom, our Chief Financial Officer, is a key factor in the continuing success of our business.
Our management team has a strong background in manufacturing businesses, with an average of
approximately 18 years of industry experience. Our management team has implemented a comprehensive
business plan that we believe will allow us to protect our market share in our home markets and capture
growth in our other focus markets. In addition, our management team includes a strong senior
management team, with the division heads representing a combined total of 89 years’ industry experience,
with 61 years at Paroc Group.
Our Strategy
We believe we have a strong business platform across our established divisions. We will continue to
leverage our strengths and drive improvements based on the following key strategies:
Maintain existing presence and grow market share in home markets, with continued innovation and
expansion of our product and solution offering
In our home markets of Finland, Sweden and the Baltic States, our key priority is to maintain and protect
what we believe are our existing market leadership positions through a continuing commitment to
innovation, in particular through the creation and development of what we believe to be superior,
premium insulation products.
We are highly motivated to improve and develop our product and service offering, as we pursue innovation
through research and development projects. In our BI division, we intend to strengthen our product
offering in the renovation and low lambda segments (where ‘‘lambda’’ is a measure of the insulating
capacity of a product for a given thickness, with lower values indicating a better insulating capacity). The
renovation sector is attractive as it tends to be less vulnerable to market cyclicalities than the new build
construction sector, and lower lambda products are appealing to customers because they provide the same
level of insulation with a thinner insulation layer or provide a higher level of insulation with the same
insulation thickness. In our TI division, we intend to focus on the development of new HVAC solutions, as
well as oil & gas and marine product certifications, since product certifications are vital to our key TI
end-market customers. Externally, we are focused on enhancing our existing products and developing new
products to meet our customers’ known and anticipated needs. Internally, we are focused on innovation
across the organization, including integrating new technologies and adopting new methods of working with
our customers. We also intend to strengthen our dealer network to set ourselves apart as the supplier of
choice in our other focus markets. In our PPS division, we intend to focus on value-add services to our
products, utilizing our skilled staff to develop tailored solutions for our customers’ projects, ensure smooth
implementation of those projects and provide technical advice on the design and selection of structural
solutions.
Grow our market share in other focus markets with existing proven products
In our BI division, our strategic priority is to secure a recognized market position, which we aim to achieve
by growing faster than the underlying construction market with modest share gains, driven by strong brand
positioning and an active sales strategy of dealer and contractor targeting.
In our TI division, our strategy is to strengthen our market positioning and grow market share in certain
core end-markets, by leveraging our state-of-the-art technical insulation manufacturing capability at our
Trzemeszno facility. This growth is expected to be led by our HVAC offering, and strengthening our dealer
network will be highly important to achieving these strategic objectives. Outside of Europe, where we sell
4
technical insulation on a project basis, we intend to take a highly selective and opportunistic approach to
project sales, with a focus on larger-scale industrial projects with higher value-added products.
In our PPS division, our strategy is to emphasize our panels’ design and aesthetics, and the fact that our
product offering includes the materials needed to complete a panel wall structure.
Focus on the growth potential in Russia and capitalize on our in-country manufacturing presence
Our recent investment in our new Tver manufacturing facility in Russia, which began meaningful
commercial production in January 2014, has provided us with an in-country manufacturing presence and
will enable us to serve the growing Russian market. Although we had previously sold our products in
Russia through sales offices, developing an in-country manufacturing presence has reduced the
transportation costs required to serve the market and has allowed us to avoid the significant tariffs on our
imported products, which had previously limited the profitability of our Russian sales. We intend to use the
quality of our product offering and our brand strength to modestly grow market share.
We anticipate that demand in the Russian market will support our new Tver manufacturing facility
operating at high capacity utilization from the second year of its operation. Although no decision has yet
been made, detailed plans are being considered for the addition of a second production line in Tver for the
manufacture of base stone wool, as well as the addition of new machinery that would provide us with offline TI production capacity, which would double base production capacity in Russia and allow us to take
advantage of growing Russian demand for technical insulation solutions.
Drive further efficiency and cost savings through operational excellence
We plan to improve efficiency and cost savings through a continued focus on research and development.
We have implemented our ‘‘Operational Excellence’’ plan, which is a clear and detailed cost savings
program through which we have delivered, and believe we will continue to deliver, significant savings. We
anticipate that these savings will primarily come from our Base Production division, with one of the key
sources of cost reduction expected to be energy efficiency measures applied throughout the production
process. Through these initiatives, we believe we can manage our cost base more effectively and generate
margin enhancement through operational leverage if we increase production over the medium term.
The Issuer
The Issuer is a private limited liability company (‘‘osakeyhtiö’’) incorporated under the laws of Finland and
registered in the commercial register kept by the National Board of Patents and Registration of Finland
under business identity code 2303371-0. Its registered office is Energiakuja 3, 00180 Helsinki, and its
telephone number is +358 46 876 8000.
Recent Developments
Based on preliminary results, our revenue for the three-month period ended March 31, 2014 was
A97.6 million, as compared to A95.6 million for the three-month period ended March 31, 2013. This slight
increase was driven primarily by growth in BI and TI net sales volumes, as well as improvements in product
mix as a result of our continued focus on sales of higher margin, value-added HVAC products, partially
offset by a decrease in net sales in our PPS division and foreign exchange translation losses. Our EBITDA
for the three-month period ended March 31, 2014 was A11.2 million, as compared to A13.4 million for the
three-month period ended March 31, 2013. This decrease was primarily attributable to a significant
increase in one-off costs incurred in connection with design and planning activities undertaken in
connection with a feasibility study around a potential second phase of Russian expansion, start-up costs
incurred at our new manufacturing facility in Tver and foreign exchange translation losses, which were
partially offset by improvements in product mix, raw materials cost savings and savings on distribution
costs realized as a result of our new local production operating model in Russia. Our cash flow from
operations was also impacted by an increase in the change in operating net working capital, which
increased from negative A3.9 million in the three-month period ended March 31, 2013 to negative
A12.3 million in the three-month period ended March 31, 2014, primarily as a result of (i) higher trade
receivables as of December 31, 2012 as compared to December 31, 2013, which were paid in the first
quarter of 2013, and (ii) the introduction of our project to improve accounts payable in the first quarter of
2013, which had a positive impact on change in working capital, the effects of which were not as
pronounced in the first quarter of 2014 with the project fully underway through the fourth quarter of 2013.
5
The above information is based solely on preliminary results and estimates and is not intended to be a
comprehensive statement of our financial or operational results for the three-month period ended
March 31, 2014. Our preliminary results in relation to the three-month period ended March 31, 2014 are
based on a number of assumptions that are subject to inherent uncertainties and subject to change. While
we believe these estimates to be reasonable, the above information may be subject to modification during
the preparation of our consolidated financial statements and audit thereof by our independent auditors.
Accordingly, our actual results for the three-month period ended March 31, 2014 may vary from our
preliminary results and estimates above, and such variations could be material. As such, you should not
place undue reliance on them. See ‘‘Forward-Looking Statements’’ and ‘‘Risk Factors’’ for a more complete
discussion of certain of the factors that could affect our future performance and results of operation.
The above preliminary financial information has been prepared by, and is the responsibility of, our
management. PricewaterhouseCoopers Oy has not audited, reviewed, compiled or performed any
procedures with respect to such preliminary financial information. Accordingly, PricewaterhouseCoopers
Oy does not express an opinion or any other form of assurance with respect thereto.
6
Corporate Structure and Financing Agreements
The following diagram depicts in simplified form our corporate and financing structure after giving pro
forma effect to the Transactions. See also ‘‘Description of the Notes’’ and ‘‘Description of Other
Indebtedness.’’
Shareholders(1)
Safari Luxco 2
S.A.
€41.7 million
Existing Junior
Notes(7)(8)
Safari Finco 1 Oy
€200.0 million
Fixed Rate Notes
offered hereby(4)
Paroc Group Oy
(the “Issuer”)(2)
€60.0 million
New Revolving Credit
Facility(3)
€230.0 million
Floating Rate Notes
offered hereby(4)
Paroc Sverige
AB(3)(4)
Paroc Oy Ab(3)(4)
UAB Paroc(3)(4)
Paroc AB(3)(4)
Non-Guarantor
subsidiaries
99.999%
0.0001%
Non-Guarantor
subsidiaries and
equity interests
Paroc Export
Oy Ab
Paroc Panel
System Oy
Ab(3)(4)
Paroc Polska
Sp. z o.o.(3)(4)
Paroc Panel
System AB
ZAO
Paroc(3)(4)(6)
Issuer
Guarantors
Restricted Group(5)
12MAY201407054508
(1)
For a description of Safari Luxco 2 S.A.’s shareholders, see ‘‘Principal Shareholders.’’
(2)
The Issuer is a private limited liability company (‘‘osakeyhtiö’’) incorporated under the laws of Finland.
(3)
On or before the Issue Date, Paroc Oy Ab, as borrower, will enter into the New Revolving Credit Facility. The New Revolving
Credit Facility will be guaranteed by the Issuer and the Guarantors, and secured by first-ranking security interests over the
Collateral on a ‘‘super-priority’’ basis. See ‘‘Description of Other Indebtedness—Intercreditor Agreement’’ and ‘‘Description of
Other Indebtedness—New Revolving Credit Facility.’’
(4)
On the Issue Date, the Notes will be guaranteed by the Guarantors on a senior secured basis. The Notes and the Note
Guarantees will be secured by first-ranking security interests over the Collateral, that will be shared with the lenders under the
New Revolving Credit Facility. The New Revolving Credit Facility and certain hedging obligations will be secured on a
‘‘super-priority’’ basis, and in the event of enforcement of the security granted over the Collateral, the lenders under the New
Revolving Credit Facility and counterparties to certain hedging obligations will receive the proceeds from such enforcement in
priority to the holders of the Notes. See ‘‘Description of the Notes—Security’’ and ‘‘Description of Other Indebtedness—
Intercreditor Agreement.’’ For the year ended December 31, 2013, the Issuer and the Guarantors generated 95.3% of the Group’s
EBITDA and, as of December 31, 2013, directly held 94.6% of the Group’s consolidated total assets. As of December 31, 2013,
after giving pro forma effect to the Transactions, our non-Guarantor subsidiaries had no third party indebtedness. The Note
Guarantees will be subject to contractual and legal limitations, and both the Note Guarantees and the security interests in the
Collateral may be released under certain circumstances. See ‘‘Certain Insolvency Law and Local Law Limitations’’ and ‘‘Risk
Factors—Risks Related to the Notes and Our Structure—There are circumstances other than repayment or discharge of the Notes
7
under which the Collateral securing the Notes and the Note Guarantees will be released automatically and under which the Note
Guarantees will be released automatically, without your consent or the consent of the Trustee.’’
(5)
The ‘‘Restricted Group’’ indicates those companies subject to the covenants in the Indenture. See ‘‘Description of the Notes.’’
(6)
Once we have shareholder consent, we plan to change the corporate form of ZAO Paroc from a closed joint-stock company to a
limited liability company. This process began in March 2014 and is expected to be completed after the Issue Date.
(7)
A portion of the proceeds of the Offering, together with cash on hand, will be used to (i) partially redeem, and pay accrued and
unpaid interest on, the Existing Junior Notes and (ii) fund the purchase by Safari Luxco 2 S.A. of Existing Junior Notes from
the Lender-Owner Syndicate. See ‘‘Use of Proceeds’’ and ‘‘Principal Shareholders.’’ The Existing Junior Notes Trust Deed will be
amended and restated on or before the Issue Date to amend the terms of the Existing Junior Notes so that they constitute
unsecured subordinated notes. See ‘‘Description of Other Indebtedness—Shareholder Loans of Safari Finco 1 Oy.’’
(8)
Includes Existing Junior Notes (in the form of newly constituted unsecured subordinated notes) expected to be held by Safari
Luxco 2 S.A. upon completion of the Transactions in an aggregate principal amount of A4.2 million.
8
The Offering
The summary below describes the principal terms of the Notes. It may not contain all the information that is
important to you. Certain of the terms and conditions described below are subject to important limitations and
exceptions. The ‘‘Description of the Notes’’ section of this offering memorandum contains more detailed
descriptions of the terms and conditions of the Notes, including the definitions of certain terms used in this
summary.
Issuer . . . . . . . . . . . . . . . . . . . . . . .
Paroc Group Oy, a private limited liability company
(‘‘osakeyhtiö’’) incorporated under the laws of Finland.
Notes Offered . . . . . . . . . . . . . . . . . .
A200 million aggregate principal amount of the Issuer’s 6.250%
Senior Secured Notes due 2020 (the ‘‘Fixed Rate Notes’’).
A230 million aggregate principal amount of the Issuer’s Floating
Rate Senior Secured Notes due 2020 (the ‘‘Floating Rate Notes,’’
and together with the Fixed Rate Notes, the ‘‘Notes’’).
Issue Date . . . . . . . . . . . . . . . . . . . .
May 14, 2014 (the ‘‘Issue Date’’).
Issue Price
Fixed Rate Notes . . . . . . . . . . . . . . .
100.000% (plus accrued and unpaid interest, if any, from the
Issue Date).
Floating Rate Notes . . . . . . . . . . . . .
100.000% (plus accrued and unpaid interest, if any, from the
Issue Date).
Maturity Date
Fixed Rate Notes . . . . . . . . . . . . . . .
May 15, 2020.
Floating Rate Notes . . . . . . . . . . . . .
May 15, 2020.
Interest Rate
Fixed Rate Notes . . . . . . . . . . . . . . .
6.250%
Floating Rate Notes . . . . . . . . . . . . .
The sum of (i) three-month EURIBOR, plus (ii) 5.250% per
annum, reset quarterly.
Interest Payments
Fixed Rate Notes . . . . . . . . . . . . . . .
Semi-annually in arrears on May 15 and November 15 of each
year, commencing on November 15, 2014.
Floating Rate Notes . . . . . . . . . . . . .
Quarterly in arrears on February 15 , May 15, August 15 and
November 15 of each year, commencing on August 15 , 2014.
Form and Denomination . . . . . . . . . .
The Issuer will issue the Notes on the Issue Date in global
registered form in minimum denominations of A100,000 and
integral multiples of A1,000 in excess thereof. Notes in
denominations of less than A100,000 will not be available.
Ranking of the Notes . . . . . . . . . . . .
The Notes will:
•
be general senior obligations of the Issuer, secured as set
forth under ‘‘Description of the Notes—Security’’;
•
rank pari passu in right of payment with any existing and
future indebtedness of the Issuer that is not subordinated in
right of payment to the Notes, including the obligations of
the Issuer under the New Revolving Credit Facility and
certain hedging obligations;
•
be guaranteed on a senior basis by the Guarantors;
•
rank senior in right of payment to any existing and future
indebtedness of the Issuer that is expressly subordinated in
right of payment to the Notes;
9
Note Guarantees . . . . . . . . . . . . . . . .
•
be effectively subordinated to any existing or future
indebtedness or obligation of the Issuer and its subsidiaries
that is secured by property or assets that do not secure the
Notes, to the extent of the value of the property or assets
securing such indebtedness or obligations; and
•
be structurally subordinated to any existing or future
indebtedness of the subsidiaries of the Issuer that are not
Guarantors, including obligations to trade creditors.
The
•
•
•
•
•
•
•
Notes will be guaranteed on a senior secured basis by:
Paroc Sverige AB;
Paroc AB;
Paroc Oy Ab;
Paroc Panel System Oy Ab;
Paroc Polska Sp. z o.o.;
UAB Paroc; and
ZAO Paroc.
For the year ended December 31, 2013, the Issuer and the
Guarantors generated 95.3% of the Group’s EBITDA and, as of
December 31, 2013, directly held 94.6% of the Group’s
consolidated total assets. As of December 31, 2013, after giving
pro forma effect to the Transactions, our non-Guarantor
subsidiaries had no third party indebtedness.
The obligations of the Guarantors will be contractually limited
under the applicable Note Guarantees to reflect limitations
under applicable law, if any, including, but not limited to, with
respect to maintenance of share capital, corporate benefit,
fraudulent conveyance, insolvency and other legal restrictions
applicable to the Guarantors and their directors. For more
information on potential limitations to the Note Guarantees, see
‘‘Risk factors—Risks Related to the Notes and Our Structure’’ and
‘‘Certain Insolvency Law and Local Law Limitations.’’
The Note Guarantees will be subject to release under certain
circumstances. See ‘‘Description of the Notes—Release of Note
Guarantees’’ and ‘‘Risk Factors—Risks Related to the Notes and
Our Structure—There are circumstances other than the repayment
or discharge of the Notes under which the Collateral securing the
Notes and the Note Guarantees will be released automatically and
under which the Note Guarantees will be released automatically,
without your consent or the consent of the Trustee.’’
Ranking of the Note Guarantees . . . .
The Note Guarantee of each Guarantor will:
•
be a general senior obligation of that Guarantor, secured as
set forth under ‘‘Description of the Notes—Security’’;
•
rank pari passu in right of payment with any existing and
future indebtedness of that Guarantor that is not
subordinated in right of payment to such Note Guarantee,
including the obligations of that Guarantor under the New
Revolving Credit Facility and certain hedging obligations;
•
be structurally subordinated to all obligations of each
Guarantor’s non-Guarantor subsidiaries;
10
Collateral . . . . . . . . . . . . . . . . . . . . .
•
be effectively subordinated to any existing or future
indebtedness or obligation of such Guarantor that is
secured by property or assets that do not secure the
Guarantor’s Note Guarantee, to the extent of the value of
the property or assets securing such indebtedness or
obligations; and
•
rank senior in right of payment to any existing and future
indebtedness of that Guarantor that is expressly
subordinated in right of payment to its Note Guarantee.
On or around the Issue Date, the Notes will be secured, subject
to applicable perfection requirements, by a first-ranking security
interest in the following Collateral:
•
the shares of the Issuer (prior to an initial public offering of
any such shares), Paroc Oy Ab, Paroc Panel System Oy Ab,
Paroc Sverige AB, Paroc AB, UAB Paroc and Paroc Polska
Sp. z o.o.;
•
all bank accounts of the Issuer, Paroc Oy Ab and Paroc
Panel System Oy Ab, substantially all bank accounts of
UAB Paroc and Paroc Polska Sp. z o.o. and certain bank
accounts of Paroc Sverige AB and Paroc AB;
•
mortgages over all real property of Paroc Polska Sp. z o.o.
and substantially all real property of Paroc Oy Ab, Paroc
Panel System Oy Ab, Paroc AB and UAB Paroc;
•
mortgages over substantially all business mortgage
certificates of the Issuer, Paroc Oy Ab, Paroc Panel System
Oy Ab and Paroc AB;
•
certain intellectual property rights of the Issuer;
•
all receivables of Paroc Sverige AB, Paroc AB and UAB
Paroc;
•
certain intragroup receivables of the Issuer;
•
all machinery and equipment of UAB Paroc;
•
all inventory (including, but not limited to, raw materials,
manufactured goods, technical materials, spare parts and
other) of UAB Paroc in circulation;
•
all movable assets and rights of Paroc Polska Sp. z o.o.; and
•
all third party contracts, agreements or other business
arrangements of Paroc AB.
The Collateral will also secure on a first-ranking basis the
liabilities under our New Revolving Credit Facility and certain
hedging obligations, and may also secure certain future
indebtedness permitted to be incurred under the Indenture and
the New Revolving Credit Facility Agreement. See
‘‘—Intercreditor Agreement’’ below.
The security interests may be limited by applicable law or subject
to certain defenses that may limit their validity and
enforceability. For more information on the security interests
granted, see ‘‘Description of the Notes—Security’’ and for more
information on potential limitations to the security interests, see
‘‘Risk factors—Risks Related to the Notes and Our Structure’’ and
‘‘Certain insolvency law and local law limitations.’’
11
Applicable law may require that a security interest in certain
assets can only be properly perfected and its priority retained
through certain actions undertaken by the secured party or the
grantor of the Collateral, which in the case of some of the
Collateral, may not be completed until after the Issue Date or
may be dependent on certain further events occurring, as
permitted by the Security Documents, the Indenture and the
New Revolving Credit Facility Agreement. See ‘‘Risk Factors—
Risk Related to the Notes and Our Structure—Rights in the
Collateral may be adversely affected by the failure to perfect security
interests in the Collateral.’’
The Collateral will be subject to release under certain
circumstances. See ‘‘Description of the Notes—Security—Release
of Liens’’ and ‘‘Risk Factors—Risks Related to the Notes and Our
Structure—There are circumstances other than the repayment or
discharge of the Notes under which the Collateral securing the
Notes and the Note Guarantees will be released automatically and
under which the Note Guarantees will be released automatically,
without your consent or the consent of the Trustee.’’
Intercreditor Agreement . . . . . . . . . .
On or before the Issue Date, the Trustee, the Security Agent,
and certain other parties will enter into an Intercreditor
Agreement which will govern the relationships among the
lenders under the New Revolving Credit Facility, the holders of
the Notes and the holders of certain other indebtedness
(including hedging counterparties), the relative priorities of the
secured creditors of the Issuer and its subsidiaries and certain
other matters relating to the administration of security interests.
Pursuant to the Intercreditor Agreement, the security interests
securing the Notes and the Note Guarantees will be first-ranking
security interests that will rank pari passu with the security
interests that secure obligations under the New Revolving Credit
Facility and certain hedging obligations. In addition, the
Indenture and the Intercreditor Agreement will permit the
incurrence of additional senior indebtedness or obligations that
are permitted to be secured with security interests over the
Collateral on a pari passu basis.
However, under the terms of the Intercreditor Agreement, in
the event of enforcement of the security granted over the
Collateral, the lenders under the New Revolving Credit Facility
and counterparties to certain hedging obligations will receive the
proceeds from such enforcement in priority to the holders of the
Notes. See ‘‘Description of Other Indebtedness—Intercreditor
Agreement.’’
Use of Proceeds . . . . . . . . . . . . . . . .
The proceeds of the Offering, together with cash on hand, will
be applied to (i) redeem in full the Existing Senior Notes,
(ii) make certain payments to holders of the Existing Junior
Notes and (iii) pay fees and expenses incurred in connection
with the Offering. See ‘‘Use of Proceeds.’’
12
Additional Amounts . . . . . . . . . . . . .
All payments made by or on behalf of the Issuer or the
Guarantors, as applicable, under or with respect to any Notes or
Note Guarantee, as applicable, will be made free and clear of
and without withholding or deduction for, or on account of, any
present or future tax, duty, levy, assessment or other
governmental charge, including any related interest, penalties or
additions to tax, unless the withholding or deduction of such
taxes is then required by law. If any deduction or withholding
for, or on account of, such taxes is imposed or levied by or on
behalf of any relevant taxing jurisdiction, the Issuer or
Guarantor, as applicable, subject to certain exceptions, will pay
such additional amounts as may be necessary in order that the
net amounts received in respect of such payments after such
withholding, deduction or imposition (including any such
withholding, deduction or imposition from such additional
amounts) will equal the respective amounts that would have
been received in respect of such payments in the absence of such
withholding, deduction or imposition. See ‘‘Description of the
Notes—Withholding Taxes.’’
Optional Redemption
Fixed Rate Notes . . . . . . . . . . . . . . .
On or after May 15, 2016, the Issuer may redeem some or all of
the Fixed Rate Notes at the redemption prices set forth under
‘‘Description of the Notes—Optional Redemption.’’
Prior to May 15, 2016, the Issuer may redeem some or all of the
Fixed Rate Notes at a price equal to 100% of the principal
amount of the Fixed Rate Notes redeemed plus accrued and
unpaid interest and additional amounts, if any, plus the
applicable ‘‘make-whole’’ premium, as described under
‘‘Description of the Notes—Optional Redemption.’’
Subject to certain exceptions, prior to May 15, 2016, the Issuer
may on any one or more occasions use the proceeds of one or
more specified equity offerings to redeem up to 40% of the
aggregate principal amount of the Fixed Rate Notes issued
under the Indenture on the Issue Date at a redemption price
equal to 106.250% of the principal amount of the Fixed Rate
Notes being redeemed, in each case plus accrued and unpaid
interest and additional amounts, if any, to, but not including, the
redemption date. See ‘‘Description of the Notes—Optional
Redemption.’’
At any time prior to May 15, 2016, the Issuer may on one or
more occasions redeem during each 12-month period
commencing with the Issue Date up to 10% of the aggregate
principal amount of the Fixed Rate Notes outstanding at a
redemption price equal to 103% of the principal amount of
Fixed Rate Notes redeemed, plus accrued and unpaid interest
and additional amounts, if any.
Floating Rate Notes . . . . . . . . . . . . .
On or after May 15, 2015, the Issuer may redeem some or all of
the Floating Rate Notes at the redemption prices set forth under
‘‘Description of the Notes—Optional Redemption.’’
Prior to May 15, 2015, the Issuer may redeem some or all of the
Floating Rate Notes at a price equal to 100% of the principal
amount of the Floating Rate Notes redeemed plus accrued and
unpaid interest and additional amounts, if any, plus the
applicable ‘‘make-whole’’ premium, as described under
‘‘Description of the Notes—Optional Redemption.’’
13
Redemption upon Changes in
Withholding Taxes . . . . . . . . . . . . .
In the event of certain developments affecting taxation of a
series of Notes, the Issuer may redeem that series of Notes, in
whole but not in part, at a redemption price equal to 100% of
the aggregate principal amount thereof, together with accrued
and unpaid interest, if any, to the date fixed by the Issuer for the
redemption and all additional amounts, if any, then due and
which will become due as a result of the redemption or
otherwise. See ‘‘Description of the Notes—Optional
Redemption—Redemption for Taxation Reasons.’’
Change of Control . . . . . . . . . . . . . .
Upon the occurrence of certain events constituting a change of
control, the Issuer will be required to offer to repurchase all of
the outstanding Notes at a purchase price in cash equal to 101%
of the principal amount thereof on the date of repurchase plus
accrued and unpaid interest to, but not including, the date of
repurchase. However, a change of control will not be deemed to
have occurred if specified consolidated leverage ratios are not
exceeded in connection with such event. See ‘‘Description of the
Notes—Change of Control.’’
Certain Covenants . . . . . . . . . . . . . .
The Indenture will limit, among other things, the ability of the
Issuer and its Restricted Subsidiaries (as defined in the
Indenture) to:
•
incur or guarantee additional indebtedness and issue
certain preferred stock;
•
create or incur certain liens;
•
make certain restricted payments, including dividends or
other distributions with respect to the shares in the Issuer
or its Restricted Subsidiaries;
•
prepay or redeem subordinated debt or equity;
•
make certain investments;
•
create encumbrances or restrictions on the payment of
dividends or other distributions, loans or advances to and
on the transfer of assets to the Issuer or its Restricted
Subsidiaries;
•
sell, lease or transfer certain assets including stock of
Restricted Subsidiaries;
•
engage in certain transactions with affiliates;
•
consolidate or merge with other entities; and
•
impair the security interests for the benefit of the holders of
the Notes.
Each of these covenants will be subject to significant exceptions
and qualifications. See ‘‘Description of the Notes—Certain
Covenants.’’
Transfer Restrictions . . . . . . . . . . . .
Neither the Notes nor the Note Guarantees have been
registered under the U.S. Securities Act or the securities laws of
any other jurisdiction and will not be so registered. The Notes
and the Note Guarantees are subject to restrictions on
transferability and resale. See ‘‘Transfer Restrictions.’’ Holders of
the Notes will not have the benefit of any exchange or
registration rights, and we have not agreed to or, otherwise
undertaken to, register the Notes.
14
No Prior Market . . . . . . . . . . . . . . .
The Notes will be new securities for which there is no existing
market. Although the Initial Purchasers of the Notes have
advised us that they intend to make a market in the Notes, they
are not obligated to do so and they may discontinue marketmaking at any time without notice. Accordingly, there is no
assurance that an active trading market will develop for the
Notes.
Listing . . . . . . . . . . . . . . . . . . . . . . .
Application will be made for the Notes to be listed on the
Official List of the Irish Stock Exchange and admitted to trading
on the Global Exchange Market of the Irish Stock Exchange.
There can be no assurance that any such application will be
successful or that any such listing will be granted or maintained.
The Global Exchange Market is not a regulated market for the
purposes of Directive 2004/39/EC.
Governing Law . . . . . . . . . . . . . . . . .
The Indenture and the Notes will be governed by the laws of the
State of New York. The Intercreditor Agreement and the New
Revolving Credit Facility Agreement will be governed by the
laws of England and Wales. The Security Documents will be
governed by the laws of Finland, Sweden, Poland and Lithuania.
Trustee . . . . . . . . . . . . . . . . . . . . . .
The Bank of New York Mellon, London Branch.
Security Agent . . . . . . . . . . . . . . . . .
ING Bank N.V., London Branch.
Paying Agent, Calculation Agent and
Transfer Agent . . . . . . . . . . . . . . .
The Bank of New York Mellon, London Branch.
Registrar . . . . . . . . . . . . . . . . . . . . .
The Bank of New York Mellon (Luxembourg) S.A.
Irish Listing Agent . . . . . . . . . . . . . .
The Bank of New York Mellon SA/NV, Dublin Branch.
Risk Factors . . . . . . . . . . . . . . . . . . .
Investing in the Notes involves substantial risks. You should
consider carefully all the information in this offering
memorandum and, in particular, you should evaluate the specific
risk factors set forth in the ‘‘Risk Factors’’ section in this offering
memorandum before making a decision whether to invest in the
Notes.
15
Summary Financial and Operating Information
The following tables set forth summary historical consolidated financial, operating and other information
of the Group as of and for the years ended December 31, 2011, 2012 and 2013.
The summary consolidated financial position information presented below as of December 31, 2012 and
2013 and the consolidated statement of income and cash flow information for the years ended
December 31, 2011, 2012 and 2013 have been derived from our audited consolidated financial statements
prepared in accordance with IFRS and included elsewhere in this offering memorandum.
This offering memorandum presents certain unaudited consolidated pro forma financial information that
has been adjusted to give effect to the Transactions. The unaudited pro forma financial information
presented herein is based on available information and certain assumptions and estimates that we believe
are reasonable and may differ materially from actual amounts. The unaudited consolidated pro forma
financial information presented herein has been included for informational purposes only, and does not
purport to present what our results would actually have been had the Transactions occurred on
December 31, 2013 for purposes of pro forma statement of financial position information or January 1,
2013 for purposes of pro forma statement of income information, nor is it necessarily indicative of our
results that may be achieved in the future.
Historically, we have not been required under IFRS to present segment information in our audited
consolidated financial statements. However, in connection with the Offering, we have adopted segment
reporting going forward and therefore we have presented certain segment information herein for each of
the years ended December 31, 2011, 2012 and 2013.
For these purposes, our three segments under IFRS are:
•
Insulation, which corresponds to our BI division and TI division;
•
Panel System, which corresponds to our PPS division; and
•
Base Production, which corresponds to our Base Production division.
We also present in this offering memorandum certain eliminations and allocations, which provide for
eliminations in respect of intercompany trading and other transactions between our operating divisions, as
well as allocation of central overhead and management charges among our operating divisions, for
purposes of Group consolidation.
For further information regarding our presentation of segment information, see ‘‘Presentation of Financial
and Other Information,’’ ‘‘Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Segment Reporting’’ and the audited consolidated financial statements included elsewhere in
this offering memorandum.
The summary historical consolidated financial, operating and other information presented below includes
certain non-IFRS measures that we use to evaluate our operating and financial performance. These
non-IFRS measures are not recognized as measurements of our performance or liquidity under IFRS and
should not be considered as alternatives to operating profit or any other performance measures derived in
accordance with IFRS or any other generally accepted accounting principles or as alternatives to cash flows
from operating, investing or financing activities. See ‘‘Presentation of Financial and Other Information—
Non-IFRS Measures.’’
The following summary historical consolidated financial, operating and other information should be read
in conjunction with, and is qualified in its entirety by reference to, the audited consolidated financial
statements of the Group and the accompanying notes thereto included elsewhere in this offering
memorandum, and should also be read together with the information set forth under the headings
‘‘Presentation of Financial and Other Information,’’ ‘‘Use of Proceeds,’’ ‘‘Capitalization,’’ ‘‘Selected Financial
Information,’’ ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ and
‘‘Business.’’
16
Summary Consolidated Statement of Income Information
Year ended December 31,
2011
2012
2013
(E in millions)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . .
Selling and marketing expenses . . . .
Research and development expenses
Administrative expenses . . . . . . . . .
Other operating income . . . . . . . . .
Other operating expenses . . . . . . . .
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.
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.
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.
.
.
.
.
.
.
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.
.
.
95.7
(33.4)
(6.0)
(20.8)
0.2
(6.9)
111.8
(34.9)
(6.9)
(25.0)
0.3
(5.0)
121.6
(34.9)
(6.3)
(26.8)
0.5
(7.0)
.........
28.8
40.3
47.2
.........
.........
.........
7.0
(14.5)
(17.0)
8.9
(12.3)
(11.9)
2.3
(9.3)
(10.5)
Profit before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.2
0.5
24.9
(7.0)
29.7
(4.1)
Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.8
17.9
25.6
Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance income and costs
Dividend received, interest income and other financial income .
Interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other financial expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17
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.
.
404.8
430.4
433.1
(309.1) (318.6) (311.5)
Summary Consolidated Statement of Financial Position Information
As of
December 31,
2012
2013
(E in millions)
Non-current assets . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . .
Property, plant and equipment . .
Available-for-sale financial assets .
Deferred tax assets . . . . . . . . . . .
Trade and other receivables . . . .
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.
477.2
268.3
203.6
0.1
3.3
2.0
498.0
259.2
233.2
0.1
2.0
3.4
Current assets . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . .
Trade and other receivables . . .
Income tax receivables . . . . . . .
Derivative financial instruments .
Cash and cash equivalents . . . . .
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168.2
34.9
57.2
3.1
0.9
72.2
159.3
36.5
51.4
1.3
0.5
69.6
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
645.4
657.3
Non-current liabilities . . . . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative financial instruments . . . . . . . . . . . . .
Deferred income tax liabilities . . . . . . . . . . . . . .
Pension obligations and other employee benefits
Provisions for other liabilities and charges . . . . .
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.
413.4
351.8
4.0
37.0
13.7
7.0
404.7
351.7
0.5
32.9
12.9
6.8
Current liabilities . . . . . . . . . . . . . . . . . . .
Trade and other payables . . . . . . . . . . . .
Income tax liabilities . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . .
Derivative financial instruments . . . . . . . .
Provisions for other liabilities and charges
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.
88.2
78.5
4.9
0.4
4.0
0.4
93.7
86.6
3.2
0.1
3.0
0.8
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
501.6
498.4
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
143.8
158.9
Total equity and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
645.4
657.3
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.
Summary Consolidated Statement of Cash Flows Information
Year ended
December 31,
2011
2012
2013
(E in millions)
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at the beginning of the financial year
Foreign exchange rate effect on cash and cash equivalents . . . . .
Cash and cash equivalents at the end of the financial year . . . . .
18
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43.8
43.9
59.8
(24.1) (38.0) (62.5)
(0.5) (0.2) (0.6)
46.5
65.7
72.2
0.0
0.8
0.8
65.7
72.2
69.6
Summary Segment Financial Information
For the year ended
December 31,
2011
2012
2013
(E in millions)
(audited, except as
otherwise indicated)
Revenue by segment:
Insulation:
Building Insulation(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Insulation(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Insulation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
248.7
130.7
366.8
257.9
144.3
385.1
256.7
150.9
390.8
Panel System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51.2
59.2
56.2
156.7
43.7
200.4
0.5
200.9
161.5
45.8
207.4
0.4
207.8
161.1
46.1
207.3
0.5
207.8
Eliminations and allocations(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(214.0)
(221.8)
(221.7)
Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
404.8
430.4
433.1
Base Production:
Internal sales:
Sales to BI division(2)
Sales to TI division(2)
Total internal sales . . . .
External sales . . . . . . .
Total Base Production . . .
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(1)
The total amounts presented give effect to eliminations for internal sales between our BI and TI divisions in the amount of
A12.6 million for the year ended December 31, 2011, A17.1 million for the year ended December 31, 2012 and A16.8 million for
the year ended December 31, 2013.
(2)
Unaudited.
(3)
We present eliminations and allocations herein to provide for eliminations in respect of intercompany trading and other
transactions between our operating divisions, as well as allocation of central overhead and management charges among our
operating divisions, for purposes of Group consolidation.
19
Summary Geographical Financial Information
Year ended December 31,
2011
2012
2013
(E in millions)
(audited, except as otherwise
indicated)
Geographical region:
Finland:
Net sales . . . . . . . .
Non-current assets(1)
Sweden:
Net sales . . . . . . . .
Non-current assets(1)
Lithuania:
Net sales . . . . . . . .
Non-current assets(1)
Poland:
Net sales . . . . . . . .
Non-current assets(1)
Russia:
Net sales . . . . . . . .
Non-current assets(1)
Other(2):
Net sales . . . . . . . .
Non-current assets(1)
Total Revenue . . . . . . . .
Total Non-current assets
....................................
....................................
93.4
177.0
93.2
176.0
87.4
168.2
....................................
....................................
108.2
189.1
110.3
193.0
108.8
187.5
....................................
....................................
15.1
24.3
16.3
21.6
17.8
20.6
....................................
....................................
27.2
58.6
27.5
63.8
28.1
59.3
....................................
....................................
26.2
1.4
32.9
17.5
36.1
56.8
134.6
0.06
404.8
450.5
150.3
0.04
430.4
471.9
155.0
0.03
433.1
492.4
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(1)
Non-current assets include intangible and tangible assets.
(2)
Other includes Norway (A29.2 million, A33.7 million and A29.6 million of Net sales for the years ended December 31, 2011, 2012
and 2013, respectively (unaudited)) and Estonia and Latvia, together (A18.8 million, A18.7 million and A19.6 million of Net sales
for the years ended December 31, 2011, 2012 and 2013, respectively (unaudited)).
Summary Operating Data
For the year ended
December 31,
2011
2012
2013
(unaudited)
Volumes (tonnes in thousands)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capacity utilization (%)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
375.9
74.1
377.2
71.3
379.9
72.1
(1)
Volumes represent the total annual tonnage of stone wool produced by our Base production lines, including blowing wool made
from recycled wool scrap.
(2)
Capacity utilization represents the volume of stone wool produced by our Base production lines divided by the practically
achievable maximum capacity on those lines. Practically achievable maximum capacity represents the running of our Base
Production lines at 8,000 hours a year, which reflects requirements to perform routine maintenance and cleaning.
20
Summary Other Financial Information
As of or for the year ended
December 31,
2011
2012
2013
(E in millions, except
percentages and ratios)
(unaudited)
EBITDA(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
EBITDA margin(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA(1)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted EBITDA margin(1)(3)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit margin(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maintenance capital expenditures(6) . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital expenditures(7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents(8) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt(9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma Cash and cash equivalents(8)(10) . . . . . . . . . . . . . . . . . . . .
Pro forma Total debt(9)(11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro forma Cash interest expense(12) . . . . . . . . . . . . . . . . . . . . . . . . .
Ratio of pro forma Total debt to Adjusted EBITDA(1)(3)(9)(11) . . . . . . .
Ratio of Adjusted EBITDA to pro forma Cash interest expense(1)(3)(12)
(1)
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54.6
13.5%
61.2
15.1%
95.7
23.6%
15.8
23.2
65.7
352.2
—
—
—
—
—
69.0
16.0%
75.1
17.4%
111.8
26.0%
10.3
37.2
72.2
352.1
—
—
—
—
—
76.6
17.7%
82.8
19.1%
121.6
28.1%
10.6
58.5
69.6
351.8
25.2
431.8
25.9
5.2x
3.2x
We define EBITDA as profit/(loss) for the period from continuing operations before income tax expense, finance income and
costs, depreciation and amortization and impairments.
EBITDA is not a uniformly or legally defined financial measure and is not a measurement of performance under IFRS, and you
should not consider EBITDA as an alternative to (a) operating profit or profit for the period (as determined in accordance with
IFRS) as a measure of our operating performance, (b) cash flows from operating, investing and financing activities as a measure
of our ability to meet our cash needs or (c) any other measures of performance or liquidity under IFRS. We believe that
EBITDA is a useful indicator of our ability to incur and service our indebtedness and can assist investors to evaluate our results
of operations. EBITDA and similar measures are used by different companies for differing purposes and are often calculated in
ways that reflect the circumstances of those companies. You should exercise caution in comparing EBITDA as reported by us to
EBITDA of other companies. See ‘‘Presentation of Financial and Other Information—Non-IFRS Measures.’’
The following table reconciles profit for the year from continuing operations to EBITDA for each of the periods presented:
Profit for the year from continuing operations
Income tax expense . . . . . . . . . . . . . . . . .
Finance income and costs:
Dividend received, interest income and other
Interest expenses . . . . . . . . . . . . . . . . . .
Other financial expenses . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . .
Impairments . . . . . . . . . . . . . . . . . . . . . .
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For the year ended
December 31,
2011
2012
2013
(E in millions)
4.8
17.9
25.6
(0.5)
7.0
4.1
financial
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(7.0)
14.5
17.0
25.8
0.0
(8.9)
12.3
11.9
26.7
2.0
(2.3)
9.3
10.5
28.7
0.7
54.6
69.0
76.6
income
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EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2)
We define EBITDA margin as EBITDA for the applicable period divided by revenue for the same period.
(3)
We define Adjusted EBITDA as EBITDA excluding items of a non-recurring or unusual nature, including in respect of our
Russian expansion (including both our construction phase and our pre-commercial production phase), redundancies and
restructuring, our transfer pricing case and the closure of our Lappeenranta site.
Adjusted EBITDA is not a uniformly or legally defined financial measure and is not a measurement of performance under
IFRS and you should not consider Adjusted EBITDA as an alternative to (a) operating profit or profit for the period (as
determined in accordance with IFRS) as a measure of our operating performance, (b) cash flows from operating, investing and
financing activities as a measure of our ability to meet our cash needs or (c) any other measures of performance or liquidity
under IFRS. We believe that Adjusted EBITDA is a useful indicator of our ability to incur and service our indebtedness and can
assist investors to evaluate us. Adjusted EBITDA and similar measures are used by different companies for differing purposes
and are often calculated in ways that reflect the circumstances of those companies. You should exercise caution in comparing
Adjusted EBITDA as reported by us to Adjusted EBITDA of other companies. See ‘‘Presentation of Financial and Other
Information—Non-IFRS Measures.’’
21
The following table reconciles EBITDA to Adjusted EBITDA for each of the periods presented:
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Russia expansion—construction phase(a) . . . . . . . . . .
Russia expansion—pre-commercial production phase(b)
Redundancies and restructuring(c) . . . . . . . . . . . . . .
Transfer pricing case(d) . . . . . . . . . . . . . . . . . . . .
Lappeenranta closure(e) . . . . . . . . . . . . . . . . . . . .
Other one-off items(f) . . . . . . . . . . . . . . . . . . . . .
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Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(a)
Year ended
December 31,
2011
2012
2013
(E in millions)
(unaudited)
54.6
69.0
76.6
4.2
2.5
2.5
—
—
2.7
1.7
0.4
0.3
—
0.7
—
—
—
0.7
0.7
2.5
—
61.2
75.1
82.8
2011: Represents a write-down of certain distressed assets acquired as part of the acquisition of our new manufacturing
site in Tver, a write-down of VAT receivables in respect of certain abandoned site development plans in Russia and
related consultancy and advisory fees.
2012: Represents the cost of demolition works and other site works, noncapitalized project team costs, liquidation costs
with respect to a Russian subsidiary as a result of abandonment of certain site development plans in Russia and
related consultancy and advisory fees.
2013: Represents the cost of demolition works and other site works, non-capitalized project team costs, the cost of
improvement works to third party property, energy costs during the construction period, the write-off of certain
redundant assets on the site, related consultancy and advisory fees and certain other costs.
(b)
Represents (i) technical team, training and other start-up costs in the amount of A1.1 million incurred at our new
manufacturing facility in Tver prior to, and in preparation for, the commencement of commercial operations and
production in January 2014 and (ii) other operating costs which may recur in the future but which are related to the
period before meaningful commercial operations began at our new manufacturing facility in Tver, including plant
management costs, production maintenance costs and quality costs.
(c)
2011: Represents redundancy payments and other personnel-related costs incurred in connection with the restructuring
of our finance, accounting and controlling functions, the change in our chief executive officer and the redundancy
of certain directors in Finland, Denmark and Germany.
2012: Represents contributions to a statutory unemployment insurance fund in Finland in relation to redundancies made
in previous years, certain provisions for termination benefits, redundancy payments and other personnel-related
costs and unusual income generated by a reversal of over-provided redundancy costs from the previous year.
2013: Represents redundancy payments, other personnel-related costs and related consultancy and advisory fees, partially
offset by miscellaneous items of unusual income.
(d)
2012: Represents a tax penalty levied on Paroc Oy AB in relation to a write-down of intragroup loans that was deemed by
the Finnish tax authorities to be incorrectly claimed as tax deductible (see ‘‘Business—Legal and Regulatory
Proceedings—Litigation—Tax dispute related to transfer pricing, write-downs of intragroup loans and VAT’’) and
related consultancy and advisory fees.
2013: Represents costs incurred in connection with our transfer pricing project and related consultancy and advisory fees,
offset by unusual income generated by a reversal of the tax penalty levied on Paroc Oy AB during the prior year
and previously paid to the Finnish tax authorities following our successful appeal of the matter (see ‘‘Business—
Legal and Regulatory Proceedings—Litigation—Tax dispute related to transfer pricing, write-downs of intragroup loans
and VAT’’).
(e)
Represents redundancy costs and provisions for certain termination benefits with respect to personnel at our
Lappeenranta site, costs of transferring plant, machinery and equipment from our Lappeenranta site to our other
production facilities and costs of certain third parties providing temporary work services and media services.
(f)
2011: Represents consultancy and advisory fees incurred in connection with the establishment of our centralized finance
function in Vilnius, Lithuania and other strategy-related consultancy and advisory fees.
2012: Represents a write-off with respect to our inventory of critical spare parts following a review of our obsolescence
policy, a one-off property tax in Poland and consultancy and advisory fees incurred in connection with the
establishment of our centralized finance function in Vilnius, Lithuania.
(4)
We define Adjusted EBITDA margin as Adjusted EBITDA for the applicable period divided by revenue for the same period.
(5)
We define gross profit margin as gross profit for the applicable period divided by revenue for the same period.
(6)
We define maintenance capital expenditures as capital expenditures required to sustain the ongoing performance of our
operations or otherwise adjust our operations to adhere to legislative or regulatory requirements, including capital expenditures
relating to maintenance and replacement of plant and equipment, environmental matters and occupational health and safety.
22
(7)
Total capital expenditures comprise (i) maintenance capital expenditures and (ii) strategic capital expenditures which are
growth investments designed to enhance productivity, achieve cost savings or gain a particular commercial advantage (including
expansionary capital expenditures).
(8)
Cash and cash equivalents generally decline through the first two quarters of the fiscal year. Cash and cash equivalents as of
March 31, 2014 were A48.1 million. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources.’’
(9)
Total debt represents our total outstanding third-party indebtedness, including loans from financial institutions and finance
lease liabilities.
(10) Pro forma Cash and cash equivalents represents Cash and cash equivalents as adjusted to give pro forma effect to the
Transactions as if the Transactions had occurred on December 31, 2013. See ‘‘Use of Proceeds’’ and ‘‘Capitalization.’’ As of the
Issue Date, after giving pro forma effect to the Transactions, we expect to have limited cash in the business and it may become
necessary to use borrowings under our New Revolving Credit Facility for working capital purposes in the near to medium term.
(11) Pro forma Total debt represents Total debt excluding capitalized transaction costs as adjusted to give pro forma effect to the
Transactions as if the Transactions had occurred on December 31, 2013. See ‘‘Use of Proceeds’’ and ‘‘Capitalization.’’
(12) Pro forma Cash interest expense primarily represents cash interest cost in respect of the Notes based upon, with respect to the
Fixed Rate Notes, the interest rate of the Fixed Rate Notes and, with respect to the Floating Rate Notes, the margin over threemonth EURIBOR, as if the Transactions had occurred on January 1, 2013, plus any cash-based commitment and agency fees in
respect thereof. Pro forma Cash interest expense has been presented for illustrative purposes only and does not purport to
represent what our cash interest payments would have actually been had the issue of the Notes occurred on the date assumed,
nor does it purport to project our cash interest payments for any future period or our financial condition at any future date.
23
RISK FACTORS
An investment in the Notes to be issued in the Offering involves a high degree of risk. In addition to the other
information contained in this offering memorandum, you should carefully consider the following risk factors
before purchasing the Notes. The risks and uncertainties we describe below are not the only ones we face.
Additional risks and uncertainties of which we are not aware or that we currently believe are immaterial may
also adversely affect our business, financial condition or results of operations. If any of the possible events
described below occurs, our business, financial condition or results of operations could be materially and
adversely affected. If that happens, we may not be able to pay interest or principal on the Notes when due and
you could lose all or part of your investment.
This offering memorandum also contains forward-looking statements that involve risks and uncertainties. Our
actual results may differ materially from those anticipated in these forward-looking statements as a result of
various factors, including the risks described below and elsewhere in this offering memorandum. See ‘‘ForwardLooking Statements.’’
Risks Related to Our Business and Our Industry
Difficult conditions in the general economy and the global financial markets may materially adversely affect our
business, financial condition and results of operations, and the majority of our sales are concentrated in limited
number of markets.
Our results of operations are materially affected by conditions in the general economy and the global
financial markets. Since 2008, the stress and disruptions experienced by global financial markets
increasingly affected other sectors of the economy resulting in a global economic downturn. In particular,
the construction industry in the markets in which we manufacture and sell certain of our products has been
adversely affected by the global economic downturn. 2013 was characterized by heterogeneous volume
development in our key building materials markets. While volumes in some countries, such as Finland,
Sweden, Norway and Denmark, declined or remained stable, some markets, such as Poland, the Baltic
States and Russia, experienced higher sales volumes than in 2012. Our Building Insulation division, which
is our largest division by sales, is particularly dependent on developments in new residential construction
activities that have historically and during the global financial and economic crisis been more susceptible to
cyclicality than renovation, remodeling and modernization activities.
We currently operate plants in five countries and sell our products in more than 40 countries. However, a
limited number of markets and regions account for the majority of our total sales. If our key geographic
markets, in particular Finland (accounting for 20.2% of our sales for the year ended December 31, 2013),
Sweden (accounting for 25.1% of our sales for the year ended December 31, 2013) and the Baltic States
(accounting for 8.6% of our sales for the year ended December 31, 2013) were to experience a
reoccurrence of the difficult economic conditions experienced in 2008-2010, or a material worsening of the
current economic conditions, the level of construction activity may decline. This would likely result in
reduced demand for our products and adversely affect our ability to pass on price increases to our
customers to offset increased costs, particularly in raw material and energy prices. Further, while the
regions in which we operate have been affected differently by the global economic downturn, there can be
no assurance that any weakening in economic growth will not affect the construction market globally or
that negative economic conditions in one or more regions will not affect the construction markets in other
regions. As a result, our business, financial condition and results of operations may be materially adversely
affected by a continued or further downturn in construction activities on a global scale or in significant
markets in which we operate.
The construction industry is cyclical in nature and subject to seasonality.
The building materials industry in any geographic market is dependent on the level of activity in the
construction sector of that geographic market. The construction industry tends to be cyclical and is
dependent on the level of construction-related expenditures in the residential, industrial and commercial
sectors, public investments and public and private spending on infrastructure projects. The construction
industry is particularly sensitive to factors such as GDP growth, interest rates and cost of mortgage
financing for residential, commercial and industrial construction, inflation, consumer confidence as well as
other macroeconomic factors. Political instability or changes in government policy may also negatively
affect the construction industry, particularly those markets with higher exposure to civil engineering and
infrastructure spending. Moreover, demand in the construction industry may be affected by demographic
24
trends, such as aging and declining populations in many mature markets and changes in the average
number of persons living in one household or migration trends.
Moreover, the construction industry is dependent on weather conditions and is subject to seasonality.
Lower demand for building materials occurs in periods of cold weather, and may be aggravated by
particularly harsh weather conditions such as those experienced in the winter of 2012/2013. These effects
and other unfavorable weather conditions, frequently lead to a volatile development of our quarterly
financial results. Historically, sales in the second and third quarters have been significantly higher than in
the other quarters of the year, particularly the first quarter. Results of a single fiscal quarter might
therefore not be a reliable basis for the expectations of a full fiscal year and may not be comparable with
the results in the other fiscal quarters. Seasonality effects may also increase our working capital
requirements. Adverse weather conditions can materially adversely affect our business, financial condition
and results of operations if they occur with unusual intensity, during abnormal periods, or last longer than
usual in our major markets, especially during peak construction periods.
We operate in competitive industries and our results may be adversely affected by competition.
Competition in the building materials industry, and more specifically, the markets for the products we
produce and sell, is strong, has adversely affected our results in the past, and may adversely affect our
results again in the future. Competition is based on many factors, including brand recognition and
customer loyalty, product quality and reliability, breadth of product range, product design and innovation,
manufacturing capabilities, distribution channels, scope and quality of services, and price. Additionally, we
could face competition from parallel imports. Further, the markets for our products are characterized by
many local and regional manufacturers and a number of major manufacturers with an international
presence. Competitive dynamics are affected by the number of competitors in a certain market, their
degree of vertical integration and pricing policies, the development of demand and capacity as well as the
access to and cost of raw materials and other inputs. Prices are subject to changes in response to relatively
minor fluctuations in supply and demand, general economic conditions, and other market conditions
beyond our control. In recent years, for example, a number of the competitors in our key Nordic building
insulation markets have been engaged in intense price competition for market share partially in response
to aggressive pricing by a new market entrant, and it is possible that we may in future be forced to reduce
our prices in order to defend our market share. We have seen pricing pressure develop in certain other
markets due to strong competition. Any significant decline in terms of volume, margin or price could have
material adverse effects on our business, financial condition and results of operations.
In addition, the foregoing factors are often subject to varying developments in the regions and countries in
which we operate. Individual regional and local competitive dynamics could in the future deteriorate and
result in further significantly intensified competition in such regions or countries. For example, competitors
may expand their capacities or enter or expand in markets in other regions or develop more innovative
products, or other products may be preferred by consumers. The consequences of such changes or of other
possible changes in the competitive environment could have material adverse effects on our competitive
position, business, financial condition and results of operations. Competitors could also further improve
the functionality or performance of their products and production processes leading to additional
competitive pressure on prices for our products and services and potential decreases of sales volumes and
market share.
In order to maintain or support our competitive position, we rely on continuous investments and
innovations in product development, production processes, brands, services and distribution network. If we
are less innovative than we historically have been, or less innovative than our competitors, we could lose
customers and market share, and this could have a material adverse effect on our business, financial
condition and results of operations. Our divisions are active in industries that are capital intensive and
require continuous capital expenditures in maintenance and optimization of our existing production
facilities. Our competitors may have greater financial and personnel resources or know-how, may react
more quickly to the changing needs and requirements of customers or better succeed in marketing their
products than we do. Each of these factors could lead to a loss of market share and have material adverse
effects on our business, financial condition and results of operations.
25
Our products compete with a variety of different products, many of which we do not produce and, as a result, we may
lose market shares to such alternative products.
Our building insulation, technical insulation and sandwich panel products compete with several other types
of insulation materials and façade panels that we do not produce. Other types of insulation materials (for
example, glass wool, expanded polystyrene, extruded polystyrene and (particularly in our key Nordic BI
and PPS markets) polyurethane products) and panels may be or may become more popular or may be
perceived as having superior characteristics in terms of thermal insulation, load-bearing capacity,
appearance, price, thickness or other respects. Given the similarities in properties, application and
production, the main competitor to stone wool is glass wool, and there is a material area of overlap
between mineral wool and foam insulation in external facades and roofs, as well as in sandwich panels,
where mineral wool and foams are relatively more substitutable. Although both glass wool and stone wool
have advantages and disadvantages, low density glass wool insulation is easier to transport than stone wool
due to better compressibility and is also cheaper to use in low density insulation products than stone wool.
See ‘‘Business—Competition.’’ The degree of substitution by other types of building materials may vary by
region and from time to time and may also be attributed to local building and construction traditions,
preferences and regulatory requirements. Substitute products may also gain market share through more
effective advertising and marketing campaigns. If the environmental, fire protection, safety, energy or
other characteristics of other products improve, or if substitute products’ marketing campaigns are
effective, any competitive advantage our building materials products enjoy may diminish. Additionally, we
compete with alternative methods to increase energy efficiency such as, among others, replacement
windows or doors and more efficient heating systems. Any significant replacement of any of our specific
products by other types of products which we do not produce may adversely impact our business, financial
condition and results of operations.
We are exposed to local business risks in many different countries.
Our growth strategy involves expanding outside of our core European markets, in particular into additional
Central and eastern European countries, as well as Russia, and a significant portion of our current sales
activities are conducted and located outside of our core markets of Finland, Sweden and the Baltic States.
Further, we believe that sales generated outside of Finland, Sweden and the Baltic States in particular and,
more generally, outside of the European Union, will increasingly account for a material portion of our
total sales in the foreseeable future, which entails certain risks. These risks include, among other things:
•
political instability, absence of sufficient protections for foreign investors and possible investment
restrictions (including restrictions on assets belonging to certain investor groups);
•
social instability, frequency of crimes and corrupt practices, and a lack of transparency on the part of
governmental and political bodies;
•
differing economic cycles and adverse economic conditions;
•
disruption of our operations, e.g., by strikes or governmental action;
•
unexpected changes in the regulatory environment;
•
varying tax regimes, including with respect to the imposition of withholding taxes on remittances and
other payments by our joint ventures or partnerships;
•
fluctuations in currency exchange rates;
•
inability to collect payments or seek recourse under or comply with ambiguous or vague commercial
or other laws, and weak enforcement procedures for court judgments;
•
changes in distribution and supply chains;
•
varying degrees of concentration among suppliers and customers;
•
insufficient protection against violations of our intellectual property rights;
•
foreign exchange controls and restrictions on repatriation of funds; and
•
difficulties in attracting and retaining qualified management and employees (including restrictions on
employing foreign workers), or further rationalizing our work force.
Our expansion into markets outside of our core markets in Finland, Sweden and the Baltic States requires
us to respond to rapid changes in market conditions in these countries. Our overall success as a global
26
business depends to a considerable extent on our ability to anticipate and effectively manage differing
legal, political, social and regulatory requirements and economic conditions and unforeseeable
developments. We may not continue to succeed in developing and implementing policies and strategies
which will be effective in each location where we do business and obtain raw materials from or may do so
in the future.
We may not be able to successfully manage future growth, including by way of organic growth to new regions and
potential acquisitions which may expose us to additional risks.
Over the past decade, we have expanded our business primarily through organic growth, in particular in
western, central and eastern Europe, the Baltic States and Russia, and we intend to continue our
international expansion in all our divisions. In implementing this strategy, we are pursuing both organic
growth and evaluating the market for potential acquisitions of insulation production facilities and other
companies. Our growth has placed and will continue to place a strain on our management systems,
infrastructure and resources. Our ability to manage this planned growth and integrate operations,
technologies, products and personnel depends on our administrative, financial and operational controls,
our ability to create the infrastructure necessary to exploit market opportunities for our products and our
financial capabilities. We may also reach limits under applicable antitrust merger control laws if we attempt
to further grow through acquisitions in certain markets. In order to compete effectively and to grow our
business profitably, we will need to maintain our financial and management controls, reporting systems and
procedures, implement new systems as necessary, attract and retain adequate management personnel, and
hire a qualified workforce that we can train and manage.
Our operations and expansion into Russia pose significant challenges as we attempt to successfully
navigate operating in this new jurisdiction. We are aware of certain deficiencies related to the new Tver
production facilities, as well as various regulatory, legal and other deficiencies in our operations in Russia,
as described below. Although we believe that these are not unusual for a new business operating in Russia
due to the regulatory structure and operational authorization process, we will need to rectify these
deficiencies in order to ensure that our business operations are compliant with applicable laws. We
commenced commercial operations and production at our new manufacturing facility in Tver in January
2014. As the facility is in its opening phase, with only limited operations underway, we are still in the
process of obtaining certain necessary authorization documents. The process of obtaining these documents
may take time, and we may not be compliant with certain regulations during this initial period. For
example, upon completion of a construction project some of our Russian production facilities may be
classified as ‘‘dangerous industrial facilities’’, which will trigger the need for us to comply with specific
industrial safety regulations. To date we have taken some, but not all, of the necessary steps to comply with
these industrial safety regulations, but some time may pass before we become fully compliant. Moreover,
some of our operations at Tver (specifically, our industrial gas consumption facilities) may be regarded as
explosive dangerous industrial facilities and, if this is the case, we will need to obtain a relevant license in
order to operate gas consumption facilities. We have commenced this process, but we only expect to
receive the license towards the end of 2014, and there is no guarantee that we will receive the license.
Certain administrative sanctions (including the temporary restriction of operations for up to 90 days) may
be imposed on our operations in Russia if we fail to promptly complete all industrial safety and license
compliance procedures. We additionally have some deficiencies in our title to real estate that will need to
be corrected. There are also certain deficiencies in corporate formalities, charter capital and
documentation that we need to address, as they could potentially result in compulsory liquidation of ZAO
Paroc, our Russian subsidiary. However, once we have shareholder approval, we intend to convert ZAO
Paroc from a closed joint-stock company to a limited liability company (or ‘‘OOO’’) later in 2014, which
should address these corporate formality deficiencies. ZAO Paroc will have to notify its creditors of this
reorganization process by publication of an official reorganization notice. Creditors whose claims have
arisen before such publication will have the right to take legal action to accelerate their claims or demand
early termination of the relevant agreements and compensation for associated losses incurred by them,
provided that ZAO Paroc, its shareholder or any other third party does not provide sufficient security in
respect of ZAO Paroc’s liabilities to its creditors. However, we believe that in relation to the potential
creditors of ZAO Paroc this risk is rather low, as most such potential creditors are either customers with
whom we have contracts generally based on payment after delivery, or service providers whose rights
should not be adversely affected by the reorganization and who we would not expect to wish to terminate
their agreements with us. We also have what could be significant shortcomings in our intellectual property
protection in Russia. See ‘‘—Any threat to, or impairment of, our intellectual property rights could cause us to
incur costs to defend those rights.’’ If we are unable to successfully address these issues and put in place
27
measures to prevent similar problems in the future, our long-term plans for expansion in Russia could be
compromised, which could adversely affect our results of operations.
Acquisitions pose additional risks, including that we may pay too much to acquire a business, assume
contingent liabilities in connection with the acquisition, lose customers or employees following the
acquisition and be unable to successfully integrate the acquired business with our existing business.
Moreover, our plans to acquire additional businesses in the future are subject to the availability of suitable
opportunities. Our competitors may also follow similar acquisition strategies and may have greater
financial resources available for investments or may have the capacity to accept less favorable terms than
we can accept which may prevent us from acquiring the businesses that we target and reduce the number of
potential acquisition targets. Moreover, certain agreements concerning the acquisition of a number of
shares in Paroc Polska sp. z o.o. might have been executed with certain legal deficiencies. Consequently, we
cannot exclude the risk of such agreements being considered invalid.
If we establish new production plants as greenfield operations, significantly expand existing plants (such as
the Tver production plant in Russia) or invest in or operate new businesses, we may initially incur start-up
losses due to lower levels of capacity utilization and ramp-up and training cost and face additional
challenges in entering or significantly increasing our exposure to new markets (such as Russia), including
locating and securing suitable plant sites, understanding the dynamics and customer composition of new
markets and translating our marketing and sales strategies to new markets. Start-up losses for production
plants in new markets typically are incurred for the first five to seven years of operation.
Furthermore, we expect that as we continue to introduce new products in our markets, we will be required
to manage an increasing number of relationships with various customers and other third parties. The
failure or delay of our management in responding to these challenges could have a material adverse effect
on our business, financial condition and results of operations.
We operate in emerging markets such as Russia, which exposes us to risks inherent to such less developed markets,
and we may be exposed to greater risks as we intend to increase our operations in such markets.
Some of the markets in which we operate and/or are considering entering or expanding our exposure, and
in particular Russia, and from which we obtain raw materials for our products, are emerging markets in
which the business climates expose us to greater political, economic, legal and social uncertainty than
markets with more developed institutional structures, and the risk of loss resulting from changes in law,
economic and social upheaval and other factors may be substantial. In many of these countries, the
democratic tradition is less established and the rule of law less developed. Accordingly, our business is and
may increasingly be subject to risks resulting from differing legal, political, social and regulatory
requirements and economic conditions and unforeseeable developments in a variety of jurisdictions,
including in emerging markets. In these markets we are exposed to an increased degree of risks arising
from interruption of operations due to political or social instability and the establishment or enforcement
of foreign exchange restrictions, which could effectively prevent us from repatriating profits, liquidating
assets or withdrawing from one or more of these markets. Recent political instability in Ukraine could
impact our supply of coke; although we have not been impacted thus far, there is no guarantee that we will
not be impacted in the future. See ‘‘—Our business may be negatively affected by volatility in raw and other
material prices, our inability to retain or replace our key suppliers, unexpected supply shortages and disruptions
of the supply chain.’’ The imposition of economic or other sanctions upon countries in which we operate
may also adversely affect our ability to do business in such countries, either by preventing us from doing
business, or by lowering economic growth, in such countries. For the year ended December 31, 2013,
Russia accounted for 8.3% of our revenues, and on March 6, 2014, the United States imposed sanctions on
specific Russian and Ukrainian individuals deemed responsible for undermining the Ukrainian
government, sovereignty and territorial integrity in the context of Russian actions in Crimea. On March 17,
2014, the European Union imposed sanctions (including travel restrictions and an asset freeze) against
similar individuals and other persons and entities associated with them, while the U.S. expanded the scope
of its sanctions to Russian officials (entities operating in the Russian arms sector and individuals who
allegedly provide material support to senior officials, in the Russian government). On March 20, 2014, the
United States expanded the reach of sanctions to additional officials and one Russian bank, and left open
the possibility that more extensive sanctions (for example, against core sectors of the Russian economy)
could be imposed. Most recently, on April 28, 2014, citing a failure by Russia to comply with its agreement
to assist in resolving the political crisis in Ukraine, the United States imposed additional sanctions on
Russian individuals and entities, as well as acted to freeze certain exports of military technology to Russia.
On April 29, 2014, the European Union expanded the reach of sanctions to additional individuals.
28
Although we do not believe at this time that these sanctions will directly affect our Russian business, such
sanctions could become more far-reaching, potentially covering imports to Russia, exports from Russia, or
restrictions on doing business in Russia, any of which could have a materially adverse effect on our Russian
business operations, and our business as a whole. For example, as a result of the situation in Crimea,
certain credit ratings agencies have revised their outlook for Russia from stable to negative, and there have
been signs of adverse effects on the Russian economy, for example volatility and an overall decline in the
Russian rouble against other currencies and declines in the Russian stock market. Moreover, we cannot
exclude the possibility that Russian authorities may adopt certain measures in response to the sanctions
imposed by foreign states, which may be primarily aimed at restricting foreign investments and foreign
business in Russia, and which could materially and adversely affect our business, particularly in Russia.
Further instability in or arising from Ukraine or the region could materially adversely affect our business in
Russia, including due to increased volatility in currency exchange rates in the region, lower economic
growth in the region or an increased risk of default by contractual counterparties with exposure to the
region (such as our current supplier of coke from Ukraine and suppliers and customers in Russia).
Additionally, our business and corporate governance practices may place us at a disadvantage when
competing with local companies in emerging markets, as such companies may gain a competitive advantage
by implementing corrupt or ‘shadow’ schemes, including cash tax evasion schemes, use of sham firms, and
grey salaries and imports.
Interruptions in operations at our facilities could have a material adverse effect on our business, financial
condition, results of operations and cash flows.
We operate a total of nine production plants in five countries plus additional industrial facilities, such as
stone quarries, landfill sites and storage sites, and our results of operations are dependent on the
continued operation of our production facilities and the ability to complete special customer order projects
on schedule. Our production processes and technologies are complex as they need to be adapted to
variations in the properties of certain raw materials and use combustibles and other dangerous materials,
such as coke and chemical binding agents. Significant interruptions in operations at our production plants
or other facilities, for example, due to explosions, fires, environmental incidents or other accidents, or to
routine or extraordinary state audits or changes in regulatory requirements, may significantly reduce the
productivity and profitability of a particular production or other facility, or our business as a whole, during
and after such interruptions, including as a result of necessary repairs or upgrades to or replacements of
damaged equipment or facilities, investigations or proceedings by governmental or regulatory bodies, and
compensation claims brought by injured persons. Although we hold several types of insurance policies
(including insurance against fire and business interruptions), our insurance coverage may be inadequate.
Furthermore, our insurance coverage may not continue to be available on commercially reasonable terms
and our insurance carriers may not have sufficient funds to cover all potential claims.
Additionally, three of our production facilities, including the Lappeenranta, Skövde and Vilnius facilities,
are situated on land that we lease from third parties. It is possible that such third parties may elect to
terminate or not to renew such leases, as has occurred with the Lappeenranta facility. See ‘‘—The closure
of the Lappeenranta facility may result in greater costs or disruptions to our business than currently expected.’’
In particular, the lease relating to our Skövde facility can be terminated at the end of its initial three-year
term (May 31, 2017) by either party, and unless terminated, the agreement will continue for successive
periods of three years. If a third-party lessor were to terminate or decline to renew a lease in respect of
land on which one of our facilities is located, this may result in significant interruptions to our
manufacturing operations, significant and temporary or permanent reductions in our overall production
capacity, a material impact on our ability to serve customers in the regions in which we currently operate,
and/or the incurrence of significant expenditures associated with the cessation or relocation of operations
at the relevant facility. For further detail regarding the costs related to the closure of Lappeenranta. See
‘‘—The closure of the Lappeenranta facility may result in greater costs or disruptions to our business than
currently expected.’’ This may in turn significantly reduce the productivity and profitability of our business
as a whole, both during and after any such shutdown or relocation process.
Similarly, the operation of our facility in Trzemeszno is dependent upon arrangements with the owners or
users of certain adjacent real properties, particularly regarding certain easements and infrastructure
necessary for the operation of our facility. Some of the formal documentation governing such
arrangements may have expired or may not be complete or sufficiently comprehensive. We are negotiating,
or are about to start the negotiation of, appropriate agreements in order to rectify this. However, there is
no guarantee that we will ultimately reach satisfactory agreements with such third parties or that the terms
29
of such agreements will be on substantially the same terms as the arrangements currently in place. We may
also be required to pay to such third parties amounts relating to our use or access to such easements and
infrastructure, or arising from the inability of such third parties to use or access such easements and
infrastructure. If no agreement is reached with such third parties, we may be required to temporarily or
permanently discontinue our operations in Trzemeszno, which may have a material adverse effect on our
business, financial position, results of operations and cash flows.
The closure of the Lappeenranta facility may result in greater costs or disruptions to our business than currently
expected.
Nordkalk, the owner of the land on which our Lappeenranta facility is situated (and a former affiliate
when both companies were part of Partek), has informed us that it does not intend to renew our lease of
that land upon its expiration in 2019. We have therefore decided to end our production on the site by the
end of 2016. We have commenced the relocation process in respect of our operations at that facility and
are in the process of reallocating production to our other facilities. See ‘‘Business—Divisions—Production
facilities and inter-segment sales—Lappeenranta closure.’’ Although we currently estimate that the total cost
of the transfer process will be approximately A7 million in capital expenditures and A1.3 million in
operational expenses, and have recognized a provision of A6.9 million as of December 31, 2013 for
demolition and other closure costs relating to this facility (reflecting the net present value of the A9 million
in expected future demolition, land clearing and remediation costs), it is possible that the relocation
process may not proceed according to plan and that expenses in excess of these estimates may be incurred.
We also may incur significant additional remedial or other closure costs in connection with site
investigations that are expected to be required, including if any impacts from historical operations are
identified. The transfer process may also result in significant disruptions to our production operations and
impair our ability to service our customers. We estimate that there will also be productivity, labor efficiency
and other incremental costs that are expected to be spread over the duration of the transfer period, with a
greater proportion incurred at the beginning of the transfer period. Additionally, there is a risk that the
production equipment may be damaged during the transfer process, and it could be costly to repair or
replace the equipment. These costs may underestimate the actual productivity and efficiency losses
associated with the closure of the plant. This may have a material adverse effect on our business, financial
condition and results of our operations.
Our business may be negatively affected by volatility in raw and other material prices, our inability to retain or
replace our key suppliers, unexpected supply shortages and disruptions of the supply chain.
The cost and availability of raw material and other supplies are critical to our operations. Our profit
margins are largely a function of the relationship between the prices that we are able to charge for our
products and the cost of the raw materials and other inputs we require to produce these products. The raw
materials and other inputs we depend on include chemical binding agents, stone raw materials, coke,
electricity, natural gas, steel, coatings, wired net and packaging materials. For the year ended
December 31, 2013, the cost of these raw materials and other inputs (excluding energy cost) amounted to a
total of A85.5 million, or 19.7%, of our sales. The prices of the raw materials that we use generally tend to
be cyclical and highly volatile. The availability and prices of raw materials and other supplies are
influenced by factors that we cannot control, such as market conditions, general global economic
prospects, production capacity in the relevant markets, production constraints on the part of our suppliers,
infrastructure failures, regulations, political instability that reduces production, including carbon dioxide
emission regulations applicable to our suppliers and the amounts of emission allowances available to them,
export restrictions, such as the export restriction on coke that were imposed by the Chinese government
(lifted in January 2013), demand from other users of such raw materials (such as steel manufacturers, in
the case of coke), foreign exchange rates and other factors. For the year ended December 31, 2013, we
supplied approximately 30% of the total raw stone material that our operations required from quarries
over which we have mining rights, which meant that we needed to source the majority of our total raw
stone requirements from third parties. Although the underlying prices for stone have been relatively stable
over the past five years, we have experienced volatility in connection with related inbound transport logistic
costs, which are sensitive to the distance of delivery and oil price movements. One of our outside sources of
stone is a quarry set to close in 2015; although we have alternative sources for this stone, it is possible that
upon such as a closure in the future, replacement raw materials will be more difficult to source, or if the
new source is located at a greater distance, transport costs could increase significantly.
30
We plan to purchase approximately 50% of our anticipated coke needs for 2014 from suppliers in Ukraine,
and all of our coke supplies for our Russian business are supplied by Ukrainian sources. Our main source
of Ukrainian coke is in Kharkov in the eastern region of Ukraine, where there has been continuing
political instability. Continuing instability could threaten our supplies of Ukrainian coke, which could
adversely affect our business. Although we have put in place contingency plans for the supply of coke from
the Czech Republic and Poland, there is no guarantee that these contingency plans will be as cost-effective
as our current supplies, and if there is an escalation of instability in the region, that substitute coke will be
able to reach our production plant in Russia. The coke we require for our plants must meet certain
characteristics, and it is possible that we could have difficulty in sourcing the correct type of coke, even
from these alternative suppliers. We are also investigating Ukrainian sources for raw stone material, which
could be affected by the current instability. Our plants use natural gas sourced from Russia, and such
supply could be affected by the current instability in the region. See ‘‘—We operate in emerging markets such
as Russia, which exposes us to risks inherent to such less developed markets, and we may be exposed to greater
risks as we intend to increase our operations in such markets.’’
In order to manage the risk of fluctuations in raw material and energy prices, we enter into supply
agreements covering significant portions of our expected raw material and energy requirements for set
periods of time, which may be on a monthly, quarterly, semi-annual or annual basis depending on the
nature of the supply agreement. If raw material or energy prices decline after we have entered into the
relevant supply agreement, we may have to pay prices under the agreement which are in excess of
prevailing spot market prices, which may adversely impact our results of operations.
Furthermore, interruptions of our operations resulting from supply shortages of certain raw materials or
other inputs can significantly affect our profitability. If any of our suppliers is subject to a major disruption
in its production or is unable to meet its obligations under our existing supply agreements, we may be
forced to pay higher prices to obtain the necessary raw and other materials from other sources. We
purchase certain raw materials, such as coke and binder, from a limited number of suppliers, and although
they are presently widely available, we may not in future be able to find acceptable alternative sources or
adapt our production processes sufficiently to differing qualities of raw materials and the process of
locating and securing such alternative sources might be disruptive to our business. In particular, switching
binder suppliers would require extensive testing. Any extended unavailability of a necessary raw material
or other input could cause us to cease manufacturing one or more of our products for a certain period of
time.
While we attempt to match price increases of raw materials and other inputs with corresponding product
price increases, and historically we have been able to do so with an approximately six-month time lapse,
our ability to pass on increases in the cost of raw materials to our customers is, to a large extent, dependent
upon our contractual relationships and market conditions, and we may not be able to raise product prices
immediately or at all, and we may not succeed in passing on the entire cost increase to our customers. Our
ability to pass on price increases of raw materials and other inputs may also be affected by a temporary
decline in demand for our products in the markets in which we are active and increased price competition
for market share. A significant proportion of sales of our products are made to dealers. Many of our dealer
customers, particularly larger dealer chains, have purchasing relationships with one or more of our
competitors and may possess significant pricing power. While our top 10 customers for each of our
Building Insulation, Technical Insulation and PPS divisions represented, respectively, only 31%, 37% and
19% of total gross external sales for the year ended December 31, 2013, and the vast majority of sales
made by our Russian business unit are to dealers, the purchasing power of large dealers may nonetheless
impair our ability to pass on increases in the cost of raw materials. Purchase cooperation and a tendency
toward dealer consolidation may also limit our ability to pass on increases in the cost of raw materials. Any
inability or delay in passing on increases in raw materials cost to our customers could materially adversely
affect our business, financial condition and results of operations and cash flow.
Significant fluctuations in demand or a decrease or increase of production capacities might lead to overcapacity or
undercapacity, either of which could adversely affect our business.
Our customer agreements generally do not require customers to purchase defined volumes during their
term. This means that there is no guarantee that future cash flow and revenues from such agreements will
correspond to historic levels. A significant decrease in demand, such as due to a cyclical weakness of the
construction industry, and delays in the capacity adjustment process may result in overcapacity and a
reduction in the utilization rates of our plants in the respective geographic regions. Decreases in demand
and increases in production capacity that result in overcapacity may also lead to increased price
31
competition. Should we in such a situation not succeed in reducing overcapacity at reasonable cost, for
example by temporary or permanent plant closures, thereby lowering our cost base and helping to
minimize the excess supply, we may face a further decline in profitability, cash flows and results of
operations. Even if we successfully reduce our capacity, such reduction may lead to significant
extraordinary cost, particularly in connection with plant closures, termination of employees or other
restructuring measures. In addition, the pricing and production policies of competitors are unpredictable
and could frustrate our efforts. Moreover, declining prices in a market situation with significant oversupply
may also affect neighboring regions, thereby causing further declines in sales, cash flows and results of
operations. There is also a risk that we could establish or acquire additional production capacities which
cannot be appropriately used, for example as a result of an inaccurate evaluation of market developments.
Any failure to adequately utilize our production capacities could lead to impairment on production
equipment and significant impairment charges on goodwill and have negative consequences for our
profitability due to our relatively high level of fixed cost. If one or more of the aforementioned risks
materializes, this could have material adverse effects on our business, financial condition and results of
operations.
Alternatively, a significant increase in demand, or decrease in production capacity, may result in our
production becoming capacity-constrained. If demand for our products increases beyond the maximum
production capacity of our existing production plants, our ability to satisfy customer orders in a timely
manner may be adversely affected, which may result in declines in customer satisfaction, reputational
damage and lost sales. The number of production shifts can range between three and five (representing
shifts working 24 hours a day, seven days a week), although running five production shifts is illegal in
Finland and in Russia. However, in Finland and Sweden, increasing the number of shifts from three to four
roughly increases our salary costs by 8%, and our salary costs would be increased by roughly 25% if shifts
increase from three to five, due to Sunday compensation regulated by law and our collective bargaining
agreements, thereby increasing the marginal cost of ramping up production. We may also need to notify
our Russian employees of introduction of shifts in advance and obtain their consent. Failure to meet these
requirements may impair our ability to meet the increased demand in production. We may also be required
to make substantial capital expenditures in order to augment our production capabilities to meet such
increased demand by expanding existing production plants or developing new production plants, which
may have a material adverse effect on our business, financial condition and results of operation. See ‘‘—We
may not be able to successfully manage future growth, including by way of organic growth to new regions and
potential acquisitions which may expose us to additional risks.’’
Our licenses, permits and certifications may be suspended, amended or terminated prior to the end of their terms or
may not be renewed.
Our licenses, permits and certifications required to conduct our business operations (or certain parts
thereof), including for the exploration, development and exploitation of mineral resources, operation of
our manufacturing facilities, and sale of our products for use in specific applications (particularly the
products produced by our Technical Insulation division), could be revoked, withdrawn, invalidated or
amended by the relevant authorities under certain circumstances. For example, a license, permit or
certification could be revoked, withdrawn, amended or refused to be renewed if there is a breach of a
permit condition or collateral clause, a subsequent change of facts or a relevant regulation, if a permit is
found to be contrary to the public interest, if it is deemed necessary to prevent severe harm to the common
good, or if we fail to satisfy the criteria for its continuation or renewal. Licenses or permits which have
been granted for existing operations may also be required to be reviewed regularly by the permit
authorities. As a consequence of such reviews, the relevant license or permit conditions may be updated in
accordance with current standards, which may be more rigorous or onerous than those applicable at the
time the relevant license or permit was initially granted or last renewed. In particular, the Finnish
environmental permit system does not recognize the grandfathering of existing permit conditions into
renewed permits. Due to production caps in our environmental permits we might also be required to renew
our permits if our business expands and requires larger production capacities. Our existing permits might
therefore be amended to include more stringent threshold, which may have a significant adverse effect our
operations. See ‘‘Regulation—Finland—Emissions and Environmental Permits’’ for further details.
Some of our TI products, namely those with marine applications and fire protection applications for
ventilation ducts, require certifications before they can be sold for use in certain specific applications. We
estimate that approximately 30% of our sales in the TI division come from sales of products for which a
certification is required. While we do not foresee a risk that our products will not be properly certified,
certification requirements change, and there is a possibility that we may need to make adjustments to our
products to comply with amended requirements, which could prove costly.
32
There is a potential risk of certain permits relating to our production facilities at Trzemeszno being
declared invalid in the future due to formal irregularities in their issuance. There is no guarantee that we
would be able to procure their reissue in such circumstances. Additionally, fines may be imposed by the
relevant Polish authorities if the relevant facilities are used without valid permits. Payment of benefits
under insurance policies relating to those facilities may also be refused due to our potential failure to hold
the required permits.
Moreover, in some jurisdictions and in respect of some of the licenses and permits we require, private
individuals and the public have the right to comment upon the process, raise objections to proposed
permits and initiate court proceedings to intervene and prevent the granting of requested permits. In
addition, environmental organizations, residents or other third parties may raise objections to our current
or proposed activities or file suits challenging our operations and the granting or existence of permits and
licenses to conduct our operations. However, permits must be granted to us if the legal requirements for
such permits are met, regardless of possible complaints and appeals. The administrative permit procedure
might, however, be delayed for several years due to appeals.
If any of our licenses, permits or certifications is appealed, revoked, withdrawn or amended, or if we have
difficulty renewing a license, permit or certification, we may experience delays in our operations which
could adversely impact our business, financial condition, results of operations and cash flows. In some
circumstances the Finnish environmental permitting regime permits the commencement of projects
notwithstanding pending appeals, but this does not apply to all projects. In addition, the right to commence
such a project may be cancelled or limited by appeal courts.
The licensing, permitting and certification rules, particularly in emerging markets such as Russia, are
complex, sometimes contradictory, and may change over time, making our ability to comply with all
applicable requirements more difficult or even impossible, thereby precluding continuing or future
operations. For instance, the construction or renovation of buildings in Russia requires a significant
number of varied governmental approvals, including positive conclusions of state environmental expertise
processes, project documentation approvals and ultimate construction permits issued by regional or local
authorities. Moreover, due to its location construction of the Tver production plant requires additional
consents from the administration of the Zavidovo national park. See ‘‘—We are subject to numerous
environmental, building, health and safety regulations, technical standards and other regulations’’. If the
construction of the Tver production plant fails to conform to the project documentation, construction is
commenced without an appropriate construction permit or otherwise fails to comply with regulatory
requirements, we may be subject to fines and penalties, as well as cancellation of the project by
government officials or even demolition of the building already constructed. Regulatory authorities,
particularly in Russia, exercise considerable discretion in matters of enforcement and interpretation of
applicable laws, regulations and standards, the procedure, timing and scope of issuance and renewal of
licenses, permits, approvals and authorizations, and in monitoring licensees’ compliance with the terms
thereof. Russian authorities have the right to, and frequently do, conduct inspections of the operations and
properties of license and permit holders. Any such future inspections may result in a determination that
ZAO Paroc has violated laws, decrees or regulations, and ZAO Paroc may be unable to refute such a
determination or remedy the alleged violations. ZAO Paroc’s failure to comply with existing laws and
regulations, the terms and conditions of its licenses and permits, or the findings of governmental
inspections may result in the imposition of fines and penalties or more severe sanctions, including the
suspension, amendment or termination of licenses, permits, approvals and authorizations, ZAO Paroc
being required to cease certain business activities, or the imposition of criminal or administrative penalties
on ZAO Paroc’s officers. The introduction of public consultation as a part of permitting procedures in
most of the jurisdictions in which we operate has in many cases extended the processing times for license
and permit applications, and increases unpredictability in the permitting process. Requirements imposed
by these authorities may be costly and time consuming and may result in delays in the commencement or
continuation of exploration, production, sales or distribution operations.
We also may incur penalties and other costs, sanctions and obligations as a result of permit violations.
There have also been certain compliance issues with environmental permit stipulations within the Finnish
mining sector during the last two years. This has led to an intensive discussion concerning the supervision
of permit compliance. The Finnish Ministry of the Environment amended its environmental permit
supervision guidance document in late 2013 and has established new positions within the state
environmental administration in order to support environmental permit supervision. This may have an
impact on the degree of scrutiny and likelihood of authorities imposing more stringent permit
requirements (for example, in connection with reviews of environmental permits) and may thus affect our
33
operations. Moreover, environmental protection legislation reform is currently being progressed by the
Finnish Parliament, which will implement the EU Industrial Emissions Directive (‘‘IED’’). The Polish
Parliament is also currently working on legislation implementing the IED into the Polish Environmental
Protection Law; under this implementing legislation, IPPC permits (so-called integrated permits) should
be reviewed by competent authorities within three months from the date when such legislation enters into
force, in order to adapt such permits to the standards laid down in the IED. The implementation of the
IED in the EU Member States in which we have production facilities will have an impact on all Paroc
operations, excluding quarrying, and will likely require capital expenditure in respect of baseline
environmental studies of our facilities with environmental permits. As the IED is implemented in the other
jurisdictions in which we operate, we also anticipate additional capital expenditure in respect of baseline
environmental studies from facilities with permits. See ‘‘Regulation.’’
Furthermore, we are required to obtain licenses or permits for quarrying of specific mineral deposits. In
Finland these are known as ‘mining districts’ granted pursuant to ‘mining district decisions’, where granted
in response to applications filed prior to July 1, 2011; they are known as ‘mining permits’ otherwise. See
‘‘Regulation—Finland—Excavation of Stone Resources’’ for further details. We currently hold eight mining
districts in Finland: Joutsenenlampi, Lehlampi, Ybbersnäs, Sallittu, Vanhasuo, Metsäsianniemi, Näträmälä
and Kangas. We own the two real property sites included in the Joutsenenlampi mining district, pay a
leasing fee for the land on which the Sallittu and the Kangas districts are located, and for the other five
quarries, we do not lease the land, but pay the statutory mining excavation fee. Under the Finnish mining
legislation, in order to exploit our quarries we (as the mining district holder) are also required to secure
surface rights to the relevant real property from the relevant landowners either by private agreement, or
through the exercise of statutory appropriation rights conferred by mining district decisions or permits. We
are responsible for paying annual compensation in the form of an excavation fee to the owners of land
included in the mining district. The basis for determining the annual excavation fee varies by mining
district, but is generally based on contracts with the land owner and a statutory excavation fee based on the
Finnish mining legislation. A mining district decision could be revoked if we fail to comply with the legal
requirements applicable to such mining districts decisions or we do not actively carry out mining for a
period of over five years (or such further period as may be specified in response to an extension application
by us, though during such extended period we are required to pay a higher extraction fee to the relevant
landowner). Because mining at the Kangas and Näträmälä sites (we currently hold these sites as reserves)
has been suspended for a number of years, we run the risk that the exclusive rights we obtained to exploit
stone resources at these sites will be revoked. We have already been granted an extension to begin mining
at Kangas until December 3, 2015. If our right to quarry is revoked, we will no longer have access to the
reserves at these sites, which could materially adversely affect our supply of stone and therefore results of
operations. After the closure of the Lappeenranta facility, we will likely hold the Vanhasuo mining district
as a reserve site and will not conduct active quarrying operations.
We also need to obtain environmental permits which cover each of our operations. These environmental
permits are reviewed at regular intervals determined by the relevant environmental permitting authority.
We currently hold valid environmental permits for our production sites in Finland (Lappeenranta, Oulu
and Parainen) and for the Joutsenenlampi, Lehlampi, Vanhasuo, Ybbersnäs, Sallittu and Metsäsianniemi
districts, however, we do not have valid environmental permits for the Kangas or Näträmälä districts.
Environmental permits are needed before commercial exploitation of these rights may commence. The
Oulu, Hässleholm and Vilnius environmental permits will need to be renewed by December 31, 2014, we
are applying for new environmental permits at the Lappeenranta plant (by October 2015) and landfill (by
May 2015) and the environmental permits at Joutsenenlampi, Sallittu and Ybbersnäs each have an
authority audit due by December 31, 2017. We are also required to have chemical safety permits for each
of our operations. Although we have a good historical record of obtaining such mining districts and
environmental permits in Finland, we may not be able to obtain such specific permits in the future, which
could have an adverse effect on our business, financial condition, results of operations and cash flows.
Increased energy cost or disruptions in energy supplies could have a material adverse effect on our business,
financial condition and results of operations.
Our business is dependent on the steady supply of significant amounts of energy, in the form of coke and
electricity, at commercially reasonable terms. In particular, the stone wool production process relies on
substantial amounts of energy to melt the stone raw materials and other materials used in the production
process. In our manufacturing facilities this is done in a cupola oven fired by coke or in an electric melting
furnace (in two of our facilities). Our energy cost, which therefore mainly consists of cost for the supply of
34
coke and electricity incurred in connection with the production of our products, accounts for a high
percentage of our cost base. We also consume natural gas, propane and biogas and burning oil. Gas is used
primarily as fuel in the curing process to polymerize binder. Gas is also used to pre-heat combustion air in
the melting process. In the year ended December 31, 2013, our energy cost (excluding coke) amounted to a
total of A27.5 million, or 6.3% of our sales. Energy cost is affected by various factors, including the
availability of supplies of particular sources of energy, energy prices and regulatory decisions. We have also
experienced significant volatility with respect to coke prices in recent years. Coke prices spiked in 2011
with an approximately 28% increase in price over the previous year, but over the course of 2012 and 2013
prices have declined significantly. For example, coke average consumption prices have ranged between
approximately A234 and A506 per tonne since 2007. Negotiated prices are generally based on trends in
Australian coking coal prices. Such volatility may increase as a result of natural disasters (for example
floods in Queensland, Australia, which is an important region in the global supply of coking coal, increased
the global price of coking coal), current political instability, such as the unrest currently occurring in
several countries in the Middle East, North Africa and eastern Europe, the promoted growth of renewable
energy sources, especially in Europe, or the imposition of regulations such as export restrictions or
government excises on coke or coking coal. Any significant increase in market prices, transportation cost,
grid fees or taxes (including reduction of tax benefits) associated with the supply of energy would increase
our operating cost and, thus, may negatively affect our results of operations if we are not able to pass the
increased cost fully and without delay on to our customers. Our ability to pass on energy price increases
may also be affected by a decline in demand for our products in the markets in which we are active and
increased price competition for market share. Any inability or delay in passing on increases in energy cost
to our customers or any interruption or shortage of energy supply may negatively impact our business,
financial condition and results of operations.
In addition, in March 2014 the Finnish government reached an agreement on central government spending
limits for 2015-2018. The Finnish government has decided to increase energy taxation in respect of the
mining industry. It is anticipated that the electricity tax rate (currently at 0.703 c/hWh (VAT 0%))
applicable to companies operating in the mining industry will be increased, and mines will be excluded
from the scope of accompanying energy tax cuts to support companies operating in energy-intensive
industries. The Finnish government may yet change its position and no precise information is available at
the moment. However, if enacted these changes may increase the energy taxes paid by the mining industry
in the forthcoming years. Because we operate quarries, all or part of our operations may be subject to any
increased tax rate applicable to the mining industry, and we may not receive all or any of the benefit of the
accompanying reductions in the energy tax applicable to companies operating in energy-intensive
industries. Any increase in our effective tax rate may have a material adverse effect on our business,
financial position and results of operations.
The availability of and any significant increase in the cost of transportation represent a significant risk for our
business.
Transportation plays an important part in our supply chain as we ship our products, mainly by truck and to
a lesser extent by rail or ship, to our customers. Further, most of the raw materials need to be transported
to our production facilities. Any material disruption in or lack of availability of transportation, inadequacy
of transport infrastructure (particularly in Russia), or significant increases in fuel or energy prices, road
tolls or demand-driven market prices resulting in higher transportation cost, could have a material adverse
effect on our business and our financial condition and results of operations. In addition, increased costs
relating to exhaust emissions control requirements that have been or may be imposed in the future,
particularly due to climate change-related legislation, may also lead to such effects. Additionally, it is
possible that legislation (both at the EU and national level) will change regarding truck size, axis weight
and truck length, or that regulations may introduce or raise fuel content or economy standards, which
could potentially increase transportation costs. For example, over the past decade in certain jurisdictions in
which we operate, national legislation on such issues has changed in response to EU legislation and
domestic political concerns, which has in certain cases, such as the introduction of a new heavy vehicle
tolling system in Poland in 2011, resulted in higher transportation costs. In the year ended December 31,
2013, our transportation cost, which include freight for deliveries from our plants or other stocks to
customers, customs tariffs and clearance, as well as intra-group transfers of finished products but excluding
transportation cost arising from purchases of raw materials and other inputs, amounted to a total of
A44.7 million, or 10.3%, of our sales.
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We generally rely upon third-party service providers for the transportation of our products to customers.
Our ability to service our customers at commercially reasonable cost depends, in many cases, upon our
ability to negotiate commercially reasonable terms with carriers, including railroads and trucking and
shipping companies. To the extent that third-party carriers increase their rates, including to reflect higher
labor, maintenance, fuel or other cost they may incur, we may be forced to pay such increased rates sooner
than we are able to pass on such increases to our customers, if at all. Any material increases in our
transportation cost that we are unable to pass on to customers fully and in a timely manner could adversely
affect our business, results of operations, financial condition and prospects.
Any threat to, or impairment of, our intellectual property rights could cause us to incur cost to defend these rights.
Protection of intellectual property is essential in the context of maintaining and developing Paroc
proprietary technology. We currently own 332 registered trademarks and 513 registered patents (and
patent applications) worldwide. These protections may not adequately safeguard our intellectual property
and we may incur significant cost to defend our intellectual property rights, which may adversely affect our
results of operations. There is a risk that third parties, including our current competitors, will infringe on
our intellectual property rights, in which case we would have to defend these rights. We have in the past
(some licensing agreements are still in place) licensed our proprietary technology to third parties, including
to some of our competitors, which carries with it the risk that our intellectual property may be misused or
used in ways contrary to the licensing agreements. There is also a risk that third parties, including our
current competitors, will claim that our products infringe on their intellectual property rights. These third
parties may bring infringement claims against us or our customers. Additionally, any of our intellectual
property may be challenged, invalidated, or circumvented by third parties, which could limit our ability to
prevent competitors from marketing related or competing products. Any such actions by third parties may
adversely affect our results of operations, our customer relationships and our reputation.
Although we are not aware of any major legal proceedings that have been brought against us for
infringement of a patent or trademark or of any proceedings brought against any of our patents that could
have a material adverse effect on our business if we would not prevail in such proceedings, we cannot
exclude the possibility that such a claim could be brought against us in the future. We do, from time to
time, face incidents of infringement of our intellectual property, and currently there are two companies
which may be infringing upon our patented technology, and we are in the process of evaluating the proper
course of action. We have recently settled a dispute with another company over the other company’s use of
red and white stripes. The Office for Harmonization in the Internal Market recently denied our application
for a Community Trademark for our red and white stripes, ruling that the trademark is instead protected
by local regulations. If not enough is done in these cases to protect our proprietary technology or other
intellectual property, there is a risk that our proprietary technology or other intellectual property will
become widely available and could be used by our competitors, which could adversely affect our results of
operations.
Our expansion into the Russian market has brought with it certain challenges with respect to intellectual
property. There are certain shortcomings in our intellectual property protection in Russia that we will need
to address in order to properly protect our intellectual property. Although the process of addressing these
shortcomings is ongoing, there is no guarantee that we are able to rectify all of the shortcomings before
irrecoverable damage is done to our intellectual property protection in Russia. For example, certain Paroc
Group patents and trademarks used in Russia have not been properly licensed to our Russian subsidiary
and it may be difficult to prove the actual use of these patents and trademarks in order to protect them
from being contested in Russia on the basis of non-use. Furthermore, to date we have not definitively
confirmed whether or not the products that we sell in Russia infringe any third-party patents, and we
cannot guarantee that there are no third-party patents that might hinder our Russian operations.
Moreover, we do not currently employ all available means to prevent the parallel importation of our
products into Russia, such as registration of our trademarks with the Russian Customs Register of
Intellectual Property Rights and registration of our trademarks in other countries of the Customs Union of
Russia, Belarus and Kazakhstan. Moreover, there is a risk that certain of our products are not adequately
protected by our trademarks in Russia. Our existing internal procedures in Russia do not provide a
sufficient level of protection for business secrets, and so there is a risk that they may be disclosed to our
competitors in circumstances where we are unable to recover damages or obtain injunctive relief in respect
of such disclosure. There is also some evidence that there are imitators using the Paroc name in Russia. If
we are not able to resolve these issues, or we incur significant costs in doing so, this may adversely affect
our results of operations.
36
We rely on trade secret protection and confidentiality agreements with our employees and contractors for the
protection of our products, technologies, recipes and other material know-how. If we are not able to maintain
sufficient secrecy, this could have a material adverse effect on our results of operations and financial condition.
While we own a significant number of patents and trademarks, in certain circumstances we protect our
technology and know-how as trade secrets. We principally rely on trade secrets instead of other forms of
protection either because patent or trademark protection is not possible, for example the particular
technology could not be exactly identified which was used or would not qualify for patent or trademark
protection, or in our opinion would be less effective than maintaining secrecy. In addition, we rely upon
confidentiality agreements with our employees and contractors. To the extent that we rely on trade secret
protection and confidentiality agreements, there can be no assurance that our efforts to maintain secrecy
will be successful or that third parties will not be able to develop the product, technology or know-how
independently. Any loss of secrecy could have a materially adverse effect on our results of operations and
our financial condition.
The quality of our stone wool products depends upon our ability to successfully exploit existing resources of stone
raw materials that are difficult to source from third parties and acquire and develop further stone raw material
resources at competitive costs. Delay or failure in acquiring, developing and completing development projects could
have an adverse effect on our business, financial condition, results of operations and cash flows.
The quality of our stone wool products depends on our ability to quarry certain stones that are difficult to
source from third parties cost-effectively and to meet the quality standards required by our manufacturing
facilities. Although we can supply stones that are difficult to source from third parties over the medium- to
long-term based on current production levels, in the future our resources may not be available when
required or, if available, may not be capable of being quarried cost-effectively or possess appropriate
qualities. Additionally, we may not be able to accurately assess the geological characteristics of any
resources that we acquire, and the acquisition of an inferior grade of resources may materially and
adversely affect our profitability and financial condition.
Although we believe that there are local substitutes for one type of stone that is difficult to source from
third parties and there are other substitutes, such as slag, for another type of stone, substitution would
likely increase costs as we transport the first type of stone over longer distances to our production plants,
and as we test the replacements for the second type of stone. As the chemical composition of the second
type of stone is uniquely suited to our stone wool products, sourcing slag with the correct composition may
be a costly process, and it is possible that the products produced with the substitute will not be of the same
quality as those made with the virgin stone we currently source from the quarries over which we have
mining rights. We estimate that it would cost approximately A50,000 per plant in research and development
and other costs to implement the use of slag instead of this stone across all our production facilities. This
estimated cost does not include possible losses in productivity or higher scrapping costs.
The hydrological and geological structure of the quarry can affect the ease and volume of quarrying as well
as the speed of overburden removal. Additionally, our operations require the quality monitoring and
removal of groundwater during quarrying. Future efforts to remove groundwater may not be adequate and
may not meet future operational demands or expectations. In addition, quarrying involves hazardous
activities, such as operating large pieces of rotating and other heavy equipment. It is possible that the
equipment may be subject to corrosion due to weather exposure, and preventing such corrosion may
require additional costs. All of these factors could adversely affect our business, financial condition, results
of operations and cash flows.
We currently hold both Kangas and Näträmälä mining districts in reserve and no mining has been carried
out in those areas for a number of years. If mining is ceased for a period of five years the Finnish Mining
Authority (TUKES, the Chemical Safety Agency) may rescind the mining district decisions. Prior to this,
we may apply for an extension to this five-year limit in order to avoid losing the mining district. The Mining
Authority may grant extensions up to a period of 10 years. We are in the process of applying for an
extension for the Näträmälä mining district, and have an extension for the Kangas mining district.
However, during this time we must pay a higher land area based extraction fee to landowners (normally
A50 per hectare; higher fee A100 per hectare). Once we commence quarrying, we will also be required to
pay, in addition to the normal 50A per hectare land area-based extraction fee, a fee which is based on the
amount of quarried minerals in accordance with the Finnish Mining Act. A byproduct fee may also be
required if byproducts are sold for use outside the mining operations. The Mining Authority has not
initiated any proceedings so far. However, if such proceedings are initiated and the mining districts are
37
revoked, there may be material adverse effects on our profitability. Furthermore, if we are required to start
quarrying in these mining districts in order to avoid losing them, we may incur additional costs.
Our stone resource estimates are based on current production needs. If we increase production, this could
cause our stone resources to be depleted earlier. The success of our plans to extend the life of our quarries
depends on, among other factors, our ability to expand existing quarrying areas and to make new quarrying
areas accessible. This may require extensive and costly infrastructure measures such as the relocation of
industrial facilities or residential communities and may lead to compensation obligations. In addition to
general quarrying permit requirements, relocation measures may require administrative or judicial
proceedings or other legal procedures to enforce the relocation, particularly if agreement on relocation is
not reached with affected parties. With such proceedings we risk an unfavorable decision that may delay,
complicate or impede projects to expand existing or develop new quarries. Moreover, increasing attention
on the environmental impacts of quarrying may have an impact on future permitting procedures and cause
delays in initiating new production. If we cannot expand existing or acquire new quarries and make them
accessible to increase our stone resources, this may adversely affect our business, financial condition,
results of operations and cash flows. Our quarries will require additional capital expenditures in the future
in order to fully exploit these resources as projected. In addition, since we attempt, where practical, to
quarry our lowest-cost resources first, we may not be able to quarry all of our reserves at a cost similar to
our current operations.
Because our stone resources deplete as we extract stone, our ability to sustain or increase our current level
of production in the long term depends, in part, upon our ability to acquire and develop additional stone
resources that are economically recoverable and to develop new, and expand existing, quarrying
operations. We applied for, and on July 24, 2013 and January 15, 2014 (respectively) received, mining
district decisions for the Teerisuo and Longanlampi concession areas. We believe these mining district
decisions are legally valid. These decisions have been delivered to the National Land Survey of Finland and
we are currently awaiting the commencement of the requisite land surveys to define the boundaries of the
respective concession areas. We have yet to complete the process of securing the necessary surface rights to
the respective areas (either by entering into private agreements with the relevant landowners, or exercising
the statutory expropriation rights conferred by the mining district decisions). We currently expect these
surveys to be completed, and the surface rights to be acquired, during 2014. This will increase our
resources of the stones that are difficult to source from third parties. However, there is no guarantee that
those surface rights will be obtained (though in certain circumstances the land surveying process permits a
mining district holder to access expropriated areas notwithstanding unresolved appeals by landowners
regarding compensation amounts), and it is possible that the land surveys may uncover issues that could
potentially delay the finalization of our rights in relation to the respective areas. Moreover, our planned
expansion projects might not result in additional stone resources, and we might not have continuing
success developing additional quarries due to the aforementioned reasons. Furthermore, the quality of
stone and quarrying conditions in new or expanded quarries is uncertain and may be less favorable than
those at which we are currently quarrying. In addition, these expansion projects could be limited by many
factors, including our ability to raise sufficient financing, investment restrictions under our existing or
future debt agreements and the inability to expand onto properties on commercially reasonable terms.
Furthermore, expansion of existing quarries requires significant economic, political, public and
infrastructure development efforts and investments, particularly if there is a need to relocate existing
residents. Recent reforms of Finnish mining legislation have made the expropriation of properties within a
proposed mining area more difficult, particularly in cases of low-value or short-term deposits. Prior to
those reforms, obtaining a mining district decision automatically gave grounds for expropriation. For
mining permit applications filed after July, 2011, obtaining an expropriation permit requires that the
construction of the mine be in the public interest, and that the benefits of the project outweigh the
detriments. The previous provisions relating to expropriations will continue to apply to mining district
decisions granted in response to applications filed prior to July 1, 2011. Although our Teerisuo and
Longanlampi applications were filed before the reforms became effective, the new rules may affect future
applications for mining permits. The occurrence of any of the aforesaid risks could have a material and
adverse effect on our business, financial condition, results of operations and cash flows.
Additional factors affecting our ability to successfully exploit stone resources, particularly in new areas of
our quarries, include the ability to acquire new land, gather geological data, obtain reserve assessments,
acquire approvals, consents, licenses and permits from the relevant authorities, work with environmental
groups, work with unions, secure the availability, terms, conditions and timing of acceptable arrangements
for quarrying, ensure successful transportation and construction and the performance of engineering and
38
construction contractors and secure the services of contractors, suppliers and consultants. Exploitation
permits or quarrying rights that have already been granted may later be restricted or limited by the
competent authorities. The authorities may make such permits or rights subject to new conditions provided
these conditions still allow for an economically reasonable exploitation. A delay in obtaining required land
plots and gathering information necessary for an application for, or the denial of, an allowance, approval,
consent, license or permit or other delays in permitting procedures may harm our business, financial
condition, results of operations and cash flows. There can be no guarantee as to when our development
projects will receive the appropriate approval and whether the necessary project infrastructure will be
completed, whether the resulting operations will achieve the anticipated production volumes or whether
the costs in developing these projects, including additional costs necessary to comply with conditions
imposed by the relevant authorities, will be in line with those anticipated.
The stated stone resources included in this offering memorandum are estimates based on our, and a third party
contractor’s knowledge, experience and industry practice, and the volume and quality of our actual resources could
be substantially lower than such estimates, and may also differ from those generally disclosed in filings with the U.S.
Securities and Exchange Commission in accordance with SEC Industry Guide 7. Our stated resources are not
calculated or reported pursuant to or in accordance with the JORC Code.
Our stone resources data with respect to our six active quarries over which we have mining rights, on which
our production and capital investment program are based, are estimates that were calculated by a thirdparty contractor, and confirmed by us. There are no requirements under Finnish law relating to the
classification or quantification of mineral reserves. The Finnish association of extractive resources industry
recommends that mining companies use the Fennoscandian review board’s standards of disclosure for
mineral projects when they make reports of their mineral projects. These standards are based on the
Canadian NI 43-101. However, most mining companies use the reporting standards which are typically
employed in the jurisdictions where the companies are listed or systems for which their personnel have
accreditation; the JORC Code and CIM/NI 43-101 are frequently used. Our mineral resources are not
calculated pursuant to or in accordance with such standards, but rather are calculated through the taking
and analysis of core samples, and land surveying, by a third-party contractor.
Our reserve and resource estimates are inherently uncertain and depend on geological assumptions, cost
assumptions and statistical inferences which may ultimately prove to have been unreliable. Consequently,
reserve estimates are often regularly revised based on actual production experience or new information
and could change. Furthermore, should we encounter mineralization or formations different from those
predicted by past drilling, sampling and similar examinations, the volume or quality projections of our
reserve estimates may have to be adjusted and exploitation plans may have to be altered in a way that
might adversely affect our operations.
Moreover, increases in capital expenditures necessary for quarry development, production costs, decreases
in recovery rates or changes in applicable laws and regulations, including environmental, permitting, title
or tax regulations that are adverse to us, could result in the volumes or qualities of stone that we can
feasibly extract being significantly lower than the resource estimates indicated in this offering
memorandum. If it is determined that the quarrying of certain of our resources has become uneconomical,
this may ultimately lead to a reduction in our aggregate stone resources. These variations could be
material, and therefore could adversely affect our results of operations.
The estimated volume and quality of resources described in this offering memorandum should not be
interpreted as an assurance of the commercial viability, profitability or potential of any future operations.
Our production levels at any of our quarries might not reach previous historical production levels, and the
volumes of stone that we can feasibly extract may be significantly lower than the reserve and resource
estimates indicated in this offering memorandum.
Our resource estimates are disclosed on a different basis than those disclosed in registration statements
and other documents filed by other companies with the U.S. Securities and Exchange Commission (the
‘‘SEC’’). The calculation and disclosure principles that are the basis for our reserve calculations may differ
in several significant respects from the SEC Industry Guide 7 (‘‘Guide 7’’), which governs disclosures of
stone or other mineral resources in registration statements and reports filed with the SEC and may differ
in several significant respects from reserves calculated pursuant to the JORC Code. In particular, Guide 7
does not recognize classifications other than proven and probable reserves, and the SEC does not permit
mining companies to disclose mineral resources estimates other than proven and probable reserves in SEC
filings.
39
The resource estimates included in this offering memorandum may include measured, indicated and
inferred resources, which are generally not permitted in disclosure filed with the SEC. Under Guide 7,
minerals may not be classified as a ‘‘reserve’’ unless the determination has been made that the minerals
could be economically and legally produced or extracted at the time the reserve determination is made. All
or any part of measured or indicated resources may never be classified as reserves. Further, there is a great
amount of uncertainty as to the existence of ‘‘inferred resources’’ and as to whether they can be exploited
legally or economically. Accordingly, it should not be assumed that all or any part of an ‘‘inferred
resource’’ will be upgraded to a higher category.
We are subject to numerous environmental, building, health and safety regulations, technical standards and other
regulations.
We are subject to a number of European Union, national, state and municipal environmental, building and
occupational health and safety laws, rules and regulations and technical standards relating to, among other
things, the protection of the environment and natural resources, including those governing air emissions,
energy performance of buildings, hazardous substances and waste, water discharges and emission of
pollutants into water, transportation, remediation of contamination, product requirements, dangerous
industrial facilities, sanitary requirements and workplace health and safety. Several of the regulatory
requirements that apply to our business operations have in the recent past become more stringent, and we
expect some of them to become even more stringent in the future. For further information about the
various laws, rules and regulations as well as technical standards applicable to our business operations, see
‘‘Regulation.’’
Compliance with environmental, health and safety laws and regulations, as well as technical standards
applicable to our business operations, entails and is expected to continue to require considerable capital
expenditures and other cost. In addition, any violation of or liability under these laws and regulations, such
as those governing discharges to air and water, contamination of groundwater, sediments or soil, or
occupational health and safety, and the failure to maintain necessary permits and approvals, could result in
substantial administrative and criminal penalties and remediation cost, temporary or permanent shutdowns
of certain of our production facilities, temporary or permanent prohibitions on the marketing and sale of
certain products, third-party claims and negative publicity. Any of these factors could have a material
adverse effect on our business, financial condition and results of operations. See ‘‘—Obligations resulting
from environmental conditions at our current and former production and other sites could have a material
adverse effect on our business, financial condition and results of operations.’’
We are also required to obtain and maintain permits from governmental authorities for many of our
operations. These permits are subject to modification, renewal and revocation by governmental
authorities. For example, in January 2011, the European Directive 2010/75/EC on industrial emissions
(‘‘IED’’) came into force, which sets out rules on the prevention and control of pollution from industrial
activities and includes rules aimed at reducing emissions into air, water and land, as well as preventing the
generation of waste in order to achieve a high level of overall environmental protection. From 2016, each
of the jurisdictions in which we have manufacturing operations (apart from Russia) has to comply with the
emissions limits set for certain industries. However, according to the European Commission, few of these
jurisdictions has fully implemented laws necessary to comply with the IED’s provisions, and, therefore,
future modifications to the permitting requirements in each such jurisdiction are possible to address
IED-related requirements. In Finland, the implementation of the IED is currently ongoing, while Sweden
has fully adopted the IED. The IED is to be implemented by a revision of the Finnish Environmental
Protection Act. The revision is ongoing and the new act is expected to enter into force during year 2014.
Poland is yet to implement the IED, though it is currently expected that implementing legislation will be
passed during 2014 that will require certain terms of existing integrated permits (such as that under which
our Trzemeszno plant operates) to be reviewed within three months after the legislation comes into force.
Additionally, although the IED and its implementation provide transitional provisions, once a new industry
standard becomes binding, existing permits, which are not in compliance with such standard, will not be
grandfathered but will be adjusted with respect to the new (binding) standard. In Sweden, however, the
emission limits stipulated by the provisions of the IED Directive will not adjust the existing permit
provisions, but will apply to the operations in parallel with existing environmental permit conditions. See
‘‘Regulation.’’
We have in the past incurred, and will in the future incur, significant cost for capital and operating
expenditures to obtain and maintain, or as a result of obligations imposed under, necessary permits. For
example, our Hällekis and Hässleholm facilities in Sweden (Skövde is exempt from environmental
40
permitting), which implemented the IED in 2013, will be required to conduct baseline studies to evaluate
soil and groundwater conditions either by 2016 or otherwise in connection with any earlier application for
an environmental permit application or an amendment to an existing permit. Lappeenranta, which will
shut down operations in 2016, is required to conduct a baseline report on soil contamination by the end of
October 2015. Certain of our facilities (namely Hässleholm, Oulu and Parainen) expect that it will be
necessary to make certain IED-related improvements in order to remain compliant with ‘‘best available
techniques’’ requirements under the directive, which may require significant capital expenditures.
However, we cannot ensure that we will also in the future be able to obtain and finance all permits which
we require for our business operations. Any such failure or any violation of the terms and conditions of
such permits or revocation of existing permits could have a material adverse effect on our business,
financial condition and results of operations.
We are also required to comply with Regulation (EC) No. 1907/2006 of the European Parliament and
Counsel concerning the Registration, Evaluation, Authorization and Restriction of Chemicals (‘‘REACH’’),
which requires companies to secure the safe use of substances and chemicals put on the market. REACH
requires that, unless exempt, all chemicals and substances manufactured, imported, or used within the EU
must be registered with the European Chemicals Agency (‘‘ECHA’’). We registered our stone wool fiber, a
man-made vitreous (silicate) fiber, with the ECHA in September 2010 and we believe we are compliant
with the REACH regulations. Our ECHA registration covers the stone wool fiber used in all of our
products. In addition, as we manufacture building materials, regulations on constructions products are
applicable to our activities. We are also required to comply with the EU Packaging and Packaging Waste
Directive (94/62/EC).
In addition, the disposal of waste is often restricted to licensed facilities and/or by licensed entities or, in
some jurisdictions, generators, owners, collectors and transporters of waste must demonstrate to the
competent authority and to other parties that they have properly disposed of hazardous waste by proof of
waste disposal. Our hazardous waste in Finland is mainly disposed of by authorized hazardous waste
management and treatment companies. Non-hazardous waste is either disposed at our own landfills or by
waste management companies. We are responsible for costs of the necessary waste management and for
the environmental impacts of our operative and closed landfills. Liability for closed landfills may last for
several decades. Even though we believe we are in compliance with environmental and waste regulation at
the time, remediation liabilities may arise as a result of conditions identified or obligations imposed in the
future that could have an adverse effect on our business. See ‘‘—Obligations resulting from environmental
conditions at our current and former production and other sites could have a material adverse effect on our
business, financial condition and results of operations.’’ Requirements for regulated substances may reduce
the possibility for landfill disposals and may result in higher costs of disposal. In addition, we cannot
exclude that a so-called ‘‘taking back’’ obligation may be introduced in the future requiring us to take-back,
or fund the take-back, of our products for recycling or disposal when they are discarded by end users,
which could result in higher costs to us for disposal of products containing regulated substances.
At our production facilities and quarrying sites, certain particulates are released in the form of dust.
Additionally, certain chemical binding agents and other hazardous substances are used at our sites. Future
limits on the use of such materials or chemicals may result in additional costs in the production process and
more complex handling procedures at construction sites due to more extensive workplace safety
requirements. Increased attention has been paid to chemicals in connection with workplace safety and
environmental permits in Finland. This may result in requirements to replace chemicals now in use with
chemical considered to be safer. This may have adverse effect on our business. In addition, our products
contain mineral fibers, which complicates handling at construction sites due to more extensive
requirements for worker safety requirements, resulting in increased costs to us. Any occupational safety
deviations, discoveries of latent injuries, spills of substances or other accidents could result in claims for
damages, capital expenditures for technical improvements, or maintenance to ensure future compliance,
which could adversely affect our business. Consumer concern about mineral fibers included in our
products or released during production processes, construction or use of certain products may negatively
affect the reputation of our products. Our production facilities and quarrying sites also generate noise that
is regulated by permit conditions in our environmental permits. Permit conditions regarding noise
generally establish a maximum noise threshold, which may vary depending on the time of day. If general
noise reference values are updated our permit conditions may be correspondingly altered. This could have
adverse effects on our business as we may be required to limit or alter our operations so that applicable
noise thresholds are not exceeded.
41
As urbanization continues to progress in many of our operating jurisdictions, residential areas have drawn
increasingly close to a number of our older sites. For example, Vilnius, Parainen, Lappeenranta and
Hässleholm are located close to city centers. Hällekis and Parainen are located close to Natura 2000 sites
(EU-wide network of ‘‘Special Areas of Conservation’’ designated by Member States under the EU
Habitats Directive, and also incorporates ‘‘Special Protection Areas’’ which are designated by Member
States under the 1979 EU Birds Directive), which require additional focus on emissions levels. Although
we expend substantial efforts on community engagement and research and development of solutions to
minimize or address potential impacts on nearby communities, we may be compelled to cease or scale back
operations at sites located close to residential areas or protected natural reserve areas in response to
community pressure or regulatory changes (such as changes in zoning), or to relocate certain households
situated in the special protection zone of our facilities. We may not be able to obtain compensation for any
such cessation or reduction in production, or may be required to incur substantial expenditures in
connection with such relocations, and thus they may have a material adverse effect on our business,
financial condition and results of operations. See ‘‘—Interruptions in operations at our facilities could have a
material adverse effect on our business, financial condition, results of operations and cash flows.’’
The Tver production plant is located in a specially protected natural area—the Zavidovo national park—
and consequently is subject to stricter environmental regulations. For instance, losses incurred as a result
of environmental offences committed in specially protected natural areas are required to be compensated
by double damages. Administrative liability for environmental offenses committed in such areas can lead to
confiscation of the equipment which caused the relevant environmental offence. Moreover, due to its
location construction of the Tver production plant requires additional consents to be issued by the
administration of the Zavidovo national park. Moreover, we cannot exclude the possibility that in the
future any production activities within the territory of the Zavidovo national park may be restricted due to
its special status. Should ZAO Paroc violate the existing environmental regulations and/or fail to comply
with additional requirements for protection of the national park area and/or fail to effectively arrange for
exclusion of its land from the territory of the Zavidovo national park, it may be subject to inspection by the
Russian authorities, and administrative or other liabilities, which may have a material adverse effect on our
business, financial condition or results of operations.
We receive government subsidies that may, in certain circumstances, be reduced, withdrawn or required to be repaid.
We receive certain subsidies from the Finnish Funding Agency for Technology and Innovation for research
and development financing of certain R&D projects, but there is no guarantee such subsidies will continue
in the future. In particular, the Finnish Funding Agency for Technology and Innovation has the right to
claw-back these subsidies if certain events specified in the funding conditions (e.g. business changes or
reorganizations such as mergers, divisions or significant changes in ownership) occur without its consent
within five years after the payment of the subsidies. It is therefore possible that any subsidies received by
us, plus interest and fees, may be clawed back if such an event were to occur without its consent. If such
claw-back rights were to be triggered and exercised, we would be required to repay such subsidies. The
establishment of our financial services center in Vilnius, and the associated training of new employees
recruited in connection therewith, was partially funded by EU Structural Funds received by UAB Paroc
totaling approximately LTL 1.4 million. The terms and conditions upon which this funding was provided to
us include obligations on us to invest at least LTL 6.5 million in the financial center and training projects,
and to create at least 50 new jobs at our financial services center. If we fail to reach these targets, the
amount of the funds may be decreased proportionally. The terms and conditions also prohibit us from
changing the nature or scope of our business, participating in a reorganization, or initiating any liquidation
procedure without the prior written consent of the Ministry of Economics and Ministry of Social Security
and Labour of the Republic of Lithuania within the five-year period after completion of the relevant
investment projects (i.e., until April 5, 2015 (for the financial center project) and July31, 2015 (for the
training project)). Additionally, we are obliged to assure the continuity of the projects for the same
respective five-year post-completion periods. If we fail to comply with any of these terms and conditions,
we may be required to repay all or part of the EU Structural Funds that we have received. This may
adversely affect our business, financial position or results of operations.
Changes in the European Union’s and Member States’ energy efficiency policies could have a material adverse effect
on our business, financial condition, results of operations and cash flows.
The insulation materials industry is strongly influenced by the European Union’s policy of targeting a 20%
increase in energy efficiency by 2020, pursuant to Directive 2012/27/EU (Energy Efficiency Directive
42
(‘‘EED’’)) adopted by the European Parliament and the European Council in 2012. The EED entered into
force on December 4, 2012 and obliges Member States to set national energy efficiency targets and report
any progress achieved towards these targets to the European Commission by April 30 of each year from
2013. The EED further states that Member States should encourage the use of financing incentives to
further the objectives of the EED. Such financing incentives could include financial contributions and fines
resulting from non-fulfillment of certain provisions of the EED.
Pursuant to the EED, as an alternative to setting up an energy efficiency obligation scheme, Member
States may opt to take other policy measures to achieve energy savings among final customers. The annual
amount of new energy savings achieved through this approach would be equivalent to the amount of new
energy savings required by the energy efficiency obligation scheme option. Provided that equivalence is
maintained, Member States may combine obligation schemes with alternative policy measures, including
national energy efficiency programs. The policy measures may include, but are not limited to:
•
the implementation of energy or CO2 taxes that have the effect of reducing end-use energy
consumption;
•
financing schemes and instruments or fiscal incentives that lead to the application of energy-efficient
technology or techniques and have the effect of reducing end-use energy consumption;
•
regulations or voluntary agreements that lead to the application of energy-efficient technology or
techniques and have the effect of reducing end-use energy consumption;
•
standards and norms that aim at improving the energy efficiency of products and services, including
buildings and vehicles, except where these are mandatory and applicable in Member States under EU
law;
•
energy labeling schemes, with the exception of those that are mandatory and applicable in the
Member States under EU law; and
•
training and education, including energy advisory programs that lead to the application of energy
efficient technology or techniques and have the effect of reducing end-use energy consumption.
Because demand for our insulation materials (and panels containing such materials), which are more
energy efficient than many competing types of insulation, is currently supported, or is expected to be
supported by, actions taken by governments pursuant to the EED in many of the countries in which we
operate, any changes to the EED or associated programs that reduce the requirements imposed thereby,
or the level of government support or subsidies for energy-efficient insulation may have a material adverse
effect on our business, financial condition, results of operations and cash flows.
Regulations regarding carbon dioxide emissions could have a material adverse effect on our business, financial
condition and results of operations.
We operate a total of nine production plants in addition to other industrial facilities. Our operations result
in the release of substantial quantities of carbon dioxide, particularly through the combustion of coke in
our manufacturing process. The emission of carbon dioxide is subject to a constantly developing body of
laws and regulatory requirements addressing the challenges of global climate change by reducing
greenhouse gas emissions, promoting higher efficiency in the use of energy from conventional sources and
increasing the use of energy from renewable sources. In the European Union, regulations attempt to both
reduce greenhouse gas emissions and to establish a mechanism for trading in carbon dioxide emission
allowances under the EU Emissions Trading System (‘‘EU ETS’’). The trading period of the EU ETS
commenced in 2013, and the quantity of emission allowances allocated each year in the European Union
was reduced by a linear factor of 1.74% annually as compared to the average annual total quantity of
emission allowances issued in previous years. In addition, since January 2013, a full auctioning of emission
allowances has been gradually introduced for the manufacturing sector by reducing the allocation of
emission allowances free of charge from 80% in 2013 to 30% in 2020 and to 0% in 2027.
As a result, we will need to purchase a significant, and steadily increasing, share of emission allowances in
auctions in the future, which will result in substantial additional cost, depending on certain factors. In
particular, certain energy-intensive industries which are exposed to a significant risk of relocation to
countries with less stringent climate protection laws, a phenomenon known as ‘‘carbon leakage,’’ will
receive free allowances corresponding to their sector specific ‘‘benchmark value’’ of emissions levels. If
granted free emissions allowances because of a ‘‘carbon leakage’’ classification, an installation is not
subject to the aforementioned reduction of free allowance allocations from 80% to 30% between 2013 and
43
2020, but instead receives free allowances determined in accordance with the benchmark value applicable
to the relevant sector. Although all of our manufacturing plants other than the Tver facility, the Panel
System facility at Parainen and the Skövde facility are subject to the EU ETS, each of these sites benefit
from the current carbon leakage exemption granted in 2012 for the years 2013-2014 pursuant to
Commission Decision 2012/498/EU (amending Commission Decision 2010/2/EU and Commission
Decision 2011/278/EU), and have therefore initially been allocated emission allowances free of charge
corresponding to the mineral wool sector benchmark value and the average historical annual level of
production performed in the relevant installation, calculated for the higher of the periods between 2005
and 2008, and 2009 and 2010. The European Commission will determine every five years which industries
are threatened by carbon leakage. Thus, there is no certainty that the stone wool industry will again be
considered as being threatened by carbon leakage. Although the mineral wool sector has again been
specified as a sector deemed to be exposed to a significant risk of carbon leakage in the draft European
Commission decision published on May 5, 2014 regarding the 2015-2019 carbon leakage list, there is no
guarantee that the sector will be included in the list ultimately adopted by the European Commission
following scrutiny by the EU Climate Change Committee, the European Parliament and the Council. If the
European Commission concludes that no such threat of carbon leakage exists in 2014 or at the time of any
later determination, the regular emissions reduction scheme would also apply to our manufacturing plants
and we would be required to purchase emission allowances in the amount required for our production
purposes. Even assuming that carbon leakage status is maintained by the stone wool industry, we estimate
that we will have an average annual shortfall of approximately 29% in emissions allowances across the
whole Paroc Group during Phase III (2013 to 2020) and this shortfall will be greater if carbon leakage
status is not maintained). In addition, new production capacity may not be eligible for carbon leakage
status, unless the operations meet the required criteria for new entrants. We expect the future cost of
purchasing necessary additional emissions allowances to be material, although we do not have an estimate
at this time given that the emissions allowance market is an open market with fluctuating prices. See
‘‘Regulation—Finland—Climate Change Law—Emission Trading Law in the European Union,’’ ‘‘—Sweden—
Emission Trading Law in the European Union,’’ ‘‘—Lithuania—Emission Trading Law in the European
Union’’ and ‘‘—Poland—Emission Trading Law in the European Union.’’ Compliance with existing, new or
proposed regulations governing such emissions might lead to a need to reduce carbon dioxide emissions, to
purchase rights to emit carbon dioxide from third parties, or to make other changes to our business, all of
which could result in significant additional cost or could reduce demand for our products. In addition, we
require large quantities of energy in various forms for our production processes. Existing, new and
proposed regulations relating to the emission of carbon dioxide by our energy suppliers could result in
materially increased energy cost for our operations and we may be unable to pass on these increased
energy cost to our customers, which could have a material adverse effect on our business, financial
condition and results of operations. See ‘‘—Increased energy cost or disruptions in energy supplies could have
a material adverse effect on our business, financial condition and results of operations.’’
We have no control over the security and operational processes of the national registries for emissions allowances
within Europe.
We own a significant number of emissions allowances and emission credits, which are registered as
intangible assets by national registries in individual EU countries. National emissions allowances and
emission credits registries are operated by independent governmental bodies and are governed by EU law.
We have no control over or influence on the security and operational processes of these national registries.
The financial value of our assets registered in such registries is significant and a change in the quantity of
permitted emissions represented by our allowances and credits or an unauthorized transfer on the relevant
registries of such allowances and credits to another party could have a material adverse effect on our
business, financial condition, results of operations and cash flows.
Obligations resulting from environmental conditions at our current and former production and other sites could
have a material adverse effect on our business, financial condition and results of operations.
Many of our current and former facilities and properties have long histories of industrial operations. In
addition, we have responsibility for a number of sites we have acquired, or that we owned or operated in
the past. At many of our sites, hazardous substances and waste are or have been used or stored in
significant quantities. Contaminants have been detected at some of these sites. For example, groundwater
and/or soil contamination has been found at our Hässleholm, Oulu, Parainen, Trzemeszno and Tver sites.
In 2005, we conducted environmental remediation when resin leaked from a broken hose at Oulu.
Although our remedial responsibilities at these sites, other than the Lappeenranta site and the Oulu site in
44
2005, have not been material to date, the ultimate cost of remediation is difficult to accurately predict, and
we could incur significant additional cost as a result of the discovery of additional contamination or the
imposition of additional remediation obligations at these or other sites in the future, including in
connection with site investigations that may be necessary in complying with IED requirements or the
closure of our Lappeenranta site. In some cases, we may also incur costs related to remediation of
pre-existing contamination of properties owned by us which has not been caused by us, if the original
polluter cannot be established in the course of administrative proceedings or, in certain jurisdictions,
because we are the current owner of the relevant property. We may also incur significant costs in seeking to
enforce contractual indemnities provided to us in respect of environmental liabilities by other parties
conducting operations at our sites, and we may not be successful in enforcing such indemnities. Moreover,
certain permits which we need to carry out our operations contain provisions requiring us to remediate
possible contamination or old landfills, and it is possible that such provisions will be introduced into our
other necessary permits. See ‘‘Regulation—Finland—Soil and Groundwater Contamination,’’ ‘‘—Sweden—
Soil and Groundwater Contamination,’’ ‘‘—Poland—Soil and Groundwater Contamination and ‘‘—Russia—
Soil.’’
In relation to the Lappeenranta site, as at December 31, 2013, we have recognized an environmental
provision of A6.9 million for demolition and other costs related to the closure of the Lappeenranta facility.
However, costs in excess of this provision may be required to be incurred by us in order to comply with our
ultimate remediation obligations, which are difficult to accurately predict. In addition, we may have failed
to properly identify and assess potential risks with respect to plants and sites that we have acquired in the
past, for example at Skövde, the prior occupants produced polystyrene, and we would be liable for any
contamination discovered in the future under Swedish law. In such a case, we might not succeed in
claiming damages or indemnification against the relevant seller; our ability to seek indemnification from
the relevant seller may be limited by various factors, including the financial condition of the indemnifying
or responsible party as well as by contractual or legal limits on such indemnities or obligations (for
example, in the case of the Tver production plant, most of the associated assets were purchased pursuant
to a bankruptcy sale and so recourse to the vendor of the assets may not be possible). Furthermore, there is
no insurance coverage for financial liabilities arising from soil, water and other forms of contamination. In
addition, we may be responsible for any contamination detected at a site that we have sold or vacated in
the past, if the contamination is traced back to our use of the site. Any of these risks could have a material
adverse effect on our business, financial condition and results of operations.
We are subject to certain restrictions and reclamation and recultivation obligations resulting from our Finnish law
mining rights, as well as to Finnish environmental regulations, which could adversely affect our ability to expand
our business, our financial condition, our results operations and cash flows.
As one of the prerequisites for obtaining a permit to quarry a designated area, we are required by the
Finnish mining and environmental authorities to provide a reclamation plan which obligates us to restore
the quarrying site in accordance with specific standards. As part of this reclamation plan, we are required
to create, and annually adjust, non-cash reserves to cover these future reclamation costs, which are
calculated by discounting estimated costs under the reclamation plan to their present value. Furthermore,
our environmental permits and mining district decisions (i.e., mining concessions in Finland) require us to
collateralize our obligations to remediate waste areas and mining district or permit areas. The requirement
to provide collateral for the remediation of mining district areas was introduced in connection with the
2011 reform of the Finnish mining legislation and the Mining Authority has accepted our proposal that we
provide a three-year bank guarantee in the amount of A50,000 to cover all of our mining districts. See
‘‘Regulation—Finland—Excavation of Stone Resources.’’
It is possible that the relevant authorities might demand reserves or security in the future, in response to
increases in expected reclamation costs. The relevant legislator may also tighten the requirements to obtain
quarrying rights or the terms and conditions under which quarrying rights are granted. In the event of a
material adverse change in our financial condition, or in response to an economic downturn or volatility in
the financial markets, financial assurance providers may have the right and could decide not to issue or
renew the financial assurances, to demand additional collateral upon renewal, or to require us to obtain a
discharge of the financial assurance provider’s liability under the financial assurances or to provide cash or
letters of credit equal to 100% of the amount of the outstanding financial assurances. A failure to maintain
or renew, or our inability to acquire or provide a suitable alternative for, any such financial assurances and
any exercise of rights the financial assurance providers have to require us to discharge the related liability
45
or to provide additional collateral would have a material adverse effect on our business, financial condition
and results of operations.
As of December 31, 2013, we had a A7.3 million non-cash environmental provision for restoration and
decommissioning booked as a liability included in the consolidated Paroc Group balance sheet pursuant to
IFRS, and no cash reserves. These environmental provisions relate to costs from future closure of quarries
related to landscaping, security arrangements and stacking area lining work and future closure of
dumpsites related to landscaping, as well as the A6.9 million provision for the demolition costs relating to
the closure of the Lappeenranta facility. The provisions for dumpsites are estimated to be used between
2014 and 2019. The provisions for quarries are estimated to be used between 2020 and 2096. Changes to
the assumptions used to estimate the present value of the provisions, such as the applicable discount rate,
the inflation rate and the estimated future cash costs related to reclamation, can have a substantial impact
on such provisions, and can also have an impact on financial results for the Paroc Group.
If the necessary scope for restoration and remediation activities increases, or if we have underestimated
the costs of such restoration and remediation, we may be required to create higher provisions or spend
greater amounts than anticipated. For example, reclamation costs could further increase if, after draining
the quarries, groundwater levels exceed pre-quarrying levels and cause flooding, including damage to
buildings and infrastructure, as the quarrying operator is, in principle, held responsible for such damage. In
addition, we may be liable for damages caused by our activities or associated with our quarrying activities
on properties owned by third parties. Furthermore, anticipated costs may be affected by possible third
party claims resulting from damage caused by our operations. In either case, we could be required to make
significant payments in the future, adversely impacting our business, financial condition, results of
operations and cash flows. Any requirement to increase our provisions could adversely impact our
business, financial condition, results of operations and cash flows.
We may need to write down goodwill and brands, which would adversely affect our financial results.
As of December 31, 2013, 39.4% of our total group assets were intangible assets, with 26.2% and 3.2% of
our total group assets corresponding to goodwill and brands with indefinite useful lives, respectively.
Goodwill arising from an acquisition represents the excess of the consideration transferred over the
acquisition date fair values of the assets acquired, liabilities assumed and contingent liabilities recognized.
Goodwill is recognized at cost and is subsequently measured at cost less any accumulated impairment
losses. Goodwill is not amortized but tested for impairment annually whenever events or changes in
circumstances indicate that the carrying amount of a cash generating unit may not be recoverable.
Preparation of these calculations requires the use of estimates and assumptions. The key assumptions used
in cash flow projections are based on management estimates and estimates made by certain third parties.
The most significant key assumption affecting the projections is the development of residential
construction business, as well as the development of commercial building construction business which has
an effect on our panels segment. For our insulation segment, an increase in discount rate of 0.5 percentage
points or any other reduction in gross margin of 1.2 percentage points, of the estimated gross margins
would cause the cash generating units’ recoverable amount to be equal to its carrying amount. According
to our estimates, in other cash generating units, any reasonably possible change in a key variable would not
create a scenario in which the unit’s carrying value would exceed its value in use.
In determining that the Paroc brand has an indefinite useful life, we have considered various factors such
as the past and expected longevity of the brand, the impact of possible changes in technologies and the
impact of possible evolutions of the regulatory environment. Based on the analysis of these factors, we
have determined and confirmed at December 31, 2013 that there is no foreseeable limit to the period of
time over which the Paroc brand is expected to generate cash inflows for the Group. Paroc brand is not
amortized but tested for impairment annually.
We believe that our brands are important to our ongoing success, and damage to our brands could harm our
business results and reputation.
During the year ended December 31, 2013, we generated the majority of our product sales (i.e., sales
excluding service sales, trading goods, transportation and inter-segment sales) from products marketed
mainly under the PAROC and PARAFON brands. We believe that the brand awareness, preference and
loyalty that some professional and end-user customers exhibit for these brands in many markets in which
we operate are an important competitive advantage. The maintenance and protection of our brands are
therefore important for our future success. If we are unable to protect and promote our brands effectively,
46
our brands might not continue to be recognized by our relevant customer groups for their high quality and
advanced technical standards. This could have a material adverse effect on our reputation, business,
financial condition and results of operations.
Currency rate and interest rate fluctuations might adversely affect our financial position and results of operations.
Due to our international business activities, we are exposed to a variety of financial risks. In particular,
these include risks related to changes in foreign currency exchange rates and interest rates. Although we
may enter into derivatives transactions from time to time to hedge against interest rate and currency risks,
we may misjudge the extent to which such hedges are required and, accordingly, be required to pay rates
exceeding the prevailing market price under our hedging agreements to effect certain transactions.
Interest rate risks exist as a result of potential changes in the market interest rate and might lead to a
change in fair value in the case of fixed interest-bearing financial instruments, and to fluctuations in
interest payments in the case of variable interest-bearing financial instruments. Our interest risks arise
primarily from short-term deposits and draw-downs on cash loan facilities. As of December 31, 2013, after
giving pro forma effect to the Transactions, approximately A230 million of our third-party indebtedness
would have had a floating interest rate. With regard to variable interest-bearing financial instruments,
changes in market rates have an impact on our interest expense. We may decide to put hedging in place for
our New Revolving Credit Facility, our Floating Rate Notes or any other variable rate debt obligations we
may have outstanding from time to time in the future. See ‘‘Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures about Market
Risk—Interest rate risk.’’
Our consolidated financial statements are presented in euros, which is the functional and reporting
currency of the Group. Currency risk arises through fluctuations of the exchange rate of the currencies of
countries that are not part of the European Monetary Union and their impact on our results of operations
and statements of financial position as we translate the financial results from our subsidiaries in those
countries to the euro. We also face transactional currency exchange rate risks if income generated in one
currency is accompanied by cost in another currency. Net currency exposure from sales denominated in
foreign currencies arises to the extent that we do not incur corresponding expenses in the same foreign
currencies.
Other than the euro and the Lithuanian litas (which is pegged to the euro), the principal currencies we
transact in are the Swedish krona, the Danish krone, the Norwegian krone, the Polish zloty, the Russian
rouble and the British pound. Currency exchange rate risks exist in connection with inter-company
transactions between Group companies with different functional currencies. Exchange rate risks related to
such inter-company transactions are managed by intragroup sales to subsidiaries domiciled in jurisdictions
that are not part of the European Monetary Union being denominated in their own functional currencies,
such that currency risk is concentrated at the producing entities. We do not hedge our net investments in
our subsidiaries. We attempt to absorb short- and medium-term exchange rate fluctuations through the use
of forward foreign exchange contracts. Specifically, we forecast our cash flows by currency on a rolling
six-month basis and hedge between 60% and 80% of those estimated cash flows, calculated on a Group
basis. We also require our subsidiaries to follow standardized group procedures and guidelines regarding
the management of exchange rate risk. As of December 31, 2013, for such purposes we had outstanding
currency forward agreements amounting in total to A33.4 million. However, these hedging transactions
may prove to be insufficient. In the context of such transactions, we are also exposed to the risk of the
insolvency of the relevant hedge counterparty.
Currency exchange risks also exist in connection with inter-company loans between Group companies with
different functional currencies. For example, as a result of a restructuring of the Group that occurred in
2009, there is currently an outstanding SEK-denominated intercompany loan from Paroc Group Oy (the
functional currency of which is the euro) to Paroc Sverige AB (the functional currency of which is the
Swedish krona) which, as of December 31, 2013, had a book value of A225.8 million. Due to movements in
the euro-krona exchange rate since that loan was established in 2009, as at December 31, 2013, Paroc
Group Oy has an unrealized gain in the amount of A20 million in respect of that loan. In connection with
the Transactions, we may repay this intercompany loan and replace it with a new SEK-denominated
intercompany loan from Paroc Group Oy to Paroc Sverige AB, which may be in an amount that is greater
than the amount of the existing loan. When this loan is repaid (whether in connection with the
Transactions or otherwise), any foreign exchange gain would become taxable at the applicable taxation rate
in Finland, which is currently 20%. To the extent we replace this intercompany loan in the future, we will
47
be exposed to similar risks of incurring taxable foreign exchange gains upon repayment such replacement
loans.
We may also be exposed to currency exchange rate risks if we commit to making substantial future
expenditures denominated in a currency other than one of our principal transacting currencies, or in an
amount of one of our transacting currencies that is significantly greater than the amounts of that currency
that we generally deal in. We generally manage these risks through hedging transactions entered into by
the relevant Group company. For example, during the construction phase of our new Tver manufacturing
facility, we hedged our significant Russian rouble exposures arising from the capital expenditure
commitments involved in that project through currency forward purchase agreements covering our entire
expected Russian rouble exposure for that project.
It is impossible to hedge completely against exchange rate fluctuations. The business activities of our
foreign competitors could be favored by exchange rate advantages, meaning that we may lose customers
and suffer a decline in sales. As the foreign exchange markets are characterized by high volatility, exchange
rate fluctuations could in the future have a material adverse effect on our net assets, financial position and
results of operations. Should we be unable to structure our earnings capacity more independently of
exchange rate fluctuations, this could have negative effects on our sales and results of operations.
We have obligations to our employees relating to retirement and other obligations, the calculations of which are
based on a number of assumptions, including discount rates and life expectancies, which may differ from actual
rates in the future.
We operate an unfunded defined-benefit pension scheme for beneficiaries under an arrangement that has
been established in Sweden.
Our exposures under the Finnish defined contribution scheme, which mandatorily applies to all employees
in Finland, are insured insofar as sponsors retain no risk in respect of past service benefits once they pay
contributions at the rates set by the Finnish Ministry of Social Affairs and Health. Contribution rates for
this scheme are set centrally by the Finnish Ministry of Social Affairs and Health, there is a risk that
contribution rates may be increased in the future so as to have a material adverse effect on our financial
condition and results of operations.
Our exposures under the Swedish defined contribution scheme are fully insured as to benefits that accrued
after March 31, 1994 pursuant to arrangements under which we pay regular premiums according to
pension schemes agreed in the Swedish collective bargaining agreements. However, we have unfunded
exposures under the PRI plan as to certain benefits accrued up to and including March 31, 1994. The PRI
solution enables the company to retain the pension capital within the company, with the company making
an annual provision in its balance sheet corresponding to the value of the accrued pension debt. The PRI
plan is not funded by way of paying recurring pension premiums, but instead is handled in accordance with
the obligations under the PRI arrangement, which require the payment of the pension as and when it falls
due (i.e., as an employee covered under the PRI plan retires). Around 130 current employees have benefits
that accrued prior to April 1994, with a further 210 pensioners currently in receipt of benefits that accrued
prior to April 1994. As of December 31, 2013, we had total unfunded pension obligations under the
Swedish PRI plan of A10.1 million. We are also required by law to obtain credit insurance from PRI
Pensionsgaranti in respect of these defined benefits obligations, and PRI Pensionsgaranti also has the
power to require us to provide additional security towards these benefits, or even obtain insurance in
respect of the benefits. We have provided PRI Pensionsgaranti with a letter of credit in the amount of
SEK 35 million in respect of our unfunded pension obligations (the ‘‘Pensions L/C’’), as well as a parent
company guarantee (from the Issuer) covering amounts in excess thereof. It is possible that, in the event of
any material change in our capital structure or ownership, PRI Pensionsgaranti may require us to provide
similar or additional security or credit support, or obtain pension insurance, at significant expense to us.
The remainder of the pension schemes we operate or are required to contribute to are defined
contribution schemes. In some countries, including Russia, we are subject to mandatory pension and other
social contributions and we cannot exclude the possibility that the welfare policies in such countries and
the growing number of the beneficiaries under the pension legislation would lead to the increase of the
amount of contributions that may adversely negatively influence our business and financial results.
Our defined benefit obligations are based on certain actuarial assumptions that can vary by defined benefit
plan, including discount rates and life expectancies and rates of increase in future compensation levels. If
actual results, especially discount rates or life expectancies were to differ from our assumptions, our
48
pension obligations could be higher than expected and we could incur actuarial re-measurements. Changes
in all assumptions or under performance of plan assets could also adversely affect our financial condition
and results of operations. In the fiscal years ended December 31, 2011, 2012 and 2013 actuarial gains and
losses were charged or credited to equity through other comprehensive income. In the beginning of
January 1, 2013 we have applied the revised International Accounting Standard (‘‘IAS 19’’). Revised
IAS 19 did not have a significant impact on our financial statements in 2013. Under IAS 19 (revised), the
approach to assess interest cost and expected return on plan assets is replaced by compulsory application
of a uniform, market-based discount rate to both the defined benefit liability and any corresponding plan
asset (net interest approach). Future declines in the value of plan assets or lower-than-expected returns
may require us to make additional current cash payments to pension plans. However, our current defined
benefit schemes do not include plan assets as defined by IAS 19. Significantly increased contribution
obligations could have adverse effects on our financial condition and results of operations. Moreover, local
funding rules might require additional contributions to avoid underfunding. The defined benefit plan in
Sweden is operated by Alecta, which is not able to split the plan assets by company. Consequently, the plan
operated by Alecta has been accounted for as a defined contribution plan. Top management located in
Finland and Sweden has individual voluntary pension plans. These plans entitle a pension at the age of 62.
The plans were changed in 2010 so that they are classified as defined contribution plans.
As part of the Finnish statutory defined contribution pension plan, there has been a system of registered
supplementary pensions that was created to supplement the statutory pension scheme. The registered
supplementary pension system was closed to new insured in 2001, but approximately 90 of our employees
are still covered by this scheme. However, due to legislative changes, such schemes will have to be
discontinued by the year 2016. We may, therefore, be obligated to agree on a new pension arrangement
with the employees who have not yet retired but are within the scheme by, for example, taking out a group
life insurance for the employee. Upon the occurrence of certain conditions the employer may pay a
lump-sum payment. Depending on the arrangements chosen, such a change may cause additional costs to
us in the form of several lump-sum payments or increased insurance costs.
In the fiscal years ended December 31, 2011, 2012 and 2013, pension payments amounted to A8.5 million,
A9.9 million and A10.5 million, respectively, of which payments in respect of our unfunded and uninsured
defined benefit obligations comprised A0.4 million (plus additional expenses incurred in connection with
the Pensions L/C) in each year.
We are dependent on qualified personnel in key positions and employees having special technical knowledge.
Qualified and motivated personnel is one of the key factors for the further development of our business, in
particular our further technological development and geographic expansion. There is a risk that we may
not be able to attract key personnel, or employ foreign citizens in certain markets (such as Russia, where
we have in the past had difficulty getting approval to employ foreign citizens), to fill vacancies or that we
fail to retain key employees. Personnel shortages and the loss of key employees could negatively influence
our further business development. In addition, there are risks related to our dependence on individual
persons in key positions, particularly at the level of the managing board as well as in the areas of
development, distribution, service, production, finance and marketing. The loss of management personnel
or employees in key positions would lead to a loss of know-how, or under certain circumstances, to the
passing on of this know-how to our competitors. If one or more of these risks materialize, this could
adversely affect our business, financial condition and results of operations.
Our business may be affected by the default of counterparties in respect of money owed to us.
In the ordinary course of our business, we are often owed significant amounts of money by numerous
counterparties, including customers. We manage customer credit risk for trade receivables through
insuring sales in all significant countries. All sales above A5,000 are covered with a deductible of 10%. We
apply internal credit policies and regularly analyze the status of trade receivables. In addition, we often
hold significant cash balances on deposit with financial institutions or invested on a short-term basis. These
contractual arrangements, deposits and other financial instruments give rise to credit risk on amounts due
from such counterparties. The Group’s treasury monitors counterparty credit ratings, however, credit risks
arising from transactions with financial counterparties in particular can escalate rapidly and a high credit
rating is no guarantee that an entity will not experience a rapid deterioration of its financial position.
During the financial crisis and the economic downturn, we were increasingly exposed to the default of
counterparties, including financial institutions and customers with bad debts. If the economic conditions do
not improve or continue to worsen, this could have a material adverse effect on our financial condition and
results of operations.
49
We depend on efficient and uninterrupted operations of our information and communication technology.
The operation of our production facilities as well as our sales and service activities depend on the efficient
and uninterrupted operation of complex and sophisticated computer, telecommunication and data
processing systems. Computer and data processing systems and related infrastructure (data center,
hardware and wide and local area networks) are generally exposed to the risk of human errors,
disturbances, contractual discontinuity, damage, electricity failures, computer viruses, fire, other disasters,
hacker attacks and similar events. Disruptions to operations or interruptions in operations involving the
systems may occur in the future and minor interruptions have occurred in individual cases in the past.
Although administration and production networks are separated, an interruption in the operations of
computer or data processing systems could adversely affect our ability to efficiently maintain our
production processes and to ensure adequate controls. Disruptions to or interruptions in operations could
lead to production downtime which, in turn, could result in lost sales. Information and communication
technology-related risks are particularly relevant since, even though our business critical applications have
been consolidated, our information technology landscape is partly decentralized for non-business critical
applications. The different platforms used throughout the group for key processes may lead to
inefficiencies, such as problems with interoperability, malfunctions and higher cost, as well as to difficulties
in the administration of the scope and contents of the required licenses and related support services
acquired from third-party service providers that may render the company vulnerable to risks associated
with contract discontinuity. Further, we are dependent on the expertise of third-party contractors and
service providers operating certain key information technology systems, which may increase the risk of
service interruptions. Our standard group wide information technology systems may be disturbed,
damaged or disrupted. If one or more of these risks materializes, this could materially adversely affect our
business, financial condition and results of operations.
Our risk management and internal controls may not prevent or detect violations of law.
Our existing compliance processes and controls may not be sufficient in order to prevent or detect
inadequate practices, fraud and violations of law by our contractors and customers, intermediaries, sales
agents and employees. These risks may increase as we expand into new markets, especially Russia. In
certain business transactions, we cooperate with intermediaries or sales agents whose activities we are not
able to control, especially in connection with promoting business in certain countries and in connection
with mergers and acquisitions. We pay the intermediaries customary commissions. We also cooperate with
consultants in relation to the expansion of our business activities, such as in certain eastern European
markets, for example, Russia.
In the case that any contractors, customers, intermediaries, consultants, sales agents or employees with
whom we cooperate receive or grant inappropriate benefits or generally use corrupt, fraudulent or other
unfair business practices, including sham tax schemes, we could be confronted with associated financial
losses, legal sanctions, penalties and loss of orders and harm to our reputation. For example, we are
currently involved in litigation relating to alleged embezzlement in 2011 and 2012 by a former employee of
our Latvian subsidiary of goods with a total value of approximately LVL 104,000 from us using a system of
fake invoicing, which we allege also resulted in additional VAT liabilities totaling approximately
LVL 22,000 in respect of the allegedly misappropriated goods. Both criminal and civil proceedings in
relation to these allegations are currently ongoing. However, we may not be able to recover the full amount
of the losses we allege that we have sustained in connection with these matters, and may incur substantial
legal costs in attempting to do so. We conducted thorough internal investigations in relation to these
incidents and introduced consequential amendments to our internal systems and controls. Nonetheless,
given our global alignment, complex group structure, size and the extent of our cooperation with
intermediaries, consultants and sales agents, our internal controls and procedures, policies and our risk
management may not be adequate, which may result in similar occurrences in the future having a material
negative impact on our reputation, business activities, financial position and results of operations.
Our international sales are subject to various jurisdictions’ economic sanctions, export control and anti-corruption
laws and regulations, which increases the risk that we may become subject to significant penalties for violating such
laws.
We operate on a global basis and are subject to laws of the EU and other jurisdictions regulating the export
of our products to certain countries. For instance, Belarus is subject to sanctions under the laws of the
U.S., the EU, and other jurisdictions. For the year ended December 31, 2013, A12.1 million of revenues
(3%, of our total sales) came from Belarus, which we conduct through a representation office in Belarus.
50
We have additionally agreed to sell products to a customer in Iraq on a project-specific basis, and could sell
other products to customers in sanctioned countries in the future on a project-specific basis. We do not
believe that any of our exports or customers are designated or targeted by U.S. or EU sanctions.
Nevertheless, due to political instability in Ukraine it is possible that further sanctions will be imposed on
Russia that may effect on our operations. See ‘‘—We operate in emerging markets such as Russia, which
exposes us to risks inherent to such less developed markets, and we may be exposed to greater risks as we intend
to increase our operations in such markets.’’ We have implemented certain policies and procedures to
address compliance with sanctions, export controls and anti-corruption laws and regulations, including
limited training to educate our employees about these topics, but we do not currently maintain formal
group-wide written policies or training detailing how to comply with such laws. Although we are committed
to conducting our operations in accordance with applicable laws and will continue to implement our
current policies and procedures, the absence of formal policies and training detailing specific compliance
procedures may make it more difficult to control and monitor full compliance of our activities in countries
subject to U.S., EU or other sanctions with applicable anti-corruption laws. We are in the process of
planning formal group-wide policies and procedures, including formal employee training, to ensure
continued compliance with sanctions, export controls and anti-corruption laws and regulations and expect
these formal compliance procedures to be implemented group-wide by the end of 2014. Failure to comply
with these laws could expose us to civil and criminal prosecution and penalties, the imposition of export or
economic sanctions against the Group, and reputational damage, all of which could materially and
adversely affect the Group’s financial results.
We also conduct business in countries where there is governmental and private corruption. We are
committed to doing business in accordance with all applicable laws, but there is a risk that we or our
respective officers, directors, employees or agents may act in violation of our codes and applicable laws.
Any such violations could result in substantial civil and criminal penalties and might materially adversely
affect our business and results of operations or financial condition.
If the European Monetary Union ceases to exist or one or more countries leave the European Monetary Union, our
business, financial condition and results of operations may be materially adversely affected.
Recent economic events affecting the European economies, including the sovereign debt and other
economic crises in Cyprus, Greece, Ireland, Italy, Portugal, Slovenia and Spain, have raised a number of
questions regarding the overall stability of the European Monetary Union. Despite measures taken by
countries in the European Monetary Union and the European Central Bank to alleviate credit risk,
concerns persist with respect to the ability of certain European Monetary Union countries to meet future
financial obligations, the overall stability of the euro and the suitability of the euro as a single currency
given the diverse economic and political circumstances in individual euro member states. The economic
outlook is adversely affected by the risk that one or more European Monetary Union countries could come
under increasing pressure to leave the European Monetary Union, that the euro could cease to be the
single currency of the European Monetary Union, or that certain post-Soviet states, with weaker economic
fundamentals, could become part of the European Monetary Union. The legal and contractual
consequences of such a development for the business of the Group and for holders of the Notes would be
determined by applicable laws in effect at such time. Any of these developments, or a perception that any
of these developments may be likely to occur, could have a material adverse effect on the economic
development of the affected countries or lead to economic recession or depression that could jeopardize
the stability of financial markets or the overall financial and monetary system. This, in turn, may have a
material adverse effect on our business, financial condition and results of operations.
We may incur material cost as a result of warranty, product liability or personal injury claims which could adversely
affect our profitability.
Our products are subject to express and implied warranties and we face an inherent business risk of
exposure to product liability claims, including class action claims, in the event that the use of any of our
products results in personal injury or property damage. In the event that any of our products is defective or
proves to be defective, among other things, we may be responsible for damages related to any defective
products, including damages for indirect or consequential losses, and we may be required to recall or
redesign such products. Because of the long useful life of our products, it is possible that latent defects
might not appear for several years. Similarly, although Finnish Emission Classification of Building
Materials tests on our insulation products for volatile organic compounds emissions currently categorize
them as low-emitting building materials, it is possible that this categorization may be revised in the future.
51
Any such revisions may expose us to material claims, interruptions to our business and research and
development expenditures that may consequentially be required in order to modify our products. We
therefore may not be successful in maintaining or reducing the historical level of warranty claims and
claims in connection with the supply of our products may increase significantly. Additionally, defects in our
products may result in product recalls, adverse customer reactions and negative publicity about us or our
products. Product failures, in particular of insulation materials or panels produced by us or our
predecessors or acquired businesses or facilities, could result in substantial harm to people or property. We
hold insurance for product liability risks, and in many instances have contractual arrangements to limit or
exclude our liability or hold us harmless against such claims (though such arrangements may not in the past
have always been effectively included in our supply agreements). However, such insurance and contractual
arrangements may not adequately cover any such matter, insurance coverage may not continue to be
available on commercially reasonable terms, the insurance carrier or the contractual partner may not have
sufficient funds to cover all claims, if any, or such contractual arrangements may not be valid or
enforceable or may not cover our activities in certain jurisdictions. Defects may also require expensive
modifications to our products and may adversely affect our reputation. If any of these events occur, our
reputation, business, financial condition and results of operations could be materially adversely affected,
even if we are not legally liable for particular claims.
A small number of the current and former employees of the Finnish Group companies and their
predecessor entities, including five of our current employees, have probably worked in the past under
circumstances that exposed them to asbestos-containing materials associated with certain activities
conducted by previous owners of some of our plants. In accordance with the Finnish employment
legislation, employees’ existing rights and obligations automatically transfer to the new employer upon a
transfer of business, and have thus transferred to us in connection with our purchase of these assets in
1998. An employee who has been injured or has a medical condition due to exposure may claim damages
for the amount of lost salary and other damages that are not covered by the Statutory Worker’s
Compensation Insurance. The magnitude of potential damage is, however, limited by the principle of the
prohibition of enrichment, which is a fundamental principle of Finnish tort law. Compensation is as a rule
only issued for proven losses (i.e. punitive damages are not awarded). Although no such claims for
compensation by our employees, insurers or other parties have been presented to us, if claims for
compensation or otherwise relating to past activities are made against us in the future, it could have a
significant and adverse effect on our reputation and business and financial condition. See ‘‘Regulation—
Finland—Asbestos Containing Material (ACM).’’
Prior to Paroc ownership, there was an asbestos-cement sheet production plant at our Trzemeszno site in
Poland, which was established in 1968 and shut down in 1998 when the former parent company of Paroc
(Partek, a Finnish industrial conglomerate) acquired the stone wool production departments (the other
departments were acquired by third parties). Although we understand that all asbestos materials were
removed before Partek purchased the site, it is possible that we could incur material expenses in
cleaning-up any residual impacts that are identified, or as result of any liability claims that are brought
against us, in the future.
Our insurance coverage may not be adequate to cover all the risks we may face and if we were no longer covered by
our existing insurance, it may be difficult to obtain replacement insurance on acceptable terms or at all.
Our production plants, equipment and other assets are insured for property damage and business
interruption risks and our business as a whole is insured for public and products liability risks. We believe
that these insurance policies are generally in accordance with customary industry practices, including
deductibles and limits of cover, but we cannot be fully insured against all potential hazards incident to our
business, including losses resulting from risks of war, terrorist acts, riots, coups, uprisings, invasions,
annexations or other political or crisis management risks, expropriation, confiscation and forced
abandonment, employment practices liability, certain natural hazards (such as earthquakes), cybercrime or
other cyber risks, environmental damages (including pollution liabilities and costs for gradual pollution
incidents and on-site clean-up costs), or all potential losses, including damage to our reputation. If we were
to incur a significant liability for which we were not fully insured, or if premiums and deductibles for
certain insurance policies were to increase substantially as a result of any incidents for which we are
insured, our business, financial condition and results of operations could be materially adversely affected.
52
We are subject to risks from legal proceedings.
We are involved in litigation in the ordinary course of business and could become involved in additional
legal and arbitration disputes in the future which may involve substantial claims for damages or other
payments, including damages claims by customers in connection with past or future product liability claims,
tax litigation, violations of antitrust laws, compensation suits by former employees (including for workplace
injuries) or compensation owed to former minority shareholders in connection with squeeze-out
proceedings. The outcome of currently pending or potential future proceedings is difficult to predict with
any certainty. In the event of a negative outcome of any material legal or arbitration proceeding, whether
based on a judgment, award or a settlement, we could be obligated to make substantial payments. In
addition, the cost related to litigation and arbitration proceedings may be significant.
In 2012 (with respect to 2006) and 2013 (with respect to 2007-2008), the Finnish tax authorities conducted
tax reassessments concerning the tax payable by Paroc Oy Ab in respect of the company’s transfer pricing
practices for intra group pricing of supplies of raw materials, license fees and distributor services during
the 2006 to 2008 financial years. Under these tax reassessments, the company is required to pay
A22.3 million in taxes and penalties (this amount also includes interest of A5.9 million calculated until
December 31, 2013). Because we have a different view as to the correct tax treatment of our transfer
pricing practices during that period, we have filed an appeal against the tax reassessment with the Board of
Appeals and have not recognized a provision for this potential liability in our financial statements. We have
been granted an interdiction of payment, which means that the reassessed taxes are not due until the
earlier of the date of the Board of Appeals’ decision and January 31, 2015. However, if we are unsuccessful
in our appeal and the Board of Appeals does not accept our view, absent any successful subsequent appeal
by us, we will be liable to pay the reassessed amount, plus additional interest calculated up to the payment
date. As we have applied the same transfer pricing practices in respect of the 2009 to 2013, financial years,
if our appeal is unsuccessful we may also have to pay additional taxes, penalties and accrued interest, which
we estimate may total as much as A16.7 million (comprising additional tax of A12.6 million, plus
A2.5 million in penalties and A1.6 million in interest, in respect of those financial years).
In 2012, the Finnish tax authorities also conducted an audit of Paroc Oy Ab’s tax return in respect of the
financial year ended December 31, 2011 and assessed A7.6 million of additional taxable income on the
basis that a deduction had been incorrectly claimed on write-downs of intragroup loans. The authorities
also imposed an additional penalty of A370,000, which we have paid. We have appealed this assessment and
the penalty, and as a result of the appeal the penalty imposed has been reduced to A800. The Finnish tax
authorities have appealed the reduction of the penalty and we have appealed the assessment of additional
income as taxable income. The proceedings before the Administrative Court in relation to the matter are
currently pending. If the Finnish tax authorities are successful in the pending proceedings before the
Administrative Court, we will not receive a refund of the penalty amount paid by us absent any successful
subsequent appeal by us.
We are also currently involved in a material dispute arising from our operations in Poland. In 2011, a local
authority sought to impose real property taxes for 2009 to 2011 in respect of an investment project at our
Trzemeszno production facility in an amount totaling approximately PLN2.2 million more than the
amounts declared and paid by us for such taxes. To date we have been unsuccessful in disputing the
imposition of these additional taxes in appeals to the Self-Government Appeal Court and Regional
Administrative Court in Poznań. We are currently awaiting the outcome of a further appeal to the
Supreme Administrative Court. While we await the outcome of our appeal, we have paid this additional
tax amount, and have booked a tax receivable for which 100% of the provision is booked.
We are subject to certain competition and antitrust laws.
Our business is subject to applicable competition and antitrust laws, rules and regulations. In general, these
laws are designed to preserve free and open competition in the marketplace in order to enhance
competitiveness and economic efficiency. While we believe we are generally in compliance with all
applicable competition and antitrust laws, rules and regulations we may become subject to investigations
and proceedings by national and supranational competition and antitrust authorities for alleged
infringements of competition or antitrust laws. This may result in fines or other forms of liability, which
could have a material adverse effect on our reputation, business, financial condition and results of
operations. From 2009 to 2012, there was an investigation by the Finnish Competition Authority on the
competition in the Finnish insulation industry. Although this investigation was not related to Paroc
specifically, and was closed, the Finnish Competition Authority did indicate that it will continue to monitor
53
the competitive situation in the industry, leaving open the possibility that a new investigation could be
opened in the future. Our market shares in certain business segments are relatively high and it is thus
possible that competition authorities may find us to hold a dominant market position in one or several
relevant markets. If such a finding is made, there is a risk that certain of our sales and distribution policies
and agreements could come under competition scrutiny in the various jurisdictions in which we operate,
exposing us to the possibility of substantial fines and other restraints on our operations. It is also possible
that certain of our procurement arrangements with our suppliers may be subject to competition scrutiny. In
the past we have also entered into licensing agreements, some of which remain outstanding, with regard to
our intellectual property, and as some of these licensing agreements are with competitors, they could
potential be the subject of competition scrutiny. Depending on the particular facts and circumstances, we
could become subject to certain limitations on future acquisitions and certain business practices if we were
found to have obtained a dominant position in certain markets.
The adoption of new or revised International Financial Reporting Standards may have material effects on our
future consolidated financial statements.
The International Financial Reporting Standards (‘‘IFRS’’) comprise IFRS issued by the International
Accounting Standards Board (‘‘IASB’’), the International Accounting Standards (‘‘IAS’’) as well as the
interpretations of the International Financial Reporting Interpretations Committee (‘‘IFRIC’’) and the
Standing Interpretations Committee (‘‘SIC’’). Our consolidated financial statements included elsewhere in
this offering memorandum comply with the IFRS as adopted by the European Union as of the date of such
financial statements. The IASB has published or may in the future publish new or amended standards and
interpretations, which are not yet effective and have not yet been adopted by the Group in its financial
statements. See ‘‘Note 2—Summary of significant accounting policies—Standards, amendments and
interpretations to existing standards that are not yet effective’’ to our consolidated financial statements
included elsewhere in this offering memorandum for more information on new or amended standards and
interpretations that have been published by the IASB. The Group will adopt each standard and
interpretation from their effective date, or if the effective date is different from the first date of the
reporting period, from the start of the next reporting period following the effective date as endorsed by the
European Union. The amendments to the standards and interpretations mentioned in ‘‘Note 2—Summary
of significant accounting policies—Standards, amendments and interpretations to existing standards that
are not yet effective’’ to our consolidated financial statements included elsewhere in this offering
memorandum are estimated to primarily impact the presentation in our financial disclosures.
Pending and future tax audits within our Group and changes in fiscal regulations or the interpretations thereof
could lead to additional tax liabilities.
We operate in many countries, most of which have complex tax regimes. Our corporate structure requires a
variety of intercompany services and supplies. Due to the nature of our operations and our significant
reorganizations in recent years, our tax affairs and those of our subsidiaries are complex. Significant
judgment is required in determining provisions for income taxes. There are many transactions and
calculations for which the ultimate tax determination is uncertain. Management judgment is required for
the calculation of the provision for income taxes. Where the final tax outcome of these matters is different
from the amounts that were initially recorded, such differences will impact the current recorded and
unrecorded tax provisions in the period in which such determination is made.
The Group and its constituent entities are subject to routine tax audits by the respective local tax
authorities. Paroc Oy Ab is currently subject to disputes with the Finnish tax authorities arising from tax
audits regarding transfer pricing in financial years 2006 through 2008, and the deductibility of write-downs
of intercompany loans in the 2011 financial year. See ‘‘—We are subject to risks from legal proceedings.’’ As
the associated litigation has not yet been finalized, we cannot exclude that actual tax payment obligations
may exceed the amount reflected in our financial statements. Paroc AB was the subject of a general tax
audit opened by the Swedish taxation authorities in July 2013. While we have received formal notification
that we are not required to pay additional tax and penalties in excess of the amount reflected in our
financial statements, we cannot exclude the possibility of further tax audits in the future. Future tax audits
in Finland or other jurisdictions may result in additional tax and interest payments which would negatively
affect our financial condition and results of operations.
Changes in fiscal regulations or the interpretation of tax laws, including regarding transfer pricing, by the
courts or the tax authorities in Finland or foreign jurisdictions in which we are conducting our business
may also have adverse consequences for us. For example, the Group recently completed a reorganization
54
of the holding structure for the intellectual property previously held by its Finnish entity, Paroc Oy Ab,
which will have the effect of transferring all such intellectual property to Paroc Group Oy. Although tax
clearance for the reorganization, including the proposed post-reorganization transfer pricing methodology,
was obtained in advance from the Finnish tax authorities, the Finnish tax authorities have not approved
our suggested pricing under that methodology. As the Finnish tax authorities’ approach to transfer pricing
appears to be in a state of flux, it is possible that our transfer pricing practices in respect of this intellectual
property may result in tax and interest payments in excess of the amount currently expected.
In some jurisdictions, such as Russia, tax authorities have broad powers in terms of the application and
interpretation of existing laws and the issuance of by-laws. Their position on various issues may change
significantly over time, which in turn increases the probability of adverse consequences for our business.
For example, we are currently involved in a pending dispute with the Russian tax authorities in relation to
the refusal by such authorities to permit ZAO Paroc to recover RUB 11.8 million (approximately A262,222)
of VAT for the second quarter of 2013 due to insufficient documentation. ZAO Paroc expects to receive
similar VAT recovery refusals for the third and fourth quarters of 2013 for the amount of RUB 9.2 million
(approximately A204,444) and RUB 20 million (approximately A444,444), respectively. ZAO Paroc plans to
settle this issue with the Russian tax authorities out-of-court by providing a revised tax return with
complete documentation. Non-residents are also exposed to the risk of cancellations of or amendments to
double taxation treaties, which in turn may affect such an investor’s position if they previously derived
benefits from such treaties. Over the last 20 years, the Russian taxation system has been subject to
frequent, arbitrary and radical changes and the system will likely continue to change. Therefore, we are
unable to confidently predict the impact of the Russian taxation system on our activities in Russia, though
it is possible that it may have a material adverse effect on our business, financial position or results of
operations.
Due to restrictions on the deduction of interest expenses or forfeiture of interest carry-forwards under Finnish and
Swedish law, we may be unable to fully deduct interest expenses on our financial liabilities.
A certain amount of our Group’s annual financing expenses (interest payments) may not be deductible
under Finnish or Swedish taxation laws. Subject to certain prerequisites, these laws impose certain
restrictions on the deductibility of interest for tax purposes. Most relevantly, new interest deduction
limitation rules were introduced in Sweden with effect on and from January 1, 2013, pursuant to which
interest payments to affiliated companies are not deductible unless an exemption applies. These
exemptions are essentially that either (i) the interest income would have been taxed at a minimum rate of
10% in the residence state of the beneficial owner thereof, assuming that such income were its only
income, unless the main reason for the loan structure is to obtain a substantial tax benefit, or (ii) the loan
(as well as the acquisition, if the loan relates to an acquisition of shares from an affiliated party or shares in
a company that will become affiliated further to the acquisition), are motivated by business reasons, and
the recipient of the interest is resident in another EEA country or a country which has a tax treaty with
Sweden. At present, there is a SEK-denominated intercompany loan outstanding between Paroc Sverige
AB and Paroc Group which, as of December 31, 2013, had a book value of A225.8 million, and in respect of
which the interest expense in the stand-alone financial statements of Paroc Sverige AB for the year ended
December 31, 2013 was A10.5 million. It is possible that we may be denied a deduction for this interest
expense, which may result in additional tax liabilities in respect of the 2013 financial year in the order of
A2.2 million, plus penalties of A0.9 million. We may also not be able to claim a deduction for interest
expenses in respect of this loan, or any similar loans replacing or refinancing this loan, for the 2014
financial year or future financial years. If we are unable to claim a deduction for this loan, or any similar
loans replacing or refinancing this loan, in respect of any financial year, this may have a material adverse
effect on our business, financial condition or results of operations. In this context, it should be noted that a
committee has been appointed by the Swedish government to carry out a general review of the Swedish
corporate tax system. The committee has a specific instruction to propose rules making it more neutral to
invest in equity compared to debt and to contemplate and propose legislation to further restrict deductions
on interest payments. At this stage it is uncertain what the outcome of this will be (the committee is to
submit its final report in June, 2014), The restriction of the deductibility of interest expenses for tax
purposes may have adverse consequences for our financial condition and results of operations.
In Finland, new interest deduction limitation rules were introduced in 2013 and are applicable from the
2014 tax year. The rules considerably limit the ability to deduct interest expenses paid between affiliated
companies. According to the rules, net interest expenses may become non-deductible if they exceed
A500,000 per tax year. If the A500,000 limit is exceeded, the net interest expenses can still be deducted to
55
the extent that they do not exceed 25% of the company’s adjusted EBITDA. For the purposes of the
calculation of the 25% limit, both interest on associated loans and third party loans are taken into account,
while the deductibility of interest on associated loans may only be lost. The new rules include a solvency
test based on which otherwise non-deductible net interest cost may become deductible. According to the
solvency test, net interest expenses are always deductible if the taxpayer provides evidence that the ratio of
the equity of the taxpayer to the balance sheet total is not below the corresponding ratio of the group
balance sheet in the end of the tax year. Any non-deductible amount is carried forward and may be, again
subject to the interest barrier rules, deductible in future fiscal years. The restriction of the deductibility of
interest expenses for tax purposes may have adverse consequences for our financial condition and results
of operations in the future.
Restrictions on the utilization of our tax loss carry-forwards may have an adverse effect on our financial condition
and results of operations.
Certain companies in our corporate structure have tax loss carry-forwards of which the tax effect has
partially been capitalized as deferred tax assets in the consolidated financial statements for the fiscal year
ending December 31, 2013. The Group reviews at each balance sheet date the carrying amount of deferred
tax assets. The Group considers whether it is probable that the group entities will have sufficient taxable
profits against which the unused tax losses or unused tax credits can be utilized. The factors used in
estimates may differ from actual outcome which could lead to significant adjustments to deferred tax assets
expensed in the statement of income. The net operating loss carry-forwards for which no deferred tax asset
is recognized due to uncertainty of their utilization amounted to A8.4 million at December 31, 2013 for the
Paroc Group, and does not include significant tax loss carry-forwards at our parent company, Safari Finco
1 Oy. These losses for the Paroc Group expire between the years 2019 - 2023. In general, in Finland, tax
losses may be carried forward for 10 years and set off against income from the same source in which the
loss was incurred, assuming certain conditions are met. According to Finnish rules, if more than 50% of the
share capital is transferred, tax loss carry-forwards and current losses will be forfeited unless a dispensation
is granted. In addition, in Finland the ability to make group contributions to passive holding companies
may be restricted, which could potentially limit our ability to utilize tax losses in our corporate structure,
including at Safari Finco 1 Oy. To the extent that the utilization of tax losses is restricted, they cannot be
set-off against future tax profits which would result in increased future tax burdens. In addition, any such
restriction may require a write-down of the deferred tax assets in our consolidated financial statements.
This could negatively impact our financial condition and results of operations.
Certain of our customers have been expanding and may continue to expand through consolidation and internal
growth, which may increase their buying power, which could materially and adversely affect our revenues, results of
operations and financial position.
Certain of our important customers in certain markets are large companies with significant buying power.
In addition, potential further consolidation in the distribution channels could enhance the ability of certain
of our customers to seek more favorable terms, including pricing, for the products that they purchase from
us. A tendency toward dealer consolidation and therefore increased customer bargaining power is a risk,
especially in the dealer segment. Accordingly, our ability to maintain or raise prices in the future may be
limited, including during periods of raw material and other cost increases. See ‘‘—Our business may be
negatively affected by volatility in raw and other material prices, our inability to retain or replace our key
suppliers, unexpected supply shortages and disruptions of the supply chain.’’ If we are forced to reduce prices
or to maintain prices during periods of increased costs, or if we lose customers because of pricing or other
methods of competition, our revenues, operating results and financial position may be materially and
adversely affected.
Because to a certain extent we depend on a core group of significant customers, our sales, cash flows from operations
and results of operations may decline if our key customers reduce the amount of products that they purchase from
us.
Our top 10 customers accounted for 31%, 37% and 19% of our gross external sales in our BI, TI and PPS
divisions, respectively, in the year ended December 31, 2013. We expect a small number of customers to
continue to account for a not insignificant portion of our net sales for these divisions for the foreseeable
future. By contrast, in our Russian operations, our top 10 customers accounted for 50% of our gross
external sales in the year ended December 31, 2013, and a small number of customers may continue to
account for a substantial portion of our net sales for this business unit for the foreseeable future.
56
The loss of, or a significant adverse change in our relationships with, our major customers, or a loss of
market position of any major customer, could cause a decrease in our sales. The loss of, or a reduction in
orders from, any significant customers, losses arising from customers’ disputes regarding shipments, fees,
merchandise condition or related matters, or our inability to collect accounts receivable from any major
retail customer could cause a decrease in our net income and our cash flows. In addition, revenue from
customers that have accounted for significant revenue in past periods, individually or as a group, may not
continue, or if continued, may not reach or exceed historical levels in any period.
Increases in union organizing activity and work stoppages at our facilities or the facilities of our suppliers could
delay or impede our production, reduce sales of our products and increase our costs.
Our financial performance is affected by the cost of labor. As of December 31, 2013, we estimate that in
Finland, approximately 98% of our blue collar and 85% of our white collar employees were represented by
labor unions, in Sweden, approximately 95% of our blue collar and 75% of our white collar employees
were represented by labor unions, in Poland, approximately 40% of our blue collar and 20% of our white
collar employees were represented by labor unions and in Lithuania, 15% of our blue collar employees
were represented by labor unions. There is currently no unionization at our Russian facility. We are subject
to the risk that strikes or other types of conflicts with personnel may arise or that we may become a subject
of union organizing activity. There are collective bargaining agreements in place in our operations in
Finland, Sweden and Lithuania. In Poland, we have a set of ‘‘Regulations’’ related to, for example,
remuneration, which have been drafted according to the Polish Labor Code, issued by Paroc Polska Sp. z
o.o. and approved by the trade unions active in Paroc Polska Sp. z o.o. Furthermore, some of our direct
and indirect suppliers have unionized work forces. Strikes, work stoppages or slowdowns experienced by
these suppliers could result in insufficient supply of the raw materials we need to produce our stone wool
products. In the past, we have had disputes with unions operating in our Polish operations, which in 2011
were ultimately settled amicably. We could in the future have disputes with the unions operating in our
organization. Any interruption in the production or delivery of our products could reduce sales of our
products and increase our costs.
Our ability to operate and our growth potential could be materially and adversely affected if we cannot employ, train
and retain qualified personnel at a competitive cost.
Many of the products that we manufacture and assemble require manual processes in plant environments.
We believe that our success depends upon our ability to attract, employ, train and retain qualified
personnel with the ability to design, manufacture and assemble these products. In addition, our ability to
expand our operations depends in part on our ability to increase our skilled labor force as the housing
market recovers in our core Nordic markets. A significant increase in the wages paid by competing
employers could result in a reduction of our qualified labor force, increases in the wage rates that we must
pay, or both, particularly in the emerging markets in which we operate. In addition, our ability to quickly
and effectively train additional workforce to handle the increased volume and production while minimizing
labor inefficiencies and maintaining product quality will be a strategic initiative in a housing market
recovery. If either of these events were to occur, our cost structure could increase, our margins could
decrease, and any growth potential could be impaired.
We may not be able to effectively predict or react to rapid technological changes that could render our products
obsolete.
The emergence of new technologies is driving rapid change in some of the Group’s markets. The Group
has to keep pace with these changes and integrate the new technologies in its product offer, in order to
respond effectively to customers’ needs. This requires spending on research and development, with no
guaranteed return on investment. The Group’s sales and operating margin may be affected if it fails to
invest in appropriate technologies or to rapidly bring new products to market, or if competing products are
introduced or the Group’s new products do not adequately respond to customers’ needs. This could in turn
have a material adverse effect on the Group’s financial position and results.
Changes in distribution channels may adversely affect our sales volume and profitability, and new distribution
channels may have lower margins and reduce our profitability.
Distribution of insulation materials is generally made via dealers or other intermediaries or by direct sales
to end users. Panels are generally sold directly to end users, other than in Russia. Direct sales typically have
lower margins. If direct sales channels gain greater importance in the future, we may lose market share or
57
our margins may decline, which may adversely affect our business, financial condition and results of
operations.
In addition, in recent years, the trend towards the increasing use of the internet as a source of information
has generally resulted in greater levels of price transparency. However, the share of the internet as a sales
channel is still limited in our industry. Although we do not believe that the internet has had a material
impact on our sales or margins to date, we cannot assure you that this will not change in the future. We
have seen an increasing tendency toward dealer consolidation, which could increase customer bargaining
power and lower margins if dealers start to demand lower prices, which could adversely affect our business,
financial condition and results of operations.
We may be affected by changes of approach or existing practices by governmental authorities or courts in certain
countries with respect to the interpretation of unclear or ambiguous provisions of laws
In certain countries, like Poland and, to some extent, Russia, a number of provisions of the laws, including
in relation to taxation, applicable to our operations and the way we finance them are unclear or ambiguous
and, therefore, we are exposed to the risk of unfavorable administrative or judicial interpretations thereof.
Moreover, the past and current practices of governmental authorities, courts and other parties in regarding
or interpreting our actions, or actions of third parties, as effective and valid may be altered, which could
result in a negative impact on our business, financial position and results of operations. In particular,
certain agreements we have entered into in relation to the acquisition of part of the real property on which
our manufacturing facilities in Trzemeszno are located may be declared invalid or ineffective due to the
fact that at the time of closing such acquisitions we relied on permits issued by the Polish Ministry of
Internal Affairs which might not have been fully effective as at the time of closing. This may affect our title
to our land and the facilities we have constructed thereon; at worst, if in the event of a dispute no
agreement is reached with the legal successor of the vendor of the relevant real property in Trzemeszno
and our real property interests are not recognized by a court, we may be forced to move our Polish
manufacturing facilities to another location, relinquish the relevant real property to the legal successor of
the vendor, pay damages to the legal successor of the vendor, or offset the cost of our investments in the
facilities against damages payable by us to the vendor’s successor. Our ultimate recovery, if any, in such
circumstances may be less than the cost of our investments in the facilities. This can have a material
adverse effect on our business, financial position and results of operations. See ‘‘—Interruptions in
operations at our facilities could have a material adverse effect on our business, financial condition, results of
operations and cash flows.’’
We may not realize any or all of our anticipated cost savings and productivity and efficiency gains with respect to our
cost savings programs.
This offering memorandum includes estimates and assumptions, including some that are related to the
implementation of cost savings programs. These cost savings programs include productivity, efficiency and
selling, general and administrative expense (‘‘SG&A’’) programs, including an energy efficiency project, a
consumption optimization project, a packaging improvement project, a maintenance saving program
(involving the centralization of maintenance and repair processes), a reduction in headcount (mainly
indirect, finance/accounting), a finance transformation project wherein a financial service center was
established in Vilnius, Lithuania and the business controlling organization was reorganized, among other
programs. The estimates contained herein involve risks, uncertainties, assumptions and other factors that
may cause actual results, performance or achievements to be materially different from any future results,
performance or achievements expressed or implied.
We may not be able to obtain the anticipated benefit of our cost savings programs. In addition, any cost
savings that we realize may be offset, in whole or in part, by temporary or permanent reductions in
revenues, or through increases in other expenses, including expenses incurred in connection with the
implementation of cost savings programs.
Risks Related to the Notes and Our Structure
Our substantial leverage and debt service obligations could have a material adverse effect on our business and
preclude us from satisfying our obligations under our debt, including the Notes and the Note Guarantees.
We have a substantial amount of outstanding indebtedness. As of December 31, 2013, after giving pro
forma effect to the Transactions, we would have had total financial liabilities of A431.8 million (which
represents the aggregate principal amount of the Notes offered hereby, together with finance lease
58
liabilities), of which A430.0 million constituted senior secured indebtedness. As of the same date, we also
would have had the ability to incur significant additional financial indebtedness under our New Revolving
Credit Facility.
Our significant leverage could continue for the foreseeable future and the degree to which we are
leveraged could have important consequences to our business and the holders of the Notes, including, but
not limited to:
•
limiting our ability to obtain additional funding for future capital expenditure, working capital
requirements, debt service requirements, acquisitions, and other general corporate requirements;
•
requiring us to dedicate a substantial portion of our cash flow from operations to payments on our
debt, thereby reducing the availability of our cash flow to fund working capital, capital expenditure,
acquisitions, and other general corporate requirements;
•
limiting our flexibility in planning for, or reacting to, changes in our business and the markets in which
we operate;
•
increasing our vulnerability to downturns in our business or in economic conditions generally;
•
placing us at a competitive disadvantage compared with our competitors, to the extent that they are
not as highly leveraged or have greater financial resources;
•
exposing us to increases in interest rates with respect to our floating rate debt instruments, such as the
New Revolving Credit Facility and the Floating Rate Notes; and
•
making it more difficult for us to satisfy our debt obligations, including those with respect to the
Notes.
Any of these or other consequences or events could have a material adverse effect on our ability to satisfy
our debt obligations, including the Notes.
Despite our current level of indebtedness, we may be able to incur substantial additional indebtedness in the future
which may make it difficult for us to service our debt, including the Notes.
We may be able to incur substantial additional indebtedness in the future, including up to A60.0 million
under our New Revolving Credit Facility, which will be secured on a pari passu basis with the Notes.
Although the New Revolving Credit Facility and the Indenture will contain restrictions on the incurrence
of additional indebtedness, these restrictions are subject to a number of significant qualifications and
exceptions, and under certain circumstances the amount of indebtedness that could be incurred in
compliance with these restrictions could be substantial and we may be able to secure such additional
indebtedness with the Collateral or other assets. Certain creditors in respect of our debt, including lenders
under our New Revolving Credit Facility and counterparties to certain hedging obligations will receive
proceeds from the enforcement of security granted over the Collateral prior to the holders of the Notes. If
new indebtedness is added to our existing debt levels, the related risks that we now face would increase. In
addition, the Indenture and the New Revolving Credit Facility will not prevent us from incurring
obligations that do not constitute indebtedness under those agreements.
Furthermore, some of the debt that we incur in the future could be structurally senior to the Notes and
may be secured by collateral that does not secure the Notes. In particular, our non-Guarantor subsidiaries
may incur substantial additional indebtedness in the future, further increasing the risks associated with our
substantial leverage. If any of our non-Guarantor subsidiaries incur additional indebtedness, the holders of
that debt will be entitled to share ahead of you in any proceeds distributed in connection with any
insolvency, liquidation, reorganization, dissolution or other winding-up of such subsidiaries. See ‘‘—The
Notes will be structurally subordinated to present and future liabilities of our non-Guarantor subsidiaries.’’
We may not be able to generate sufficient cash to service our debt and sustain our operations. Our ability to generate
sufficient cash depends on many factors beyond our control.
Our ability to make payments on, or repay or refinance, our debt, including the Notes, and to fund future
capital expenditure and other cash needs will depend largely upon our future operating performance. Our
future performance, to a certain extent, is subject to general economic, financial, competitive, legislative,
regulatory, technical and other factors, including those discussed in these ‘‘Risk Factors,’’ that are beyond
our control. In addition, our ability to borrow funds in the future to make payments on our debt will
depend on the satisfaction of the covenants in our New Revolving Credit Facility, the Indenture and our
other debt agreements, as well as any other agreements we may enter into in the future. We cannot assure
59
you that our business will generate sufficient cash flow from operations or that future borrowings will be
available to us in an amount sufficient to enable us to pay our debt, including the Notes, or to fund our
other liquidity needs. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources.’’
In addition, prior to the repayment in full of the Notes, we will be required to refinance or repay certain
other debt, including debt under the New Revolving Credit Facility. We cannot assure you that we will be
able to refinance or repay any of our indebtedness, including the Notes, on commercially reasonable terms
or at all. Any refinancing of our indebtedness could be at higher interest rates than our current debt and
may require us to comply with more onerous covenants, which could further restrict our business
operations. If we are unable to make payments or refinance our indebtedness or obtain new financing
under these circumstances, we would have to consider other options, such as:
•
sell assets or equity;
•
reduce or delay our business activities and any capital expenditures;
•
restructure or refinance all or a portion of our debt, including the Notes, on or before maturity;
•
forego opportunities such as acquisitions of other businesses; or
•
negotiate with our lenders to restructure the applicable debt.
If we are not able to accomplish any of these alternatives on a timely basis or on commercially reasonable
terms, or at all, we may not be able to satisfy our debt obligations. Any failure to raise additional funds
necessary to service our debt on a timely basis could result in a default under our debt, including under the
New Revolving Credit Facility and the Notes. This in turn would also likely result in a reduction of our
credit rating, which could adversely affect our ability to incur additional indebtedness. An event of default
under any of these circumstances could result in:
•
holders of our indebtedness declaring all outstanding principal and interest to be due and payable;
•
the lenders under our New Revolving Credit Facility being able to terminate their commitments to
lend us money and foreclose against the Collateral securing their borrowings; and
•
our being forced into bankruptcy or liquidation, which could result in you losing your investment in
the Notes.
Restrictive covenants in the New Revolving Credit Facility and the Indenture may restrict our ability to operate our
business. Our failure to comply with these covenants, including as a result of events beyond our control, could result
in an event of default that could materially and adversely affect our financial condition and results of operations.
The Indenture and the New Revolving Credit Facility will contain, among other things, certain provisions
which may restrict our ability to:
•
incur additional debt and issue guarantees and preferred stock;
•
create or incur certain liens;
•
make certain payments, including dividends and other distributions, with respect to outstanding share
capital;
•
repay or redeem subordinated debt or share capital;
•
create restrictions on the payment of dividends or other amounts from the Issuer and its restricted
subsidiaries;
•
make certain investments, loans or other restricted payments;
•
sell, lease or transfer certain assets, including shares of any restricted subsidiary of the Issuer;
•
engage in certain transactions with affiliates;
•
guarantee certain types of other indebtedness of the Issuer and its restricted subsidiaries without also
guaranteeing the Notes;
•
expand into unrelated businesses;
•
impair the security interests granted over the Collateral; and
•
effect a merger or consolidation of, or sell all or substantially all of, the assets of the Issuer and its
restricted subsidiaries.
60
All of these limitations are subject to significant exceptions and qualifications. In addition, the New
Revolving Credit Facility also requires us to satisfy financial condition tests provided for in the New
Revolving Credit Facility. See ‘‘Description of Other Indebtedness—New Revolving Credit Facility.’’
Our ability to comply with the covenants and restrictions under the Indenture and the New Revolving Credit Facility
and under other agreements governing our indebtedness may be affected by events beyond our control. These include
prevailing political, economic, financial and industry conditions.
The covenants in the Indenture and the New Revolving Credit Facility and any future indebtedness may
significantly restrict our future operations and our ability to react to market conditions or take advantage
of potential business opportunities as they arise. If there were an event of default under any of the
agreements relating to our outstanding debt, including from the Issue Date the Indenture, and from the
date of its execution (if earlier) the New Revolving Credit Facility, which was not cured or waived during
any applicable grace period, the holders of the defaulted debt could cause all amounts outstanding with
respect to that debt to be due and payable immediately. We cannot assure you that our assets or cash flow
would be sufficient to fully repay borrowings under our outstanding debt instruments, including the Notes,
if accelerated upon an event of default. Further, if we are unable to repay, refinance or restructure our
secured debt, the holders of such debt could proceed against the Collateral securing that debt in
accordance with the provisions of the Intercreditor Agreement. In addition, any event of default or
declaration of acceleration under one debt instrument could also result in an event of default under one or
more of our other debt instruments.
The New Revolving Credit Facility and the Floating Rate Notes will bear interest at a floating rate that could rise
significantly, increasing our interest cost and debt and reducing our cash flow.
The New Revolving Credit Facility and the Floating Rate Notes will bear interest at a floating rate of
interest which could rise significantly in the future. Although we may enter into and maintain certain
hedging arrangements designed to fix a portion of these rates, there can be no assurances that hedging will
continue to be available on commercially reasonable terms. Hedging itself carries certain risks, including
that we may need to pay a significant amount (including costs) to terminate any hedging arrangements. To
the extent interest rates were to rise significantly, our interest expense associated with the New Revolving
Credit Facility and the Floating Rate Notes and the carrying cost of our indebtedness would
correspondingly increase, thus reducing cash flow.
Creditors under the New Revolving Credit Facility and certain hedging liabilities are entitled to be repaid with the
proceeds of the Collateral sold in any enforcement sale prior to the holders of the Notes.
The obligations under the Notes and the Note Guarantees are secured, subject to certain exceptions, on a
contractual first-ranking basis with security interests over the Collateral that also secures our obligations
under the New Revolving Credit Facility and certain hedging obligations on a pari passu basis. The
Indenture also permits the Collateral to be pledged to secure additional indebtedness, including on a
contractual first-ranking basis in accordance with the terms thereof and the Intercreditor Agreement. The
Security Agent will act on behalf of the lenders under the New Revolving Credit Facility Agreement,
certain hedge counterparties, the trustee for the Notes and holders of the Notes. See ‘‘—The holders of the
Notes may not control decisions regarding the Collateral.’’
Pursuant to the Intercreditor Agreement, the liabilities under the New Revolving Credit Facility and
certain hedging obligations will have priority over the Notes with respect to the proceeds from the
enforcement of the security granted over the Collateral. See ‘‘Description of Other Indebtedness—
Intercreditor Agreement.’’ As a result, the claims of the holders of the Notes will be effectively subordinated
to the rights of our existing and future secured creditors who have priority in respect of proceeds from
enforcement of the liens over assets that constitute Collateral to the extent of the value of such assets. In
the event we are subject to any foreclosure, dissolution, winding-up, liquidation, reorganization,
administration or other bankruptcy or insolvency proceeding, lenders under the New Revolving Credit
Facility, certain hedge counterparties and the holders of any other such super-priority debt will receive
payment in respect of their obligations prior to any payments in respect of the Notes. As a result, holders
of Notes may receive less than holders of such super-priority secured indebtedness, or may not recover
amounts at all.
We will be permitted to borrow additional indebtedness in the future, subject to the terms of the Indenture
and the New Revolving Credit Facility, and we may secure such indebtedness, including in certain cases, on
61
a super priority basis. Our ability to incur additional debt in the future secured on the Collateral may have
the effect of diluting the ratio of the value of such Collateral to the aggregate amount of the obligations
secured by the Collateral.
The claims of the holders of the Notes will be effectively subordinated to the rights of our existing and future secured
creditors to the extent of the value of the assets securing such creditors which do not also secure the Notes.
The claims of any secured creditors which are secured by assets that do not also secure the Notes will have
priority with respect to such assets over the claims of holders of the Notes. As such, the claims of the
holders of the Notes will be effectively subordinated to the rights of such secured creditors to the extent of
the value of the assets securing such indebtedness.
You may be unable to recover in civil proceedings for U.S. securities laws violations.
The Issuer, the Guarantors and their respective subsidiaries are organized outside of the United States. It
is anticipated that all of the directors and executive officers of the Issuer and the Guarantors will be
non-residents of the United States and that the majority of their assets will be located outside the United
States. As a result, it may not be possible for investors to effect service of process within the United States
upon the Issuer, the Guarantors or their respective directors and executive officers, or to enforce any
judgments obtained in U.S. courts predicated upon civil liability provisions of the U.S. securities laws.
Additionally, there is doubt as to the enforceability in many foreign jurisdictions of civil liabilities based on
the civil liability provisions of the federal or state securities laws of the United States against the Issuer, the
Guarantors, the directors, controlling persons and management and any experts named in this offering
memorandum who are not residents of the United States. See ‘‘Service of Process and Enforcement of civil
liabilities.’’
The Issuer is primarily a holding company that conducts substantially all of its operations through its subsidiaries
and will depend on receiving payments or distributions from its subsidiaries to meet its obligations under the Notes.
The Issuer is primarily a holding company that conducts substantially all of its operations through its direct
and indirect subsidiaries. Consequently, it will be dependent upon payments from its subsidiaries to meet
its obligations, including under the Notes. In addition, because certain of the Guarantors are also holding
companies, the ability of these Guarantors to make payments on their guarantees will be dependent on the
same factors.
The ability of the Issuer’s subsidiaries to make payments to it to fund payments on the Notes will depend
upon their cash flows and earnings which, in turn, will be affected by all of the factors discussed in these
‘‘Risk Factors’’ and elsewhere in this offering memorandum.
The payment of dividends and the making, or repayment, of loans and advances to the Issuer by the
Issuer’s direct subsidiaries and such payments by its indirect subsidiaries to their respective parent entities
are subject to various restrictions. Existing and future indebtedness of certain of these subsidiaries may
prohibit the payment of dividends or the making, or repayment, of loans or advances to the Issuer or its
parent entities. In addition, the ability of any of the Issuer’s direct or indirect subsidiaries to make certain
distributions may be limited by the laws of the relevant jurisdiction in which the subsidiaries are organized
or located, including financial assistance rules, corporate benefit laws, liquidity requirements, requirements
that dividends must be paid out of reserves available for distribution and other legal restrictions which, if
violated, might require the recipient to refund unlawful payments.
Although the Indenture will limit the ability of the Issuer’s subsidiaries to enter into future consensual
restrictions on their ability to pay dividends and make other payments to the Issuer, there are significant
qualifications and exceptions to these limitations. We cannot assure you that arrangements with the
Issuer’s subsidiaries and the funding permitted by the agreements governing existing and future
indebtedness of the Issuer’s subsidiaries will provide the Issuer with sufficient dividends, distributions or
loans to fund payments on the Notes when due. See ‘‘Description of Other Indebtedness’’ and ‘‘Description of
the Notes.’’
If our operating subsidiaries do not distribute sufficient cash to the Issuer to make scheduled payments on
the Notes, we do not expect the Issuer to have any other source of funds that would allow it to make
payments to the holders of the Notes.
62
The Notes will be structurally subordinated to present and future liabilities of our non-Guarantor subsidiaries.
Not all of our subsidiaries will guarantee the Notes. Generally, claims of creditors of a non-Guarantor
subsidiary, including trade creditors and claims of preference shareholders (if any) of the subsidiary, will
have priority with respect to the assets and earnings of the subsidiary over the claims of creditors of its
parent entity, including claims by holders of the Notes under the applicable Note Guarantee. In the event
of any foreclosure, dissolution, winding-up, liquidation, administration, reorganization or other insolvency
or bankruptcy proceeding of any of our non-Guarantor subsidiaries, holders of their indebtedness and
their trade creditors will generally be entitled to payment of their claims from the assets of those
subsidiaries before any assets are made available for distribution to its parent entity. Consequently, the
Notes and the Note Guarantees will each be structurally subordinated to the creditors (including trade
creditors) and preference shareholders (if any) of our non-Guarantor subsidiaries. Further, the
enforceability and scope of Note Guarantees granted by our Guarantor subsidiaries may be limited due to
statutory restrictions (relating to, for example, corporate benefit and prohibited financial assistance)
applying in the jurisdiction of the relevant Guarantor and to the extent of such limitations, the Notes and
the Note Guarantees may each be structurally subordinated to the creditors (including trade creditors) and
preference shareholders (if any) of our Guarantor subsidiaries or, in certain jurisdictions, rendered invalid
and unenforceable. Although our non-Guarantor subsidiaries currently represent only a portion of our
revenues and EBITDA, the covenants in the Indenture and New Revolving Credit Facility permit us to
incur additional indebtedness at subsidiaries which do not guarantee the Notes and in the future the
revenues and EBITDA of such entities could increase, possibly substantially.
The security interests in the Collateral will be granted to the Security Agent rather than directly to the holders of the
Notes. The ability of the Security Agent to enforce certain of the Collateral may be restricted by local law.
The security interests in the Collateral that will secure our obligations under the Notes and the obligations
of the Guarantors under the Note Guarantees will not be granted directly to the holders of the Notes but
will be granted only in favor of the Security Agent. The Trustee will enter into the Intercreditor Agreement
with, among others, the Security Agent and representatives of the other indebtedness secured by the
Collateral, including the New Revolving Credit Facility and counterparties to certain hedging obligations.
Other creditors may become parties to the Intercreditor Agreement in the future. Among other things, the
Intercreditor Agreement governs the enforcement of the Security Documents, and will provide that, to the
extent permitted by applicable law, only the Security Agent has the right to enforce the Security
Documents relating to the Collateral on behalf of the Trustee and the holders of the Notes, the sharing in
any recoveries from such enforcement and the release of the Collateral by the Security Agent. As a
consequence, holders of the Notes will not have direct security interests and will not be entitled to take
enforcement action in respect of the Collateral securing the Notes, except through the Security Agent, who
will follow instructions as set forth in the Intercreditor Agreement. For more information, see ‘‘Description
of Other Indebtedness—Intercreditor Agreement—Release of the Guarantees and the Security—Distressed
Disposal’’ and ‘‘Certain Insolvency Law and Local Law Limitations.’’
In addition, the ability of the Security Agent to enforce the security interests in the Collateral is subject to
mandatory provisions of the laws of each jurisdiction in which security interests over the Collateral are
taken. For example, the laws of certain jurisdictions may not allow for an appropriation of certain pledged
assets, but require a sale through a public auction and certain waiting periods may apply. There is some
uncertainty under the laws of certain jurisdictions as to whether obligations to beneficial owners of the
Notes that are not identified as registered holders in a Security Document will be validly secured. In
addition, the foreclosure of the pledged items in Poland as a part of an enforcement action may turn out to
be ineffective if the foreclosure value does not correspond to the fair market value of the assets.
There is some uncertainty under the laws of certain jurisdictions, including the laws of Poland and
Lithuania, as to whether trusts, including the security trust created pursuant to the Intercreditor
Agreement, will be recognized and enforceable. To address this uncertainty, a direct covenant to pay (the
‘‘Parallel Debt’’) has been granted to the Security Agent by each debtor under the Intercreditor Agreement,
including each Guarantor of the Notes. The Parallel Debt provision allows the Security Agent to act in its
own name in its capacity as a creditor. The Parallel Debt is an obligation under the Intercreditor
Agreement to pay to the Security Agent amounts equal to any amounts owing from time to time by that
debtor to any secured party under the debt documents, including the relevant Notes and the Notes
Guarantees (the ‘‘Principal Obligations’’). The Parallel Debt is a separate obligation of each respective
debtor to the Security Agent and independent from the corresponding Principal Obligations. The Parallel
Debt provisions constitute a secured obligation for the purposes of each Security Document securing the
63
Notes and the other indebtedness secured subject to the Intercreditor Agreement. Any payment in respect
of the Principal Obligations shall discharge the corresponding Parallel Debt and any payment in respect of
the Parallel Debt shall discharge the corresponding Principal Obligations. In respect of the security
interests granted to the Security Agent (including to secure the Parallel Debt), the relevant Trustee and the
holders of the relevant Notes do not have direct security and are not entitled to take enforcement actions
in respect of such security, except through the Security Agent. As a result, the holders of Notes bear some
risks associated with the security trust and Parallel Debt structure. Moreover, although the Polish legal
system does not provide for the formal legal institution of Parallel Debt, Polish courts’ rulings (only limited
judicial guidance is available) have generally accepted the parallel debt mechanism and, consequently, also
the Polish security for repayment of such debt. However, this position may change in the future and the
existence of a parallel debt alongside the primary debt may be found as contradicting Polish legal order.
Similarly, the concept of parallel debt is not native to Lithuanian law and thus the Parallel Debt may be
subject to uncertainties as to validity and enforceability in Lithuania. See ‘‘Certain Insolvency Law and
Local Law Limitations.’’
The Issuer and the Guarantors have control over the Collateral securing the Notes and the sale of particular assets
could reduce the pool of assets securing the Notes.
The Security Documents (except certain Security Documents subject to Swedish law) will, subject to the
terms of the New Revolving Credit Facility and the Indenture, allow the Issuer and the Guarantors, as
applicable, to remain in possession of, retain exclusive control over, freely operate, and collect, invest and
dispose of any income from the Collateral. So long as no default or event of default under the New
Revolving Credit Facility or the Indenture would result therefrom, the Issuer and the Guarantors may,
among other things, without any release or consent by the Security Agent, conduct ordinary course
activities with respect to the Collateral, such as selling, factoring, abandoning or otherwise disposing of
Collateral and making ordinary course cash payments, including repayments of indebtedness. Any of these
activities could reduce the value of the Collateral and consequently the amounts payable to you from
proceeds of any sale of Collateral in the case of an enforcement of the liens.
The Security Documents further provide for the perfection of security taken over certain Collateral in
Sweden and Finland only upon the occurrence of certain specified enforcement events. In certain
jurisdictions (including Finland, Sweden, Poland and Lithuania) a valid and enforceable security interest
will not be deemed to have been effectively created until it is duly perfected and perfection will not be
possible (or normally not be possible in Sweden) to achieve once insolvency proceedings have been
commenced. Security may also be susceptible to recovery if granted or perfected within a certain critical
time before the commencement of, for example, insolvency proceedings. Further, the enforceability and
scope of security created under Security Documents may be limited due to statutory restrictions (relating
to, among other things, corporate benefit and prohibited financial assistance) applying in the jurisdiction of
the relevant security provider. All of the above could reduce the value of the Collateral and consequently
the amounts payable to you from proceeds of any sale of Collateral in the case of enforcement. See
‘‘Certain Insolvency Law and Local Law Limitations.’’
No appraisals of any of the Collateral have been prepared by us or on our behalf in connection with the issuance of
the Notes. The Notes will be secured only to the extent of the value of the Collateral that has been granted as security
for the Notes and the Note Guarantees, and the value of the Collateral securing the Notes and the Note Guarantees
may not be sufficient to satisfy our obligations thereunder and such Collateral may be reduced or diluted under
certain circumstances.
The Notes and the Note Guarantees will be secured by security interests in the Collateral as described in
this offering memorandum, which Collateral also secures the obligations under the New Revolving Credit
Facility and certain hedging obligations. The Collateral may also secure additional indebtedness to the
extent permitted by the terms of the Indenture, the New Revolving Credit Facility and the Intercreditor
Agreement. Your rights to the Collateral may be diluted by any increase in the indebtedness secured by the
Collateral on a pari passu basis with the Notes. To the extent that other first-ranking security interests,
pre-existing liens, liens permitted under the Indenture and other rights encumber the Collateral securing
the Notes, those parties may have or may exercise rights and remedies with respect to the Collateral that
could adversely affect the value of the security and the ability of the Security Agent (in each case in
accordance with the Security Documents and the Intercreditor Agreement) to realize or foreclose on the
security. In addition, pursuant to the Intercreditor Agreement, the liabilities under the New Revolving
Credit Facility and certain hedging obligations will have priority over the Notes with respect to the
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proceeds from the enforcement of the security granted over the Collateral. As a result, holders of Notes
may receive less than holders of such super-priority secured indebtedness, or may not recover amounts at
all. See ‘‘—Creditors under the New Revolving Credit Facility and certain hedging liabilities are entitled to be
repaid with the proceeds of the Collateral sold in any enforcement sale prior to the holders of the Notes.’’
No appraisal of the fair market value of the Collateral has been made in connection with this Offering. The
book value of the Collateral should not be relied on as a measure of realizable value for such assets. The
value of the Collateral could be impaired in the future as a result of changing economic and market
conditions, our failure to successfully implement our business strategy, competition and other factors. The
Collateral may include intangible or other illiquid assets that by their nature may not have a readily
ascertainable market value, whose value to other parties may be less than its value to us, or may not be
readily saleable or, if saleable, there may be substantial delays in their liquidation. In addition, the value of
the Collateral may decrease because of obsolescence, impairment or certain casualty events.
In the event of a liquidation, insolvency, foreclosure, bankruptcy, reorganization or similar proceeding, the
value of the Collateral and the amount that may be received upon a sale of Collateral will depend upon
many factors including, among other things, the condition of the Collateral and our industry, the ability to
sell the Collateral in an orderly sale, market and economic conditions, whether the business is sold as a
going concern, the availability of buyers and other factors. In addition, courts could limit recoverability
with respect to the Collateral if they deem a portion of the interest claim usurious in violation of applicable
public policy. As a result, liquidating the Collateral may not produce proceeds in an amount sufficient to
pay any amounts due on the Notes. We cannot assure you of the value of the Collateral or that the net
proceeds received upon a liquidation, foreclosure, bankruptcy, reorganization or similar proceeding would
be sufficient to repay all amounts due on the Notes.
If the proceeds of Collateral were not sufficient to repay amounts outstanding under the Notes, then
holders of the Notes (to the extent not repaid from the proceeds of the sale of the Collateral) would only
have an unsecured claim against our remaining assets.
We cannot assure you that the Collateral will be saleable or, if saleable, there may be substantial delays in
the liquidation thereof. Not all of our assets will secure the Notes and the value of the Collateral may not
be sufficient to cover the amount of debt secured by such Collateral. There is no requirement under the
Indenture to provide funds to enhance the value of the Collateral if it is insufficient, though applicable law
may provide otherwise. With respect to any shares of our subsidiaries pledged to secure the Notes and the
Note Guarantees, such shares may also have limited value in the event of a bankruptcy, insolvency,
liquidation, winding-up or other similar proceedings in relation to the entity’s shares that have been
pledged because all of the obligations of the entity whose shares have been pledged must first be satisfied,
leaving little or no remaining assets in the pledged entity. As a result, the creditors secured by a pledge of
the shares of these entities may not recover anything of value in the case of an enforcement sale. In
addition, the value of the Collateral may decline over time.
The Indenture will permit the granting of certain liens other than those in favor of the Security Agent on
the Collateral. To the extent that holders of other secured debt or third parties enjoy liens, including
statutory liens, such holders or third parties may have rights and remedies with respect to our or the
Guarantors’ shares that, if exercised, could reduce the proceeds available to satisfy our obligations under
the Notes. Moreover, if additional Notes are issued under the Indenture, holders of such additional Notes
would benefit from the same Collateral as the holders of the relevant Notes being offered hereby, thereby
diluting your ability to benefit from the Collateral for such Notes.
The holders of the Notes may not control certain decisions regarding the Collateral.
Pursuant to the Intercreditor Agreement, the Security Agent has been appointed to act as a common
security agent for the secured parties under the New Revolving Credit Facility, the Notes, the Note
Guarantees and certain hedging arrangements with regard to the Collateral (as applicable). The
Intercreditor Agreement provides that the Security Agent will, subject to certain limited exceptions, act to
enforce the security interests in the Collateral and take instructions from the relevant secured creditors in
respect of the Collateral only at the direction of the ‘‘instructing group.’’
The Intercreditor Agreement will provide that the Security Agent shall act upon the instructions of the
‘‘Senior Secured Instructing Group’’, which is comprised of (a) the holders of more than 662⁄3% of the
aggregate of all outstanding liabilities under the New Revolving Credit Facility and the super senior
hedging liabilities (the ‘‘Majority Super Senior Creditors’’) and (b) the holders of Notes and holders of
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future pari passu debt and non-super senior hedging, if any, together holding more than 50% in aggregate
principal value of the senior secured liabilities and (provided the aggregate amount of such debt is above a
specified de minimis level) the pari passu liabilities then outstanding, and certain hedging liabilities
permitted to be secured on a non-super senior basis pari passu with the Notes (the ‘‘Majority Senior
Secured Creditors’’). The Intercreditor Agreement sets forth that both the Majority Super Senior
Creditors and the Majority Senior Secured Creditors shall be entitled to provide written enforcement
instructions (the ‘‘Initial Enforcement Notice’’) to the Security Agent (which the Security Agent shall
forward to each other creditor representative which did not deliver such notice). The Security Agent will
act in accordance with the enforcement instructions received from the Majority Senior Secured Creditors,
subject to the following: (1) if (a) the Majority Senior Secured Creditors have not, within three months of
the date of the Initial Enforcement Notice, either (i) made a determination as to the method of
enforcement they wish to instruct the Security Agent to pursue (and notified the Security Agent thereof in
writing) or (ii) appointed a Financial Advisor (as defined in the Intercreditor Agreement) to assist them in
making such a determination, or (b) the Super Senior Discharge Date (as defined under ‘‘—Permitted
Payments’’ in ‘‘Description of Other Indebtedness—Intercreditor Agreement’’ below) has not occurred within
six months of the date of the Initial Enforcement Notice, the Security Agent will act in accordance with the
enforcement instructions received from the Majority Super Senior Creditors, until the Super Senior
Discharge Date has occurred; (2) if an insolvency event is continuing with respect to a debtor under the
Intercreditor Agreement, then the Security Agent will, to the extent the Majority Super Senior Creditors
elect to provide enforcement instructions, act in accordance with such instructions until the Super Senior
Discharge Date has occurred; (3) if (a) the Majority Senior Secured Creditors have not made a
determination as to the method of enforcement they wish to instruct the Security Agent to pursue (and
notified the Security Agent thereof in writing) or appointed a Financial Advisor (as defined in the
Intercreditor Agreement) to assist them in making such a determination and (b) the Majority Super Senior
Creditors (i) determine in good faith (and notify the other creditor representatives and the Security Agent)
that a delay in issuing enforcement instructions could reasonably be expected to have a material adverse
effect on the ability to effect a distressed disposal or on the expected realisation proceeds of any
enforcement and (ii) deliver enforcement instructions which they reasonably believe to be consistent with
the Security Enforcement Principles (see ‘‘—Security Enforcement Principles’’ in ‘‘Description of Other
Indebtedness—Intercreditor Agreement’’ below) before the Security Agent has received any enforcement
instructions from the Majority Senior Secured Creditors, then the Security Agent will act in accordance
with the enforcement instructions received from the Majority Super Senior Creditors until the Super
Senior Discharge Date has occurred.
These arrangements could be disadvantageous to the holders of Notes in a number of respects and may
permit the lenders under the New Revolving Credit Facility to control enforcement in circumstances in
which their interests are different from those of the holders of Notes. Disputes may occur between the
holders of the Notes and creditors under our New Revolving Credit Facility, the counterparties to the
relevant hedging arrangements or holders of any permitted additional indebtedness as to the appropriate
manner of pursuing enforcement remedies and strategies with respect to the Collateral securing such
obligations. In such an event, the holders of the Notes will be bound by any decisions of the instructing
group, which may result in enforcement action in respect of the relevant Collateral, whether or not such
action is approved by the holders of the Notes or may be adverse to such noteholders. The Intercreditor
Agreement also provides that the enforcement sale of any Collateral will be subject to, as a condition to
the release of any claims of any other indebtedness secured by such collateral under the Intercreditor
Agreement, certain protections intended to maximize the recovery from an enforcement sale. The
creditors under the New Revolving Credit Facility, the counterparties to certain hedging arrangements or
the holders of any permitted additional indebtedness may have interests that are different from the interest
of holders of the Notes and they may elect to pursue their remedies under the relevant Security
Documents at a time when it would otherwise be disadvantageous for the holders of the Notes to do so.
In addition, if the Security Agent sells Collateral comprising the shares of the Issuer or, if applicable, the
shares of any of its subsidiaries as a result of an enforcement action in accordance with the Intercreditor
Agreement, claims under the Notes, the Note Guarantees (together with claims under the Notes) and the
liens over any other assets securing the Notes and the Note Guarantee may be released. See ‘‘Description
of other indebtedness—Intercreditor Agreement’’ and ‘‘Description of the Notes—Security—Release of Liens.’’
Other creditors not party to the Intercreditor Agreement could commence enforcement action against us
or our subsidiaries during the consultation period, we or one or more of our subsidiaries could seek
protection under applicable bankruptcy laws, or the value of certain Collateral could otherwise be
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impaired or reduced in value. In addition, if we incur substantial additional indebtedness which may be
secured by security interests in the Collateral, the holders of the Notes may not comprise the requisite
majority of the senior secured creditors for the purposes of instructing the Security Agent. See ‘‘Description
of Other Indebtedness—Intercreditor Agreement.’’
It may be difficult to realize the value of the Collateral securing the Notes.
The Collateral will be subject to any and all exceptions, defects, encumbrances, liens, loss of legal
perfection and other imperfections permitted under the Indenture and the New Revolving Credit Facility
and accepted by other creditors that have the benefit of pari passu security interests in the Collateral
securing the Notes from time to time pursuant to the provisions of the Intercreditor Agreement, whether
on or after the date the Notes are first issued. The existence of any such exceptions, defects, encumbrances,
liens, loss of legal perfection and other imperfections could adversely affect the value of the Collateral, as
well as the ability of the Security Agent to realize or foreclose on such Collateral. Furthermore, the firstpriority ranking of security interests can be affected by a variety of factors, including, among other things,
the timely satisfaction of perfection requirements, statutory liens or recharacterization under the laws of
certain jurisdictions.
The security interests granted to the Security Agent in respect of the Collateral will be subject to practical
problems generally associated with the realization of security interests over real or personal property such
as the Collateral. For example, the Security Agent may need to obtain the consent of a third-party,
including that of competent regulatory authorities (including competition regulators) or courts, to enforce
a security interest. We cannot assure you that the Security Agent will be able to obtain any such consents.
We also cannot assure you that the consents of any third parties will be given when required to facilitate a
foreclosure on such assets. Accordingly, the Security Agent may not have the ability to foreclose upon
those assets, and the value of the Collateral may significantly decrease.
Furthermore, enforcement procedures and timing for obtaining judicial decisions in Finland, Sweden,
Poland, Lithuania and any other jurisdictions in which Collateral may be located may be materially more
complex and time-consuming than in equivalent situations in jurisdictions with which investors may be
familiar.
In addition, our business requires a variety of national and local permits and licenses. The continued
operation of properties that comprise part of the Collateral and that depend on the maintenance of such
permits and licenses may be prohibited or restricted. Our business is subject to regulations and permitting
requirements and may be adversely affected if we are unable to comply with existing regulations or
requirements or if changes in applicable regulations or requirements occur. In the event of foreclosure, the
grant of permits and licenses may be revoked, the transfer of such permits and licenses may be prohibited
or may require us to incur significant cost and expense. Furthermore, we cannot assure you that the
applicable governmental authorities will consent to the transfer of all such permits. If the regulatory
approvals required for such transfers are not obtained, are delayed or are economically prevented, the
foreclosure may be delayed, a temporary or lasting shutdown of operations may result, and the value of the
Collateral may be significantly decreased.
The Collateral is limited to certain categories of assets.
Certain limited assets will be pledged pursuant to the Security Documents. See ‘‘Description of the Notes—
Security.’’ The Security Agent, and therefore indirectly the holders of the Notes, will only have an
unsecured claim against any of the Issuer’s or the Guarantors’ assets that do not constitute Collateral.
The Collateral is subject to casualty risks.
We intend to continue to maintain insurance or otherwise insure against hazards in the manner described
in this offering memorandum. There are, however, certain losses that may be either uninsurable or not
economically insurable, in whole or in part. Insurance proceeds may not compensate us fully for our losses.
If there is a complete or partial loss of any of the Collateral, the insurance proceeds may not be sufficient
to satisfy all of the secured obligations, including the Notes and the Note Guarantees. In addition, even if
there is sufficient insurance coverage, if there is a total or partial loss of certain Collateral, there may be
significant delays in obtaining replacement Collateral.
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Enforcing your rights as a holder of the Notes or under the Note Guarantees or security across multiple jurisdictions
may prove difficult or provide less protection than U.S. bankruptcy law.
The Notes will be issued by the Issuer, a company incorporated under the laws of Finland. The Notes will
be guaranteed by the Guarantors, which are incorporated under the laws of Finland, Sweden, Poland,
Lithuania and Russia, and which hold assets in, among other jurisdictions, Finland, Sweden, Poland,
Lithuania and Russia. In the event of a bankruptcy, insolvency or similar event, proceedings could be
initiated in any, all or any combination of the above jurisdictions. Such jurisdictions may not be as
favorable to investors as the laws of the United States or other jurisdictions with which investors are
familiar, and proceedings in these jurisdictions are likely to be complex and costly for creditors and
otherwise may result in greater uncertainty and delay regarding the enforcement of your rights. Your rights
in and under the Notes, the Note Guarantees and the Collateral will be subject to the bankruptcy,
insolvency and administrative laws of the relevant jurisdictions and there can be no assurance that you will
be able to effectively enforce your rights in such complex, multiple bankruptcy, insolvency or similar
proceedings. See ‘‘Certain Insolvency Law and Local Law Limitations.’’
In addition, in the event that one or more of the Issuer, the Guarantors and any future guarantor, if any, or
any other of our subsidiaries experiences financial difficulty, the bankruptcy, insolvency, administrative and
other laws of the Issuer’s and the Guarantors’ jurisdictions of organization and location of assets may be
materially different from, or in conflict with, each other and those of the United States, including in the
areas of rights of creditors, contractual subordination, priority of governmental and other creditors, ability
to obtain post-petition interest and duration of the proceedings. The application of these laws, or any
conflict among them, could call into question whether the law of any particular jurisdiction should apply,
and may adversely affect your ability to enforce your rights under the Notes, the Note Guarantees and the
Collateral in those jurisdictions or limit any amounts that you may receive. See ‘‘Service of Process and
Enforcement of Civil Liabilities’’ with respect to certain of the jurisdictions mentioned above.
Moreover, in certain jurisdictions, the security interests in the Collateral will not give the Security Agent a
right to prevent other creditors from foreclosing on and realizing the Collateral, but will only give the
Security Agent priority (according to their rank) in the distribution of any proceeds of such realization.
Accordingly, the Security Agent and the holders of the Notes may not be able to avoid foreclosure by other
creditors (including unsecured creditors) on the Collateral.
Each Note Guarantee will be subject to certain limitations on enforcement and may be limited by applicable laws or
subject to certain defenses that may limit its validity and enforceability.
Each Note Guarantee provides the holders of the Notes with a direct claim against the relevant Guarantor.
However, the Indenture will provide that each Note Guarantee will be limited to the maximum amount
that may be guaranteed by the relevant Guarantor without, among other things, rendering the relevant
Note Guarantee, as it relates to that Guarantor, voidable or otherwise ineffective or limited under
applicable law or resulting in the Guarantor’s bankruptcy or causing the officers of the Guarantor to incur
personal civil or criminal liability, and enforcement of each such Note Guarantee would be subject to
certain generally available defenses. See ‘‘Certain Insolvency Law and Local Law Limitations.’’
Enforcement of any of the Note Guarantees against any Guarantor, or of the security interests in respect
thereof, will be subject to certain defenses available to Guarantors in the relevant jurisdiction. Although
laws differ among these jurisdictions, these laws and defenses generally include those that relate to
corporate purpose or benefit, fraudulent conveyance or transfer, voidable preference, insolvency or
bankruptcy challenges, financial assistance, preservation of share capital, thin capitalization, capital
maintenance or similar laws, regulations or defenses affecting the rights of creditors generally.
If one or more of these laws and defenses are applicable, a Guarantor may have no liability or decreased
liability under its Note Guarantee depending on the amounts of its other obligations and applicable law.
Limitations on the enforceability of judgments obtained in New York courts in such jurisdictions could
limit the enforceability of any Note Guarantee against any Guarantor.
Although laws differ among various jurisdictions, in general, under bankruptcy or insolvency law and other
laws, a court could (i) avoid or invalidate all or a portion of a Guarantor’s obligations under its Note
Guarantee or the security interests in respect thereof, (ii) direct that the holders of the Notes return any
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amounts paid under a Note Guarantee to the relevant Guarantor or to a fund for the benefit of the
Guarantor’s creditors or (iii) take other action that is detrimental to you, typically if the court found that:
•
the relevant Note Guarantee was incurred with actual intent to give preference to one creditor over
another, hinder, delay or defraud creditors or shareholders of the relevant Guarantor or, in certain
jurisdictions, when the granting of the Note Guarantee has the effect of giving a creditor a preference
or when the recipient was aware that the relevant Guarantor was insolvent when it granted the
relevant Note Guarantee;
•
the relevant Guarantor did not receive fair consideration or reasonably equivalent value or corporate
benefit for the relevant Note Guarantee and such Guarantor was: (i) insolvent or rendered insolvent
because of the relevant Note Guarantee; (ii) undercapitalized or became undercapitalized because of
the relevant Note Guarantee; or (iii) intended to incur, or believed that it would incur, indebtedness
beyond its ability to pay at maturity;
•
the relevant Note Guarantee was held to exceed the corporate objects of the Guarantor or not to be in
the best interests or for the corporate benefit of the Guarantor or was executed in the absence of
corporate approvals required under the applicable law; or
•
the amount paid or payable under the relevant Note Guarantee was in excess of the maximum amount
permitted under applicable law.
These or similar laws may also apply to any future guarantee granted by any of our subsidiaries pursuant to
the Indenture.
We cannot assure you which standard a court would apply in determining whether a Guarantor was
‘‘insolvent’’ at the relevant time or that, regardless of the method of the valuation, a court would not
determine that a Guarantor was insolvent on that date, or that a court would not determine, regardless of
whether or not a Guarantor was insolvent on the date its Note Guarantee was issued, that payments to
holders of the Notes constituted preferences, fraudulent transfers or conveyances on other grounds.
The measures of insolvency for purposes of fraudulent transfer laws vary depending upon applicable
governing law. Generally, an entity would be considered insolvent if, at the time it incurred indebtedness:
•
the sum of its debts, including contingent liabilities, is greater than the fair value of all its assets;
•
the present fair saleable value of its assets is less than the amount required to pay the probable
liability on its existing debts and liabilities, including contingent liabilities, as they become due; or
•
it cannot pay its debts as they become due.
The liability of each Guarantor under its Note Guarantee will be limited to the amount that will result in
such Note Guarantee not constituting a preference, fraudulent conveyance or improper corporate
distribution or otherwise being set aside. However, there can be no assurance as to what standard a court
will apply in making a determination of the maximum liability of each Guarantor. There is a possibility that
the entire Note Guarantee may be set aside, in which case the entire liability may be extinguished.
If a court decided that a Note Guarantee was a preference, fraudulent transfer or conveyance and voided
such Note Guarantee, or held it unenforceable for any other reason, you may cease to have any claim in
respect of the relevant Guarantor and would be a creditor solely of the Issuer and, if applicable, of any
other Guarantor under the relevant Note Guarantee that has not been declared void. In the event that any
Note Guarantee is invalid or unenforceable, in whole or in part, or to the extent the agreed limitation of
the Note Guarantee obligations apply, the Notes would be effectively subordinated to all liabilities of the
applicable Guarantor, and if we cannot satisfy our obligations under the Notes or any Note Guarantee is
found to be a preference, fraudulent transfer or conveyance or is otherwise set aside, we cannot assure you
that we can ever repay in full any amounts outstanding under the Notes. See ‘‘Certain Insolvency Law and
Local Law Limitations.’’
The granting of the security interests in the Collateral may create hardening periods for such security interests in
accordance with the law applicable in certain jurisdictions.
The granting of new security interests in connection with the issuance of the Notes and the entry into the
New Revolving Credit Facility may create hardening periods for such security interests in certain
jurisdictions. The applicable hardening period will run as from the moment each new security interest has
been granted, perfected or recreated.
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In addition, the granting of a shared security interest to secure future debt may require the releasing and
retaking of security or otherwise restart or reopen hardening periods in certain jurisdictions, as the
Indenture will permit the release and retaking of security granted in favor of the Notes in certain
circumstances, including in connection with the incurrence of future debt. The applicable hardening period
for these new security interests will run from the moment each new security interest has been granted or
perfected. If the security interest granted were to be enforced before the end of the respective hardening
period applicable in such jurisdiction, the security interest may be declared void or ineffective and it may
not be possible to enforce it.
If the grantor of such security interest were to become subject to a bankruptcy or winding up proceeding
after the Issue Date, any security interest in Collateral delivered after the Issue Date would face a greater
risk than security interests in place on the Issue Date of being avoided by the grantor or by its trustee,
receiver, liquidator, administrator or similar authority, or otherwise set aside by a court, as a preference
under insolvency law. To the extent that the grant of any security interest is voided, holders of the Notes
would lose the benefit of the security interest. The same rights and risks also will apply with respect to
future security interests granted in connection with the accession of further subsidiaries as additional
Guarantors and the granting of security interests over their relevant assets and equity interests for the
benefit of holders of the Notes. See ‘‘Description of the Notes—Security.’’
Rights in the Collateral may be adversely affected by the failure to perfect security interests in the Collateral.
Applicable law may require that a security interest in certain assets can only be properly perfected and its
priority retained through certain actions undertaken by the secured party or the grantor of the Collateral.
The liens on the Collateral may not be perfected with respect to the Notes and the Note Guarantees, as the
case may be, if the Security Agent is not able to or does not take the actions necessary to perfect or
maintain the perfection of any such liens. Certain of these perfection steps may not be taken until after the
Issue Date, or until the occurrence of certain events, as permitted by the Security Documents, the
Indenture and the New Revolving Credit Facility Agreement. For example, in Poland, mortgages and
pledges require registration, and such registration normally takes up to one month. However, such
registration may take three months or longer depending on court procedures, in particular if the court
requests additional documents and information. In Finland, business mortgages and intellectual property
pledges require registration, and such registration normally takes up to three weeks. However, such
registration may take up to one and a half months, depending on how quickly the relevant registrar acts to
complete the registration process. Such failure may result in the invalidity of the relevant security interest
in the Collateral securing the Notes, as applicable, or adversely affect the priority of such security interest
in favor of third parties, including a trustee in bankruptcy and other creditors who claim a security interest
in the same Collateral. In addition, applicable law may require that certain property and rights acquired
after the grant of a general security interest can only be perfected at the time such property and rights are
acquired and identified. For example, establishment of a mortgage over newly acquired real property in
Poland will require the issue by the security provider of a notarial mortgage deed and registration in the
relevant land and mortgage register. There can be no assurance that the Security Agent will monitor, or
that we will inform the Security Agent of, the future acquisition of property and rights that constitute
Collateral, and that the necessary action will be taken to properly perfect the security interest in such afteracquired collateral. The Security Agent has no obligation to monitor the acquisition of additional property
or rights that constitute Collateral or the perfection of any security interest therein. Such failure may result
in the loss of the security interest in the Collateral or adversely affect the priority of the security interest in
favor of the relevant Notes and the Note Guarantees against third parties, including a trustee in
bankruptcy and other creditors who may claim a secured interest in the Collateral. Additionally, the
security interests over a number of the Collateral assets in Sweden and Finland have been granted over
assets to be acquired (such as future receivables) or with delayed perfection and will only be perfected
upon the occurrence of an enforcement event (See ‘‘Certain Insolvency Law and Local Law Limitations—
Sweden—Creation of Valid Security Interests’’ and ‘‘—Finland—Creation of Valid Security Interests’’).
Additionally, the Indenture and the Security Documents entered into in connection with the Notes will
require us to take a number of actions that might improve the perfection or priority of the liens of the
Security Agent in the Collateral. Certain of these perfection steps may not be taken until after the Issue
Date, as permitted by the Security Documents. To the extent that the security interests created by the
Security Documents with respect to any Collateral are not perfected, the Security Agent’s rights will be
equal to the rights of general unsecured creditors in the event of a liquidation, foreclosure, bankruptcy,
reorganization or similar proceeding.
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There are circumstances other than repayment or discharge of the Notes under which the Collateral securing the
Notes and the Note Guarantees will be released automatically and under which the Note Guarantees will be released
automatically, without your consent or the consent of the Trustee.
Under various circumstances, Collateral securing the Notes and the Note Guarantees will be released
automatically (subject to compliance with certain requirements for the consent of the Security Agent, in
the case of Collateral governed by Swedish law), including:
•
only with respect to the security interests in the shares of the Issuer, in the event of an initial public
offering of the Issuer as further described in ‘‘Description of the Notes—Security—Release of Liens’’;
•
subject to certain conditions, in connection with any sale or other disposition of such Collateral to a
person that is not the Issuer or a Restricted Subsidiary (but excluding any transaction subject to the
‘‘Merger’’ provisions of the Indenture), if such sale or other disposition does not violate the ‘‘Asset
Sale’’ provisions of the Indenture or is otherwise permitted in accordance with the Indenture;
•
in the case of a Guarantor that is released from its Note Guarantee pursuant to the terms of the
Indenture, the release of the property and assets, and capital stock, of such Guarantor;
•
as permitted by the Indenture as provided under the caption ‘‘Description of the Notes—Amendments
and Waivers’’;
•
upon payment in full of principal, interest and all other obligations on the Notes, legal defeasance,
covenant defeasance or satisfaction and discharge of the Indenture as provided under the captions
‘‘Description of the Notes—Defeasance’’ and ‘‘Description of the Notes—Satisfaction and Discharge’’;
•
if the Issuer designates any of its Restricted Subsidiaries to be an Unrestricted Subsidiary in
accordance with the applicable provisions of the Indenture, the release of the property and assets, and
capital stock, of such Unrestricted Subsidiary;
•
in accordance with an enforcement action pursuant to the Intercreditor Agreement or any Additional
Intercreditor Agreement;
•
to effect certain permitted reorganizations in accordance with the Indenture; or
•
as otherwise permitted in accordance with the Indenture.
Under various circumstances, Note Guarantees will be released automatically, including:
•
upon a sale or other disposition (including by way of consolidation or merger) of the capital stock of
the relevant Guarantor (whether by direct sale or sale of a holding company), or the sale or
disposition of all or substantially all the assets of the Guarantor (other than to the Issuer or a
Restricted Subsidiary), if the sale or other disposition does not violate the Indenture and the
Guarantor ceases to be a Restricted Subsidiary of the Issuer as a result of the sale or other disposition;
•
if the Issuer designates any Restricted Subsidiary that is a Guarantor to be an Unrestricted Subsidiary
in accordance with the applicable provisions of the Indenture;
•
upon legal defeasance, covenant defeasance or satisfaction and discharge of the Indenture as provided
under the captions ‘‘Description of the Notes—Defeasance’’ and ‘‘Description of the Notes—Satisfaction
and Discharge’’;
•
in the case of any Restricted Subsidiary of the Issuer that after the Issue Date is required to guarantee
the Notes pursuant to the covenant described under ‘‘Description of the Notes—Certain Covenants—
Additional Guarantees,’’ so long as no Event of Default has occurred and is continuing, upon the
release or discharge of the guarantee of Indebtedness by such Restricted Subsidiary which resulted in
the obligation to guarantee the Notes;
•
in accordance with an enforcement action in compliance with the Intercreditor Agreement or any
Additional Intercreditor Agreement;
•
as described under ‘‘Description of the Notes—Amendments and Waivers’’; or
•
as a result of a transaction permitted by ‘‘—Certain Covenants—Merger and Consolidation—The
Guarantors.’’
71
We may not have the ability to raise the funds necessary to finance an offer to repurchase the Notes upon the
occurrence of certain events constituting a change of control as required by the Indenture.
Upon the occurrence of a ‘‘change of control,’’ as defined in the Indenture, we would be required to offer
to repurchase all the relevant outstanding Notes at a purchase price equal to 101% of the aggregate
principal amount thereof on the date of purchase plus accrued and unpaid interest and additional
amounts, if any, to the date of purchase.
Our ability to fund the purchase price for any offer to purchase the Notes upon a change of control would
be limited by our access to funds at the time and the terms of our other debt and contractual agreements,
including the New Revolving Credit Facility and the Intercreditor Agreement. We may not have sufficient
funds at the time of any such event to make the required repurchases. The source of funds for any
repurchase required will be available cash or cash generated from operating activities or other sources,
including borrowings, sales of assets or sales of equity or funds provided by subsidiaries. We cannot assure
you that we would be able to obtain the necessary level of financing. If an event constituting a change of
control occurs at a time when our subsidiaries are prohibited from providing funds to ourselves for the
purpose of repurchasing the Notes, our subsidiaries may seek the consent of the lenders under such
indebtedness to the purchase of the Notes or may attempt to refinance the borrowings that contain such
prohibition. If a consent to repay such borrowings is not obtained, we may be prohibited from repurchasing
any Notes. In addition, a change of control may result in an event of default under, or acceleration of, our
New Revolving Credit Facility, the Notes and any other indebtedness we may have outstanding. The
repurchase of the Notes pursuant to such an offer could cause a default under the New Revolving Credit
Facility and other indebtedness, even if the change of control itself does not. Any failure by us to offer to
purchase the Notes would constitute a default under the Indenture which would, in turn, constitute a
default under the New Revolving Credit Facility and certain other indebtedness. See ‘‘Description of the
Notes—Change of Control.’’
The change of control provision contained in the Indenture may not necessarily afford you protection in
the event of certain important corporate events, including a reorganization, restructuring, merger,
recapitalization or other similar transaction involving us that may adversely affect you, because such
corporate events may not involve a shift in voting power or beneficial ownership or, even if they do, may
not constitute a ‘‘change of control’’ as defined in the Indenture. Except as described under ‘‘Description of
the Notes—Change of Control,’’ the Indenture will not contain provisions that would require us to offer to
repurchase or redeem the applicable Notes in the event of a reorganization, restructuring, merger,
recapitalization or similar transaction.
The definition of ‘‘change of control’’ contained in the Indenture will include (with certain exceptions) a
disposition of all or substantially all the assets of ourselves and our restricted subsidiaries, taken as a whole,
to any person. Although there is a limited body of case law interpreting the phrase ‘‘all or substantially all,’’
there is no precise established definition of the phrase under applicable law. Accordingly, in certain
circumstances, there may be a degree of uncertainty as to whether a particular transaction would involve a
disposition of ‘‘all or substantially all’’ of our assets and its restricted subsidiaries taken as a whole. As a
result, it may be unclear as to whether a change of control has occurred and whether we are required to
make an offer to repurchase the Notes.
If an active trading market does not develop for the Notes, your ability to resell the Notes may be limited.
The Notes are new securities for which there is currently no market. We cannot assure you as to the
liquidity of any market that may develop for the Notes, the ability of holders of the Notes to sell them or
the price at which holders of the Notes may be able to sell them. Although application will be made for the
Notes to be listed on the Official List of the Irish Stock Exchange and admitted to trading on the Global
Exchange Market thereof within a reasonable period after the Issue Date, we cannot assure you that the
Notes will become or remain listed. Although no assurance is made as to the liquidity of the Notes as a
result of the admission to trading on the Global Exchange Market, failure to be approved for listing or the
delisting of the Notes, as applicable, from the Official List of the Irish Stock Exchange may have a material
effect on a holder’s ability to resell the Notes in the secondary market. Historically, the market for
non-investment grade debt has been subject to disruptions that have caused substantial volatility in the
prices of securities similar to the Notes. Any market for the Notes will likely be subject to similar
disruptions and such disruptions may have a negative effect on you, as holder of the Notes, regardless of
our prospects and financial performance.
72
The liquidity of any market for the Notes will depend on the number of holders of the Notes, prevailing
interest rates, the market for similar securities and other factors, including general economic conditions
and our own financial condition, performance and prospects, as well as third-party recommendations. The
Initial Purchasers have informed us that they intend to make a market in the Notes. However, they are not
obligated to do so and may discontinue such market-making at any time without notice. As a result, we
cannot assure you that an active trading market for the Notes will develop or, if one does develop, that it
will be maintained. If no active trading market develops, you may not be able to resell your Notes at fair
value, if at all.
The liquidity of, and trading market for, the Notes may also be affected by declines in the market for high
yield securities generally. Such a decline may affect any liquidity and trading of the Notes independent of
our financial performance and prospects.
The Notes will initially be held in book-entry form, and therefore you must rely on the procedures of the relevant
clearing systems to exercise any rights and remedies.
The Notes will initially only be issued in global form and held through Euroclear and Clearstream.
Interests in the global notes will trade in book-entry form only, and the Notes in definitive registered form,
or Definitive Registered Notes, will be issued in exchange for Book-Entry Interests only in very limited
circumstances. Owners of Book-Entry Interests will not be considered owners of the Notes. The common
depositary, or its nominee, for Euroclear and Clearstream will be the sole registered holder of the global
notes representing the Notes. Payments of principal, interest and other amounts owing on or in respect of
the global notes representing the Notes will be made to The Bank of New York Mellon, London Branch, as
paying agent, which will make payments to Euroclear and Clearstream. Thereafter, these payments will be
credited to participants’ accounts that hold Book-Entry Interests in the global notes representing the Notes
and credited by such participants to indirect participants. After payment to the common depositary for
Euroclear and Clearstream, we will have no responsibility or liability for the payment of interest, principal
or other amounts to the owners of Book-Entry Interests. Accordingly, if you own a Book-Entry Interest,
you must rely on the procedures of Euroclear and Clearstream, and if you are not a participant in
Euroclear or Clearstream, on the procedures of the participant through which you own your interest, to
exercise any rights and obligations of a holder of the Notes under the Indenture.
Unlike the holders of the Notes themselves, owners of Book-Entry Interests will not have the direct right
to act upon our solicitations for consents, requests for waivers or other actions from holders of the Notes.
Instead, if you own a Book-Entry Interest, you will be permitted to act only to the extent you have received
appropriate proxies to do so from Euroclear or Clearstream. The procedures implemented for the granting
of such proxies may not be sufficient to enable you to vote on a timely basis.
Similarly, upon the occurrence of an event of default under the relevant Indenture, unless and until
Definitive Registered Notes are issued in respect of all Book-Entry Interests, if you own a Book-Entry
Interest, you will be restricted to acting through Euroclear and Clearstream. The procedures to be
implemented through Euroclear and Clearstream may not be adequate to ensure the timely exercise of
rights under the Notes. See ‘‘Book-Entry, Delivery and Form.’’
The transfer of the Notes is restricted, which may affect the value of the Notes.
The Notes are being offered and sold pursuant to an exemption from registration under the Securities Act
and applicable state securities laws of the United States. The Notes have not been and will not be
registered under the Securities Act or any state securities laws. Therefore, you may not transfer or sell the
Notes in the United States except pursuant to an exemption from, or a transaction not subject to, the
registration requirements of the Securities Act and applicable state securities laws, or pursuant to an
effective registration statement, and you may be required to bear the risk of your investment in the Notes
for an indefinite period of time. The Notes and the Indenture contain provisions that restrict the Notes
from being offered, sold or otherwise transferred except pursuant to the exemptions available pursuant to
Rule 144A and Regulation S under the Securities Act, or other exemptions under the Securities Act. In
addition, by acceptance of delivery of any Notes, the holder thereof agrees on its own behalf and on behalf
of any investor accounts for which it has purchased the Notes that it shall not transfer the Notes in an
aggregate principal amount of less than A100,000. Furthermore, we have not registered the Notes under
any other country’s securities laws and do not have any intention to do so. It is your obligation to ensure
that your offers and sales of the Notes within the United States and other countries comply with applicable
securities laws. See ‘‘Transfer Restrictions.’’
73
The Notes may not become, or remain, listed on the Official List of the Irish Stock Exchange.
Although an application will be made for the Notes to be listed on the Official List of the Irish Stock
Exchange and admitted to trading on the Global Exchange Market of the Irish Stock Exchange within a
reasonable period after the Issue Date, the Issuer cannot assure you that the Notes will become, or will
remain, listed. If the Notes are listed on the Official List of the Irish Stock Exchange and admitted to
trading on the Global Exchange Market of the Irish Stock Exchange and the Issuer can no longer maintain
such listing, or if it becomes unduly burdensome to make or maintain such listing, the Issuer may cease to
make or maintain such listing on the Official List of the Irish Stock Exchange; provided, however, that it will
use its commercially reasonable efforts to obtain and maintain the listing of the Notes on another
‘‘recognised stock exchange,’’ although there can be no assurance that the Issuer will be able to do so.
In addition, although no assurance is made as to the liquidity of the Notes as a result of listing the Notes on
the Official List of the Irish Stock Exchange or another recognized stock exchange in accordance with the
Indenture, failure to obtain approval for the listing or the delisting of the Notes from the Official List of
the Irish Stock Exchange or another recognized stock exchange, as applicable, may have a material adverse
effect on your ability to resell Notes in the secondary market.
The interests of our controlling shareholders may differ from the interests of the holders of the Notes.
The Issuer is a wholly-owned subsidiary of Safari Finco 1 Oy, a private limited liability company
(‘‘osakeyhtiö’’) incorporated under the laws of Finland, which is in turn indirectly majority-owned by a
lending syndicate comprised of over 30 financial institutions (the ‘‘Lender-Owner Syndicate’’). The LenderOwner Syndicate took control of the Group in 2009 after a restructuring of the the Group’s debt. In
addition to the Existing Senior Notes and the Existing Senior Facility, the Lender-Owner Syndicate also
holds the Existing Junior Notes issued by Safari Finco 1 Oy, as well as tracking preferred equity certificates
issued by Safari Luxco 1 S.A. A portion of the proceeds of the Offering, together with cash on hand, will be
used to (i) partially redeem, and pay accrued and unpaid interest on, the Existing Junior Notes and
(ii) fund the purchase by Safari Luxco 2 S.A. of Existing Junior Notes from the Lender-Owner Syndicate.
As a result, the Lender-Owner Syndicate is able to exercise significant influence over our corporate
actions, including, but not limited to, the decision to incur indebtedness over a certain threshold, enter into
significant transactions or undertake capital expenditures over a certain threshold. See ‘‘Principal
Shareholders—Shareholders’ Agreement of Safari Luxco 1 S.A. and Safari Luxco 2 S.A.’’ The interests of the
Lender-Owner Syndicate may differ from yours in material respects and may be in pursuing acquisitions,
divestitures, financings or other strategic transactions that, in their judgment, could enhance their equity
investment, even though such transactions might involve risks to you as a holder of Notes. Additionally, the
Indenture will, subject to certain limitations, permit us to pay advisory fees, dividends or make other
payments to the Lender-Owner Syndicate and its affiliates. You should consider that the interests of these
holders may differ from yours in material respects and understand that in the event of a conflict of interest
between you and the Lender-Owner Syndicate, their actions could affect our ability to meet our payment
obligations to you. See ‘‘Principal Shareholders’’ and ‘‘Certain Relationships and Related Party Transactions.’’
Credit ratings may not reflect all risks, are not recommendations to buy or hold securities and may be subject to
revision, suspension or withdrawal at any time and different credit rating agencies may assign different ratings.
Credit ratings address our ability to perform our obligations under the terms of the Notes and credit risks
in determining the likelihood that payments will be made when due under the Notes. Any ratings of the
Notes may not reflect the potential impact of all risks related to the structure, market, additional risk
factors discussed above and other factors that may affect the value of the Notes. A credit rating is not a
recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal by
the rating agency at any time. No assurance can be given that a credit rating will remain constant for any
given period of time or that a credit rating will not be lowered or withdrawn entirely by the credit rating
agency if, in its judgment, circumstances in the future so warrant. Other credit rating agencies which do not
publish credit ratings with respect to the Notes may assign a lower rating than any published ratings of the
Notes. A suspension, reduction or withdrawal at any time of the credit rating assigned to the Notes by one
or more of the credit rating agencies may adversely affect the cost and terms and conditions of our
financings and could adversely affect the value and trading of the Notes.
74
Investors may face foreign currency exchange risks by investing in the Notes.
The Notes will be denominated and payable in non-U.S. currency. Accordingly, for U.S. Holders (as
defined under ‘‘Certain Tax Considerations—Material U.S. Federal Income Tax Considerations’’), an
investment in a series of Notes will entail foreign currency exchange-related risks due to, among other
factors, possible significant changes in the value of the non-U.S. currency relative to the U.S. dollar
because of economic, political and other factors over which we have no control. Depreciation of the
non-U.S. currency against the U.S. dollar may cause a decrease in the effective yield of the Notes below
either series’ stated coupon rate and may result in a loss to U.S. Holders when the non-U.S. currency from
the Notes is translated into U.S. dollars. Investments in Notes by U.S. Holders may also have important tax
consequences as a result of foreign currency exchange gains or losses, if any. See ‘‘Certain Tax
Considerations—Material U.S. Federal Income Tax Considerations.’’
75
USE OF PROCEEDS
The proceeds of the Offering, together with cash on hand, will be applied to (i) redeem in full the Existing
Senior Notes, (ii) make certain payments to holders of the Existing Junior Notes and (iii) pay fees and
expenses incurred in connection with the Offering. Our Existing Senior Facility, which we expect will
remain undrawn as of the Issue Date, will be canceled in connection with the Offering.
In connection with the Transactions, we will enter into our A60 million New Revolving Credit Facility on or
before the Issue Date. We do not expect any amounts to be drawn under our New Revolving Credit Facility
as of the Issue Date, provided that the amounts available for drawing thereunder will be reduced as of the
Issue Date by the applicable euro equivalent amount of our SEK 35 million Pensions L/C, which is being
rolled into our New Revolving Credit Facility on the Issue Date. See ‘‘Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Contractual Obligations—Pension obligations.’’
Certain of the Initial Purchasers or their affiliates are lenders under the Existing Senior Facility or holders
of the Existing Senior Notes (or both) and will be repaid with the proceeds of the Offering. See ‘‘Plan of
Distribution.’’
(E in
millions)
Sources
Notes offered hereby .
Fixed Rate Notes . .
Floating Rate Notes
Cash on hand(4) . . . . .
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Total sources . . . . . . . . . . . . . . . . . . . .
(E in
millions)
Uses
430.0
Redemption in full of Existing Issuer
Senior Notes(1) . . . . . . . . . . . . . . . .
Redemption in full of Existing Oy Ab
Senior Notes(1) . . . . . . . . . . . . . . . .
Payments to holders of Existing Junior
Notes(2) . . . . . . . . . . . . . . . . . . . . .
Estimated transaction costs(3) . . . . . . .
44.4
474.4
.
301.1
.
51.1
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.
105.0
17.2
Total uses . . . . . . . . . . . . . . . . . . . . . .
474.4
(1)
Represents the estimated principal amount outstanding as of, and includes estimated accrued and unpaid interest through,
May 12, 2014.
(2)
A portion of the proceeds of the Offering, together with cash on hand, will be distributed, advanced or otherwise paid to our
parent company, Safari Finco 1 Oy, to (i) partially redeem, and pay accrued and unpaid interest on, the Existing Junior Notes in
the aggregate amount of A100.8 million and (ii) fund the purchase by Safari Luxco 2 S.A. of Existing Junior Notes from the
Lender-Owner Syndicate in the aggregate principal amount of A4.2 million. See ‘‘Principal Shareholders’’ and ‘‘Description of
Other Indebtedness—Shareholder Loans of Safari Finco 1 Oy.’’
(3)
Represents estimated fees and expenses incurred in connection with the Offering, including Initial Purchasers’ fees,
commissions and discounts, professional and legal fees, financial advisory fees, unwinding costs with respect to existing hedging
arrangements and other transaction costs. Actual fees and expenses may differ from the amounts presented and we may use
borrowings under our New Revolving Credit Facility to pay any principal, interest or other costs in excess of this assumed
amount.
(4)
We expect cash on hand to generally decline during the first two quarters of the fiscal year due to increased investment in
working capital, and as a result we may fund a portion of the Transactions or our other working capital requirements with
borrowings under our New Revolving Credit Facility.
76
CAPITALIZATION
The following table sets forth the consolidated cash and cash equivalents and capitalization of the Issuer as
of December 31, 2013 on an actual basis and as adjusted to give pro forma effect to the Transactions as if
they had occurred on December 31, 2013. The actual consolidated financial information has been derived
from our audited consolidated financial statements prepared in accordance with IFRS and included
elsewhere in this offering memorandum.
This table should be read in conjunction with ‘‘Use of Proceeds,’’ ‘‘Management’s Discussion and Analysis of
Financial Condition and Results of Operations,’’ ‘‘Description of Other Indebtedness’’ and the audited
consolidated financial statements prepared in accordance with IFRS and the accompanying notes included
elsewhere in this offering memorandum. Except as set forth below, there have been no other material
changes to our capitalization since December 31, 2013.
Actual
Cash and cash equivalents(1) . . .
Loans and borrowings:
Notes offered hereby . . . . . . . .
Fixed Rate Notes . . . . . . . . .
Floating Rate Notes . . . . . . .
New Revolving Credit Facility(2) .
Existing Senior Facility(3) . . . . . .
Existing Issuer Senior Notes(4) . .
Existing Oy Ab Senior Notes(4) .
Finance lease liabilities . . . . . . .
Capitalized transaction costs(5) . .
Total loans and borrowings . . . .
Total equity(6) . . . . . . . . . . . . . .
Total capitalization . . . . . . . . . .
..........................
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At December 31, 2013
As adjusted for
Adjustments
the Offering
(E in millions)
(unaudited)
69.6
(44.4)
25.2
—
—
—
—
—
299.2
50.8
1.8
—
351.8
158.9
510.7
430.0
430.0
—
—
(299.2)
(50.8)
—
(14.6)
65.4
(102.3)
(36.9)
—
—
—
—
1.8
(14.6)
417.2
56.6
473.8
(1)
Cash and cash equivalents generally decline through the first two quarters of the fiscal year. Cash and cash equivalents as of
March 31, 2014 were A48.1 million. See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources.’’ As of the Issue Date, after giving pro forma effect to the Transactions, we expect
to have limited cash in the business and it may become necessary to use borrowings under our New Revolving Credit Facility for
working capital purposes in the near to medium term.
(2)
In connection with the Transactions, we will enter into our New Revolving Credit Facility on or before the Issue Date. We do
not expect any amounts to be drawn under our New Revolving Credit Facility as of the Issue Date, provided that the amounts
available for drawing thereunder will be reduced as of the Issue Date by the applicable euro equivalent amount of our SEK
35 million Pensions L/C, which is being rolled into our New Revolving Credit Facility on the Issue Date. See ‘‘Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations—Pension obligations.’’
(3)
Our Existing Senior Facility was undrawn as of December 31, 2013. We expect our Existing Senior Facility will remain undrawn
as of the Issue Date. Our Existing Senior Facility will be canceled in connection with the Offering.
(4)
Excludes accrued and unpaid interest.
(5)
We estimate that the gross proceeds of the Offering will be A430 million with estimated transaction costs of A14.6 million
(excluding an estimated A2.6 million in unwinding costs with respect to existing hedging arrangements), which we plan to
capitalize and amortize over the life of the Notes.
(6)
The reduction is equity primarily results from the distribution of proceeds of the Offering to Safari Finco 1 Oy, the Issuer’s
parent, to be used to make payments to holders of the Existing Junior Notes. See ‘‘Use of Proceeds.’’
77
SELECTED FINANCIAL INFORMATION
The following tables set forth selected historical consolidated financial information of the Group as of and
for the years ended December 31, 2011, 2012 and 2013.
The selected consolidated financial position information presented below as of December 31, 2012 and
2013 and the selected consolidated statement of income and cash flow information for the years ended
December 31, 2011, 2012 and 2013 have been derived from our audited consolidated financial statements
prepared in accordance with IFRS and included elsewhere in this offering memorandum.
The results of operations for prior periods are not necessarily indicative of the results to be expected for
any future period or our financial condition at any future date. The following selected historical
consolidated financial information should be read in conjunction with, and is qualified in its entirety by
reference to, the audited consolidated financial statements of the Group and the accompanying notes
thereto included elsewhere in this offering memorandum, and should also be read together with the
information set forth under the headings ‘‘Presentation of Financial and Other Information,’’ ‘‘Use of
Proceeds,’’ ‘‘Capitalization,’’ ‘‘Summary Financial, Operating and Other Information,’’ ‘‘Management’s
Discussion and Analysis of Financial Condition and Results of Operations’’ and ‘‘Business.’’
Selected Consolidated Statement of Income Information
Year ended December 31,
2011
2012
2013
(E in millions)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . .
Selling and marketing expenses . . . .
Research and development expenses
Administrative expenses . . . . . . . . .
Other operating income . . . . . . . . .
Other operating expenses . . . . . . . .
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95.7
(33.4)
(6.0)
(20.8)
0.2
(6.9)
111.8
(34.9)
(6.9)
(25.0)
0.3
(5.0)
121.6
(34.9)
(6.3)
(26.8)
0.5
(7.0)
.........
28.8
40.3
47.2
.........
.........
.........
7.0
(14.5)
(17.0)
8.9
(12.3)
(11.9)
2.3
(9.3)
(10.5)
Profit before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.2
0.5
24.9
(7.0)
29.7
(4.1)
Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.8
17.9
25.6
Operating profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finance income and costs
Dividend received, interest income and other financial income .
Interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other financial expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
78
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.
404.8
430.4
433.1
(309.1) (318.6) (311.5)
Selected Consolidated Statement of Financial Position Information
As of
December 31,
2012
2013
(E in millions)
Non-current assets . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . .
Property, plant and equipment . .
Available-for-sale financial assets .
Deferred tax assets . . . . . . . . . . .
Trade and other receivables . . . .
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477.2
268.3
203.6
0.1
3.3
2.0
498.0
259.2
233.2
0.1
2.0
3.4
Current assets . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . .
Trade and other receivables . . .
Income tax receivables . . . . . . .
Derivative financial instruments .
Cash and cash equivalents . . . . .
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168.2
34.9
57.2
3.1
0.9
72.2
159.3
36.5
51.4
1.3
0.5
69.6
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
645.4
657.3
Non-current liabilities . . . . . . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative financial instruments . . . . . . . . . . . . .
Deferred income tax liabilities . . . . . . . . . . . . . .
Pension obligations and other employee benefits
Provisions for other liabilities and charges . . . . .
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413.4
351.8
4.0
37.0
13.7
7.0
404.7
351.7
0.5
32.9
12.9
6.8
Current liabilities . . . . . . . . . . . . . . . . . . .
Trade and other payables . . . . . . . . . . . .
Income tax liabilities . . . . . . . . . . . . . . . .
Borrowings . . . . . . . . . . . . . . . . . . . . . .
Derivative financial instruments . . . . . . . .
Provisions for other liabilities and charges
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88.2
78.5
4.9
0.4
4.0
0.4
93.7
86.6
3.2
0.1
3.0
0.8
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
501.6
498.4
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
143.8
158.9
Total equity and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
645.4
657.3
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Selected Consolidated Statement of Cash Flows Information
Year ended
December 31,
2011
2012
2013
(E in millions)
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at the beginning of the financial year
Foreign exchange rate effect on cash and cash equivalents . . . . .
Cash and cash equivalents at the end of the financial year . . . . .
79
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43.8
43.9
59.8
(24.1) (38.0) (62.5)
(0.5) (0.2) (0.6)
46.5
65.7
72.2
0.0
0.8
0.8
65.7
72.2
69.6
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion and analysis below provides information that we believe is relevant to an assessment and
understanding of our historical consolidated financial condition and results of operations. You should read the
following discussion and analysis in conjunction with the sections entitled ‘‘Presentation of Financial and Other
Information,’’ ‘‘Summary—Summary Financial, Operating and Other Information,’’ ‘‘Selected Historical
Consolidated Financial Information,’’ ‘‘Use of Proceeds,’’ ‘‘Capitalization’’ and ‘‘Business,’’ as well as our
audited consolidated financial statements and the accompanying notes thereto included elsewhere in this
offering memorandum.
The following discussion and analysis of our financial condition and results of operations as of and for the years
ended December 31, 2011, 2012 and 2013 has been derived from, and is qualified in its entirety by reference to,
the audited consolidated financial statements of Paroc Group Oy as of and for the years ended December 31,
2011, 2012 and 2013, which have been prepared in accordance with International Financial Reporting
Standards, as adopted by the European Union (‘‘IFRS’’).
The discussion and analysis of our financial condition and results of operations presented below includes
certain non-IFRS measures that we use to evaluate our operating and financial performance. These non-IFRS
measures are not recognized as measurements of our performance or liquidity under IFRS and should not be
considered as alternatives to operating profit or any other performance measures derived in accordance with
IFRS or any other generally accepted accounting principles or as alternatives to cash flows from operating,
investing or financing activities. See ‘‘Presentation of Financial and Other Information—Non-IFRS Measures.’’
The following discussion and analysis includes forward-looking statements, which, although based upon
assumptions that we consider to be reasonable, are subject to risks, uncertainties and other factors that could
cause our actual results to differ materially from those expressed or implied by such forward-looking statements.
See ‘‘Forward-Looking Statements’’ and ‘‘Risk Factors.’’
Overview
We are a producer of premium stone wool insulation, and we believe that we are a market leader in
Finland, Sweden and the Baltic States by market share, which according to our estimates has remained
stable overall over the past three years. Our other important markets include Norway, Denmark, Poland,
Germany and the United Kingdom. Our stone wool products are used for both building insulation and
technical insulation, and are known for their high product quality and superior fire resistance, as evidenced
by regular customer and market surveys. We have significantly broadened our geographic sales reach since
2009 through the expansion and leveraging of our strategically located manufacturing network, allowing
for an increasing sales presence into western Europe and Russia, which we view to be potential growth
markets. As of March 31, 2014, we operated nine production plants in five different countries with 13 Base
production lines, 18 Technical Insulation production lines and one Panel System production line. As of the
same date, we had sales and representative offices in 14 European countries and sales to over 40 countries.
For the year ended December 31, 2013, we generated total sales of A433.1 million (with Finland, Sweden
and the Baltic States accounting for 20.2%, 25.1% and 8.6% of our total sales, respectively) and Adjusted
EBITDA of A82.8 million.
Our business is organized in four divisions:
•
Building Insulation (‘‘BI’’). Our Building Insulation division markets and distributes a range of
insulation productions and solutions for residential and commercial buildings in both new-build and
renovation construction markets. Products in the BI division range from general building insulation to
more specialized acoustic or fire protection insulation products. General building insulation is the
largest business segment within BI. The majority of the BI division’s stone wool products are
manufactured by our Base Production division, with the exception of some more specialized acoustics
and roofing products, which are produced by our Technical Insulation division. The BI division does
not have its own production lines or manufacturing capacity. The BI division also sells panel wool
internally to our Panel System division and sells insulation for pre-fabricated panels to third parties
across Europe. For the year ended December 31, 2013, our Building Insulation division generated
sales of A256.7 million (with external sales of A242.0 million, or 55.9% of our total sales).
•
Technical Insulation (‘‘TI’’). Our Technical Insulation division produces high-quality stone wool
products used in specialized industrial and technical applications. Because the TI division’s products
are tailored for specific customer applications, including meeting regulatory requirements, the TI
80
division has its own manufacturing capacity. It uses stone wool from the Base Production division to
produce more customized TI products through its own production lines and specialized machinery.
There are 18 TI production lines at four plants. Products in the TI division are primarily used to
provide insulation from heat, fire, condensation and sound, and are supplied to four key end-markets:
heating, ventilation and air conditioning (‘‘HVAC’’), process industries, marine and offshore and
original equipment manufacturers (‘‘OEM’’). The TI division also sells specialized acoustics and
roofing products to the BI division. For the year ended December 31, 2013, our Technical Insulation
division generated sales of A150.9 million (with external sales of A133.5 million, or 30.8% of our total
sales).
•
Panel System (‘‘PPS’’). Our Panel System division manufactures sandwich façade panels—lightweight
steel-faced panels with an insulating core of stone wool. The main application of these panels are in
the industrial and commercial construction of warehouses, municipal buildings and offices. The PPS
division buys its stone wool from the BI division. For the year ended December 31, 2013, our Panel
System division generated sales of A56.2 million (with external sales of A56.2 million, or 13.0% of our
total sales).
•
Base Production (‘‘Base’’). Our Base Production division is responsible for producing all of the stone
wool for our Building Insulation, Technical Insulation and Panel System divisions, developing
proprietary production technology and managing capacity utilization across the Paroc Group. As of
March 31, 2014, we operated eight production plants in five different countries with 13 Base
Production lines producing stone wool. Production sites are managed as a network with production
costs allocated to the most cost-efficient plant, taking into account distribution costs. For the year
ended December 31, 2013, our Base division generated sales of A207.8 million (including internal sales
of A207.3 million and external sales of A0.5 million). All of our internal sales are at a fixed cost agreed
at the beginning of each year.
Key Factors Affecting Our Results of Operations
Set forth below is a description of certain key factors that have historically affected our results of
operations and which may continue to impact our business in the future.
General market conditions and construction industry cyclicality
Similar to other building materials, demand for stone wool insulation in any geographic market is impacted
by the level of construction activity within that geographic market. A substantial majority of our sales
across the Group are driven by construction, meaning our results of operations depend to a large extent on
the level of new build and renovation activity in both the residential, commercial and industrial
construction sectors of the markets in which we operate. The construction industry is cyclical in nature and
depends on the level of construction-related spending and investment in the residential, commercial and
industrial sectors. The construction industry is particularly sensitive to factors such as economic growth,
interest rates, cost and availability of financing for residential, commercial and industrial construction
projects, inflation and other macroeconomic factors, although the new build construction market is subject
to these cyclical effects to a much greater degree than the repair, maintenance and improvement (‘‘RMI’’)
construction market, which is less cyclical in nature. Our results of operations have been significantly
affected by changes in the economic conditions of the markets in which we manufacture, market and sell
our products. As a result of the global financial and economic crisis which began towards the end of 2007
and the subsequent sovereign debt and Eurozone crisis, we experienced a significant drop in revenue and
EBITDA in 2009 for the entire Group as the availability of credit became very limited and the number of
construction projects (especially in the new build residential sector) declined dramatically across Europe,
particularly in Finland, Sweden and the Baltic States. Of our various operating divisions, Building
Insulation (‘‘BI’’) is generally most sensitive to cyclicality in the construction industry and was affected
most severely by the recent economic turmoil, given that it has greater exposure to the new build
residential construction market and a higher proportion of sales in the Baltic States (which are typically
more volatile than the Nordic countries) than our other divisions. In comparison, our Technical Insulation
(‘‘TI’’) division displayed a greater resilience during the recent economic downturn and over time has
generally exhibited more stability in terms of gross profit margin than our BI division. This is primarily due
to the fact that we sell our TI products to a more diversified set of end markets across Europe, which are
driven by residential, commercial and industrial construction activities, as well as industrial production. As
a result, we are exposed to the different business cycles presented by those markets. For example, although
our TI division relies to some extent on the residential and commercial construction sectors (primarily for
81
the sale of heating, ventilation and air conditioning (‘‘HVAC’’) products), we also supply our various TI
products to the oil and gas, petrochemical, power generation, pulp and paper, marine and offshore and
original equipment manufacturer industries. Therefore, through the growth of our TI division since 2008,
we believe we have benefited from a significantly greater degree of diversification in our business model
and a greater level of stability with respect to our financial profile.
Regulatory initiatives and increased demand for energy efficiency
Our results of operations have been impacted by increased demand for energy efficiency in buildings as
governments across Europe implement regulatory initiatives designed to reduce energy consumption.
According to EU data, buildings account for approximately 40% of total energy consumption in the
European Union, and heating accounts for the vast majority of this consumption. In recent years there has
been an increased political focus throughout the European Union on climate change, which, in
combination with rising energy costs, has resulted in the implementation of tighter regulations concerning
energy efficiency both at the EU and the individual country level. Current EU directives, which impose
energy efficiency requirements on new buildings, as well as renovated buildings, have set a target for a 20%
reduction in energy consumption by 2020. Since this target is unlikely to be met under the measures
currently in place, new energy efficiency goals for 2030 (which are likely to be in excess of the present 20%
reduction target) are currently under review by the European Commission. At a national level, individual
countries have put in place their own specific requirements from time to time over the last 10-15 years.
Given that insulation can dramatically reduce heat loss and energy consumption in buildings and also has
the added benefit of being the most cost-effective of all the available technologies to reduce carbon dioxide
emissions, the implementation of more stringent energy efficiency requirements has affected demand for
our products in our various geographic markets. However, the effect of tighter regulation in recent years
has been most noticeable in the Baltic States, Poland and Russia. This is due to the fact that the Nordic
countries have traditionally always had a more comprehensive set of energy efficiency measures in place,
meaning there is less scope for broad-sweeping regulatory changes in those markets that are likely to
significantly intensify demand for insulation in general, as compared to the Baltic States, Poland and
Russia. In addition, the tightening of certain specific regulations (for example, the recent implementation
in Finland and Sweden of new regulations requiring greater thicknesses for technical insulation) has
fuelled demand for the higher margin, more specialized products offered by our TI division. Furthermore,
an increased level of concern with respect to fire safety has also resulted in certain improvements being
made to fire safety regulations in many of our markets (particularly in central Europe) in recent years,
which has in turn also impacted our results of operations by increasing demand for our stone wool
products, which are known for their superior fire resistance qualities as opposed to other insulation
materials, particularly foam insulation.
Raw materials and energy cost
The main raw materials used in the manufacturing processes for our various stone wool products are stone,
coke, binder, steel, coatings and adhesives, which accounted for 18%, 27%, 22%, 14%, 12% and 4%,
respectively, of our raw materials cost for the year ended December 31, 2013. Our manufacturing processes
also require large quantities of electricity, particularly at our two manufacturing facilities which operate
electric furnaces. Collectively, raw materials, packaging materials and energy cost amounted to
A136.4 million, A139.0 million and A133.9 million (or 44.1%, 43.6% and 43.0% of our total cost of sales) in
the years ended December 31, 2011, 2012 and 2013, respectively. The prices for our raw materials and
energy requirements have fluctuated significantly in the past for a variety of reasons, many of which are
beyond our control, and consequently our results of operations have been affected by such fluctuations.
During the year ended December 31, 2013, we sourced approximately 70% of our total stone requirements
for the year from third parties. Although the underlying prices for stone have been relatively stable over
the past five years, we have experienced volatility in connection with related inbound transport logistic
costs, which are sensitive to the distance of delivery and oil price movements. We have also experienced
significant volatility with respect to coke prices in recent years. Coke prices spiked in 2011 with an increase
in price of approximately 28% over the previous year, but over the course of 2012 and 2013 prices have
declined significantly. The falling price of coke over the last two years has been partially offset by an
increase in the price of binder. Binder pricing fluctuates from year to year and is impacted mainly by
movements in the market price for certain constituent chemicals (namely phenol, urea and methanol), as
well as any material changes in the euro to U.S. dollar exchange rate. The average price for binder has
increased in each of the last three years. Together, coke and binder represented approximately 50% of our
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total raw materials cost (and approximately 13% of our total cost of sales) for the year ended
December 31, 2013. Our total energy cost is driven by cost for the supply of electricity used in connection
with our furnace processes. In the year ended December 31, 2013, our total energy cost (excluding coke)
amounted to A27.5 million and accounted for 9% of our cost of sales.
In order to manage the risk of fluctuations in raw material and energy prices, we enter into supply
agreements covering significant portions of our expected raw material and energy requirements for set
periods of time, which may be on a monthly, quarterly, semi-annual or annual basis depending on the
nature of the supply agreement. If raw material or energy prices decline after we have entered into the
relevant supply agreement, we may have to pay prices under the agreement which are in excess of
prevailing spot market prices, which may adversely impact our results of operations. We also seek to
mitigate the risk of fluctuations in raw materials cost by implementing measures designed to improve
efficiency of consumption, as well as using alternative, cheaper raw materials where possible. For example,
with respect to stone, we generally try to source our supply locally and as close as possible to our
manufacturing facilities and often seek to substitute virgin stone for cheaper industrial residual materials.
With respect to coke, most of our requirements are now sourced on a quarterly basis from suppliers in
Poland and Ukraine, on a semi-annual basis from suppliers in Spain and on an occasional basis from
suppliers in Italy, which means we benefit from a better security of supply and improved logistics, working
capital and price leverage as compared to our previous arrangements with suppliers in China. Coke prices
are negotiated largely based on Australian coking coal price trends. For example, the significant spike that
we experienced in 2011 with respect to coke prices was primarily the result of severe flooding in
Queensland, which is a key region in the global supply of coking coal. With respect to binder, pricing under
our current supply arrangements is agreed each month on a spot basis and is indexed to price movements
in phenol, urea and methanol. In Finland and Sweden, which together account for approximately half of
our annual electricity usage, we mitigate the risk of fluctuations in electricity prices by estimating our
electricity consumption over a rolling three-year period and fixing prices each year for a specified
percentage of our estimated usage for that year. We fix prices for between 75% and 85% of our estimated
consumption in the first year, between 35% and 45% in the second year and between 10% and 20% in the
third year. In Lithuania and Poland, which together generally account for the remainder of our electricity
usage, we enter into long-term contracts with the relevant suppliers and fix prices for our electricity
consumption on an annual basis.
Although historically we have generally been able to pass on increases in costs with respect to raw
materials and energy to our customers by increasing prices for our products, we generally have no
contractual pass-through mechanisms in our contracts with dealers and other customers and there can be
no assurance that we will be able to increase prices in the future. See ‘‘—Competition and pricing’’ below.
See also ‘‘Risk Factors—Risks Related to Our Business and Our Industry—Our business may be negatively
affected by volatility in raw and other material prices, our inability to retain or replace our key suppliers,
unexpected supply shortages and disruptions of the supply chain’’ and ‘‘—Increased energy cost or disruptions in
energy supplies could have a material adverse effect on our business, financial condition and results of
operations.’’
Product mix
Our results of operations and gross profit margins are impacted as a result of changes in our product mix.
Given the finite nature of our production capacity, our profitability generally improves to the extent that
we are able to dedicate our production capacity to manufacture higher margin products and sell those
products to our customers at prices which reflect the value-added nature of the products. In recent years,
our growth strategy has involved a greater concentration on sales of higher margin, value-added HVAC
products (in particular, pipe sections and certain types of wired mats) through our TI division, as opposed
to less profitable industrial products. This strategic shift in product mix within our TI division was a major
contributing factor to us achieving an overall increase in our consolidated gross profit margin from 23.6%
in the year ended December 31, 2011 to 28.1% in the year ended December 31, 2013, despite recording
only a slight increase in volumes of TI products sold.
Seasonality and weather conditions
The construction industry, and therefore demand for stone wool insulation and other building materials
generally, is seasonal in nature and dependent on weather conditions, as periods of frost, snow or heavy
rain can negatively affect construction activities. Accordingly, these seasonal effects frequently impact our
results of operations. In general, due to the climate, many construction sites in our core markets open in
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the spring with the majority of outdoor construction work occurring during the summer months. By the
time autumn arrives, construction work generally moves inside to focus on general interior insulation,
sound and acoustic insulation, heating systems, air conditioning and fire proofing. As a result, sales across
the entire Group are generally weighted more towards the second half of each year, with sales increasing
throughout the autumn months and tending to peak in September and October. Construction activities
then decline dramatically during the winter, when weather conditions in our core markets are at their most
severe, which means we experience a corresponding decline in sales over that time. The lower level of
demand for our products which we experience during periods of cold weather may be further aggravated
by particularly harsh weather conditions, such as those experienced in the winter of 2012/2013. Inclement
weather conditions can also adversely affect our results of operations if they occur with unusual intensity,
during abnormal periods, or last longer than usual in our core markets, especially during peak construction
periods. Furthermore, public holidays and vacation periods constitute an additional factor that may
exacerbate certain seasonality effects, as construction projects or industrial production processes may
temporarily cease. In general, we experience a significant drop in sales in July each year due to the
traditional Northern European holiday season. As a result of these seasonal effects, the results of any given
single fiscal quarter might not be a reliable basis for the expectations of a full fiscal year and may not be
comparable with the results in the other fiscal quarters in the same year or previous years.
Competition and pricing
A primary factor affecting our profitability, in addition to the structure of our cost base, the absolute level
of cost and our ability to manage our operating costs, is the price that we are able to charge to our
customers for our products. Due to the strength of our brand, which is underpinned by the superior quality
of our portfolio of premium, high-specification stone wool products and our ability to provide innovative,
customer-specific solutions through our full-service sales and technical support offering, we believe that we
have been able to achieve premium prices for our products in the past. Our ability to increase prices from
time to time may be limited by the level of competition to which we are subject in the relevant market. We
generally experience more intense price pressure in those markets where we have a relatively small market
share or in which we have a greater number of competitors, as compared to those markets where we have a
significant market share or in which we have a limited number of competitors. Our competitors’ pricing
policies may be influenced by, among other things, general economic conditions and more specifically
conditions within the construction industry, the number of competitors and their production capacities, our
competitors’ cost base and general business strategy. A period of reduced demand for stone wool
insulation (either as a result of a downturn in the construction industry, adverse weather conditions or
otherwise) may result in at least temporary excess capacity and increased competition from our
competitors as they lower prices and seek to gain market share. There can be no assurance that any price
increases on our part will be accepted by our customers in the future, or that we will be able to pass on
further increases in the cost of raw materials, energy and other input factors in a sustainable manner, or at
all, or that we will be able to maintain premium prices for our products. To the extent that we do
implement price increases, our sales volumes and market share may be adversely affected, at least
temporarily, if our competitors do not also increase their prices, or only do so after a delay. See also
‘‘Business—Competition.’’
Cost structure and cost saving initiatives
For the year ended December 31, 2013, approximately 83% of our cost of sales was variable, comprising,
among other things, raw materials cost, energy cost, direct production wages and distribution cost, which
generally move in line with changes in volume. Accordingly, the cost base within our business is relatively
flexible, meaning that our results of operations are impacted from year to year as a result of variations
within our cost structure. For example, our manufacturing processes allow for flexible shift systems and
capacity adjustments to meet increased or decreased levels of demand for our products. As a result, during
periods of peak demand for our products, we are generally able to increase the number of factory shifts per
day in order to meet the additional demand. Furthermore, we have implemented initiatives from time to
time to make improvements with respect to productivity, efficiency and selling, general and administrative
expenses, which have impacted our results of operations and helped to improve our historical profitability.
Overall, through the implementation of such initiatives, we achieved direct cost savings of A2.5 million,
A0.5 million and A4.4 million in the years ended December 31, 2011, 2012 and 2013, respectively. On top of
these productivity savings, we have executed a maintenance saving program that has successfully reduced
costs by A2.8 million over the course of the last three financial years through the centralization of certain
maintenance and repair processes. We have also realized savings from projects designed to increase the
84
efficiency of our organizational structure. For example, by establishing a centralized financial service
center in Vilnius, Lithuania and implementing other internal transformational measures with respect to
certain business functions, we estimate that we have reduced our direct office and finance costs in the
amount of A1.2 million for the year ended December 31, 2013. Going forward, we intend to continue to
make investments to maintain and improve our production facilities and processes to ensure high
productivity and reduce operational costs. See ‘‘—Liquidity and Capital Resources—Capital expenditures.’’
Geographic expansion and capital expenditures
We have a history of mainly organic expansion. Since 2009, we have significantly broadened our geographic
sales reach by expanding and leveraging our strategically-located manufacturing footprint, which has
allowed us to benefit from an increased sales presence and larger customer base within Western Europe
and Russia, which has, in turn, impacted our results of operations. For example, as our TI business has
grown, the geographic markets in which we are able to sell our higher margin, value-added TI products
have also broadened and increased in scale, since it is generally more economically feasible to transport TI
products over long distances as compared to BI products. In particular, the location of our Polish
manufacturing facility has significantly increased the scope for sales of TI products into markets in Western
Europe, including Germany and the United Kingdom, which we view as key growth markets for our TI
division.
As of March 31, 2014, we had eight manufacturing facilities (excluding our factory located in
Lappeenranta, which is scheduled to close down in 2016) located in Finland, Sweden, Poland, Lithuania
and Russia, and we sold our products in more than 40 countries. Historically, we have invested in new
plants in Poland and Lithuania to benefit from high growth markets in the Baltic States and Eastern
Europe. Most recently, as part of our ongoing strategy to establish a manufacturing presence in high
growth markets, we expanded our Russian operations and invested approximately A60 million in the
construction of a new manufacturing facility in Tver, which is strategically located between Moscow and
Saint Petersburg, allowing for ease of transport of products to end customers within Russia. The first
production line for the manufacture of base stone wool at the new facility (‘‘Tver Line 1’’) began
meaningful commercial production in January 2014, although we do not yet have local TI production
capacity in Russia. We have been importing our products into Russia since 1993. However, we are now
enjoying significant benefits from having a local manufacturing presence in Russia. Local in-country
production has enabled us to become more competitive in the Russian market, since we now benefit from
significantly lower transportation costs, as well as the removal of substantial import tariffs, which
previously limited the profitability of our Russian sales. We intend production at our Tver manufacturing
facility to replace a substantial majority of the products which we have historically imported from plants in
neighboring countries to supply the Russian market. Furthermore, we are currently considering making
further material capital expenditures to expand production capacity at our Tver manufacturing facility. See
‘‘—Key Factors Affecting Our Future Results of Operations—Further Russian expansion,’’ ‘‘—Liquidity and
Capital Resources—Capital expenditures’’ and ‘‘Business—Divisions—Russian expansion.’’ Operations in new
markets or investments in new manufacturing facilities frequently have periods of start-up losses, and it
may take a substantial period of time, subject to developments in the relevant markets, for such new
operations or investments to become profitable.
Our capital expenditures can principally be divided into two categories: (i) maintenance capital
expenditures, which are capital expenditures required to sustain the ongoing performance of our
operations or otherwise adjust our operations to adhere to legislative or regulatory requirements, and
(ii) strategic growth investments, which are capital expenditures designed to enhance productivity, achieve
cost savings or gain a particular commercial advantage. Maintenance capital expenditures in 2012 and 2013
were generally stable at A10.3 million and A10.6 million, respectively. However, during 2011, maintenance
capital expenditures were significantly higher at A15.8 million due to the implementation of several large
one-off projects which impacted our results of operations. For example, we replaced packaging machinery
at our manufacturing facility in Oulu, installed a sulphur cleaning system at our manufacturing facility in
Hällekis and added module machines and robot palletizers to the packing ends at our manufacturing
facility in Parainen. In comparison, strategic growth investments (excluding those made in connection with
our Russian expansion) amounted to A6.0 million, A9.9 million and A7.0 million for 2011, 2012 and 2013,
respectively. Historically, the split between maintenance capital expenditures and strategic growth
investments has been relatively equal, although in recent years maintenance capital expenditures have
taken precedence to our strategic growth investments outside Russia as a result of the extra capital we have
been required to commit in connection with our Russian expansion. Although maintenance capital
85
expenditures have remained relatively steady over the last two years, we may be required to make
additional maintenance capital expenditures in the future as we start to operate at higher utilization rates.
In addition, increased levels of capital expenditure for expansion, maintenance and optimization may be
followed by an increase in depreciation expense as machinery and buildings will be depreciated over their
useful lives.
Exchange rate fluctuations
Although our reporting currency for purposes of our consolidated financial statements is the euro, a
significant portion of our business is conducted in currencies other than the euro, including the Swedish
krona, the Norwegian krone, the Danish krone, the Lithuanian litas, the Polish zloty, the Russian rouble
and the British pound. Accordingly, our results of operations are subject to currency effects, primarily
currency translation exposure. For purposes of our consolidated financial statements, the profits and losses
of our subsidiaries with a functional currency other than the euro are translated into euro at average
exchange rates, while assets and liabilities are translated into euro at the closing exchange rate as of the
date of the applicable statement of financial position. Excluding sales denominated in the Latvian lats
(which was replaced by the euro as of January 1, 2014) and the Lithuanian litas (which is pegged to the
euro), we generated approximately 56% of our revenue in currencies other than the euro during the year
ended December 31, 2013; namely the Swedish krona (accounting for approximately 30% of our total
revenue), the Russian rouble (accounting for approximately 8% of our total revenue), the Norwegian
krone (accounting for approximately 7% of our total revenue), the Polish zloty (accounting for
approximately 6% of our total revenue), the Danish krone (accounting for approximately 3% of our total
revenue) and the British pound (accounting for approximately 2% of our total revenue). Fluctuations in
foreign currency exchange rates (particularly in relation to the Swedish krona, the Russian rouble, the
Norwegian krone, the Polish zloty, the Danish krone and the British pound) can affect the value of our
foreign assets, liabilities, sales and costs when reported in euro and will therefore give rise to
period-on-period differences in our results of operations.
Transaction-related exposure at our subsidiaries is relatively limited because their revenues and expenses
are, in general, generated and incurred in their respective operating or functional currencies. However, we
do face some transaction risk, primarily as a result of sales being made out of Finland into Sweden and
Norway, out of Sweden into Norway and Denmark and out of Poland into Germany and the United
Kingdom. As a result of our recent Russian expansion, we also face transaction risk to the extent we source
coke and other raw materials from countries with a functional currency other than the Russian rouble. We
mitigate the risk of fluctuations in exchange rates through the use of forward foreign exchange contracts.
Specifically, we forecast our cash flows by currency on a rolling six-month basis and hedge between 60%
and 80% of those estimated cash flows, calculated on a Group basis. Currency translation exposure is not
hedged. While our hedging strategy enables us to partly mitigate the effects on our cash flows of an
appreciation of the value of the euro compared to the respective functional currencies of our foreign
subsidiaries over the relevant period, it does not enable us to mitigate the risk of a long-term appreciation
of the euro compared to the respective functional currencies of our foreign subsidiaries. Furthermore, we
are also subject to foreign currency effects linked to loans (including intercompany loans) made in a
currency other than the functional currency of the entity advancing or receiving those loans. For example,
we currently have an outstanding SEK-denominated intercompany loan from Paroc Group Oy (the
functional currency of which is the euro) to Paroc Sverige AB (the functional currency of which is the
Swedish krona) which, as of December 31, 2013, had a book value of A225.8 million. Due to favorable
exchange rate movements that have occurred during the period since the intercompany loan was made,
Paroc Group Oy is likely to realize a substantial taxable gain upon repayment of the intercompany loan,
which repayment may occur in connection with the Transactions. See also ‘‘Risk Factors—Risks Relating to
Our Business and Our Industry—Currency rate and interest rate fluctuations might adversely affect our
financial position and results of operations,’’ and ‘‘—Quantitative and Qualitative Disclosures about Market
Risk—Exchange rate risk.’’
Interest rate fluctuations
We have a significant amount of long-term indebtedness, including under our Existing Senior Notes and
our Existing Senior Facility, pursuant to which we pay interest at a floating interest rate. Accordingly, our
various debt instruments expose us to fluctuations in interest rates which can impact our results of
operations. Specifically, if interest rates increase, our interest expense will also increase, and conversely, if
interest rates decrease, our interest expense will also decrease. Through our Group treasury, we monitor
86
market conditions and may from time to time implement appropriate measures to manage interest rate
risk, including the utilization of approved interest rate derivatives. As of December 31, 2013, our
A350 million Existing Senior Notes were fully hedged through interest rate swaps until February 2015,
pursuant to which we pay fixed interest and receive a floating interest rate linked to three-month
EURIBOR. See also ‘‘—Quantitative and Qualitative Disclosures about Market Risk—Interest rate risk.’’
Key Factors Affecting Our Future Results of Operations
In addition to the matters discussed above under ‘‘—Key Factors Affecting Our Results of Operations,’’ we
expect that our future results of operations will be also affected by the key factors described below.
Further Russian expansion
We believe Russia (which accounted for 8.3% of the Group’s revenue for the financial year ended
December 31, 2013) represents an attractive growth market for our business. Accordingly, we are currently
considering a plan to significantly expand our production capacity at our new manufacturing facility in
Tver by adding a second production line for the manufacture of base stone wool (‘‘Tver Line 2’’), as well as
additional machinery that would provide us with off-line TI production capacity in Russia. This potential
second phase of our Russian expansion remains subject to internal approval, which we would not expect to
receive prior to the second half of 2014. In the event that we proceed with the second phase of our Russian
expansion, we expect that we will make total capital expenditures in the amount of approximately
A75 million during the 18 to 24 month period following any decision to proceed with the project. We expect
that we would fund these capital expenditures using cash generated by our operating activities.
As a result of the construction and commissioning of Tver Line 1, our operating model with respect to
Russia has fundamentally changed from an import model to a local production model, and this
transformation would be further reinforced if we were to proceed with the second phase of our Russian
expansion. As a result of this change in our operating model, we expect that we will be able to serve the
Russian market at a significantly lower cost than we have achieved historically, since local production
enables us to make savings with respect to distribution costs (partly due to the shorter distances between
our Tver manufacturing facility and our customers, and partly due to our finished products no longer being
subject to substantial Russian import duty). Over time, we expect this cost saving will result in EBITDA
growth. However, our establishment of a manufacturing presence in Russia also entails risks, which would
increase if we proceed with the second phase of our Russian expansion. See ‘‘Risk Factors—Risks Related to
Our Business and Our Industry—We operate in emerging markets such as Russia, which exposes us to risks
inherent to such less developed markets, and we may be exposed to greater risks as we intend to increase our
operations in such markets’’ and ‘‘—We may not be able to successfully manage future growth, including by way
of organic growth to new regions and potential acquisitions which may expose us to additional risks.’’
Furthermore, the effect of our expansion into Russia in the short term (as our operations ramp up) will be
to increase the level of our cost of sales, operating expenses and depreciation, as well as decrease our
margins. There can be no assurance that the benefits we expect to derive from our expansion into Russia
will be realized.
Lappeenranta closure
The owner of the land on which our Lappeenranta manufacturing facility is situated has informed us that it
does not intend to renew our lease of that land upon its expiration in 2019. Accordingly, we have decided
to end our production operations on the site by the end of 2016, which will impact our future results of
operations. As a result of the closure, we will be required to reallocate resources and transfer production
operations and equipment from the Lappeenranta site to certain of our other manufacturing facilities,
which is already in process. See ‘‘Business—Divisions—Production facilities and intersegment sales—
Lappeenranta closure.’’ We will incur significant costs and expenses in connection with the closure of the
Lappeenranta site and the transfer of operations to our other manufacturing facilities. Specifically, we
expect that we will incur capital expenditures of approximately A7 million in connection with the transfer
process, as well as demolition, land clearing and remediation costs of approximately A9 million.
Furthermore, we expect that we will incur productivity losses, labor efficiency losses and other incremental
costs during the transfer period. There is a risk that the transfer process may not proceed according to plan
and that actual expenses may materially exceed our estimates. The transfer process may also result in
significant disruptions to our production operations and impair our ability to service our customers. See
‘‘Risk Factors—Risks Related to Our Business and Our Industry—Interruptions in operations at our facilities
could have a material adverse effect on our business, financial condition, results of operations and cash flows’’
87
and ‘‘—The closure of the Lappeenranta facility may result in greater costs or disruptions to our business than
currently expected.’’
Presentation of Financial Information
The following is a discussion of our key consolidated statement of income items. For additional
information, see ‘‘Note 2—Summary of significant accounting policies’’ of our audited consolidated
financial statements included elsewhere in this offering memorandum.
Revenue
Revenue primarily consists of income generated from the sale of building materials, including building
insulation, technical insulation, marine insulation, panels and acoustic products, as well as the sale of
services to third parties. Revenue from the sale of building materials is recognized when all the following
criteria have been satisfied: (1) the Group has transferred to the buyer the significant risks and rewards of
ownership of the goods; (2) the Group retains neither continuing managerial involvement to the degree
usually associated with ownership nor effective control over the goods sold; (3) the amount of revenue can
be measured reliably; (4) it is probable the economic benefits associated with the transaction will flow to
the entity; and (5) the costs incurred or to be incurred with respect to the transaction can be measured
reliably. Revenue from the sale of services is recognized once the service has been rendered. Revenues
recognized based on sales contract prices are deducted by estimated discounts at the time of sale.
Cost of sales
Cost of sales consists of costs incurred in connection with the production and delivery of our products and
services, including raw materials cost, energy cost, direct production wages, other direct production cost
(including packaging cost and other manufacturing process cost), distribution cost, indirect production cost
(including maintenance cost, indirect production wages and other indirect cost) and production
depreciation.
Selling and marketing expenses
Selling and marketing expenses consists of expenses incurred in connection with the sale and marketing of
our products and services, including cost of sales personnel (including salaries, commissions, incentive
payments and other payroll expenses), sales personnel-related expenses (including training and internal
meeting expenses), sales activity and marketing communication cost (including with respect to public
relations activities, seminars, trade fairs and exhibitions, brochures, advertising, sponsorship and
promotion activities, customer support and market research), other sundry selling and marketing expenses
(including commissions with respect to agency sales, consultancy fees, product management cost, cost
related to customer order intake, product approval and certification cost, royalty expenses with respect to
brand and trademark licenses, sales and marketing-related rental and lease expenses and demonstration
equipment cost) and sales and marketing depreciation.
Research and development expenses
Research and development expenses consists of expenses incurred in connection with the research and
development (‘‘R&D’’) of new or improved products, services, techniques and processes, including R&Drelated staff salaries and other personnel-related expenses, cost of R&D-related materials, R&D-related
management and administrative expenses, cost of new product test runs, cost of development of new
production software, cost of R&D-related external services, R&D-related insurance expenses, R&Drelated rental and lease expenses and R&D depreciation.
Administrative expenses
Administrative expenses consists of expenses relating to general and administrative activities, including
administrative staff salaries and other administrative personnel-related expenses, management fees, office
and information technology costs, travel expenses and other administrative expenses not otherwise
included within selling and marketing expenses or research and development expenses.
88
Other operating income
Other operating income consists of gains made on sale of tangible assets and other income relating to
ordinary business activities, not related to the sale of goods or services, which cannot be allocated to other
functions, including rental and lease income, release of provisions and any material non-recurring or
unusual income.
Other operating expenses
Other operating expenses consists of losses incurred on sale of tangible assets, property taxes, write-down
and valuation allowances for bad debts, vacant offices or buildings, credit insurance expenses, material
non-recurring or unusual expenses (including termination benefits with respect to redundancies and
organizational restructuring, costs incurred in connection with our Russian expansion, associated start-up
expenses and demolishing expenses incurred in respect of the brownfield site on which our new
manufacturing facility in Tver is located) and other operating expenses.
Dividend received, interest income and other financial income
Dividend received, interest income and other financial income consists of dividend income received from
investments in other companies, interest income received in connection with deposits, loans and other
receivables, fair value gains on financial instruments and other financial income, including exchange rate
gains on loans, deposits and derivative instruments, provisions and fees received for financial services and
gains made on sale of marketable securities.
Interest expenses
Interest expenses consists of interest payable on our borrowings, including under our Existing Senior Notes
and Existing Senior Facility, and interest expense arising under our finance leases, including accruals.
Other financial expenses
Other financial expenses consists of fair value losses on financial instruments, exchange rate losses on
loans, deposits and derivative instruments, bank guarantee fees, commitment fees, provisions and fees paid
in connection with financing operations, stamp taxes related to financing operations and losses on sale of
marketable securities.
Income tax expense
Income tax expense consists of the balance of current tax expense, current tax from previous years, other
direct taxes currently payable and deferred taxes.
EBITDA
We define EBITDA as profit/(loss) for the period from continuing operations before income tax expense,
finance income and costs, depreciation, amortization and impairment and share of results of associates.
We present EBITDA in this offering memorandum only as a supplemental measure of our performance
and liquidity. EBITDA is not recognized as a measurement of our performance or liquidity under IFRS
and should not be considered as an alternative to operating profit or any other performance measures
derived in accordance with IFRS. See ‘‘Presentation of Financial and Other Information—Non-IFRS
Measures’’ and ‘‘Summary—Summary Financial and Operating Information—Summary Other Financial
Information.’’
Segment Reporting
Historically, we have not been required under IFRS to present segment information in our audited
consolidated financial statements. However, in connection with the Offering, we have adopted segment
reporting going forward and therefore we have presented certain segment information herein for each of
the years ended December 31, 2011, 2012 and 2013.
For these purposes, our three segments under IFRS are:
•
Insulation, which corresponds to our BI division and TI division;
•
Panel System, which corresponds to our PPS division; and
•
Base Production, which corresponds to our Base Production division.
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We also present in this offering memorandum certain eliminations and allocations, which provide for
eliminations in respect of intercompany trading and other transactions between our operating divisions, as
well as allocation of central overhead and management charges among our operating divisions, for
purposes of Group consolidation.
Our Base Production division is responsible for the manufacture of stone wool, which it supplies primarily
to our BI and TI divisions pursuant to fixed price agreements entered into at the beginning of each year.
Our Base Production division also makes very small external sales of raw stone wool directly to third
parties. Our BI division principally markets and sells the stone wool products purchased from our Base
Production division to external third parties, but it also makes internal sales of panel stone wool to our PPS
division. Our TI division uses the raw stone wool purchased from our Base Production division to
manufacture highly customized, value-added technical insulation products through specialized off-line
production processes. Our TI division principally markets and sells its finished TI products to external
third parties, but it also makes internal sales of specialized acoustic and roofing products to our BI division.
For further details with respect to the trading relationships between our operating divisions, see
‘‘Business—Divisions—Production facilities and intersegment sales.’’
In the following tables, we present revenue data with respect to our Base Production reporting segment for
each of the years ended December 31, 2011, 2012 and 2013. However, given that our Base Production
division principally makes only internal sales to our other operating divisions and generates no material
external income, we have not presented a discussion of the results of operations for our Base Production
reporting segment for the periods under review, since such a discussion would not be meaningful. Rather,
reference should be made to the discussion of results of operations presented hereafter for our Insulation
reporting segment.
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Consolidated Results of Operations for the Years Ended December 31, 2012 and 2013
The following table sets forth our consolidated results of operations for each of the periods presented.
Year ended
December 31,
2012
2013
(E in millions)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . .
Selling and marketing expenses . . . .
Research and development expenses
Administrative expenses . . . . . . . . . .
Other operating income . . . . . . . . . .
Other operating expenses . . . . . . . .
111.8
(34.9)
(6.9)
(25.0)
0.3
(5.0)
121.6
(34.9)
(6.3)
(26.8)
0.5
(7.0)
..........................................
40.3
47.2
income and other financial income(1) . . . . . . . . . . . . . . .
..........................................
..........................................
8.9
(12.3)
(11.9)
2.3
(9.3)
(10.5)
Profit before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24.9
(7.0)
29.7
(4.1)
Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17.9
25.6
Operating profit . . . . . . . . .
Finance income and costs:
Dividend received, interest
Interest expenses . . . . . . .
Other financial expenses .
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430.4
433.1
(318.6) (311.5)
The following table sets forth our revenue by segment for each of the periods presented.
Year ended
December 31,
2012
2013
(E in millions)
(audited, except
as otherwise
indicated)
Revenue by segment:
Insulation:
Building Insulation(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Insulation(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Insulation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
257.9
144.3
385.1
256.7
150.9
390.8
Panel System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59.2
56.2
161.5
45.8
207.4
0.4
207.8
161.1
46.1
207.3
0.5
207.8
Base Production:
Internal sales:
Sales to BI division(2)
Sales to TI division(2)
Total internal sales . . . .
External sales . . . . . . .
Total Base Production . . .
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Eliminations and allocations(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(221.8) (221.7)
430.4
433.1
(1)
The total amounts presented give effect to eliminations for internal sales between our BI and TI divisions in the amount of
A17.1 million for the year ended December 31, 2012 and A16.8 million for the year ended December 31, 2013, which largely
comprised internal sales of PARAFON-branded acoustic products and, to a lesser extent, other products and traded goods
marketed and distributed through our BI division.
(2)
Unaudited.
(3)
We present eliminations and allocations herein to provide for eliminations in respect of intercompany trading and other
transactions between our operating divisions, as well as allocation of central overhead and management charges among our
operating divisions, for purposes of Group consolidation.
91
Revenue
Our total revenue for the year ended December 31, 2013 remained generally flat at A433.1 million,
compared to A430.4 million for the year ended December 31, 2012.
Insulation
Total revenue for our Insulation reporting segment in the year ended December 31, 2013 increased by
1.5% from A385.1 million in the year ended December 31, 2012 to A390.8 million in the year ended
December 31, 2013.
Building Insulation revenue remained generally flat in the year ended December 31, 2013 at
A256.7 million, compared to A257.9 million in the year ended December 31, 2012, with volumes generally
flat, primarily as a result of a decline in the level of residential construction activity and a continuation of
challenging market and economic conditions in several key markets, particularly in Finland and Sweden
(where we faced strong competition, principally with respect to roofing products, as a result of aggressive
pricing by a new market entrant seeking to gain market share).
Technical Insulation revenue increased by 4.6% from A144.3 million in the year ended December 31, 2012
to A150.9 million in the year ended December 31, 2013, despite volumes remaining generally flat, primarily
as a result of our continued focus on sales of higher margin, value-added HVAC products resulting in an
improved product mix variance, combined with an increase in prices for our TI products generally and the
implementation of regulatory changes in Finland and Sweden requiring new buildings to have thicker,
better quality technical insulation.
Panel System
Revenue for our Panel System reporting segment decreased by 5.1% from A59.2 million in the year ended
December 31, 2012 to A56.2 million in the year ended December 31, 2013, primarily as a result of a decline
in demand for PPS products due to slow market conditions in Finland and across Scandinavia (particularly
in Norway, where there was a natural drop in the level of activity compared to the previous year, during
which there were a particularly high number of construction projects requiring our PPS products),
resulting in a reduction in our order intake, combined with a decrease in local currency prices and foreign
exchange translation losses.
Cost of sales
Our cost of sales decreased by 2.2% from A318.6 million in the year ended December 31, 2012 to
A311.5 million in the year ended December 31, 2013, primarily as a result of a significant decline in the cost
of raw materials (particularly coke) during the year, combined with an increase in the level of productivity
in our manufacturing processes, partially offset by an increase in distribution costs due to increased sales
into Russia, which involve the transportation of products over long distances to Russian customers and the
incurrence of significant import tariffs.
Selling and marketing expenses
Our selling and marketing expenses for the year ended December 31, 2013 remained flat at A34.9 million,
compared to A34.9 million for the year ended December 31, 2012.
Research and development expenses
Our research and development expenses decreased by 9.4% from A6.9 million in the year ended
December 31, 2012 to A6.3 million in the year ended December 31, 2013, primarily as a result of a decline
in R&D depreciation in the amount of A0.9 million, partially offset by a general increase in the level of
spending with respect to R&D activities during the year.
Administrative expenses
Our administrative expenses increased by 7.4% from A25.0 million in the year ended December 31, 2012 to
A26.8 million in the year ended December 31, 2013, primarily as a result of the expansion of our Russian
operations and an increase in administrative expenses in connection therewith in the amount of
A1.6 million following a gradual organizational ramp-up over the course of the year ended December 31,
2012.
92
Other operating income
Our other operating income increased by 58.9% from A0.3 million in the year ended December 31, 2012 to
A0.5 million in the year ended December 31, 2013, primarily as a result of our realization of an unusual
item of income in the amount of A0.4 million as a result of our successful appeal with respect to a
previously paid tax penalty in Finland in respect of the year ended December 31, 2011.
Other operating expenses
Our other operating expenses increased by 39.3% from A5.0 million in the year ended December 31, 2012
to A7.0 million in the year ended December 31, 2013, primarily as a result of expenses incurred in
connection with our Russian expansion, including associated start-up expenses and expenses incurred in
connection with demolition activities undertaken at the brownfield site on which our new manufacturing
facility in Tver is located prior to the beginning of meaningful commercial production at Tver Line 1 in
January 2014.
Dividend received, interest income and other financial income
Our dividend received, interest income and other financial income decreased by 73.7% from A8.9 million
in the year ended December 31, 2012 to A2.3 million in the year ended December 31, 2013, primarily as a
result of movements in foreign exchange rates impacting the revaluation of internal loans and the market
value of foreign exchange derivatives.
Interest expenses
Our interest expenses decreased by 24.5% from A12.3 million in the year ended December 31, 2012 to
A9.3 million in the year ended December 31, 2013, primarily as a result of a decrease in the rate of threemonth EURIBOR over the period.
Other financial expenses
Our other financial expenses decreased by 11.7% from A11.9 million in the year ended December 31, 2012
to A10.5 million in the year ended December 31, 2013, primarily as a result of movements in foreign
exchange rates impacting the revaluation of internal loans and the market value of foreign exchange
derivatives.
Income tax expense
Our income tax expense decreased by 41.4% from A7.0 million in the year ended December 31, 2012 to
A4.1 million in the year ended December 31, 2013, primarily as a result of the creation of a deferred tax
liability in the amount of A2.2 million being created during the year ended December 31, 2012 with respect
to undistributed earnings of our Estonian subsidiary. In addition, the change in the Finnish income tax rate
from 24.5% to 20.0% contributed to a positive impact of A3.8 million on the income tax expense for 2013.
EBITDA
Our total EBITDA increased by 11.0% from A69.0 million in the year ended December 31, 2012 to
A76.6 million in the year ended December 31, 2013, which can be attributed principally to an increase in
sales of higher margin, value-added HVAC products resulting in an improved product mix variance,
combined with a significant decline in the cost of raw materials (particularly coke) and efficiency and
productivity gains realized with respect to our manufacturing processes, partially offset by the incurrence
of one-off costs in connection with the expansion of our Russian operations and the construction and
commencement of operations of Tver Line 1.
93
Consolidated Results of Operations for the Years Ended December 31, 2011 and 2012
The following table sets forth our consolidated results of operations for each of the periods presented.
Year ended
December 31,
2011
2012
(E in millions)
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . .
Selling and marketing expenses . . . .
Research and development expenses
Administrative expenses . . . . . . . . . .
Other operating income . . . . . . . . . .
Other operating expenses . . . . . . . .
95.7
(33.4)
(6.0)
(20.8)
0.2
(6.9)
111.8
(34.9)
(6.9)
(25.0)
0.3
(5.0)
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28.8
40.3
income and other financial income(1) . . . . . . . . . . . . . . .
..........................................
..........................................
7.0
(14.5)
(17.0)
8.9
(12.3)
(11.9)
Profit before taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.2
0.5
24.9
(7.0)
Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.8
17.9
Operating profit . . . . . . . . .
Finance income and costs:
Dividend received, interest
Interest expenses . . . . . . .
Other financial expenses .
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404.8
430.4
(309.1) (318.6)
The following table sets forth our revenue by segment for each of the periods presented.
Year ended
December 31,
2011
2012
(E in millions)
(audited, except
as otherwise
indicated)
Revenue by segment:
Insulation:
Building Insulation(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Insulation(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Insulation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
248.7
130.7
366.8
257.9
144.3
385.1
Panel System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51.2
59.2
156.7
43.7
200.4
0.5
200.9
161.5
45.8
207.4
0.4
207.8
Base Production:
Internal sales:
Sales to BI division(2)
Sales to TI division(2)
Total internal sales . . . .
External sales . . . . . . .
Total Base Production . . .
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Eliminations and allocations(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(214.0) (221.8)
404.8
430.4
(1)
The total amounts presented give effect to eliminations for internal sales between our BI and TI divisions in the amount of
A12.6 million for the year ended December 31, 2011 and A17.1 million for the year ended December 31, 2012, which largely
comprised internal sales of PARAFON-branded acoustic products and, to a lesser extent, other products and traded goods
marketed and distributed through our BI division.
(2)
Unaudited.
(3)
We present eliminations and allocations herein to provide for eliminations in respect of intercompany trading and other
transactions between our operating divisions, as well as allocation of central overhead and management charges among our
operating divisions, for purposes of Group consolidation.
94
Revenue
Our total revenue increased by 6.3% from A404.8 million in the year ended December 31, 2011 to
A430.4 million in the year ended December 31, 2012.
Insulation
Total revenue for our Insulation reporting segment increased by 5.0% from A366.8 million in the year
ended December 31, 2011 to A385.1 million in the year ended December 31, 2012.
Building Insulation revenue increased by 3.7% from A248.7 million in the year ended December 31, 2011
to A257.9 million in the year ended December 31, 2012, despite a decline in volumes due to challenging
market and economic conditions in several key markets, primarily as a result of budgeted price increases
implemented during the year and foreign exchange translation gains.
Technical Insulation revenue increased by 10.4% from A130.7 million in the year ended December 31, 2011
to A144.3 million in the year ended December 31, 2012, primarily as a result of improvements being made
with respect to product mix as part of our continued focus on sales of higher margin, value-added HVAC
products, price increases being implemented during the year and volume growth fuelled by expansion into
new markets in Germany, the United Kingdom and Switzerland during the year.
Panel System
Revenue for our Panel System reporting segment increased by 15.8% from A51.2 million in the year ended
December 31, 2011 to A59.2 million in the year ended December 31, 2012, primarily as a result of an
increase in volumes driven by a rise in the level of market activity, particularly in Sweden and Norway,
where increased sales also benefited from foreign exchange translation gains, together with an increase in
prices.
Cost of sales
Our cost of sales increased by 3.1% from A309.1 million in the year ended December 31, 2011 to
A318.6 million in the year ended December 31, 2012, largely as a result of higher volumes. However, the
rate of increase in cost of sales was proportionally less than the rate of total revenue growth for the same
year, primarily as a result of a growth in sales of higher margin products, a slight improvement in
productivity and a slight decrease in raw materials cost, which, taken together, more than offset an increase
in distribution costs due to increased sales into Russia, which involve the transportation of products over
long distances to Russian customers and the incurrence of significant import tariffs, and higher indirect
production costs due to one-off spare parts write-down in the amount of A1.5 million following a change in
accounting policy.
Selling and marketing expenses
Our selling and marketing expenses increased by 4.3% from A33.4 million in the year ended December 31,
2011 to A34.9 million in the year ended December 31, 2012, primarily as a result of an increase in the level
of internal sales and marketing resources dedicated to supporting our Russian expansion.
Research and development expenses
Our research and development expenses increased by 15.9% from A6.0 million in the year ended
December 31, 2011 to A6.9 million in the year ended December 31, 2012, primarily as a result of the
one-time impairment write-down of certain technology development costs in April 2012, combined with a
slight reduction in the level of spending with respect to R&D activities during the year which partially
offset a depreciation charge in the year.
Administrative expenses
Our administrative expenses increased by 20.2% from A20.8 million in the year ended December 31, 2011
to A25.0 million in the year ended December 31, 2012, primarily as a result of costs incurred in connection
with the restructuring of our finance, accounting and controlling functions, an impairment write-down in
respect of certain Russian real property assets and certain other increased administrative expenses
(including, among other things, with respect to recruitment in connection with our Russian expansion and
the transfer of our corporate headquarters to new premises in Helsinki).
95
Other operating income
Our other operating income increased by 87.6% from A0.2 million in the year ended December 31, 2011 to
A0.3 million in the year ended December 31, 2012, primarily as a result of income generated from the sale
of shares held in a company outside the Group.
Other operating expenses
Our other operating expenses decreased by 27.4% from A6.9 million in the year ended December 31, 2011
to A5.0 million in the year ended December 31, 2012, primarily as a result of a decline in certain unusual
expense items as compared to the prior year (specifically, with respect to one-time costs related to our
Russian expansion and redundancy costs for the year), partially offset by a higher cost of bad debt
allowances for certain customers in Finland and Norway.
Dividend received, interest income and other financial income
Our dividend received, interest income and other financial income increased by 27.1% from A7.0 million in
the year ended December 31, 2011 to A8.9 million in the year ended December 31, 2012, primarily as a
result of movements in foreign exchange rates impacting the revaluation of internal loans and the market
value of foreign exchange derivatives.
Interest expenses
Our interest expenses decreased by 15.2% from A14.5 million in the year ended December 31, 2011 to
A12.3 million in the year ended December 31, 2012, primarily as a result of a decrease in the rate of threemonth EURIBOR over the period.
Other financial expenses
Our other financial expenses decreased by 29.9% from A17.0 million in the year ended December 31, 2011
to A11.9 million in the year ended December 31, 2012, primarily as a result of movements in foreign
exchange rates impacting the revaluation of internal loans and the market value of foreign exchange
derivatives.
Income tax expense
Our income tax expense changed from a tax credit of A0.5 million in the year ended December 31, 2011 to
a tax expense of A7.0 million in the year ended December 31, 2012, primarily as a result of a substantial
increase in our profit before tax from A4.2 million in the year ended December 31, 2011 to A24.9 million in
the year ended December 31, 2012, as well as the devaluation of certain deferred tax assets during the year
ended December 31, 2012 in connection with the forfeiture of certain tax losses in Paroc Oy AB during the
prior year, partially offset by the write-down of certain intragroup loans being deductible from taxation and
our utilization of previously unrecognized tax losses during the year in the amount of A1.3 million. In
addition, the change in the Swedish tax rate from 26.3% to 22.0% contributed to a positive impact of
A2.2 million in 2012.
EBITDA
Our total EBITDA increased by 26.3% from A54.6 million in the year ended December 31, 2011 to
A69.0 million in the year ended December 31, 2012, primarily as a result of a combination of the
implementation of price increases in each of our BI, TI and PPS divisions, improvements being made with
respect to product mix as part of our continued focus on sales of higher margin, value-added HVAC
products, an increase in PPS volumes driven by a significant rise in the level of market activity (particularly
in Sweden and Norway) and significant foreign exchange translation gains, partially offset by the
incurrence of one-off costs in connection with the expansion of our Russian operations and the
construction of Tver Line 1.
96
Liquidity and Capital Resources
Liquidity describes our ability to generate sufficient cash flows to meet the cash requirements of our
business operations, including our working capital needs, debt service obligations, capital expenditures,
contractual obligations and other commitments, as well as acquisitions. Historically, our primary sources of
liquidity have been cash generated from our operating activities and borrowings under our Existing Senior
Facility.
Cash flows
The following table sets forth the principal components of our cash flows for the periods presented.
Year ended
December 31,
2011
2012
2013
(E in millions)
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at the beginning of the financial year
Foreign exchange rate effect on cash and cash equivalents . . . . .
Cash and cash equivalents at the end of the financial year . . . . .
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43.8
43.9
59.8
(24.1) (38.0) (62.5)
(0.5) (0.2) (0.6)
46.5
65.7
72.2
0.0
0.8
0.8
65.7
72.2
69.6
Cash flow from operating activities
Our net cash from operating activities increased by 36.3% from A43.9 million in the year ended
December 31, 2012 to A59.8 million in the year ended December 31, 2013, primarily as a result of a
A6.9 million decrease in working capital in the year ended December 31, 2013, an increase in cash flow
from operations of A4.8 million for the year (predominantly as a result of an underlying increase in
EBITDA of A7.6 million for the year) and a lower net interest paid of A3.5 million, partially offset by a
higher tax expense for the year in the amount of A1.0 million.
Our net cash from operating activities for the year ended December 31, 2012 remained generally flat at
A43.9 million, compared to A43.8 million for the year ended December 31, 2011.
Cash flow from investing activities
Our net cash used in investing activities increased by 64.5% from A38.0 million in the year ended
December 31, 2012 to A62.5 million in the year ended December 31, 2013, primarily as a result of our
Russian expansion project moving into a more capital intensive phase.
Our net cash used in investing activities increased by 57.8% from A24.1 million in the year ended
December 31, 2011 to A38.0 million in the year ended December 31, 2012, primarily as a result of the
commencement of construction works on the brownfield site on which our new manufacturing facility in
Tver is located and related capital outlays.
Cash flow from financing activities
Our net cash used in financing activities increased by 167.9% from A0.2 million in the year ended
December 31, 2012 to A0.6 million in the year ended December 31, 2013, primarily as a result of changes in
pension and finance lease liabilities.
Our net cash used in financing activities decreased by 55.2% from A0.5 million in the year ended
December 31, 2011 to A0.2 million in the year ended December 31, 2012, primarily as a result of changes in
pension and finance lease liabilities.
Cash and cash equivalents
Our cash and cash equivalents comprise (i) cash at bank, principally denominated in euro, Swedish kronor,
Polish zloty, Norwegian kroner and Russian roubles, and (ii) cash equivalents, primarily consisting of short
term deposits for up to three months.
Working capital
To finance our working capital requirements, from the Issue Date we will have available our New
Revolving Credit Facility, pursuant to which we may draw up to A60 million for general corporate
97
purposes. We do not expect any amounts to be drawn under our New Revolving Credit Facility as of the
Issue Date.
Our business has a relatively predictable working capital cycle and generally mirrors developments in our
operating business, as well as underlying activity in the construction industry, over the course of each year.
Accordingly, our working capital has a seasonal trend and certain seasonal patterns may cause material
fluctuations in our working capital. In general, our working capital increases over the course of each year
through the end of the third quarter. This upward trend is driven by an increase in inventories of finished
goods and accounts receivable as trading increases in line with sales seasonality (whereby sales are
weighted more towards the second half of each year). Working capital then generally decreases in the
fourth quarter of each year as accounts receivable are collected, stocks of finished goods are lower and
customer bonus accruals are typically at their highest level. Inventories of raw materials are generally
higher in the first and fourth quarters of each year as deliveries become more limited during the winter
months, whereas inventories of finished goods are typically built up over the course of the second and third
quarters to cover the seasonal sales peak. In addition, each July we typically experience a decrease in our
working capital balance as a result of the traditional Northern European holiday season. Lower levels of
trading and decreased sales over this holiday period usually result in a decline in our accounts receivable
and consequently a significant decrease in our working capital. See also ‘‘—Key Factors Affecting Our
Results of Operations—Seasonality and weather conditions.’’
We monitor working capital on a monthly basis and continually seek to optimize working capital. For
example, as a result of the implementation of a project to decrease accounts receivable, we achieved a
reduction in the number of debtor days (defined as the product of (x) average accounts receivable for the
financial year divided by total net sales for the financial year multiplied by (y) 365 days) from 44 debtor days
in the year ended December 31, 2011 to 41 debtor days in the year ended December 31, 2013.
Furthermore, in 2013 we introduced an initiative designed to improve accounts payable turnover. As part
of the initiative, payment terms with our smaller suppliers were renegotiated and any contracts having
payment terms of less than 30 days are no longer accepted without the approval of senior management. As
a result of this initiative, we achieved an increase in the number of creditor days (defined as the product of
(x) average accounts payable for the financial year divided by total cost of goods sold for the financial year
multiplied by (y) 365 days) from 43 creditor days in the year ended December 31, 2011 to 50 creditor days
in the year ended December 31, 2013.
The following table sets forth the changes to our cash flow from operating activities as a result of working
capital for the periods presented.
Year ended
December 31,
2011
2012
2013
(E in millions)
Change
Change
Change
Change
in
in
in
in
trade and other receivables .
inventories . . . . . . . . . . . . .
trade and other payables . .
provisions . . . . . . . . . . . . .
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6.1
2.6
0.2
1.2
Change in working capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.2
(1.3) 4.7
1.1 (2.3)
(0.6) 3.9
(0.9) 0.7
(1.7)
6.9
Working capital decreased by A6.9 million for the year ended December 31, 2013, driven primarily by (i) a
decrease in trade and other receivables in the amount of A4.7 million, relating in part to a decline in trade
receivables owing partially to a lower sales revenue in last two months of the year as compared to the
corresponding months of the previous year and partially to the country mix (whereby Russian sales grew at
a rate that was generally higher than the Group’s average growth rate and on substantially shorter average
payment terms), as well as a decline in certain other receivables (mainly in connection with the return of a
security deposit in relation to currency hedge arrangements entered into in connection with our Russian
expansion), partially offset through adverse foreign exchange effects, (ii) an increase in inventories in the
amount of A2.3 million, relating primarily to the build-up of inventories of raw materials at our new
manufacturing facility in Tver in connection with the commencement of its manufacturing operations and
to a lesser extent an adverse foreign exchange effect, (iii) an increase in trade and other payables in the
amount of A3.9 million, relating primarily to the implementation of a more stringent Group supplier
payment policy (demanding at least 30 days payment terms for smaller suppliers), as well as a run rate
effect of the improved vendor invoices circulation, materially offset through a decline in the accrued
expenses and VAT payables, but supported through a favourable foreign exchange effect, and (iv) an
98
increase in provisions in the amount of A0.7 million, relating to an increase in remediation costs with
respect to the planned closure of our Lappeenranta manufacturing facility and redundancy costs
provisions, as well as an increase in provisions related to other personnel benefits.
Working capital increased by A1.7 million for the year ended December 31, 2012, driven primarily by (i) an
increase in trade and other receivables in the amount of A1.3 million, relating to a decrease of trade
receivables in connection with a lower sales revenue at the end of the year as compared to the
corresponding period during the previous year, as well as a decrease in average trade receivable days and
further supported through a favourable foreign exchange effect, which in total were more than offset
through an increase in other receivables (mainly in connection with a security deposit in relation to
currency hedge arrangements entered into in connection with our Russian expansion and an increase in
VAT receivables, particularly in relation to procurements with respect to our Russian expansion), (ii) a
decrease in inventories in the amount of A1.1 million, relating to an adverse movement in foreign exchange
rates and a slight increase in resale product stocks, with other inventory items remaining broadly flat, (iii) a
decrease in trade and other payables in the amount of A0.6 million, relating to a decline in trade payables
in combination with an adverse movement in foreign exchange rates and, to a lesser extent, a decrease in
VAT payables, substantially offset through an increase in accrued expenses, and (iv) a decrease in
provisions in the amount of A0.9 million, relating primarily to a reversal of provisions for restructuring
liability against certain termination benefits incurred as a result of certain organisational and management
changes and, to a lesser extent, unwinding of a discount with respect to the environmental provision for
remediation of our Lappeenranta site and a reversal of a tax provision in Poland.
Working capital decreased by A10.2 million for the year ended December 31, 2011, driven primarily by (i) a
decrease in trade and other receivables in the amount of A6.1 million, relating to the successful
implementation of an accounts receivable project aimed at substantially improving trade debtor days
through the introduction of a Group-wide payment term policy, a careful and structured approach to
customer payment term negotiations and customer bonus payment frequency, (ii) a decrease in inventories
in the amount of A2.6 million, relating to an increased focus on an optimal utilization of inventories fuelled
by a sound underlying growth of sales and production volumes, partially offset through an adverse foreign
exchange effect, (iii) an increase in trade and other payables in the amount of A0.2 million, relating to an
increase in trade payables driven by longer average payment days and a favourable foreign exchange effect,
materially offset as a result of other payables, particularly a decline in VAT payables, and (iv) an increase
in provisions in the amount of A1.2 million, relating predominantly to termination benefits envisaged in
relation to certain organisational and management changes, as well as to a tax provision with respect to
Poland and slightly adverse foreign exchange effects.
Capital expenditures
Our capital expenditures can principally be divided into two categories:
•
maintenance capital expenditures, which are capital expenditures required to sustain the ongoing
performance of our operations or otherwise adjust our operations to adhere to legislative or
regulatory requirements, including capital expenditures relating to maintenance and replacement of
plant and equipment, environmental matters and occupational health and safety; and
•
strategic growth investments, which are capital expenditures designed to enhance productivity, achieve
cost savings or gain a particular commercial advantage, including expansionary capital expenditures.
We finance our capital expenditures primarily out of our cash flow from operations.
The following table sets forth a summary of our capital expenditures for the periods presented.
Year ended
December 31,
2011
2012
2013
(E in millions)
(unaudited)
Maintenance capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Strategic growth investments
Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Russia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15.8
10.3
10.6
1.4
6.0
16.9
9.9
41.0
7.0
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23.2
37.2
58.6
99
Our total capital expenditures for the years ended December 31, 2011, 2012 and 2013 were A23.2 million,
A37.2 million and A58.6 million, respectively.
Maintenance capital expenditures remained generally stable during the years ended December 31, 2012
and 2013 at A10.3 million and A10.6 million, respectively. However, during the year ended December 31,
2011, maintenance capital expenditures were significantly higher at A15.8 million due to the
implementation of several large one-off projects which impacted our results of operations. For example, we
replaced a packaging end at our manufacturing facility in Oulu, installed a sulphur cleaning system at our
manufacturing facility in Hällekis and added module machines and robot palletizers to the packing ends at
our manufacturing facility in Parainen.
Strategic growth investments with respect to Russia for the years ended December 31, 2011, 2012 and 2013
were A1.4 million, A16.9 million and A41.0 million, respectively. The significant increase in investment
which occurred during the years ended December 31, 2012 and 2013 can be attributed to the
commencement of our Russian expansion and the construction of Tver Line 1.
Strategic growth investments excluding those made with respect to Russia remained relatively stable at
A6.0 million, A9.9 million and A7.0 million for the years ended December 31, 2011, 2012 and 2013,
respectively, although the slight increase which occurred in the year ended December 31, 2012 was
attributable to a new pipe section machine at our Trzemeszno manufacturing facility and a higher spend
generally with respect to productivity and market-related investments.
Historically, the split between maintenance capital expenditures and strategic growth investments has been
relatively equal. However, in recent years, maintenance capital expenditures have taken precedence to our
strategic growth investments outside Russia as a result of the extra capital we have been required to
commit in connection with our Russian expansion. While we believe that our plants are generally in good
condition and adequate for our existing needs, we will be required to continue to invest in our
manufacturing facilities in order to improve productivity, product quality and energy efficiency, as well as
to expand capacity to meet expected demand for our existing and potential new products. As a supplier of
premium stone wool products, maintenance and replacement measures in our plants are essential to
continuously provide the required product quality. Furthermore, although maintenance capital
expenditures have remained relatively steady over the last two years, we may be required to make
increased levels of maintenance capital expenditures in the future as we start to operate at higher
utilization rates.
For the year ended December 31, 2014, and excluding any potential acquisitions, we expect our total
capital expenditures will be approximately A23 million, which includes approximately A3 million currently
committed in connection with the potential second phase of our Russian expansion. See ‘‘—Key Factors
Affecting Our Future Results of Operations—Further Russian expansion’’ and ‘‘Business—Divisions—Russian
expansion.’’ The second phase of our Russian expansion remains subject to internal approval, which we
would not expect to receive prior to the second half of 2014. In the event that we proceed with the second
phase of our Russian expansion, we estimate that we will make total capital expenditures in the amount of
approximately A75 million during the 18 to 24 month period following any decision to proceed with the
project. We expect that we would fund these capital expenditures using cash generated by our operating
activities.
In connection with the planned closure of our Lappeenranta manufacturing facility in 2016, we estimate
that we will incur capital expenditures of approximately A7 million in connection with the transfer process,
as well as demolition, land clearing and remediation costs of approximately A9 million. Furthermore, we
expect that we will incur productivity losses, labor efficiency losses and other incremental costs during the
transfer period. See ‘‘—Key Factors Affecting Our Future Results of Operations—Lappeenranta closure’’ and
‘‘Business—Divisions—Production facilities and inter-segment sales—Lappeenranta closure.’’
See also ‘‘—Key Factors Affecting Our Results of Operations—Geographic expansion and capital
expenditures.’’
Long-term indebtedness outstanding upon completion of the Transactions
We currently have, and upon consummation of the Transactions we will continue to have, a significant
amount of outstanding indebtedness with substantial debt service requirements. As of December 31, 2013,
after giving pro forma effect to the Transactions as described in ‘‘Use of Proceeds,’’ our total outstanding
indebtedness (excluding finance leases and shareholder loans) would have been A430 million.
100
Upon consummation of the Transactions as described in ‘‘Use of Proceeds’’, our long-term indebtedness
will consist primarily of the Notes and the New Revolving Credit Facility (which provides for certain
maintenance covenants). For a description of the material terms of our long-term indebtedness, see
‘‘Description of Other Indebtedness’’ and ‘‘Description of the Notes.’’
Initially, we will have A60 million available to be drawn under our New Revolving Credit Facility as of the
Issue Date. In connection with the Transactions, our SEK 35 million Pensions L/C will be rolled into our
New Revolving Credit Facility as a letter of credit issued under an ancillary facility thereunder on the Issue
Date. Such ancillary facility utilisation by the Pensions L/C will thereby reduce amounts available for
drawing under our A60 million New Revolving Credit Facility as of the Issue Date by the corresponding
euro equivalent amount. See ‘‘—Contractual Obligations—Pension obligations.’’
We do not otherwise expect our New Revolving Credit Facility to be drawn as of the Issue Date.
We are highly leveraged and we may undertake further expansion and make additional investments in the
future which may increase our level of indebtedness. Our ability to make scheduled payments of principal
of, or to pay interest on, or to refinance, our indebtedness (including the Notes), or to fund planned capital
expenditures and working capital, will depend on our future performance and our ability to generate cash,
which, to a certain extent, will be subject to general economic, financial, competitive, market, legal,
regulatory and other factors that are beyond our control, including those factors discussed under ‘‘Risk
Factors’’ and ‘‘Forward-Looking Statements.’’
We believe that our cash flow from operating activities and borrowings under our New Revolving Credit
Facility will be sufficient to fund our working capital requirements, anticipated capital expenditures and
debt service requirements as they become due. We cannot, however, assure you that our business will
generate sufficient cash flow from operating activities, that our currently anticipated sales development,
cost savings and operating improvements will be realized, or that future borrowings will be available under
our New Revolving Credit Facility in an amount sufficient to enable us to service our indebtedness or to
fund our other liquidity needs. See ‘‘Risk Factors—Risks Related to the Notes and Our Structure—We may
not be able to generate sufficient cash to service our debt and sustain our debt and sustain our operations. Our
ability to generate sufficient cash depends on many factors beyond our control.’’
Contractual Obligations
Financing arrangements
As of December 31, 2013, after giving pro forma effect to the Transactions as described in ‘‘Use of
Proceeds,’’ the schedule for payments of principal amounts outstanding under our material long-term
financing arrangements would have been as follows:
Principal payments on material long-term financing
arrangements due by period
Less than 1 year 1 - 5 years Greater than 5 years
Total
(E in millions)
Notes offered hereby . . . . . . . . . . . . . . . . . . . . .
Finance leases(1) . . . . . . . . . . . . . . . . . . . . . . . .
—
0.1
—
1.7
430
—
430
1.8
Total(2)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.1
1.7
430
431.8
(1)
Finance lease obligations primarily relate to leasing arrangements for forklifts, front-end loaders, machinery and office
premises in Parainen. We have an obligation to buy the office premises after the end of the lease period.
(2)
Does not include borrowings under our New Revolving Credit Facility, which borrowings may be drawn, repaid and redrawn at
any time. See ‘‘Description of Other Indebtedness—New Revolving Credit Facility.’’
(3)
Does not include amounts outstanding under our Pensions L/C in connection with certain unfunded pension obligations arising
under our defined benefit plan in Sweden. See ‘‘—Pension obligations’’ below.
Other contractual obligations
In addition to the financing arrangements shown in the table above, we have other contractual obligations
incurred in the ordinary course of business, including purchase commitments for energy, raw materials and
other components, operating lease obligations and hedging obligations.
101
As of December 31, 2013, our other contractual obligations were as follows:
Less than 1 year
Operating leases(1) . . . . . . . . .
Interest rate derivatives(2) . . . .
Foreign exchange derivatives(3)
Purchase commitments(4) . . . . .
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Payments due by period
1 - 5 years Greater than 5 years
(E in millions)
Total
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3.7
2.8
—
7.8
5.7
0.5
—
3.9
—
—
—
—
9.3
3.2
—
11.7
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14.6
10.1
—
24.5
(1)
Operating leases primarily relate to leasing arrangements for office premises, IT equipment, forklifts and company vehicles.
(2)
Interest rate derivatives primarily relate to interest hedging arrangements with respect to our Existing Senior Notes, which will
be closed out in connection with the Transactions. We may decide to put hedging in place for our New Revolving Credit Facility,
our Floating Rate Notes or any other variable rate debt obligations we may have outstanding from time to time in the future.
(3)
Foreign exchange rate derivatives primarily relate to currency hedging arrangements with respect to our cash flow from
operations.
(4)
Purchase commitments primarily relate to commitments to purchase energy (including electricity and natural gas), raw
materials (including coke, packaging materials and briquettes) and other components.
Pension obligations
In addition to the contractual obligations shown in the table above, we have significant pension obligations,
of which A10.1 million were unfunded as of December 31, 2013.
We provide company-sponsored pension arrangements to our employees in Finland, Sweden, Norway,
Lithuania, Germany and the United Kingdom. For the most part, these pension arrangements are either
defined contribution plans, or are accounted for as defined contribution plans, or are defined benefit plans
which are fully-insured and financed through the payment of regular premiums, which means we retain no
financial risk in respect of past service benefits under those plans. However, in Sweden, we have defined
benefit arrangements in place for certain ‘‘white-collar’’ employees, a portion of which are unfunded and
not otherwise insured. To the extent that a plan is not fully funded or insured, we are required to recognize
a liability for the relevant amount in our consolidated financial statements. Accordingly, a liability of
A10.1 million has been included on our consolidated balance sheet as of December 31, 2013 in respect of
our unfunded pension obligations, while our consolidated income statement for the year ended
December 31, 2013 includes a charge to earnings in the amount of A0.4 million in respect of the cost of
interest on the related liabilities.
Our defined benefit obligations are based on certain actuarial assumptions that can vary according to
discount rates, life expectancies and rates of increase in compensation levels. If actual results, especially
discount rates or life expectancies, were to differ from our assumptions, our pension obligations could be
higher than expected and we could incur re-measurements (gains or losses). Changes in all assumptions or
under-performance of plan assets could also adversely affect our financial condition and results of
operations. Future declines in the value of plan assets or lower-than-expected returns may require us to
make additional current cash payments to pension plans or non-cash charges to other comprehensive
income. However, our current defined benefit plans do not include plan assets as defined by IAS 19.
In connection with our unfunded pension obligations in Sweden, we are required to obtain credit insurance
with PRI Pensionsgaranti, which provides insurance annually against the risk of our insolvency. Each year,
PRI Pensionsgaranti sets its premiums based on, among other things, a measurement of the relevant
pension liabilities, which is determined using methods and assumptions that differ from the IFRS (IAS 19)
measurement. As of December 31, 2013, the cost of our premiums with PRI Pensionsgaranti amounted to
1.0% of the first SEK 35 million of the relevant pension liabilities plus 0.3% of the relevant pension
liabilities in excess of SEK 35 million. PRI Pensionsgaranti can also require companies to provide
additional security with respect to their pension arrangements and, in extreme circumstances, can require
companies to insure the pension benefits with a third party. We estimate that the cost of doing this would
be approximately SEK 95 million (or approximately A10.7 million). We currently have a letter of credit in
place with ING Bank N.V., London Branch (the ‘‘Pensions L/C’’) to cover the first SEK 35 million (or
approximately A4.0 million) of any unpaid pension obligations, as well as a parent company guarantee to
cover any liabilities over and above SEK 35 million. In connection with the Transactions, the Pensions L/C
will be rolled into our New Revolving Credit Facility as a letter of credit issued under an ancillary facility
102
thereunder on or about the Issue Date. Such ancillary facility utilisation by the Pensions L/C will thereby
reduce amounts available for drawing under our A60 million New Revolving Credit Facility as of the Issue
Date by the corresponding euro equivalent amount.
Environmental obligations
Provisions for environmental obligations primarily relate to covering the cost of landscaping and any other
work needed to return a quarry or dumpsite to a safe and environmentally acceptable condition once the
quarry or dumpsite has been closed. As of December 31, 2013, we had provisions for environmental
obligations in the amount of A7.3 million, primarily to cover demolishing costs and other costs associated
with the planned closure of our Lappeenranta manufacturing facility. We expect to incur these demolishing
costs by the end of 2018. See ‘‘Business—Divisions—Production facilities and intersegment sales—
Lappeenranta closure.’’
Contingent Liabilities
We have an open case with regard to transfer pricing practices at Paroc Oy Ab for the period 2006 through
2008. The Finnish tax authorities have made a tax reassessment concerning that period, and based on tax
decisions rendered by the Finnish tax authorities in 2012 and 2013, Paroc Oy Ab would be required to pay
A22.3 million in taxes, penalties and interest. The amount includes A14.1 million of taxes, A2.3 million of
surtax and A5.9 million of accrued corporate interest and penalty interest (through December 31, 2013).
Our view with respect to the transfer pricing of the Group’s intra-group supply of raw materials, license
fees and distributor services differs from that of the Finnish tax authorities, and in February 2013 we filed
an appeal against the tax reassessment with the Board of Appeals. We have been granted an interdiction of
payment related to the reassessed tax payments. This interdiction of payment is in force until the earlier of
such time as the Board of Appeals renders a decision on the matter or January 31, 2015. If the appeal is
lost, we will be obligated to pay the taxes, penalties and interest, absent any successful subsequent appeal
by us. We have not made a provision in our financial statements for the year ended December 31, 2014,
since management believes, supported by external legal advice that all transfer pricing guidelines have
been followed and the same method has been followed from 2009 to 2013. If we lose the appeal and any
subsequent appeals, we may be required to pay additional taxes, penalties and interest for the period from
2009 to 2013. See ‘‘Risk Factors—Risks Related to Our Business and Our Industry—We are subject to risks
from legal proceedings.’’
In addition to the appeal to the Board of Appeals, we have also made protective applications for a Mutual
Agreement Procedure (‘‘MAP’’). A MAP provides for a corresponding adjustment to be agreed in another
jurisdiction when a transfer pricing adjustment is applied, so that it is not a one-sided adjustment
(i.e., additional income in Finland would have resulted in reduced profits in the corresponding Group
entity, based in another territory). A MAP does not cover surtaxes and interest. Due to, for example,
differences in tax rates and tax positions of the relevant affiliated entities, part of the additional taxes
payable in Finland cannot be recovered through a MAP. We have filed an application for a MAP with the
relevant authorities in Poland, Sweden, Lithuania, Estonia, Denmark, Germany and Latvia (all based on
the EU Arbitration Convention), and with the relevant authorities in Russia and Norway (based on tax
treaties). MAP procedures can take a considerable amount of time; MAP negotiations based on the EU
Arbitration Convention are limited to two years, after which time the case is referred to the advisory
commission for resolution within 12 months. For intra-EU MAP procedures, a decision is to be reached
between the two relevant tax authorities, providing relief for any additional income that is assessed in
Finland through the open tax case. The amount of tax recoverable through an intra-EU MAP is
approximately A8 million to A12 million. For MAP negotiations based on tax treaties, there is no set time
frame or possibility to refer the case to an advisory commission in case the authorities do not reach a
conclusion. The amount of tax recoverable through a tax treaty based MAP is approximately A2 million.
The surtaxes and interest (A8.2 million) cannot be recovered through a MAP. The Finnish Competent
Authorities will not start the MAP negotiations in our case until the appeal process is complete.
Off-Balance Sheet Arrangements
Other than as described above, we are not a party to any off-balance sheet arrangements that have, or are
reasonably likely to have, a material impact on our liquidity, financial condition or results of operations.
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Quantitative and Qualitative Disclosures about Market Risk
Exchange rate risk
We are exposed to fluctuations in exchange rates. Although our reporting currency for purposes of our
consolidated financial statements is the euro, a significant portion of our business is conducted in
currencies other than the euro, including the Swedish krona, the Norwegian krone, the Danish krone, the
Lithuanian litas, the Polish zloty, the Russian rouble and the British pound. Excluding sales denominated
in the Latvian lats (which was replaced by the euro as of January 1, 2014) and the Lithuanian litas (which is
pegged to the euro), we generated approximately 59% of our revenue in currencies other than the euro
during the year ended December 31, 2013; namely the Swedish krona (accounting for approximately 30%
of our total revenue), the Russian rouble (accounting for approximately 8% of our total revenue), the
Norwegian krone (accounting for approximately 7% of our total revenue), the Polish zloty (accounting for
approximately 6% of our total revenue), the Danish krone (accounting for approximately 3% of our total
revenue) and the British pound (accounting for approximately 2% of our total revenue). As a result, we
are exposed to currency translation risk when the results of our subsidiaries that have a functional currency
other than the euro are converted into euro for purposes of our consolidated financial statements. In
connection therewith, the profits and losses of our subsidiaries with a functional currency other than the
euro are translated into euro at average exchange rates, while assets and liabilities are translated into euro
at the closing exchange rate as of the date of the applicable statement of financial position. Fluctuations in
foreign currency exchange rates can affect the value of our foreign assets, sales, liabilities and costs when
reported in euro and will therefore give rise to period-on-period differences in our results of operations.
Therefore, if the euro appreciates (particularly in relation to the Swedish krona, the Russian rouble, the
Norwegian krone, the Polish zloty, the Danish krone and the British pound) and our sales and expenses
denominated in foreign currencies remain the same (or, in some cases, even if our sales increase or our
expenses decrease), the euro value of the contribution to our consolidated results of operations and
financial condition of our subsidiaries that have a functional currency other than the euro will be reduced
and our euro-denominated consolidated revenues and profits will decline. Exchange rates between the
euro and the other currencies in which we conduct our business, particularly the Swedish krona, the
Russian rouble, the Norwegian krone, the Polish zloty, the Danish krone and the British pound, have
fluctuated in recent years and may continue to do so in the future. Based on our sales denominated in
Swedish kronor, Russian roubles, Norwegian kroner, Polish zloty, Danish kroner and British pounds in the
year ended December 31, 2013, a depreciation of 5% in each of the Swedish krona, the Russian rouble, the
Norwegian krone, the Polish zloty, the Danish krone and the British pound against the euro would have
resulted in a decrease in our consolidated sales of approximately A6.5 million, A1.6 million, A1.5 million,
A1.4 million, A0.7 million and A0.5 million, respectively.
In general, our subsidiaries generate revenue and incur expenses in their respective operating or functional
currencies. This means we face relatively limited transaction-related exposure from our operating
activities. However, we do face some transaction risk, primarily as a result of sales being made out of
Finland into Sweden and Norway, out of Sweden into Norway and Denmark and out of Poland into
Germany and the United Kingdom. Net currency exposure from sales made by our operating subsidiaries
denominated in currencies other than the functional currency of the relevant operating subsidiary arises
only to the extent that we do not incur corresponding expenses in the same foreign currencies. Such net
currency exposure may occur in relation to countries in which we do not operate production facilities (for
example, Norway and Denmark) and therefore need to source our goods from other, typically neighboring,
countries with other functional currencies, or in relation to countries in which we operate production
facilities (for example, Poland and Russia) but need to source certain raw materials in a currency other
than the functional currency of the relevant country. In order to reduce our net exposure from foreign
currency exchange fluctuations, we purchase and intend to continue to purchase certain raw materials to a
large extent in the local currencies of the relevant operating companies. Despite such purchases in local
currencies, there are certain raw materials (for example, coke) that need to be sourced in currencies other
than the relevant local currency, particularly in euro. Accordingly, the risk from foreign currency exposure
related to sales denominated in currencies other than the euro can only partly be offset by local currencydenominated expenditures incurred at the level of our operating companies.
We mitigate the risk of fluctuations in exchange rates through the use of forward foreign exchange
contracts. Specifically, we forecast our cash flows by currency on a rolling six-month basis and hedge
between 60% and 80% of those estimated cash flows, calculated on a Group basis. Currency translation
exposure is not hedged. While our hedging strategy enables us to partly mitigate the effects on our cash
flows of an appreciation of the value of the euro compared to the respective functional currencies of our
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foreign subsidiaries over the relevant period, it does not enable us to mitigate the risk of a long-term
appreciation of the euro compared to the respective functional currencies of our foreign subsidiaries.
Furthermore, we are also subject to foreign currency effects linked to loans (including intercompany loans)
made in a currency other than the functional currency of the entity advancing or receiving those loans. For
example, we currently have an outstanding SEK-denominated intercompany loan from Paroc Group Oy
(the functional currency of which is the euro) to Paroc Sverige AB (the functional currency of which is the
Swedish krona) which, as of December 31, 2013, had a book value of A225.8 million. Due to favorable
exchange rate movements that have occurred during the period since the intercompany loan was made,
Paroc Group Oy is likely to realize a substantial taxable gain upon repayment of the intercompany loan,
which repayment may occur in connection with the Transactions. See ‘‘Risk Factors—Risks Related to Our
Business and Our Industry—Currency rate and interest rate fluctuations might adversely affect our financial
position and results of operations.’’
Interest rate risk
We have, and after the Transactions we will continue to have, a significant amount of long-term
indebtedness which bears interest at variable rates, including under our New Revolving Credit Facility and
the Floating Rate Notes. As a result, we are exposed to fluctuations or variability in interest payments due
to changes in interest rates. If interest rates increase, our interest expense will also increase, and
conversely, if interest rates decrease, our interest expense will also decrease. After giving pro forma effect
to the Transactions and calculating pro forma cash interest expense on the Notes based upon, with respect
to the Fixed Rate Notes, the interest rate of the Fixed Rate Notes and, with respect to the Floating Rate
Notes, the margin over three-month EURIBOR, as if the Transactions had occurred on January 1, 2013, a
0.125% increase in our variable interest rates would have resulted in additional cash interest expense of
approximately A0.29 million for the year ended December 31, 2013. Through our Group treasury, we
monitor market conditions and may from time to time implement appropriate measures to manage interest
rate risk, including the utilization of approved interest rate derivatives. As of December 31, 2013, our
A350 million Existing Senior Notes were fully hedged through interest rate swaps until February 2015,
pursuant to which we pay fixed interest and receive a floating interest rate linked to three-month
EURIBOR. As part of the Transactions, we intend to unwind and terminate our outstanding interest rate
swaps that we previously entered into in connection with our A350 million Existing Senior Notes. We may
decide to put hedging in place for our New Revolving Credit Facility, our Floating Rate Notes or any other
variable rate debt obligations we may have outstanding from time to time in the future.
Liquidity risk
Liquidity risk is the risk of not being able to fulfill present or future obligations if we do not have sufficient
funds available to meet such obligations. Liquidity risk arises mostly in relation to cash flows generated and
used in financing activities, and particularly by servicing our debt, in terms of both interest and principal,
and our payment obligations relating to our ordinary business activities.
We believe that the potential risks to our liquidity include:
•
a reduction in cash flow from operating activities due to a decrease in revenues, which could be due to
economic, financial, competitive, market, legal, regulatory and other factors beyond our control;
•
adverse working capital developments;
•
seasonal effects impacting our business operations;
•
exposure to increased interest rates in relation to our borrowings that bear interest at a variable rate,
including our Floating Rate Notes and our New Revolving Credit Facility; and
•
higher levels of capital expenditure, including in connection with further investment initiatives to grow
production capacity.
If our future cash flow from operating activities and other capital resources (including borrowings under
our New Revolving Credit Facility) are insufficient to pay our obligations as they mature or to fund our
liquidity needs, we may be forced to:
•
reduce or delay our business activities and planned capital expenditures;
•
reduce or delay our planned acquisitions;
•
sell assets;
105
•
obtain additional debt or equity capital; or
•
restructure or refinance all or a portion of our debt, including the Notes, on or before maturity.
We cannot assure you that we would be able to accomplish any of these alternatives on a timely basis or on
satisfactory terms, if at all. In addition, the terms of our debt, including the Notes and our New Revolving
Credit Facility, limit our ability to pursue these alternatives, as may the terms of any future debt.
Our liquidity is managed centrally by our Group treasury, which monitors liquidity on a daily basis. Under
our treasury policy, we remit all excess cash within the Group to our Group treasury, which takes internal
deposits and pays interest based on the financial transactions transfer pricing policy. Any Group companies
which require financing can consequently borrow funds internally from our Group treasury. We operate
cross-border cash pools that aim to improve the utilization of our liquidity. Our Group treasury makes
short-term external deposits with approved banking counterparties that have a rating in short-term
obligations of at least P-1 (Moody’s) or similar. We give greater focus to security of funds than investment
yield. We have set our minimum level of cash available at A25 million, including cash at bank and on hand
and overdraft facilities.
Credit risk
Our main exposure to credit risk relates to trade receivables and other financial assets, including cash and
cash equivalents. We have no significant concentration of third-party credit risk due to the large number of
customers we have spread across our markets. We have adopted risk management procedures to both
reduce and monitor credit risk. We perform ongoing credit quality evaluations of our customers and use
external debt collection agencies under certain circumstances. In addition, we have insured against credit
risk with respect to our trade receivables in all significant countries. All insured sales in excess of A5,000
are covered by a deductible of 10%. We also have our own internal credit policy, which specifies the
principles that will operate in the event that an insurance company does not grant a limit to the relevant
customer. In these cases, division management will have the power to grant an internal limit up to
A100,000, beyond which authorization must lie with our chief financial officer and chief executive officer.
We monitor the status of trade receivables on a weekly basis. We record a provision on the balance sheet
for any trade and other accounts receivable overdue by more than 180 days or which are recognized as
doubtful. We recorded a provision for doubtful receivables in the amount of A0.4 million as of
December 31, 2013.
Credit risk with respect to our other financial assets, primarily comprising cash and cash equivalents, arises
from the risk that the relevant counterparty becomes insolvent and is unable to return the deposited funds
as a result of the insolvency. To mitigate this risk, we seek to transact and deposit funds with high-quality
financial institutions that we deem to be creditworthy, and we monitor transaction volumes in order to
reduce the risk of concentration of our transactions with any single counterparty.
Commodity price risk
We are exposed to commodity price risk from price volatility with respect to raw materials, energy and
other input factors for our production processes. Raw materials (including stone, coke, binder, steel,
coatings and adhesives) and electricity used in our production processes represent a significant proportion
of our cost of sales. Collectively, raw materials and energy cost accounted for 36% of our cost of sales in
the year ended December 31, 2013. See ‘‘—Key Factors Affecting Our Results of Operations—Raw materials
and energy cost.’’ The prices for our raw materials and energy requirements have fluctuated significantly in
the past for a variety of reasons, many of which are beyond our control. In particular, we have experienced
significant volatility with respect to coke prices in recent years. Coke prices spiked in 2011 with an increase
in price of approximately 28% over the previous year, but over the course of 2012 and 2013 prices have
declined significantly. The falling price of coke over the last two years has been partially offset by an
increase in the price of binder. Binder pricing fluctuates from year to year and is impacted mainly by
movements in the market price for certain constituent chemicals (namely phenol, urea and methanol), as
well as any material changes in the euro to U.S. dollar exchange rate. The average price for binder has
increased in each of the last three years. Together, coke and binder represented approximately 50% of our
total raw material costs for the year ended December 31, 2013. Our total energy cost is driven by cost for
the supply of electricity used in connection with our furnace processes. In the year ended December 31,
2013, our total energy cost (excluding coke) amounted to A27.5 million and accounted for 9% of our cost of
sales.
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In order to manage the risk of fluctuations in raw material and energy prices, we enter into supply
agreements covering significant portions of our expected raw material and energy requirements for set
periods of time, which may be on a monthly, quarterly, semi-annual or annual basis depending on the
nature of the supply agreement. If raw material or energy prices decline after we have entered into the
relevant supply agreement, we may have to pay prices under the agreement which are in excess of
prevailing spot market prices, which may adversely impact our results of operations. We also seek to
mitigate the risk of fluctuations in raw materials cost by implementing measures designed to improve
efficiency of consumption, as well as using alternative, cheaper raw materials where possible. For example,
with respect to stone, we generally try to source our supply locally and as close as possible to our
manufacturing facilities and often seek to substitute virgin stone for cheaper industrial residual materials.
With respect to coke, most of our requirements are now sourced on a quarterly basis from suppliers in
Poland and Ukraine, on a semi-annual basis from suppliers in Spain and on an occasional basis from
suppliers in Italy, which means we benefit from a better security of supply and improved logistics, working
capital and price leverage as compared to our previous arrangements with suppliers in China. Coke prices
are negotiated largely based on Australian coking coal price trends. For example, the significant spike that
we experienced in 2011 with respect to coke prices was primarily the result of severe flooding in
Queensland, which is a key region in the global supply of coking coal. With respect to binder, pricing under
our current supply arrangements is agreed each month on a spot basis and is indexed to price movements
in phenol, urea and methanol. With respect to electricity, we consume approximately half of our electricity
requirements in Sweden and Finland, with the remaining half consumed in Lithuania and Poland. Under
our electricity hedging policy, we mitigate the risk of fluctuations in electricity prices in Sweden and
Finland by estimating our electricity consumption over a rolling three-year period and fixing prices each
year for a specified percentage of our estimated usage for that year. We fix prices for between 75% and
85% of our estimated consumption in the first year, between 35% and 45% in the second year and between
10% and 20% in the third year. In Lithuania and Poland, we enter into long-term contracts with the
relevant suppliers and fix prices for our electricity consumption on an annual basis. Although historically
we have generally been able to pass on increases in costs with respect to raw materials and energy to our
customers by increasing prices for our products, there can be no assurance that we will be able to do so in
the future. See ‘‘—Competition and pricing’’ below. See also ‘‘Risk Factors—Risks Related to Our Business
and Our Industry—Our business may be negatively affected by volatility in raw and other material prices, our
inability to retain or replace our key suppliers, unexpected supply shortages and disruptions of the supply chain’’
and ‘‘—Increased energy cost or disruptions in energy supplies could have a material adverse effect on our
business, financial condition and results of operations.’’
Critical Accounting Policies and Estimates
This ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ discusses our
consolidated financial statements, which have been prepared in accordance with IFRS. The preparation of
financial statements in accordance with IFRS requires management to use estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during the relevant
period. Certain estimates and assumptions are particularly sensitive because of their complexity, and
although estimates and assumptions are based on management’s best knowledge of current events and
circumstances, the actual results ultimately may differ from those estimates and assumptions, and such
differences may be material. We evaluate such estimates and assumptions on an ongoing basis based upon
historical results and experience, in consultation with experts and using other methods we consider
reasonable in the particular circumstances, as well as our forecasts regarding future changes. Estimates and
assumptions are particularly necessary for the measurement of property, plant and equipment, intangible
assets (such as trademarks and goodwill) and non-current carbon dioxide emission certificates, as well as
for the measurement of deferred taxes and warranty provisions.
This discussion of critical accounting policies and estimates is not intended to be a comprehensive list of all
our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically
dictated by IFRS, with no need for management’s judgment regarding accounting policy. We believe that
of our significant accounting policies, the following policies may involve a higher degree of judgment and
complexity.
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Impairment testing for goodwill and other intangible assets
We test goodwill, intangible assets not yet available for use and intangible assets with indefinite lives
(including the Paroc brand) for impairment on an annual basis or whenever events or changes in
circumstances indicate that there might be impairment. The impairment test involves allocating goodwill
and such other intangible assets to certain cash-generating units (‘‘CGUs’’) based on the Group’s reporting
structure and making a determination of fair value. When the fair value is lower than the carrying amount
of the relevant CGU, an impairment charge is recognized on the goodwill allocated to the CGU. Any
impairment charges arising as a result of the impairment test are recognized in the statement of
comprehensive income. The allocation of goodwill to a CGU and the determination of fair value require
assumptions and estimates with respect to future cash flows which are based on business expectations,
discount rates and other factors which may change over time. Changes in future projected cash flows and
discount rates applied may lead to impairment charges in future periods. See ‘‘Note 2—Summary of
significant accounting policies—Uncertainty related to critical accounting estimates—Impairment testing’’
and ‘‘Note 12—Intangible assets’’ of our audited consolidated financial statements included elsewhere in
this offering memorandum.
Income taxes and deferred tax assets and liabilities
Management judgment is required in connection with the calculation of the provision for income taxes and
deferred tax assets and liabilities. At each balance sheet date, management reviews the carrying amount of
deferred tax assets and liabilities and exercises judgment as to whether it is probable that our subsidiaries
will have sufficient taxable income against which unused tax losses or unused tax credits can be utilized. We
have recorded significant deferred tax assets and liabilities, which are expected to affect our operating
results over future periods. The various factors on which management’s judgment is based may differ from
the actual outcome (for example, tax laws may be enacted that impose restrictions on the realization of
deferred tax assets, or the level of actual taxable income may not be sufficient in the future), which could
lead to significant adjustments being made to the amount of deferred tax assets expensed in the statement
of income and affect our operating results. See ‘‘Note 2—Summary of significant accounting policies—
Uncertainty related to critical accounting estimates—Income taxes’’ of our audited consolidated financial
statements included elsewhere in this offering memorandum.
Pension obligations and employee benefits
We operate a mixture of pension and other post-employment benefit schemes. Several statistical and other
actuarial assumptions are used in calculating the expense and liability related to the plans. These factors
include, among others, assumptions about the discount rate, expected return on plan assets and changes in
future compensation. Statistical information used may differ materially from actual results due to changing
market and economic conditions, changes in service period of plan participants or changes in other factors.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are
charged or credited to equity in other comprehensive income in the period in which they arise. Significant
differences in actual experience or significant changes in assumptions may materially affect the future
amounts of the defined benefit obligation and future expense. See ‘‘Note 2—Summary of significant
accounting policies—Uncertainty related to critical accounting estimates—Employee benefits’’ of our
audited consolidated financial statements included elsewhere in this offering memorandum.
Recently Adopted Accounting Pronouncements
The following standards and interpretations (in some cases revised or amended) issued by the
International Accounting Standards Board (‘‘IASB’’) and the International Financial Reporting
Interpretations Committee (‘‘IFRIC’’) were mandatory for the first time effective from January 1, 2013 and
applied by us during the year ended December 31, 2013:
•
Amendment to IAS 19 (Employee Benefits)—The amendment eliminates the so-called ‘‘corridor
approach’’ and mandates recognition of all actuarial gains and losses directly in other comprehensive
income as they occur. Furthermore, all past service costs are to be recognized immediately and finance
costs are calculated on a net funding basis.
•
IFRS 13 (Fair Value Measurement)—The new standard aims to improve consistency and reduce
complexity by providing a precise definition of fair value and a single source of fair value
measurement with additional disclosure requirements for use across various effective IFRSs. Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability in an
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orderly transaction between market participants at the measurement date (an exit price). The fair
value of a liability therefore reflects non-performance risk. The requirements, now largely aligned
between IFRS and U.S. GAAP, do not mandate or extend the use of fair value accounting, but provide
guidance on how to apply fair value measurements where already required or permitted by other
standards.
We have not experienced any significant impact on our net assets, financial position and results of
operations as a result of the adoption of the new or amended standards described above.
For information regarding new or amended standards and interpretations issued by the IASB and IFRIC
which are not yet effective, and which have not yet been adopted by the Group in its consolidated financial
statements, see ‘‘Note 2—Summary of significant accounting policies—Standards, amendments and
interpretations to existing standards that are not yet effective’’ of our audited consolidated financial
statements included elsewhere in this offering memorandum.
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INDUSTRY
Introduction
The insulation industry is an integral part of the construction industry and is thus directly affected by
developments and changes in activity in the construction sector. Several macroeconomic factors influence
the size and growth of the construction industry, including changes in GDP growth rates, changes in
household income and inflation, business cycles, government debt, the availability of credit for potential
home owners and investors, tax incentives and subsidies, interest rate levels, the state of the housing
market and demographic trends. Historically, levels of construction output have demonstrated a strong
correlation with general economic growth: during periods of GDP growth, construction output generally
increases and during periods of stagnating or decreasing GDP, construction output decreases. Because we
also operate in the technical insulation sector, we are also affected by developments in the wider
industrials sector which is correlated to industrial production growth and in turn to GDP growth. See ‘‘Risk
Factors—Risks Related to Our Business and Our Industry—Difficult conditions in the general economy and the
global financial markets may materially adversely affect our business, financial condition and results of
operations, and the majority of our sales are concentrated in a limited number of markets’’ and ‘‘—The
construction industry is cyclical in nature and subject to seasonality.’’
Insulation is used extensively in the construction industry as well as in niche segments of manufacturing
and process industries. Insulation is a key input factor to reduce energy and temperature loss from
buildings or machinery, offer protection against fire, improve sound insulation and room acoustics. In
buildings, insulation can dramatically reduce energy consumption, and of currently available technologies,
is the cheapest way to increase energy efficiency. In light of heightening global concerns as to greenhouse
gas emission, energy security and efficiency and costs and ongoing and related regulatory scrutiny, these
qualities provide a strong driver for developers and regulators to increasingly seek to use or demand the
use of high-quality insulation.
We therefore believe that our industry as a whole and our end markets in particular stand to benefit from a
favorable long-term regulatory environment in the medium-term, driven by a Europe-wide governmental
commitment to improve energy efficiency standards and reduce energy consumption and cost, which
should lead to an increase in the intensity of insulation use. We believe that insulation is viewed by
regulators as a relatively simple and impactful way to achieve these objectives, given that: (i) several recent
market studies have concluded that buildings represent around 40% of energy consumption in the
European Union, providing a significant opportunity to reduce energy consumption; and (ii) improving
insulation has been demonstrated as one of the most cost-effective ways to reduce CO2 emissions through
reduced energy consumption, with a marginal cost of CO2 abatement significantly lower than other energyefficiency initiatives.
Building Insulation Industry
Market Size and Growth
For the 19 countries reviewed by Euroconstruct (Austria, Belgium, the Czech Republic, Denmark, Finland,
France, Germany, Hungary, Ireland, Italy, The Netherlands, Norway, Poland, Portugal, Slovakia, Spain,
Sweden, Switzerland and the United Kingdom) (the ‘‘EC-19 Countries’’), the 2013 market volume for
residential construction is estimated to have been A583.0 billion, with A227.2 billion for new construction,
while the market volume for non-residential construction is estimated to have been A417.0 billion, with
A214.6 billion for new construction.
The development of the market for building insulation is linked to the level of construction activity which
has historically been linked to general economic growth. However, residential and non-residential
construction activities may decrease earlier in general economic downturns and may also experience
cyclical recoveries with some delay. Historically, cycles in major geographic markets have not occurred in
parallel as a result of which manufacturers of building materials active in different geographic markets
have, to a certain degree, benefited from offsetting effects.
In the cyclical development of the construction industry, 2007 represented the end of an extended period
of growth that peaked in 2006, when construction in Europe grew faster than GDP for that year (3.8% in
construction compared against 3.1% in GDP growth), according to Euroconstruct.
Though the total construction output has generally decreased year-on-year since the onset of the financial
crisis in 2007 (with the exception of 2011), Euroconstruct forecasts indicate that this trend is expected to
110
reverse in 2014. In 2013, volumes were substantially lower than their maximum values over the last ten
years in most of our markets. For 2014, Euroconstruct forecasts positive construction volume outlooks for
Sweden (1.6% growth), Finland (0.5% growth), Norway (3.6% growth) and Poland (3.5% growth).
According to industry sources, there is a mixed overall outlook for the Baltic States as a whole in 2014, as
falls in civil engineering activity may outweigh growth in residential and commercial construction.
For our building insulation products, we believe that the best indicator of demand in terms of volume is the
new residential construction sector, which has in recent years been severely affected by strong declines in
demand. From 2007 to 2010, the European market for new residential construction declined significantly,
according to Euroconstruct. The decline in residential construction activities has been particularly
significant in those countries that previously experienced high levels of new residential construction
activities, such as the Nordics, Spain, Ireland and the United Kingdom. Growth and subsequent decline in
the European markets for residential renovation, new commercial construction and commercial renovation
have historically been less cyclical.
Since 2010, the Nordic and Baltic new residential sectors have remained flat, with many coming under
pressure in the course of 2012 following a temporary recovery in 2011, due to the depressed
macroeconomic environment in the euro zone, the tightening of public budgets, the challenging labor
market and a decrease in consumer confidence. A potential acceleration in recovery is supported by
structural demand from an aging building stock and an economic recovery in the near term.
Euroconstruct estimates that the compound annual growth rate for the residential construction output of
all EC-19 Countries besides the Czech Republic and Spain will be positive for the period from 2013 to
2016. This reversal in trend is largely a result of increased demand following the improvement of economic
prospects and the positive impact of demographic effects.
Market Structure
Demand
Stone wool is mainly used for insulation products used in residential, industrial and commercial
construction. Stone wool products are also used in other applications, such as acoustics and fire protection.
Alternative materials to stone wool insulation include glass wool and various foam-based insulation, such
as Expanded Polystyrene (‘‘EPS’’), Rigid Polyurethane (‘‘PUR’’) and Extruded Polystyrene (‘‘XPS’’).
Individual application specifications may however impact the interchangeability of the insulation materials,
and it is only in a relatively limited subset of applications where mineral wool insulation (comprising stone
wool and glass wool) can be substituted for foam insulation. Mineral wool (comprising stone wool and
glass wool) is the primary material used in building and technical insulation, with the highest market
penetration. Mineral wool typically does not materially overlap with foam insulation in building or
technical insulation uses. However, there is a material area of overlap between mineral wool and foam
insulation in external facades and roofs, as well as in sandwich panels, where mineral wool and foams are
relatively more substitutable. Within the category of mineral wool, stone wool and glass wool are close
substitutes with relatively little differentiation in building insulation, and given the similarities in
properties, application and production, the main competitor to stone wool is glass wool. The main
advantage of stone wool is a higher fire resistance, which drives the higher share in process and marine
segments. Stone wool is also generally perceived by customers to be easier to install. Glass wool in contrast
is easier to transport than stone wool due to better compressibility and is cheaper than stone wool in low
density insulation products. Typically, the choice of insulation used in construction activities varies by
market and depends to a considerable degree on regional and local building traditions, exterior climate
and applicable technical and legal construction requirements. In addition to specific requirement in the
geographic markets, the choice of building material also depends on design requirements, relative product
price, transportation and construction cost and brand and product awareness.
Distribution
In mature markets, building materials, such as insulation, are predominantly sold through dealers
(i.e., wholesale builders’ merchants and do-it-yourself retail stores (DIY)) and, to a lesser degree (though
subject to differences by regional markets), through direct sales to customers. Sales activities of
manufacturers of building materials differ significantly between dealer sales and direct sales.
In dealer sales the ultimate customers are typically small and medium-sized contractors, retailers and
private homeowners. However, these customers are accessed through dealers with whom building
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materials manufacturers have direct contractual relationships. Dealers can come in the form of wholesale
builders’ merchant distribution outlets aimed mainly at professionals, including bigger multinationals (such
as Wolseley (i.e., DT Group, including Beijer, Stark and Starkki), Optimera and Rautakesko) as well as big
local entities (such as Interpares and Maxbo). Alternatively, dealers can come in the form of retail outlets
focused more on private end-customer DIY markets, such as Byggmax, Hornbach and Bauhaus. Dealers
generally perform several functions. With respect to logistics and warehousing, they are responsible for
managing inventories in various product categories and specific product ranges and shipping products from
their warehouses or the manufacturers’ warehouses to construction sites. Dealers also provide display
areas for building materials products and provide advice and technical assistance to their customers. In
addition, dealers invoice their end customers and thereby extend credit through payment terms and
assume the risk of their customers’ default. Physical deliveries to end customers are often made directly
from building materials manufacturers to construction sites, without building materials physically going
through builders merchants’ warehouses. Under these circumstances, the function of dealers is often
reduced to invoicing their end customers. The degree of involvement of dealers into sales processes varies
by region, manufacturer and product.
In direct sales activities the principal customer targets are national and regional construction companies,
housing developers, contractors and large industrial customers. These customers generally purchase
significant volumes for use in major projects (such as large housing developments) and are focused on
cost-effective product solutions, a steady supply chain and reliable service from insulation suppliers.
To target market participants successfully, a business must demonstrate to potential customers that it is a
reliable and efficient contracting partner (usually through a wide product range, high product quality, a
reliable and accurate delivery service, comprehensive technical and product support and strong branding),
and convey this message to the key decision makers for the ultimate customer (such as the architects and
developers that influence bid invitations and specify building material types). The graph below shows the
typical relationships between manufacturers of insulation, builders merchants, customers and various
groups of decision makers in mature markets (dotted lines indicating relationships between parties other
than with manufacturers). Additionally, direct deliveries occur to original equipment manufacturers such
as producers of pre-fabricated wall-building elements, producers of pre-fabricated houses and construction
sites with special logistical requirements.
Distribution of Building Material Products in Mature Markets
Create demand and influence supplier decisions
through pre-sales
Create demand
Manufacturer
Builders
Merchants
Builders /
Constructors
Investors /
Owners
Indirect business
Architects
Influence bid invitations and determination of building
material type
Influence bid invitations and determination of building
material type
Developers
23APR201422013610
Supply
The European mineral wool market is characterized by a small number of large pan-European
manufacturers who account for the majority of the market. Among the suppliers of mineral wool in
Europe, Rockwool, Saint Gobain, Uralita, Knauf and TechnoNICOL are our main competitors. Rockwool
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is a global producer of stone wool headquartered in Copenhagen. Saint Gobain is a large diversified
building materials group which markets its mineral wool products under the Isover brand; it is the largest
glass wool producer and manufactures some stone wool. Uralita markets its products under the URSA
brand and focuses on the manufacture of glass wool and XPS. Knauf is a German producer of mineral
wool, foam and gypsum board with production sites in the US, Europe and Russia. TechnoNICOL is a
Russian-based producer and distributor of building materials, including thermal insulation, but also
roofing/waterproofing materials, mastics and primers, flexible tiles and sealant tape. It produces both stone
wool and extruded polystyrene foam insulation with a focus on Eastern European markets. The mineral
wool market is dominated by branded products from the main producers.
In contrast, the foam-based insulation market is dominated by a few large chemical players such as Dow
Chemicals and BASF, as well as Kingspan. It is highly fragmented beyond that with many small providers.
Generally, competition in the insulation industry is geographically limited, as transportation cost
constitutes a significant part of overall product cost. Moreover, the requirements of local end-users in
terms of standard specifications and other technical features for building materials may differ by
geographic market, resulting in additional barriers to entry for non-regional suppliers. However, imports of
insulation materials play a growing role given harmonization of building regulations in Europe, such as
under the Energy Performance of Buildings Directive adopted in May 2010 and the Energy Efficiency
Directive due for implementation at member-state level in June 2014. Due to the high cost associated with
transportation over long distances, the ability to maintain a dense network of production plants that serve
local markets tends to give such companies a competitive advantage.
The production of stone wool requires a large initial capital investment. Capacity utilization rate for each
plant is a competitive factor. Relatively lower levels of demand in the past 2-3 years, along with the high
level of capital investment initially required to establish operations, have resulted in a limited number of
new competitors entering our core markets. Raw materials for manufacturing stone wool insulation
materials are generally available in all our markets, although the quality of economically obtainable raw
materials does vary between regions. Typically, plants are located in close proximity to suitable raw
material supplies and demand for products, thus naturally limiting the number of available first-class
locations. An important component of cost is energy, which results in dependency on energy prices, in
particular coke and electricity.
Key Industry Trends
In addition to a potential cyclical recovery in the residential, commercial and industrial construction
sectors, the insulation industry is influenced by the following key trends:
Sustainability and Energy Efficiency Regulation
In light of high and increasing energy prices and commitments to reduce carbon dioxide emissions,
governments, the construction industry and building owners are increasingly focusing on the
modernization of existing buildings and improving the energy efficiency of new buildings. To that end, the
reduction of energy consumption and elimination of unnecessary emissions from buildings are among the
main objectives of the EPBD, which requires Member States to amend existing building regulations and to
introduce energy certification schemes for buildings, and the EED, which requires Member States to
introduce national energy efficiency obligation schemes or other policy measures generative of equivalent
energy savings. The EPBD has defined clear requirements relating to energy efficiency of new buildings
from 2019 (public sector) and 2021 (private sector) onwards. Following the relevant implementation date,
all new buildings must be ‘‘nearly zero energy buildings.’’ In addition, the EED requires (subject to certain
exceptions) that 3% of the total floor area of public buildings owned by central governments must be
renovated to meet the energy efficiency requirement. Under the EPBD and enacting legislation at the
Member State level, building materials producers will be under pressure to further develop and improve
their products so that they meet regulatory requirements in terms of thermal insulation, carbon dioxide
emissions and reduction of waste. In particular, of all available technologies, insulation offers one of the
most cost-effective methods to reduce carbon dioxide emissions of all available technologies. Buildings
make up approximately 40% of the energy consumption in the EU, with heating representing the majority
of this energy consumption, and, although significant developments have been made, further
improvements are required to meet targets. Building heat loss through walls, roofs and floors can be
reduced through improvements in insulation. In particular, stone wool offers high thermal insulation, fire
protection and ease of handling, along with acoustic properties as required. We expect that in certain
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segments of building construction, stone wool may have an advantage over other forms of insulation, such
as glass wool or foam-based insulation, due to its fire safety properties. However these competing products
are also being improved or developed to meet evolving requirements.
Demographic Trends, Higher Quality Construction and Renovation Activities
In light of expected future economic developments and demographic trends, many European countries rely
on immigration of skilled workers, which may stimulate demand for new residential construction. At the
same time, the number of households is increasing, primarily attributed to a trend towards a lower average
number of persons per household, particularly in Western European countries. In order to facilitate and
expedite construction activities and economize on operating cost of buildings, flexible building material
solutions that combine ease of handling, pre-fabricated elements and superior product properties are
expected to play an increasing role. Similarly, many Central and Eastern European countries, as a result of
historical substantial underinvestment in the existing housing stock still require considerable new
construction, as well as renovation and modernization, to meet the higher building standards prevailing in
Western European countries. Future GDP growth in many Central and Eastern European countries may
therefore have a positive impact on demand and the evolution of new construction, as well as renovation
and modernization activities.
Technical Insulation Industry
Market Size and Growth
Compared to the market for building insulation, the market for technical insulation is focused on industrial
production and construction end-market drivers, with applications in the HVAC, Process Industries,
Marine and OEM segments. The main products used in technical insulation are pipe sections, wired net
mats, lamella mats, on-line products and other tailored products.
The market for technical insulation varies depending on the application. Development in the HVAC
segment, similar to the market for building insulation, is closely linked to the overall level of construction
activity. Likewise, the OEM segment is driven by general construction activity along with an increased
share of prefabrication in construction. The Process Industries and Marine segments are influenced
primarily by the overall levels of capital investment expenditure in: (i) oil & gas, petrochemicals, power
generation and other manufacturing industries; and (ii) shipbuilding and offshore construction activity,
respectively.
Market Structure
Demand
The specifications and demand for technical insulation vary depending on application, with material choice
by application being relatively consistent across different geographies. Mineral wool technical insulation
tends to be the primary material of choice in Process Industry, Marine and OEM applications due to fire
safety and temperature requirements. In the HVAC segment, mineral wool is preferred in sub-segments
where fire safety is necessary and where energy efficiency gains can be achieved, such as warm pipes,
thermal insulated ducts, fire insulated ducts, sound insulated ducts, ventilation equipment, HVAC
equipment and smoke & exhaust pipes. Foams tend to be preferred in applications where moisture
resistance is important. However, there is relatively limited direct substitutability as mineral wool and foam
technical insulation products rarely compete directly for the same end-use application.
Distribution
Distribution of technical insulation products is similar to the distribution of building insulation products.
Technical insulation products are mainly distributed through HVAC material dealers and technical
insulation dealers who provide service, quality, availability and sales support. The functions of the HVAC
material dealers and technical insulation dealers are similar to those in the building materials industry.
Supply
The mineral wool technical insulation market is consolidated. The leading European technical insulation
manufacturers (for all insulation materials, not just mineral wool) are Rockwool, Saint Gobain (marketed
under the Isover brand) and Knauf. Unlike building insulation, the markets for technical insulation are
broader in geographical scope, due to the higher transportable distances of technical insulation products,
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resulting from the relatively less bulky nature of the products. As a result, the supplier structure for
mineral wool technical insulation products is less fragmented and competition is less regional in nature
than in the building insulation industry.
Key Industry Trends
Energy Efficiency Trends
Similar to the trends in the building insulation industry, within the industrial production and construction
end-markets there are strong regulatory incentives to improve energy efficiency with EU directives aiming
to reduce energy consumption through the EU 2020 targets and potentially further through the EU 2030
targets which are currently under review. Furthermore rising energy costs have also created strong
economic incentives to increase efficiency, along with rising costs for carbon dioxide emissions. As in the
case of building insulation, technical insulation is one of the most cost-effective ways to improve energy
efficiency in industrial production and construction. Technical insulation is typically not regulated by law,
with the obvious exception of fire protection requirements in ventilation systems (which is typically strictly
regulated). Therefore technical insulation requirements are generally driven by industry standards and
norms governed by industry bodies and associations, along with certification requirements and required
product approvals. The ongoing trend towards stronger demand for energy efficient solutions and higher
standards of fire protection are likely to result in higher demand for technical insulation.
Industrial Investment Trends
Economic growth will likely result in increased demand for technical insulation in key segments as
investment into infrastructure and construction increases. Unlike new construction, renovation,
remodeling and modernization activities in both industrial and marine applications have historically been
less susceptible to cyclicality than new construction.
Sandwich Panels Industry
Market Size and Growth
The market for panels is primarily focused on commercial construction, and also industrial and storage
applications. The main panel systems products include interior and external wall facades with various
surface configurations, which are used in facade, fire, hygiene, acoustic and security systems. Many of these
systems are tailor-made solutions to meet specific demands. Panel systems products are generally metal
panels lined with insulation, and are used mainly as the wall elements of commercial and industrial
buildings. The type of insulation used in the panels varies across markets, with alternatives to stone wool,
including glass wool and foams such as PUR and PIR; however, the material used depends largely on cost,
traditional usage and regulatory/fire safety requirements.
Market Structure
Demand
The specifications and demand for panel systems vary depending on application and customer
requirements. Panels are generally produced and sold to order on a project basis, so key customers
fluctuate from year to year. Panels are sold directly to installers and contractors, both primary and
specialist. Demand can also be driven from specifications made during the design phase, such as by
architects. This is because panels can be used for a number of different applications and speed up the build
time, while at the same time reducing overall costs.
Supply
The panel systems market is consolidated in local markets, with the top players holding high local market
shares. There are four key competitor types, including forward integrated steel players, such as SSAB/
Ruukki, prefabrication players, such as Kingspan, steel product manufacturers, such as Lindab, and
forward integrated insulation players, such as Paroc. Differentiation is made through service, design and
quality control, with insulation materials players experiencing some cost advantages due to reduced
transportation costs due to vertical integration.
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Key Industry Trends
Fire Safety Trends
In addition to the energy efficiency trends seen in the building insulation industry, the increasing
importance of and demand for data centers may result in increased demand for fire-safe solutions in the
construction of new commercial buildings. Higher standards of fire protection and demands for energy
efficient solutions may result in higher demand for mineral wool-based panel systems.
Russian Insulation Industry
Market Size and Growth
Building insulation uses (requiring insulation slabs, mats and sandwich panels) comprise the majority of
the overall Russian market for mineral wool insulation, with technical insulation representing a relatively
smaller proportion of the market at present. Within the mineral wool market, stone wool has become
established as the most important material, and is used in Russia far more widely compared with glass wool
products.
The development of the Russian insulation market is closely linked to the level of construction activity,
which in turn is linked to growth of the broader economy. Commercial construction is driven by the
significant need to develop high-quality infrastructure in Russia, and is currently underpinned by certain
major projects in the medium term (e.g., FIFA World Cup in 2018). These incentives include dedicated
renovation fees payable by owners of apartments, with proceeds earmarked for renovation activities.
Market Structure
Demand and supply dynamics in Russia are broadly in line with the dynamics in more mature markets for
mineral wool insulation products. At present, the vast majority of the demand for insulation in Russia is
concentrated around building insulation uses (approximately 90% of the market size in 2012), with stone
wool as the preferred material of choice. Given the relatively fragmented nature of the Russian market,
dealers (primarily insulation wholesalers, as well as DIY stores) are the most important distribution
channel of insulation products in Russia. Supply in the Russian market is also relatively fragmented, with
the vast majority of Russian sales of insulation products supplied nationally, partially due to significant
import tariffs.
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Key Industry Trends
Increasing legal/regulatory push for increased energy efficiency
Russia has historically been one of the most energy intensive countries in the world. This is partly due to
the relatively low energy efficiency of the existing building stock, as well as climactic and intrinsic economic
factors (with a significant part of its industrial sector consisting of energy-heavy industries). The
U.S. Energy Information Administration (‘‘EIA’’) determined in 2011 that for every USD1,000 of GDP
produced, Russia consumed 1.25 tonnes coal equivalent (‘‘tce’’) of primary energy, substantially above
several other developed and developing economies (Finland 0.21 tce).
Energy intensity of the GDP in 2011 (tce/1,000$ of GDP)
Northern countries
1.25
0.94
(69%)
0.80
0.63
0.16
0.16
0.21
Germany
Japan
Finland
0.28
US
0.37
0.39
Brazil
Canada
India
Saudi
Arabia
China
Russia
2MAY201407042295
Source: EIA
As a result, energy efficiency has been identified as a key priority of the Russian Ministry of Energy and
the Federal Law on Energy Conservation and Increase of Energy Efficiency was adopted in Russia in
November 2009, creating a legal and economic framework to encourage energy efficiency by setting
standards for policy enforcement. Its primary focus is around the energy efficiency of buildings, and it
introduces mandatory requirements for the installation of energy consumption meters, as well as stricter
requirements for monitoring and information provision.
Differentiated pricing dynamics with resilient pricing in the premium segment
In recent years, certain sub-segments of the Russian insulation market have experienced some, albeit
limited, pricing pressure. This has been focused on the lower-quality, lower price segment of the market.
Pricing in premium products, such as our products, remained far more resilient with much smaller or
negligible declines in pricing between 2011 and 2013.
We expect the current trends of increasing focus on fire safety, improvements in construction quality and
the quality of building practices in Russia, particularly in the Central and North Western Federal regions,
to provide a stronger impetus to the growth in the high-quality segment of the market, which has been the
strongest-growth segment in recent years. Consequently, we expect to see a continued resilience in the
pricing of the premium segment in the Russian insulation market, due to the strong demand in this
segment.
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BUSINESS
Overview
We are a producer of premium stone wool insulation, and we believe that we are a market leader in
Finland, Sweden and the Baltic States by market share, which according to our estimates has remained
stable overall over the past three years. Our other important markets include Norway, Denmark, Poland,
Germany and the United Kingdom. Our stone wool products are used for both building insulation and
technical insulation, and are known for their high product quality and superior fire resistance, as evidenced
by customer and market surveys. We have significantly broadened our geographic sales reach since 2009
through the expansion and leveraging of our strategically located manufacturing network, allowing for an
increasing sales presence in western Europe and Russia, which we view to be potential growth markets. As
of March 31, 2014, we operated nine production plants in five different countries with 13 Base production
lines, 18 Technical Insulation production lines and one Panel System production line. As of the same date,
we also had sales and representative offices in 14 European countries and sales to over 40 countries. For
the year ended December 31, 2013, we generated total sales of A433.1 million (with Finland, Sweden and
the Baltic States accounting for 20.2%, 25.1% and 8.6% of our total sales, respectively) and Adjusted
EBITDA of A82.8 million.
Our business is organized in four divisions:
•
Building Insulation (‘‘BI’’). Our Building Insulation division markets and distributes a range of
insulation productions and solutions for residential and commercial buildings in both new-build and
renovation construction markets. Products in the BI division range from general building insulation to
more specialized acoustic or fire protection insulation products. General building insulation is the
largest business segment within BI. The majority of the BI division’s stone wool products are
manufactured by our Base Production division, with the exception of some more specialized acoustics
and roofing products, which are produced by our Technical Insulation division. The BI division does
not have its own production lines or manufacturing capacity. The BI division also sells panel wool
internally to our Panel System division and sells insulation for pre-fabricated panels to third parties
across Europe. For the year ended December 31, 2013, our Building Insulation division generated
sales of A256.7 million (with external sales of A242.0 million, or 55.9% of our total sales).
•
Technical Insulation (‘‘TI’’). Our Technical Insulation division produces high-quality stone wool
products used in specialized industrial and technical applications. Because the TI division’s products
are tailored for specific customer applications, including meeting regulatory requirements, the TI
division has its own manufacturing capacity. It uses stone wool from the Base Production division to
produce more customized TI products through its own production lines and specialized machinery.
There are 18 TI production lines at four plants. Products in the TI division are primarily used to
provide insulation from heat, fire, condensation and sound, and are supplied to four key end-markets:
heating, ventilation and air conditioning (‘‘HVAC’’), process industries, marine and offshore and
original equipment manufacturers (‘‘OEM’’). The TI division also sells specialized acoustics and
roofing products to the BI division. For the year ended December 31, 2013, our Technical Insulation
division generated sales of A150.9 million (with external sales of A133.5 million, or 30.8% of our total
sales).
•
Panel System (‘‘PPS’’). Our Panel System division manufactures sandwich façade panels—lightweight
steel-faced panels with an insulating core of stone wool. The main application of these panels are in
the industrial and commercial construction of warehouses, municipal buildings and offices. The PPS
division buys its stone wool from the BI division. For the year ended December 31, 2013, our Panel
System division generated sales of A56.2 million (with external sales of A56.2 million, or 13.0% of our
total sales).
•
Base Production (‘‘Base’’). Our Base Production division is responsible for producing all of the stone
wool for our BI, TI and PPS divisions, developing proprietary production technology and managing
capacity utilization across the Paroc Group. As of March 31, 2014, we operated eight production
plants in five different countries with 13 Base production lines producing stone wool. Production sites
are managed as a network, with production costs allocated to the most cost-efficient plant, taking into
account distribution costs. For the year ended December 31, 2013, our Base division generated sales
of A207.8 million (including internal sales of A207.3 million and external sales of A0.5 million). All of
our internal sales are at a fixed cost agreed at the beginning of each year.
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History
Our business has its origin in 1937, when a local manufacturer began manufacturing stone wool in Sweden.
Stone wool manufacturing began in Finland in 1952, the same year Partek, a Finnish industrial
conglomerate, first commenced insulation production. We were formed under Partek and in 1982, Paroc’s
name and trademark were registered for the first time and our Finnish and Swedish operations begin to
operate under one group. In 1999, Paroc was carved out from Partek after a 60% interest in Paroc was
acquired by Industri Kapital and the company name changed to ‘‘Paroc.’’ In 2003, Paroc was acquired by
Banc of America Capital Partners Europe and Accent Equity and, in 2006, Paroc was acquired by Arcapita
Bank B.S.C. In 2009, after a restructuring of our debt facilities, a lender consortium took control of Paroc,
with management taking an ownership stake in the Group. See ‘‘Principal Shareholders.’’
Our Strengths
We believe the following strengths have contributed to our success historically and are key factors in our
efforts to deliver profitable future growth:
Market-leading positions in our home markets, underpinned by strength of brand and reputation for high
product and service quality
We believe that we are a market leader based on market share in our home markets of Finland, Sweden
and the Baltic States in both stone wool building insulation and stone wool technical insulation. We seek to
differentiate ourselves from our competitors through our portfolio of high-quality stone wool products
offered under our distinctive, widely recognized brand, together with our ability to provide innovative,
customer-specific solutions through our full-service sales and technical support offering. Over our 75 years
of operations, we have built strong, often long-term customer relationships, particularly with dealers
(which comprise insulation wholesalers as well as DIY stores) in our home markets, which are the primary
distribution channel for our building and technical insulation products. We believe that the superior quality
of our products and services has reinforced the strength of our brand and resulted in a high degree of
customer loyalty and retention.
Increasingly diversified business across geographies, end-markets and product mix
We sell our products through multiple sales channels in over 40 countries to various end-markets, which we
believe reduces our dependency on any single market and positions us to capture additional opportunities
to expand our business. Our largest markets are Finland and Sweden, which represented 20% and 25%,
respectively, of our revenues for the year ended December 31, 2013, and no other country represented
more than 10% of our revenues for the year ended December 31, 2013. We have strong relationships with
our customers and have multiple sales channels including dealers, construction contractors, industrial
companies and equipment manufacturers (for example, prefabricated house and panel manufacturers, and
specialist original equipment manufacturers).
We have also diversified our end-market footprint and product mix in recent years with the growth of our
TI division, which now represents a significant part of our business, having reached external revenues of
A133.5 million for the year ended December 31, 2013. Our TI division displays a greater resilience and
higher gross profit margins than our other divisions. This is primarily due to the fact that we sell our TI
products to a more diversified set of end markets across Europe, as well as the higher value-added nature
of our TI products, which typically require a greater degree of customization and additional manufacturing
refinements to meet more specialized applications. Although our TI division relies to some extent on the
residential and commercial construction sectors (primarily for the sale of HVAC products), we also supply
our various TI products to diverse end markets, such as the oil and gas, petrochemical, power generation,
pulp and paper, marine and offshore and OEM industries.
Given the growth of our TI business and the associated higher margins and broader set of end-market
drivers compared to our other construction-focused divisions, we believe that the Group today has a more
robust, resilient financial profile than in the past.
Established position through well-invested manufacturing base, branded products and strong customer
relationships
We have a broad manufacturing base, consisting of nine production facilities in five countries. Our network
of plants, located in Finland, Sweden, Lithuania, Poland and Russia, provides a stable platform to enable
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us to meet our high quality standards consistently across our markets and to supply products to our
customers on a localized and cost-efficient basis, reducing transport costs, delivery times and import tariffs.
Our proprietary technology, including our proprietary recipe and manufacturing process for the
production of our stone wool products, also supports the manufacture of our high-specification products.
This allows us to produce a high-quality, differentiated product with strong brand value and corresponding
pricing. We have made significant investments to develop, and to continuously improve our facilities, as
well as our product specifications and our manufacturing processes and technologies. We review our
operations on an ongoing basis to ensure that our stone wool products meet the strict safety,
environmental and efficacy standards in the markets in which we operate. We believe it would take
considerable time and substantial investment to replicate our manufacturing base and product portfolio
due to the proprietary technology, high levels of capital expenditure, regulatory requirements,
maintenance costs, complex supply chain and strict quality standards needed to operate in the stone wool
market.
We also benefit from the partial vertical integration of our supply chain and, for the year ended
December 31, 2013, were able to supply approximately 30% of our raw stone needs through our ownership
of rights or concessions to quarry stone from eight quarries in Finland. As a result, we have the ability to
supply a majority of our requirements of certain stones that are difficult to source from third parties
internally, leading to lower raw materials input costs (through a reduction in transportation logistics costs),
assuring the quality of our stone wool products, and reducing our dependence on third-party suppliers.
In addition, we have strong, and often longstanding, customer relationships, as well as the brand awareness
amongst dealers and contractors. Based on a recent customer differentiation survey conducted by
BrandWorxx in 2013, over 90% of customers surveyed view Paroc as their preferred partner relative to
competitors. The survey also highlighted Paroc as efficient, reliable and innovative, as well as the most
socially responsible provider. We believe that this brand recognition translates into strong customer loyalty.
Attractive financial profile with strong cash generation and flexible cost base
We have a strong financial track record with net sales of A404.8 million, A430.4 million and A433.1 million
for the years ended December 31, 2011, 2012 and 2013, respectively, reflecting a compound annual growth
rate of 3.4%. We have also demonstrated an ability to improve Adjusted EBITDA during periods of
macroeconomic volatility, with Adjusted EBITDA of A61.2 million, A75.1 million and A82.8 million for the
years ended December 31, 2011, 2012 and 2013, respectively, reflecting a compound annual growth rate of
15.8%.
While we have made significant strategic growth investment capital expenditures in each of the last three
years (particularly in Russia), our maintenance capital expenditure requirements are relatively low and
manageable, with expenditures of A15.8 million, A10.3 million and A10.6 million for the years ended
December 31, 2011, 2012 and 2013, respectively. This attractive capex profile, in combination with our
continued focus on working capital optimization, has translated into a consistently positive cash conversion
over the past three fiscal years.
We also have a flexible cost base with an ability to effectively increase and decrease the number of
employees and number of shifts at our manufacturing plants depending on customer demand levels. For
the year ended December 31, 2013, approximately 83% of our cost of sales was variable, comprising,
among other things, raw materials cost, energy cost, direct production wages and distribution cost, which
generally move in-line with changes in volume. Furthermore, our well-invested manufacturing platform
and ability to increase capacity utilization provides operating leverage to drive potential profitability when
volumes increase.
Growth profile is well supported by insulation trends and favorable regulatory dynamics
We believe that our markets stand to benefit from a favorable regulatory environment in the medium-term,
driven by a Europe-wide governmental commitment to improve energy efficiency standards and reduce
energy consumption and costs, which should lead to an increase in the intensity of insulation use. In recent
years there has been an increased political focus throughout the European Union on climate change,
which, in combination with rising energy costs, has resulted in the implementation of tighter regulations
concerning energy efficiency both at the EU and the individual country level. Current EU directives, for
example, impose energy efficiency requirements on new and renovated buildings in connection with a
targeted 20% reduction in energy consumption by 2020. Given that insulation can dramatically reduce heat
loss and energy consumption in buildings and also has the added benefit of being one of the most
120
cost-effective of all the available technologies to reduce carbon dioxide emissions, the implementation of
more stringent energy efficiency requirements has affected demand for our products in our various
geographic markets.
At the national level, individual countries put in place their own specific requirements from time to time
that can drive market demand for insulation products. While the Nordic region has traditionally had
relatively more comprehensive energy efficiency measures in place than our other focus markets,
continued tightening of certain specific regulations (for example, the recent implementation in Finland and
Sweden of new regulations requiring greater thicknesses for technical insulation) has recently fuelled
demand for the higher margin, more specialized products offered by our Technical Insulation division. In
addition, increased fire safety regulations in many of our markets (particularly in central Europe) in recent
years has increased demand for our stone wool products, which are known for their superior fire resistance
qualities compared with other insulation materials, particularly foam insulation.
Highly experienced and committed management team
Our experienced and committed management team led by Kari Lehtinen, our Chief Executive Officer, and
Anders Dahlblom, our Chief Financial Officer, is a key factor in the continuing success of our business.
Our management team has a strong background in manufacturing businesses, with an average of
approximately 18 years of industry experience. Our management team has implemented a comprehensive
business plan that we believe will allow us to protect our market share in our home markets and capture
growth in our other focus markets. In addition, our management team includes a strong senior
management team, with the division heads representing a combined total of 89 years’ industry experience,
with 61 years at Paroc Group.
Our Strategy
We believe we have a strong business platform across our established divisions. We will continue to
leverage our strengths and drive improvements based on the following key strategies:
Maintain existing presence and grow market share in home markets, with continued innovation and
expansion of our product and solution offering
In our home markets of Finland, Sweden and the Baltic States, our key priority is to maintain and protect
our existing market leadership positions through a continuing commitment to innovation, in particular
through the creation and development of what we believe to be superior, premium insulation products.
We are highly motivated to improve and develop our product and service offering, as we pursue innovation
through research and development projects. In our BI division, we intend to strengthen our product
offering in the renovation and low lambda segments (where ‘‘lambda’’ is a measure of the insulating
capacity of a product for a given thickness, with lower values indicating a better insulating capacity). The
renovation sector is attractive as it tends to be less vulnerable to market cyclicalities than the new build
construction sector, and lower lambda products are appealing to customers because they provide the same
level of insulation with a thinner insulation layer or provide a higher level of insulation with the same
insulation thickness. In our TI division, we intend to focus on the development of new HVAC solutions, as
well as oil & gas and marine product certifications, since product certifications are vital to our key TI
end-market customers. Externally, we are focused on enhancing our existing products and developing new
products to meet our customers’ known and anticipated needs. Internally, we are focused on innovation
across the organization, including integrating new technologies and adopting new methods of working with
our customers. We also intend to strengthen our dealer network to set ourselves apart as the supplier of
choice in our other focus markets. In our PPS division, we intend to focus on value-add services to our
products, utilizing our skilled staff to develop tailored solutions for our customers’ projects, ensure smooth
implementation of those projects and provide technical advice on the design and selection of structural
solutions.
Grow our market share in other focus markets with existing proven products
In our BI division, our strategic priority is to secure a recognized market position, which we aim to achieve
by growing faster than the underlying construction market with modest share gains, driven by strong brand
positioning and an active sales strategy of dealer and contractor targeting.
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In our TI division, our strategy is to strengthen our market positioning and grow market share in certain
core end-markets, by leveraging our state-of-the-art technical insulation manufacturing capability at our
Trzemeszno facility. This growth is expected to be led by our HVAC offering, and strengthening our dealer
network will be highly important to achieving these strategic objectives. Outside of Europe, where we sell
technical insulation on a project basis, we intend to take a highly selective and opportunistic approach to
project sales, with a focus on larger-scale industrial projects with higher value-added products.
In our PPS division, our strategy is to emphasize our panels’ design and aesthetics, and the fact that our
product offering includes the materials needed to complete a panel wall structure.
Focus on the growth potential in Russia and capitalize on our in-country manufacturing presence
Our recent investment in our new Tver manufacturing facility in Russia, which began meaningful
commercial production in January 2014, has provided us with an in-country manufacturing presence and
will enable us to serve the growing Russian market. Although we had previously sold our products in
Russia through sales offices, developing an in-country manufacturing presence has reduced the
transportation costs required to serve the market and has allowed us to avoid the significant tariffs on our
imported products, which had previously limited the profitability of our Russian sales. We intend to use the
quality of our product offering and our brand strength to modestly grow market share.
We anticipate that demand in the Russian market will support our new Tver manufacturing facility
operating at high capacity utilization from the second year of its operation. Although no decision has yet
been made, detailed plans are being considered for the addition of a second production line in Tver for the
manufacture of base stone wool, as well as the addition of new machinery that would provide us with offline TI production capacity, which would double base production capacity in Russia and allow us to take
advantage of growing Russian demand for technical insulation solutions.
Drive further efficiency and cost savings through operational excellence
We plan to improve efficiency and cost savings through a continued focus on research and development.
We have implemented our ‘‘Operational Excellence’’ plan, which is a clear and detailed cost savings
program through which we have delivered, and believe we will continue to deliver, significant savings. We
anticipate that these savings will primarily come from our Base Production division, with one of the key
sources of cost reduction expected to be energy efficiency measures applied throughout the production
process. Through these initiatives, we believe we can manage our cost base more effectively and generate
margin enhancement through operational leverage if we increase production over the medium term.
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Divisions
We manufacture and sell a range of stone wool products for residential, commercial and industrial new
build construction, renovation, remodeling and modernization projects. We have divided our business into
four divisions: (1) Building Insulation division, (2) Technical Insulation division, (3) Panel System division
and (4) Base Production division, which correspond to our new segment structure. The table below shows
our revenue by each segment.
Year ended December 31,
2011
2012
2013
(E in millions)
(audited, except as otherwise
indicated)
Revenue by segment:
Insulation:
Building Insulation(2)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Technical Insulation(2)(5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Insulation(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
248.7
130.7
366.8
257.9
144.3
385.1
256.7
150.9
390.8
Panel System(6) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51.2
59.2
56.2
156.7
43.7
200.4
0.5
200.9
161.5
45.8
207.4
0.4
207.8
161.1
46.1
207.3
0.5
207.8
Base Production:
Internal sales:
Sales to BI division(2)
Sales to TI division(2)
Total internal sales . . .
External sales . . . . . . .
Total Base Production . . .
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Eliminations and allocations(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(214.0) (221.8) (221.7)
404.8
430.4
433.1
(1)
The total amounts presented give effect to eliminations for internal sales between our BI and TI divisions in the amount of
A12.6 million for the year ended December 31, 2011, A17.1 million for the year ended December 31, 2012 and A16.8 million for
the year ended December 31, 2013.
(2)
Unaudited.
(3)
We present eliminations and allocations herein to provide for eliminations in respect of intercompany trading and other
transactions between our operating divisions, as well as allocation of central overhead and management charges among our
operating divisions, for purposes of Group consolidation.
(4)
The total amounts presented include internal sales in the amount of A12.0 million for the year ended December 31, 2011,
A14.0 million for the year ended December 31, 2012 and A14.7 million for the year ended December 31, 2013.
(5)
The total amounts presented include internal sales in the amount of A13.1 million for the year ended December 31, 2011,
A17.6 million for the year ended December 31, 2012 and A17.4 million for the year ended December 31, 2013.
(6)
The total amounts presented include internal sales in the amount of A0.01 million for the year ended December 31, 2012 and
A0.05 million for the year ended December 31, 2013. There were no internal sales in the year ended December 31, 2011.
Base Production
Our Base Production division is responsible for producing all of the stone wool for our Building Insulation
and Technical Insulation divisions, developing proprietary production technology and stone wool
properties and managing capacity utilization (including warehousing and deliveries) across the Paroc
Group. As of March 31, 2014, we operated eight production plants in five different countries with 13 Base
Production lines producing stone wool. Production sites are managed as a network with production costs
allocated to the most cost-efficient plant, taking into account distribution costs. All of our internal sales to
other divisions are at a fixed cost agreed at the beginning of each year.
Raw materials
The main raw materials for the production of stone wool are stone raw materials, coke, binding agents,
coatings and adhesives and steel (for sandwich panels only). The purchase of the majority of key raw
materials is undertaken centrally, and in recent years we have diversified our sourcing to reduce over
reliance on a small number of suppliers.
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Stone and quarries
The quality of stone used in the production process is critical to the quality of the wool produced. We try to
source our stone as locally as possible to our production facilities due to high transportation costs,
although certain types of stone are transported from Finland to some of our plants. The stones we
transport from our quarries in Finland are important to our production processes due to their unique
chemical composition and the fact that they are more difficult to source from third parties.
We currently hold eight mining districts (i.e., mining concessions) in Finland: Joutsenenlampi, Lehlampi,
Ybbersnäs, Sallittu, Vanhasuo, Metsäsianniemi, Näträmälä and Kangas. We own the two real property sites
included in the Joutsenenlampi mining district, pay a leasing fee for the land on which the Sallittu and the
Kangas districts are located, and for the other five quarries, we do not lease the land, but pay the statutory
mining excavation fee. We do not currently conduct quarrying activities at the Kangas and Näträmälä
mining districts and hold these sites as reserve sites. After the closure of our Lappeenranta facility, we will
likely also hold the Vanhasuo mining district as a reserve site. Our quarries are ISO 9001 and 14001
certified, and operations in our quarries are conducted by third parties.
For the year ended December 31, 2013, we supplied approximately 30% of the total raw stone material
that our operations required from quarries over which we have mining rights. We acquired the balance of
our stone requirements from third parties. Certain of the stones we require for our production processes
are more difficult to source from third parties, and we have the ability to source these stones from quarries
over which we have mining rights for the medium- to long-term. We have applied for mining district
decisions at the Teerisuo and Longanlampi quarries, which, when granted, will increase our reserves of
these stones that are more difficult to source from third parties. For information on the permitting process,
see ‘‘Risk Factors—Risks Related to Our Business and Our Industry—Our licenses, permits and certifications
may be suspended, amended or terminated prior to the end of their terms or may not be renewed’’ and
‘‘Regulation.’’
If necessary, we have a substitute supplier of one type of stone that is more difficult to source from third
parties, which we use instead of our own stone when it is cost effective to do so. We can substitute slag
(non-virgin material, which is a residual product from other industrial processes, for example, steelmaking) for another type of less readily available stone, but this is not easily available, as we can only use
slag of suitable chemical composition. Slag is currently used in our Polish operations, and we are
considering the expansion of slag usage to other production sites. The main driver in the use of slag is cost,
specifically logistics costs. We estimate that it would cost approximately A50,000 per plant in research and
development and other costs implement the use of slag instead of this virgin stone across all our
production facilities. This estimated cost does not include possible losses in productivity or higher
scrapping costs. See ‘‘Risk Factors—Risks Related to Our Business and Our Industry—The quality of our stone
wool products depends upon our ability to successfully exploit existing resources of stone raw materials that are
difficult to source from third parties and acquire and develop further stone raw material resources at competitive
costs. Delay or failure in acquiring, developing and completing development projects could have an adverse
effect on our business, financial condition, results of operations and cash flows.’’
Other raw materials
The quality of coke (a fuel made from coking coal, a low-ash, low-sulfur bituminous coal) is also important,
as variation in the quality and size of coke can materially impact the output of stone wool production. The
furnaces used in this process are unique, and are calibrated over years to ensure optimal performance. We
currently source the coke we use from a steel producer in Poland and other suppliers in Spain, Italy and
Ukraine. Negotiated prices are generally based on trends in Australian coking coal prices. Although we use
coke as our primary melting energy source, electricity is used on two lines and for general production
needs. Because of the recent political instability in the Ukraine, we have put in place contingency plans to
source our coke from the Czech Republic and Poland if the need arises. See ‘‘Risk Factors—Risks Related to
Our Business and Our Industry—Our business may be negatively affected by volatility in raw and other material
prices, our inability to retain or replace our key suppliers, unexpected supply shortages and disruptions of the
supply chain.’’
We use an industry standard phenol-based binder. While such a binder is available from other suppliers,
switching suppliers would require extensive testing. We are in the process of testing a new form of binder
which would decrease emissions levels, however, we expect that this will increase costs. The pricing of the
binder fluctuates annually, impacted primarily by changes in the component pricing for phenol, urea and
methanol, in addition to any material change in the euro to US dollar exchange rate.
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Production process
There are seven key processes to the manufacture of stone wool: raw material handling, melting, spinning,
wool collection, curing, cutting and packaging.
Raw material handling involves measuring out the required quantities of stone and coke to use in the
melting process. The raw materials are precisely blended to create the optimum melt for stone wool fiber
production. In the melting process, the measured raw materials are then melted together in a cupola
furnace or electric melting furnace, using the coke and electricity as the source of heat energy. In the
spinning process, the now-melted raw materials are fed directly onto a spinner, which produces the fine
stone wool fibers. A small amount of binding materials is then added. In the wool collection process, the
fibers are then collected to form a thin sheet of raw stone wool, and then the sheets are layered and
compressed to specified densities, depending on the product specifications. In the curing process, uncured
stone wool for use in pipe machines within the Technical Insulation division is taken off of the production
line (this stone wool is left uncured) and the remaining stone wool is reheated to cure and harden the resin
binding. In the sixth process, cured products to be sold by the Technical Insulation, Building Insulation or
Panel System divisions are cut as according to product specifications, and in the final process, the products
are packaged in the form of rolls, pipes, slabs, panels or mats. We also produce ‘‘blowing wool’’ (granulated
stone wool for thermal insulation) mainly from product waste.
Sales
The Base Production division sells its stone wool products to the Building Insulation and Technical
Insulation divisions at a fixed cost agreed at the beginning of each year. The Panel System division and our
Russian operations enter into fixed price agreements at the beginning of each year, establishing the price
and volume at which the Base Production division will sell its stone wool production. We produced a
volume of approximately 375.9 thousand tonnes, 377.2 thousand tonnes and 379.9 thousand tonnes of
stone wool in the years ended December 31, 2011, 2012 and 2013, respectively, and we had internal sales of
A200.4 million, A207.4 million and A207.3 million in the years ended December 31, 2011, 2012 and 2013,
respectively. Of the stone wool we produced in the year ended December 31, 2013, 27% was produced in
Finland, 24% in Sweden, 30% in Poland and 19% in Lithuania.
The Base Production division also has external income relating to royalty income from licensing
agreements, and from the sale of unusable fragments of stone from the quarries over which we have
quarrying rights. The division had external sales of A0.5 million, A0.4 million and A0.5 million for the years
ended December 31, 2011, 2012 and 2013, respectively.
Building Insulation
Overview
Our Building Insulation division is the marketing and distribution operation for the stone wool insulation
produced by our Base Production division for residential and non-residential buildings (for both new-build
and renovation construction markets). The BI division does not have its own production lines or
manufacturing capacity. BI sends its product orders to the Base Production division which manufacturers
and delivers the product to the end customer. Products in the BI division range from general building
insulation to more specialized acoustic or fire protection insulation products, with the majority marketed
through the PAROC brand. General building insulation is the largest business segment within BI. The
majority of the BI division’s stone wool products are manufactured by our Base Production division, with
the exception of some more specialized acoustics and roofing products, which are produced by our
Technical Insulation division for our BI division. The BI division also sells panel stone wool internally to
our PPS division and also sells insulation for pre-fabricated panels to third parties across Europe.
For the year ended December 31, 2013, our Building Insulation division generated sales of A256.7 million
(with external sales of A242.0 million, or 55.9% of our total sales). Excluding sales to Russia, our Building
Insulation division generated sales of A232.3 million for the year ended December 31, 2013. For the year
ended December 31, 2013, sales in our major markets in the BI division (excluding sales to Russia) were as
follows: Finland (27%), Sweden (29%), the Baltic States (12%), Poland (7%), Germany, Austria and
Switzerland (6%), Denmark (3%) and Norway (7%). We believe that by market share, we are the market
leaders in both Sweden and the Baltic States (taken as a whole), among the top two in Finland and among
the top three in Norway. For the year ended December 31, 2013, on a gross basis excluding sales to Russia,
47% of BI’s sales were for new residential construction, 37% of BI’s sales were for new non-residential
construction and 16% of BI’s sales were for renovation projects.
Product Offerings
We offer a wide product assortment of BI products in each of the following categories.
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General building insulation
We manufacture a range of general insulation products designed for use in walls, roofs and flooring,
including flexible slabs and mats (multi-purpose general thermal insulation), blowing wool (for lofts), wall
insulation and boards (both semi-rigid and rigid) and wind protection slabs (tough, windproof panels with
Tyvek special facing). General building insulation generated sales of A83 million for the year ended
December 31, 2013, representing 36% of BI’s total sales (excluding sales to Russia).
Roof insulation
We manufacture slabs designed for thermal insulation as an underlayer and single layers for flat roofs, as
well as boards used for top layer insulation, and are also now introducing roofing insulation. Roof
insulation generated sales of A46 million for the year ended December 31, 2013, representing 20% of BI’s
total sales (excluding sales to Russia).
Rendered façade insulation
Rendered façade products produce a seamless surface for external walls which does not accumulate
moisture and does not react to changes in temperature. We produce slabs for mechanical fastening and
insulated lamellas for fastening by adhesive mortar. Rendered façade insulation generated sales of
A23 million for the year ended December 31, 2013, representing 10% of BI’s total sales (excluding sales to
Russia).
Panel insulation
We manufacture concrete panel slabs (core insulation material for manufactured concrete panels) and
metal-faced panel slabs (rigid fireproof stone wool in slabs or cut into lamellas for metal faced sandwich
panels) used in panels and sold to third parties as well as internally to our PPS division. Panel insulation
generated sales of A44 million for the year ended December 31, 2013, representing 19% of BI’s total sales
(excluding sales to Russia).
Fire protection
We manufacture special slabs and boards for fire protection applications. Paroc stone wool retains its
properties at temperatures as high as 1000C. We offer a variety of fire protection (including for steel
structures, corrugated steel, chimneys, corridor linings, fire insulated ducts, among other applications) and
fire partitioning solutions. Fire protection generated sales of A4 million for the year ended December 31,
2013, representing 2% of BI’s total sales (excluding sales to Russia).
Acoustic products
We manufacture a wide range of acoustic tiles for suspended ceilings as well as for wall mounting in a
number of applications under the PARAFON brand name. Our acoustic products are manufactured in
Skövde, Sweden, and are designed to absorb sounds that might otherwise be reflected and create an
unpleasant indoor environment. The absorption coefficient for stone wool is ~0.90-1.00 (frequencies
above 500 Hz) which means that 90%-100% of the sound will be absorbed by the acoustic product.
Acoustic products generated sales of A15 million for the year ended December 31, 2013, representing 6%
of BI’s total sales (excluding sales to Russia).
Ground insulation
We manufacture special stone wool insulation for foundations and cellar walls. A major issue when
designing foundations is ‘‘frost heave,’’ which results from ice forming beneath the surface of the soil when
there are freezing conditions in the atmosphere. Frost heave cracks foundations and can damage the entire
structure of a building. Our ground insulation stone wool products are designed to stop frost heave and
moisture problems. Ground insulation generated sales of A2 million for the year ended December 31, 2013,
representing 1% of BI’s total sales (excluding sales to Russia).
Customers and marketing
In the BI division, the main customer base is the building construction industry, which we reach through
various distribution channels. The primary distribution channel is through dealers, accounting for 43% of
total BI division sales (on a gross basis excluding sales to Russia) for the year ended December 31, 2013,
126
which encompasses wholesalers of insulation as well as DIY-type stores. The two other major customers
groups are building contractors and construction companies (28% of total BI division sales (on a gross
basis excluding sales to Russia) for the year ended December 31, 2013) (that, depending on their size, may
buy direct from Paroc) and industrial customers, such as pre-fabricated house manufacturers and panel
manufacturers, where insulation is a major component of their product (24% of total BI division sales (on
a gross basis excluding sales to Russia) for the year ended December 31, 2013). Of total BI division sales
(on a gross basis excluding Russia), 4% represented sales to other customers.
Our BI division marketing effort is focused on product positioning across geographies and on new product
development through collaboration with the Base Production division and investment in R&D programs.
We also focus on obtaining the requisite product approvals and certifications, following market trends and
regulatory requirements, as well as lobbying with industry groups for better insulation requirements. We
dedicate a considerable amount of time to educating and training staff in the uses and benefits of Paroc
insulation. The main avenue for targeting customers is by way of direct interaction with key accounts,
supported by brochures and internet services, and the occasional use of the media in local geographies.
Technical Insulation
Overview
Our Technical Insulation division produces high-quality stone wool products used in specialized industrial
and technical applications. Because the TI division’s products are tailored for specific customer
applications, the TI division has its own manufacturing capacity, using stone wool produced by the Base
Production division to produce the more customized TI products. Products in the TI division are primarily
used to provide insulation from heat, fire, condensation and sound, including products designed to meet
regulatory requirements. TI products are supplied to four key end-markets: HVAC, process industries,
marine and offshore and OEM. The TI division also sells specialized acoustics and roofing products to the
BI division. For the year ended December 31, 2013, our Technical Insulation division generated sales of
A150.9 million (with external sales of A133.5 million, or 30.8% of our total sales). Geographically, we
estimate that by market share, we are the market leader in each of Finland and Sweden, among the top two
in the market comprising the Baltic States, Poland, Ukraine, Belarus, Czech Republic, the Slovak Republic
and Hungary, and among the top three in the market comprising Norway and Denmark.
Production process
Given the high-specialized nature of our TI products, the TI division has its own proprietary
manufacturing capability to turn stone wool from the Base Production division into TI products, both the
more standardized TI products (including pipe sections and wired mats) produced on the TI production
lines and ‘‘special products’’ (including OEM products and specialized HVAC products) produced with
specialized machinery designed for ‘‘special product production.’’ Base Production supplies intermediate
stone wool products (raw, uncured wool and basic slabs and mats) to TI at full manufacturing cost. TI has
its own operators and machines to manufacture our most customized products, and our TI manufacturing
is closely configured with Base Production. We expect to have sufficient capacity to 2018, and there is the
potential to increase pipe section production capability in 2019 if volumes grow strongly in the intervening
period.
We make the following products in the TI division that have applications in our key end-markets: pipe
sections (one of our key product lines), segments/bends, wired mats, lamella mats, slabs with facings,
non-faced slabs, high temperature bricks (production was discontinued in February 2014) and OEM
products. Pipe sections are made from raw, uncured wool from our Base Production division that is
unrolled, cut to size, rolled and compressed to pipe, cured and packaged. Wire net mats are made from a
mat of stone wool from our Base Production division that is cut to size and a wire net attached. Lamella
mats are made from a slab of stone wool from our Base Production division that is cut, reoriented with a
facing attached. The TI division also has R&D programs for its applications and products.
There are 18 TI production lines at four plants (Lappeenranta (4), of which two TI production lines will be
shut down in 2014 with the remaining two TI production lines shut down in 2016 (see ‘‘—Production
facilities and inter-segment sales—Lappeenranta closure’’ for more information), Hällekis (2), Skövde
(2) and Trzemeszno (10)), with special product production equipment at Hällekis, Trzemeszno and Skövde.
127
Product offerings, key markets and customers
Given the higher value-added nature of TI’s products, our TI division achieves higher margins than our BI
division. In addition, the TI division is able to sell to a wider geographic area, given the lower margin
dilution impact of transportation costs versus BI products. As a consequence, we are able to selectively
supply TI products to high-value, high-margin products outside of our core European markets.
Product offerings
We supply the following products in the TI division that have applications in our key end-markets: pipe
sections (one of our key product lines), segments/bends, wired mats, lamella mats, slabs with facings,
non-faced slabs, preformed blocks and OEM products.
Key markets and customers
The key markets and customers of each of the four key end-markets are described below. For the year
ended December 31, 2013, 43% of TI’s external sales (on a gross basis, excluding sales to Russia) were to
original equipment manufacturers, marine and industrial customers, and 57% of TI’s external sales (on a
gross basis, excluding sales to Russia) were to HVAC customers. For the year ended December 31, 2013, of
TI’s sales on a gross basis, excluding sales to Russia, 45% were for new non-residential construction, 35%
were for renovation projects and 20% were for new residential construction. Our major customers are
technical insulation dealers (accounting for 72% of total TI division sales (on a gross basis excluding sales
to Russia) for the year ended December 31, 2013) and insulation contractors (accounting for 15% of total
TI division sales (on a gross basis excluding sales to Russia) for the year ended December 31, 2013).
Industrial customers accounted for 11% of total TI division sales (on a gross basis excluding sales to
Russia) for the year ended December 31, 2013 and other customers accounted for 3% of total TI division
sales (on a gross basis excluding sales to Russia) for the year ended December 31, 2013.
Heating, Ventilation and Air Conditioning (‘‘HVAC’’)
HVAC systems in buildings perform many roles, and generally HVAC systems are insulated, especially in
Nordic countries, where there are strict insulation requirements. HVAC applications of Paroc products
include insulation for heating and water pipes, drain pipes and wastewater pipes, ventilation systems
(including thermal insulated ducts, fire insulated ducts and noise reduction), HVAC equipment and smoke
and exhaust pipes.
Our core HVAC markets are Sweden (27% of HVAC external sales (excluding sales to Russia) for the year
ended December 31, 2013) and Finland (22% of HVAC external sales (excluding sales to Russia) for the
year ended December 31, 2013), Poland (9% of HVAC external sales (excluding sales to Russia) for the
year ended December 31, 2013), Germany (8% of HVAC external sales (excluding sales to Russia) for the
year ended December 31, 2013) and the United Kingdom (7% of HVAC external sales (excluding sales to
Russia) for the year ended December 31, 2013), and sales to the HVAC market were A77.0 million for the
year ended December 31, 2013, representing approximately 57% of total TI external sales (on a gross
basis, excluding sales to Russia). Our major customers are technical insulation dealers and insulation
contractors.
Process industries (oil and gas, petrochemical, power generation)
Customer requirements are varied, depending on the nature of the process industry; however, process
industry customers demand long-lasting, maintenance-free and energy efficient insulation solutions.
Product offerings to process industries include insulation for straight pipelines, pipe elbows, valves and
flanges, tanks, boilers, heat exchanges and vessels, filters, flue ducts and industrial chimneys. An important
property of Paroc products is their low chloride and fluoride content, which helps to minimize the risk of
corrosion under the insulation.
The geography of our process industry customer base is diverse and includes Finland, Germany, Sweden,
Poland, Belgium, the Netherlands and the United Kingdom. Sales to the process industry market were
A27.2 million for the year ended December 31, 2013, representing approximately 20% of total TI external
sales (on a gross basis, excluding sales to Russia). Distribution channels vary country-by-country; in the
Nordic countries, industrial insulation products are sold mainly to contractors, however, in continental
Europe, technical insulation dealers act as a key route to market.
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Marine and Offshore
Our marine and offshore insulation has been developed to meet the needs of the modern shipbuilding and
offshore industry. Insulation (especially fire-resistant insulation) is important in the construction of
passenger cruise vessels. The products and structures used in ships must be fire tested and approved
according to the rules and regulations of the International Maritime Organization (IMO). We have several
approvals for A60, A30 and A15 class solutions for steel and aluminum decks and bulkheads (‘‘A’’ indicates
a maritime approval and the number indicates the minutes of fire resistance). For offshore applications we
have approvals for H120 and H60 steel decks and bulkheads (‘‘H’’ indicates an offshore approval and the
number indicates the minutes of fire resistance). We also offer insulation products for marine air ducts and
pipes as well as cabins and corridors.
Our core markets for marine and offshore products are Italy (30% of marine and offshore sales (excluding
sales to Russia) for the year ended December 31, 2013), Finland (22% of marine and offshore sales
(excluding sales to Russia) for the year ended December 31, 2013) and Germany (10% of marine and
offshore sales (excluding sales to Russia) for the year ended December 31, 2013), where major European
shipyards for cruise liners and ‘‘roll-on-roll-off’’ ferries are located. Sales to the marine and offshore
market were A14.2 million for the year ended December 31, 2013, representing 10% of total TI external
sales (on a gross basis, excluding sales to Russia). In Italy, we sell through an Italian distributor with whom
we have a long relationship, and outside of Italy, marine insulation products are typically sold directly to
the shipyard or contractor.
Original equipment manufacturers (‘‘OEM’’)
In the equipment manufacturing industry, insulation is required to increase the energy efficiency of
equipment, for fire protection and for sound attenuation. The OEM market requires insulation for
specialized equipment (for example boilers, silencers, air conditioning equipment and exhaust pipes,
among others), which must meet individual customers’ requirements that may vary on a case-by-case basis.
We invest a significant amount of time building relationship with OEM customers; we identify a need for
the use of insulation, and we then work with the customer to develop tailor-made products.
Our core OEM markets are Finland (23% of OEM external sales (excluding sales to Russia) for the year
ended December 31, 2013), France (20% of OEM external sales (excluding sales to Russia) for the year
ended December 31, 2013) and Sweden (19% of OEM external sales (excluding sales to Russia) for the
year ended December 31, 2013). Sales to the OEM market were A17.7 million for the year ended
December 31, 2013, representing 13% of total TI external sales (on a gross basis, excluding sales to
Russia). We typically sell directly to OEM customers and offer a tailor-made product.
Marketing
The routes to market for our TI products vary depending on the end market and geography. Most products
are sold through contractors and distributors, with OEM and some marine products sold directly to
customers. Our TI division marketing effort is led by dedicated sales personnel for all of its major markets.
The sales team is split into three sales areas who each establish and maintain customer relationships with
dealers, distributors, contractors and OEM customers. We continue to expand our portfolio of approved
HVAC specifications and focus on strengthening customer relationships through being engrained within
the process of customer product development.
Panel System
Overview
Our Panel System division manufactures sandwich façade panels—lightweight steel-faced panels with an
insulating core of stone wool. The main application of the panels produced by the Panel System division
are in the industrial and commercial construction of warehouses, municipal buildings and offices. For the
year ended December 31, 2013, our Panel System division generated sales of A56.2 million (with external
sales of A56.2 million, or 13.0% of our total sales).
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Production process and product offerings
Production Process
Our panels are manufactured on an automated PPS production line at our Parainen plant. The stone wool
is supplied by our Base Production division (sold through the BI division at fixed market prices negotiated
annually on an arm’s-length basis), which is produced at the Parainen plant adjacent to the PPS production
line, and is put onto the PPS production line. The stone wool slabs are introduced into the production line
machine and then fed through cutters in order to produce strips of lamellas. The lamellas are then cut with
grooves in order to join the lengths together. Once joined, metal facings are bonded with adhesive onto
both sides of the mineral wool core. The steel facings are of commercially available standard steel grades
and coatings. For many years, the Finnish steel group Rautaruukki has been a major supplier. For the year
ended December 31, 2013, the PPS production line at Parainen produced approximately 1.2 million m2 of
PPS products.
PPS provides solutions that are designed to provide everything needed to complete a structure: panels,
accessories, fixings, flashings, profiles, sealants and lifting equipment, as well as design, service, logistical,
installation and solid technical support. When developing our product offerings, design and aesthetics are
important to make our products attractive to architects. An important element of our product offering is
our skilled staff. Our sales staff assists our customers in finding the best possible solutions for their specific
projects and our project engineers ensure a smooth implementation of the project according to agreement,
while our technical experts to give guidance in the design and selection of architectural and function
structural solutions.
Original System
Our Original System products are panels for ordinary external walls, internal walls and ceilings where no
special requirements exist. The Original System includes the original panel design (Paroc Original with ribs
of 200mm) with the standard steel coating for external use made of PVDF and, for internal use, polyester.
Façade System
The Façade System includes a wide range of panel designs and ‘‘flashings’’ (a decorative element) and
fixings. The external surfaces of these panels are always coated with PVDF to guarantee a long-lasting
appearance. Manufactured corner panels and the option for a special width range of 300-1,100mm add to
the flexibility in design, and our other special panel range includes panels of varying sizes. The Façade
System is used by architects for a more aesthetic finish.
Fire System
Fire System panels provide a complete solution for fire resistant facilities or interiors, with
non-combustible panels and specially designed accessories. The products include fire resistant partitioning
walls, ceilings and cladding walls. Panels meet the applicable national requirements for fire resistance up to
four hours in walls and up to one and a half hours in ceilings. Fire System Panels are classified in Euroclass
A2 and our structural stone wool core in Euroclass A1. Our products have been tested by appropriate
third-party testing organizations.
Hygiene System
Hygiene System panels are designed for the food and electronics industries, and are manufactured with
entirely smooth surfaces for internal use (food-safe coatings) and PVDF for external wall cladding
surfaces, as well as stainless steel.
Acoustic System
Acoustic System panels are designed for internal walls and ceilings in industrial applications where special
sound insulation or sound absorption is required. We use both Paroc original and perforated Paroc
acoustic panels (the perforated surface on one side of the panel provides better sound absorption) for
Acoustic System applications.
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Build-on System
Paroc Built-on is a solution for additional cladding (cladding is the application of one construction material
over another material) on Paroc sandwich panels, that combines facade panels with other cladding
materials. The combination of Paroc panels and ceramic tiles, glass, timber or bricks can create new
possibilities for facade design. Because of the properties of our panels, customers are able to install
additional cladding materials directly to panel facing.
Customers and marketing
Panels are primarily sold in our core panel markets of Sweden (32% of PPS sales for the year ended
December 31, 2013), Finland (20% of PPS sales for the year ended December 31, 2013), Norway (15% of
PPS sales for the year ended December 31, 2013) and Denmark (10% of PPS sales for the year ended
December 31, 2013) and are also sold throughout western and central Europe (including Germany,
Belgium, Luxembourg and the Netherlands, the Baltic States and the United Kingdom), as well as to the
Middle East on a project basis. For the year ended December 31, 2013, 66% of PPS sales (by surface area)
were for external wall panels, 24% for partitioning panels and 10% for ceiling panels.
Panels are produced and sold on a project basis and are sold directly to installers and contractors. All
production is allocated by orders and panel pricing is usually determined on an individual
contract-by-contract basis, with orders confirmed via a tendering process. Panel System has its own
independent sales team, and we invest a significant amount of time in meeting customers and stakeholders,
organizing industry education seminars to demonstrate the quality of Paroc panels, as well as advertising
our products and new features in construction magazines. Our sales team has a two-pronged marketing
strategy: we target architects or building owners to educate them in the advantages of Paroc products, with
the objective that they specify panels to be ‘‘Paroc or similar’’ in their design specification which is sent to
contractors and also market to the major contractors or panel installers to ensure that we are included in
any tender for construction projects. We have strong relations with certain building project management
companies that deal in large-scale projects across Europe, and we often secure orders for panels from
architects that specify the use of Paroc panels in their building plans We generally have orders five to six
weeks in advance, and peak orders are during April-June and September-November (before the beginning
of winter).
Russian expansion
Overview
We have historically sold our products through sales offices in Russia, and made the decision in 2011 to
expand and build a production facility to directly serve what we believe to be a growth market for Paroc.
There is substantial demand for new housing stock and renovation and modernization of existing housing
stock, driven by new federal governmental projects and housing programs. We sold 24 thousand tonnes of
insulation in Russia in the year ended December 31, 2012 and 30 thousand tonnes in the year ended
December 31, 2013. Our products compete in the Russian stone wool market as a premium product with a
strong service offering and a reputation for best-in-class product quality.
We intend for our Russian operations to be a stand-alone business unit consisting of a building insulation
unit, a technical insulation unit as well as a base production unit designed to supply all Paroc stone wool
products sold in the Russian market. The base production plant at Tver began commercial operations in
January 2014 with one base production line. For the year ended December 31, 2013, our Russian
operations generated sales of A32.3 million (or 7.5% of our total sales).
We face certain challenges in Russia as we expand into a new emerging market and develop our in-country
presence, including political instability in the region, as well as challenges in navigating the establishment
and operation of a manufacturing facility in a new legal jurisdiction. See Risk Factors—Risks Related to Our
Business and Our Industry—We operate in emerging markets such as Russia, which exposes us to risks inherent
to such less developed markets, and we may be exposed to greater risks as we intend to increase our operations
in such markets’’ and ‘‘—We may not be able to successfully manage future growth, including by way of organic
growth to new regions and potential acquisitions which may expose us to additional risks.’’
Tver Line 1
Following an extensive market review, we began construction of a production plant with a 50 thousand
tonne base production line on a brownfield site (Izoplit) in Tver in 2012 at a total cost of A60 million. Our
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new manufacturing facility in Tver employs 96 employees, and began meaningful commercial production in
January 2014 on one base production line. The plant uses best-in-class production practices utilizing Paroc
‘‘know-how’’ and technology from across the Group. Tver is strategically located between key target
regions of Saint Petersburg and Moscow, allowing for ease of transport to end-customers within Russia.
Our Russian operations are being provided with ongoing marketing and operational support by the main
Paroc BI, TI and Base Production divisions as it ramps up its production and sales activities. Local
production allows us to be more competitive in the market due to lower production and transportation
costs along with the elimination of high import duties. Production at the Tver plant will replace a
substantial majority of historical imports from plants in neighboring countries that currently supply the
Russian market (in particular Lappeenranta and Vilnius).
The raw materials for our Russian production include coke sources from Ukraine, locally sourced resin
and locally sourced stones, as well as certain stone sourced from our quarries in Finland. Because of the
recent political instability in the Ukraine, we have put in place contingency plans to source our coke from
the Czech Republic and Poland if the need arises. See ‘‘Risk Factors—Risks Related to Our Business and
Our Industry—Our business may be negatively affected by volatility in raw and other material prices, our
inability to retain or replace our key suppliers, unexpected supply shortages and disruptions of the supply chain.’’
Tver Line 2 and TI production
We believe Russia (which accounted for 7.5% of the Group’s revenue for the financial year ended
December 31, 2013) represents an attractive growth market for our business. Accordingly, we are currently
considering a plan to significantly expand our production capacity at our new manufacturing facility in
Tver by adding a second production line for the manufacture of base stone wool (‘‘Tver Line 2’’), as well as
additional machinery that would provide us with off-line TI production capacity in Russia. This second
phase of our Russian expansion remains subject to internal approval, which we would not expect to receive
prior to the second half of 2014. In the event that we proceed with the second phase of our Russian
expansion, we expect that we will make total capital expenditures in the amount of approximately
A75 million during the 18 to 24 month period following any decision to proceed with the project. We expect
that we would fund these capital expenditures using cash generated by our operating activities.
Production facilities and inter-segment sales
The following table describes our plants and their activities.
Number of production
lines
Plant
Hällekis . . . . .
Hässleholm . . .
Lappeenranta(5)
Oulu . . . . . . .
Parainen . . . . .
Skövde . . . . . .
Trzemeszno . . .
Tver . . . . . . . .
Vilnius . . . . . .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Location
Employees(1)
Sweden
Sweden
Finland
Finland
Finland
Sweden
Poland
Russia
Lithuania
183
63
233
74
310
142
538
96
257
Annual production(2)
Stone wool TI products Panel System
Production
Base
Panel (thousand (thousand
products
commenced production TI System tonnes)
m3)
(million m2)
1978
1967
1952
1969
1964
1937
1998
2013
1997
2
1
1
1
2
—
3
1
2
2(3)
—
4
—
—
2(3)
10(3)
—
—
—
—
—
—
1
—
—
—
—
58
26
31
14
48
—
112
0.08(4)
71
131.7
—
143.6
—
—
38.7
424.0
—
—
—
—
—
—
1.2
—
—
—
—
(1)
As of December 31, 2013.
(2)
For the year ended December 31, 2013.
(3)
These plants also have special product production equipment.
(4)
Meaningful commercial production commenced in January 2014.
(5)
Lappeenranta is scheduled to cease operations by the end of 2016. See ‘‘—Lappeenranta closure.’’ We have ceased production
on one of the Base production lines as of February 2014, and two TI production lines are scheduled to be shut down during
2014. Most of the special product production at Lappeenranta has been transferred and is in use at other production facilities.
The remaining Base production line will be shut down in 2016.
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Lappeenranta closure
Our Lappeenranta plant is scheduled for closure in 2016. It is located on a leased site at the edge of a
limestone quarry and is situated over a valuable limestone deposit. We lease the land from Nordkalk, with
the lease scheduled to expire in May 2019. Nordkalk has indicated that it will not renew the lease as it
requires access to the limestone deposits under the plant, and we have agreed to close down the plant by
the end of 2016, and, where feasible, will transfer operations and production equipment to other
production plants. Although the shutdown and production transfer process is a challenging task for our
group, we have transferred equipment in the past and a project plan and process is in place to minimize
disruption to customers. The shutdown and facility transfer phase is in process (it began in 2013) with Base
Production shifting to Oulu, Parainen, Hällekis, Trzemeszno and our new Tver plant in Russia (see
‘‘—Russian expansion’’), TI production transferred to Hällekis, Trzemeszno, Skövde and Tver. Two of the
TI production lines will be shut down in 2014, with the other two to be shut down in 2016. Most of the
special product production equipment has already been transferred and is in use at other production
facilities. All employees have been informed of the plans, and we have engaged with all employees to
relocate internally where possible, and otherwise to support further education and transfer of skills to new
professions. We believe that the plans have been well received by our employees due to the transparency of
the shutdown procedure, combined with engagement and support from Paroc in assisting with the process.
We estimate the total cost of the transfer process to be approximately A7 million in capital expenditures
and A1.3 million in operational expenditures from 2013 to 2016, with an estimated A9.0 million in
demolition and land clearing costs. We have estimated that there will be productivity, labor efficiency and
other incremental costs over the duration of the transfer period. One production line has been shut down
from February 2014. See ‘‘Risk Factors—Risks Related to Our Business and Our Industry—Interruptions in
operations at our facilities could have a material adverse effect on our business, financial condition, results of
operations and cash flows’’ and ‘‘—The closure of the Lappeenranta facility may result in greater costs or
disruptions to our business than currently expected.’’
Inter-segment sales
The Paroc Group conducts inter-segment sales among our divisions. The following chart illustrates the
inter-segment sales among the divisions.
TI
(Sales / Manufacturing)
Specialized acoustics and
roofing products
Stone
Wool
(sold at a fixed cost)
BI
External
Customers
(Sales)
Stone
Wool
(sold at a fixed cost)
BASE PRODUCTION
Panel
Wool
(Manufacturing)
Raw Material
Suppliers
PPS
(Sales / Manufacturing)
27APR201418500721
The size and thickness of arrows in the chart illustratively denote the relative sizes of intra-segment and
external sales, but are not to scale.
Competition
The main competition we face in the building insulation and technical insulation markets is from regional
and global stone wool companies (including Rockwool) (that may also participate in the sandwich panel
market) and regional and global multi-material companies (including Isover (Saint-Gobain), Knauf, Ursa
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and TechnoNICOL). These markets tend to have larger, international participants due to the large level of
investment needed. The main competition we face in the sandwich panels market is from façade
manufacturers (including small, local companies as this market requires lower levels of investment) and
global building materials producers and steel producers.
We also face competition from other insulation materials. Given the similarities in properties, application
and production, the main competitor to stone wool is glass wool. Mineral wools (comprising stone wool
and glass wool) typically do not materially overlap with foam insulation in building or technical insulation
uses. However, there is a material area of overlap between mineral wool and foam insulation in external
façades and roofs, as well as in sandwich panels, where mineral wool and foams are relatively more
substitutable. In instances where mineral wool and foam insulation are relatively substitutable, we believe
customers often prefer to use mineral wool products due to superior thermal insulation and fire safety
properties, among others, as compared to foam products, which are often slightly lower cost and take up
less space than mineral wool products. Within mineral wool, both stone wool and glass wool have their
advantages and disadvantages. Stone wool is typically easier to install than glass wool and has superior
properties for fire, heat and sound resistance. Stone wool also handles moisture slightly more effectively
than glass wool insulation. However, low density glass wool insulation is easier to transport than stone wool
due to better compressibility and is also cheaper than stone wool in low density insulation products.
Typically, the choice of insulation used in construction activities between stone wool and glass wool varies
by market and depends to a considerable degree on regional and local building traditions, exterior climate
and applicable technical and legal construction requirements. For example, according to our estimates,
stone wool has historically been the most frequently used building insulation material in the Nordic
countries and the Baltic States, and according to our estimates substitution between insulation materials
has generally been relatively limited overall in those markets in recent years. Also see ‘‘Industry.’’
The building insulation market is characterized by consolidated local markets with a larger variance in
building habits, norms and product use between neighboring countries than in the technical insulation or
sandwich panels markets, limited product transportability with a fragmented customer base, with products
sold through direct sales and dealer sales. Price sensitivity depends on the tier (i.e., quality) of the product
offering, and we operate in the higher tiers. The technical insulation market is characterized by
consolidated regional markets, with a relatively price insensitive, highly fragmented customer base, and
products sold through direct sales to contractors and manufacturers and dealer sales. The sandwich panels
market is characterized by more consolidated and more national markets (although more fragmented in
central Europe), a higher level of imports than in the BI or TI markets, with the majority of sales to
specialist contractors (low price sensitivity) and a plurality to primary contractors (higher price sensitivity).
We believe that we differentiate ourselves with a premium, high-quality product, supported by a
full-service sales and technical support offering. We target niche segments for growth where demand is
strong for our high-specification products, such as Norway (BI flexible slabs and TI products for the oil and
gas industry); Germany (BI slabs and TI HVAC/industrial processes); and Russia (high-value TI pipe
sections for the power and gas sectors).
Research and Development
We consider innovation to be among the key factors for the further development of our product offerings
and brands. Our research and development activities primarily aim to add innovative functions and
applications to our products and optimize the quality and complementary nature of our product portfolio
and application services, particularly in core areas to enable improved energy efficiency, product properties
and sustainability and production processes. We are working to change Paroc to be both more innovative
internally (through the development and use of new technologies and new ways of operating as an
organization), and innovative in product development (through the development of new products and
services to meet the needs of our customers and the development of new products based on our perception
of potential needs in the market). Our divisions work together to create new innovative solutions (for
example the collaboration between PPS and BI and the collaboration between Base Production and BI,
both to develop new products).
The core production machinery and technology that we use in our production process is proprietary and
developed in-house. Our Base Production R&D is responsible for research and development related to
stone wool properties and production technology, and is located in Parainen, Finland. Base production
R&D focuses on four main areas: raw materials (quality and cost-efficiency of internal and external stone
raw materials), process development (the development of Paroc technology, especially core technology
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areas), binder and product properties (product development for the sales division, fiber properties and
binder-related development) and R&D laboratory (supporting plants in quality assurance, as well as
supporting development projects with in-depth support on production technology and/or stone wool
properties and the development of new analysis and quality assurance methods). TI R&D is responsible
for product development, with a focus on developing new products and solutions mainly for its end-user
markets. BI R&D is responsible for maintaining and developing its products, solutions and service range
by identifying and prioritizing customer needs and coordinating those needs with Base Production
capabilities as well as with TI production for roof and acoustic insulation products. In PPS, the focus is on
product and application development, for example for new services, new features, new specification and
new certifications based on our perception of potential needs in the market, requests from customers for
new services and requests from architects and others for new features of PPS products.
We receive certain subsidies from the Finnish Funding Agency for Technology and Innovation for research
and development financing of certain R&D projects.
Total research and development expenditures for the year ended December 31, 2013 were A6.3 million and
for the year ended December 31, 2012 were A6.9 million.
Cost-management
We have a well-defined set of ‘‘operational excellence’’ initiatives which aim to continue to deliver
significant savings in the medium term. We anticipate that these savings will primarily come from our Base
Production division, with one of the key sources of cost reduction expected to be energy efficiency
measures, specifically by reducing energy consumption throughout the production process. We intend to
continue to manage our cost base effectively and generate margin enhancement through operational
leverage (through overhead dilution and the benefits of higher capacity utilization on production costs) as
we grow our volumes. A particular focus is on increasing energy efficiency. There is no assurance that we
will be able to deliver all of our expected cost-savings. See ‘‘Risk Factors—Risks Related to Our Business and
Our Industry—We may not realize any or all of our anticipated cost savings and productivity and efficiency
gains with respect to our cost savings programs.’’
Information Technology
Business critical IT has been consolidated at the Group level, but consolidation is ongoing for non-business
critical IT. We currently have 35 business core applications. Our key applications include our main
platform, the Enterprise Resource Planning solution provided by IFS. Other important applications are
provided by Modultek, Oracle, Tieto and Syncron Tech.
Intellectual Property
We currently own 332 registered trademarks and 513 registered patents (and patent applications)
worldwide. Our most important patents focus on the production of mineral wool, including raw material
mix, the methods and process of mineral wool manufacturing and related equipment. Our proprietary
technology differentiates our products, and we focus on developing and protecting intellectual property as
part of our drive for innovation.
The majority of our material intellectual property rights are currently held on a ‘‘central’’ basis by Paroc Oy
Ab (with some less material intellectual property rights held by other Paroc Group companies). Paroc Oy
Ab then licenses the other Paroc Group companies to use the Paroc Group intellectual property. We
recently completed a reorganization of our intellectual property arrangements, which has resulted in our
material intellectual property being held by Paroc Group Oy. We have in the past licensed our proprietary
technology (including associated patents) to third parties, including to some of our competitors; however,
this practice has ended (although some of the licensing agreements entered into in the past are still in
place), and we do not plan on entering into any new licensing agreements in the future. We have not
entered into any licensing agreements regarding intellectual property rights, either as licensor or as
licensee, that are material to our business.
We are not aware of any major legal proceedings that have been brought against us for infringement of a
patent or trademark or of any proceedings brought against any of our patents that could have a material
adverse effect on our business if we would not prevail in such proceedings. We have regularly taken action
to assert our intellectual property rights and we cooperate with local authorities against product piracy. We
do, from time to time, face incidents of infringement of our intellectual property, and currently there are
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two companies which may be infringing upon our patented technology, and we are in the process of
evaluating the proper course of action. We have recently settled a dispute with another company over the
other company’s use of red and white stripes. See ‘‘Risk Factors—Risks Related to Our Business and Our
Industry—Any threat to, or impairment of, our intellectual property rights could cause us to incur costs to
defend these rights.’’
In addition, our expansion into the Russian market has brought with it certain challenges with respect to
intellectual property. For example, we face challenges in properly documenting trademark licensing from
the Paroc Group to our Russian operations, filing trademark applications in Russia for all product names,
filing for intellectual property protection in Belarus and Kazakhstan (both of which are in a customs union
with Russia), the establishment of a proper legal framework for the protection of commercial secrets and
doing diligence on potential imitators in the Russian market. See ‘‘Risk Factors—Risks Related to Our
Business and Our Industry—Any threat to, or impairment of, our intellectual property rights could cause us to
incur costs to defend these rights.’’ We are in the process of addressing these challenges to ensure protection
of our intellectual property.
Safety systems
In 2011, we established a health and safety program with the goal of becoming an accident-free workplace.
The Occupational Health and Safety (‘‘OHS’’) function of the Group is situated in the Base Production
division, supporting operations at all sites. The OHS function is steered by a Group-wide Health and
Safety steering group, and line organization functions are supported through a Group-wide OHS team.
The site supervisor at each of our facilities acts as the health and safety manager.
Over 2011-2013, the number of accidents at our sites has decreased from 126 in 2011 to 56 in 2012 to 40 in
2013, and lost-time injury frequency per million hours of work (‘‘LTIF 1’’) decreased from 25.1 in 2011 to
12.4 in 2012 to 8.3 in 2013 and lost-time injury frequency resulting in leave of three or more days per
million hours of work (‘‘LTIF 3’’) decreased from 17.9 in 2011 to 8.3 in 2012 to 4.9 in 2013. We have taken
a number of actions designed to maintain a safe environment at our sites: openly presenting the accident
status of each site, properly marking safe passageways in factories, tracking safety performance indicators,
recording incidents, identifying their causes and putting remedial actions into place where warranted and
conducting safety inspections of our sites.
The Trzemeszno facility is the only facility with a ISO18001 (Occupational Health and Safety
Management) certificate, however we believe that all of our facilities operate to the ISO18001 standard,
and we hope that the other sites will be certified over the next several years. Our Finnish organization has
been a member of the Zero Accident Forum (which is coordinated by the Finnish Institute of Occupational
Health) since 2011.
Environmental matters
The conduct of our operations requires compliance with regulatory regimes designed to protect the
environment, including, among other areas, air emissions (including carbon trading), use of chemicals and
waste handling. We endeavor to comply with all known environmental regulations and we are not aware of
any material breaches of applicable environmental regulations by any member of the Paroc Group. In
addition, each of our production facilities (except Tver) is certified to the ISO14001 (Environmental
Management) standard. We believe that the operations at Tver are in line with the ISO14001 standard, but
we have not yet applied for certification. Each of our facilities has an appointed environmental manager.
We have made certain provisions in our financial statements for environmental matters. These
environmental provisions cover the costs from future closure of quarries related to landscaping, security
arrangements and stacking area lining work and future closure of dumpsites related to landscaping. The
provisions for dumpsites are estimated to be used between 2014 and 2019. The provisions for quarries are
estimated to be used between 2020 and 2096, and as of December 31, 2013, a non-cash provision of
A7.3 million has been recognized. A provision of A6.9 million has been recognized as of December 31, 2013
for demolishing and other closure costs related to the Lappeenranta production facilities. These costs are
expected to be incurred by the end of 2018.
The Environmental & Sustainability function of the Group is situated in the Base Production division,
supporting operations at all sites. A few of the major EU-wide environmental legal regimes to which we
are subject are described below. For more information, and for country-specific environmental regulations
to which we are subject, see ‘‘Regulation’’ and ‘‘Risk Factors—Risks Related to Our Business and Our
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Industry—We are subject to numerous environmental, building, health and safety regulations, technical
standards and other regulations.’’
EU Emissions Trading Scheme (‘‘EU ETS’’)
The EU ETS works to cap the total amount of certain greenhouse gases that can be emitted by factories,
power plants and other entities through three phases with the intention to lower the emission of
greenhouse gas emissions over the life of the scheme. The manufacture of stone wool was not included in
Phase I of the EU ETS. In Phase II (2008-2012), only facilities with two or more production lines were
included, which included our Trzemeszno, Vilnius, Hällekis, Parainen and Lappeenranta production
facilities. These facilities participated in Phase II as combustion plants (with thermal output of more than
20 MW). Our production facilities at Oulu and Hässleholm are required to participate in Phase III
(2013-2020). Our production facilities at Skövde and the PPS production facility at Parainen are not
currently subject to EU ETS.
We manage emissions allowances at the Paroc Group level. We received an allocation of free emissions
allowances in Phase II, many of which we reserved for future use. For the year ended December 31, 2013,
we were required to use a portion of our reserved emissions allowances as our actual emissions exceeded
our allocation of free emissions allowances for 2013. As of December 31, 2013, we have 430,387 emissions
allowances held in reserve. In addition, ‘‘Carbon Leakage’’ status is granted by the European Commission
(after agreement by Member States and the European Parliament) to (usually energy-intensive) industries
that are deemed to face competition from non-EU countries with less stringent greenhouse gas emissions
restrictions. We received ‘‘Carbon Leakage’’ status for 2013-2014 and all Paroc production facilities subject
to the EU ETS are therefore allocated free emissions allowances corresponding to our sector-specific
‘‘benchmark value’’. We currently hope to receive this status again for 2015-2019; the mineral wool sector
has again been specified as a sector deemed to be exposed to a significant risk of carbon leakage in the
draft European Commission decision published on May 5, 2014 regarding the 2015-2019 carbon leakage
list, although there is no guarantee that the sector will be included in the list ultimately adopted by the
European Commission following scrutiny by the EU Climate Change Committee, the European
Parliament and the Council. Even assuming that Carbon Leakage status is maintained throughout
Phase III, we estimate that we will have an average annual shortfall of approximately 29% in emissions
allowances across the whole Paroc Group throughout Phase III. This shortfall will be greater if Carbon
Leakage status is not maintained after 2014. In addition, new production capacity may not be eligible for
Carbon Leakage status, unless the operations meet the required criteria for new entrants. Our intention is
to use the free emissions allowances that we had purchased and reserved in Phase II to spread the cost of
purchasing the necessary additional emissions allowances over a longer period of time. Nonetheless, we
expect the future cost of purchasing necessary additional emissions allowances to be material, although we
do not have an estimate at this time given that the emissions allowance market is an open market with
fluctuating prices. See ‘‘Risk Factors—Risk Related to Our Business and Our Industry—Regulations regarding
carbon dioxide emissions could have a material adverse effect on our business, financial condition and results
of operations.’’
The following chart shows our emissions allowances for the years ended December 31, 2011, 2012 and
2013:
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
Allocated
Consumed
Surplus (+) / Deficit ()
in tonnes(1)
290,444
293,179
216,171
223,444
229,390
269,018
+67,000
+63,789
52,847
One emissions allowance equals one tonne.
EU Packaging and Packaging Waste Directive
The packaging of our stone wool products is covered by the EU packaging and packaging waste directive,
and complies with the directive through the applicable national packaging waste recycling system (REPA in
Sweden, the Environmental Register of Packaging (PYR) Ltd in Finland, by engaging a specialized
recovery organization (organizacja odzysku)—TOM S.A.—in Poland, and Pakuoči˛
u tvarkymo organizacija
in Lithuania).
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Registration, Evaluation, Authorization and Restriction of Chemicals (‘‘REACH’’)
REACH was implemented to increase the protection of human health and the environment through
measures designed to improve the safe use of chemical substances. REACH requires companies that put
chemical substances on the EU market to secure the safe use of such chemicals. REACH requires that,
unless exempt, all chemicals and substances manufactured, imported, or used within the EU must be
registered with the European Chemicals Agency (‘‘ECHA’’).
We registered our stone wool fiber, a man-made vitreous (silicate) fiber, with the ECHA in September
2010 and we believe we are compliant with the REACH regulations. Our ECHA registration covers the
stone wool fiber used in all of our products. We are a part of the man-made vitreous fibers consortia, which
manages the registration process.
EU Directive on Industrial Emissions (‘‘IED’’)
The goal of the IED is to reduce pollution resulting from industrial activities through the establishment of
a general framework for the control of industrial activities, including a ‘‘polluter pays’’ principle.
Sweden implemented the IED in 2013. Our Hällekis and Hässleholm facilities will be required to conduct
baseline studies to evaluate soil and groundwater contamination by 2016 or in connection with the
application for an environmental permit application or an amendment to an existing permit. Skövde is
exempt from environmental permitting. In Finland, the IED is to be incorporated into Finnish law by a
revision of the Finnish Environmental Protection Act expected to enter into force during 2014, after which
the obligation to perform baseline studies will apply to all of our Finnish facilities. Lappeenranta, which
will shut down operations in 2016, is already required to conduct a baseline report on soil contamination by
the end of October 2015. In Poland, the implementation process has been delayed and is expected to be
completed during 2014, after which the obligation to perform baseline studies will apply to our Polish
facilities as well. However, in Poland the first baseline report will have to be prepared not for the first IED
implementation-related adjustment of our IPPC permit (to be performed within 3 months after entry into
force of the implementing legislative amendment), but rather for any subsequent change of the IPPC
permit. In Lithuania, it is currently unclear precisely when the IED will be implemented, although under a
plan agreed by the European Commissions and the Lithuanian government implementation is currently
expected to take place between January 1, 2016 and June 30, 2020. We also anticipate that certain of our
facilities (namely Hässleholm, Oulu and Parainen) will need to make certain IED-related improvements in
order to remain compliant with ‘‘best available techniques’’ requirements under the directive by April
2016, which may require significant capital expenditures—more specifically, we currently expect to expend
approximately A0.7 million on such improvements at our Oulu facility, and A2.6 million on such
improvements at our Parainen facility. No such material expenditures are currently anticipated at our
Hässleholm facility, though if planned actions to tune production and raw material parameters are not
successful, it is possible that we may be required to invest approximately A0.7 million on IED-related
improvements.
See ‘‘Regulation’’ for more information on EU-wide regulations, as well as information on national
environmental law.
Employees
The following table sets forth information on the number of our employees by business unit and function
reported as of December 31, 2012 and 2013.
As of
December 31,
2012
2013
Base Production . . .
Building Insulation .
Technical Insulation .
Panel System . . . . . .
Russian operations .
Administrative . . . . .
Total . . . . . . . . . . .
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—
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1964
1150
123
407
102
145
132
2059
We have not suffered any material work stoppages or strikes in recent years, and we consider relations with
our employees, works councils and unions to be satisfactory. As of December 31, 2013, we estimate that in
Finland, approximately 98% of our blue collar and 85% of our white collar employees were represented by
labor unions, in Sweden, approximately 95% of our blue collar and 75% of our white collar employees
were represented by labor unions, in Poland, approximately 40% of our blue collar and 20% of our white
collar employees were represented by labor unions and in Lithuania, 15% of our blue collar employees
were represented by labor unions. These unionization percentages are not uncommon in the respective
jurisdictions. There is currently no unionization at our Russian facility. There are collective bargaining
agreements in place in Finland, Sweden and Lithuania. In Poland, we have a set of ‘‘Regulations’’ related
to, for example, remuneration which have been drafted according to the Polish Labor Code, issued by
Paroc Polska Sp. z o.o. and approved by the trade unions active in Paroc Polska Sp. z o.o.
We operate a number of pension schemes following local regulation and practice in each country in which
we operate. These pension schemes are classified as either defined benefit plans or defined contribution
plans. In Finland, employees are insured in accordance with the Employees’ Pension Act. The earningsrelated pension provision is handled by pension insurance companies and it is classified as a defined
contribution plan. Statutory earnings-related pension insurance provides security in case of old age,
disability and death of the family provider. The earnings-related benefits also include rehabilitation. Top
management located in Finland and Sweden has individual voluntary pension plans. These plans entitle a
pension at the age of 62. The plan was changed in 2010 so that it is classified as a defined contribution
plan. The old defined benefit plan in Finland has been terminated.
As part of the Finnish statutory defined-benefit pension scheme, there has been a system of registered
supplementary pensions that was created to supplement the statutory pension scheme. The registered
supplementary pension system was closed to new insureds in 2001, but approximately 90 of our employees
are still covered by this scheme. However, due to legislative changes, such schemes will have to be
discontinued by the year 2016. We may therefore be obligated to agree on a new pension arrangement with
the employees who have not yet retired but are within the scheme by, for example, taking out a group life
insurance policy for the relevant employee. Upon the occurrence of certain conditions the employer may
pay a lump-sum payment. Depending on the arrangements chosen, such a change may cause additional
costs to us in the form of several lump-sum payments or increased insurance costs.
Apart from the statutory old age pension, the main pension schemes operated in Sweden are pension
obligations derived from the applicable collective bargaining agreements. For blue collar employees the
SAF/LO pension scheme applies with pension premiums paid to Fora and for white collar employees the
ITP pension plan applies with pension premiums paid to Collectum/Alecta. It should be noted that pension
obligations in relation to white collar employees under the ITP pension plan up to and including March
1994 is primarily a PRI solution. A PRI solution enables a company to retain the pension capital within the
company. Under the PRI plan, the company makes an annual provision in its balance sheet corresponding
to the value of accrued pension entitlements. The current pension obligations are both defined benefit and
defined contribution plans depending on the age of the employee and the applicable collective agreement.
A couple of key employees are entitled to an additional pension arrangement. The employees are under
the collective bargaining agreements covered by certain collectively agreed insurances such as work injury
insurance and group life insurance. The old pension liability in Sweden for white collar employees is still
accounted for as a defined benefit plan in the financial statements (retirement obligation up to March 31,
1994). The current pension plan (for white collar employees) has been accounted for as a defined
contribution plan in our financial statements included herein.
In Lithuania, pension premiums are paid in every salary payment as a percentage of gross salary. These
pensions are funded by the state social insurance fund and treated as defined contribution plans. In
Poland, there is a mandatory social security system, the payments for which are made monthly on the basis
of actual value of salaries paid during the month and which is effectively treated as a defined contribution
plan. In other countries the pension arrangements are done in accordance with the local legislation and
practice and they are treated as defined contribution plans. In Russia we are subject to mandatory pension
and other social contributions.
Properties
Finland
We own 11 properties in Finland, including one quarry and the production facility sites at Oulu and
Parainen. We also lease a number of properties, including the land on which production facilities are
139
located and a landfill site (both at Lappeenranta, which is in the process of being shut down, see
‘‘Divisions—Production facilities and inter-segment sales—Lappeenranta closure’’), pay leasing fees for the
Sallittu and Kangas quarries, office premises (including at Parainen), land and a landfill site. We also hold
mining district decisions (mining concessions) for eight quarries in Finland.
Sweden
We own three properties in Sweden, including three tracts of land for industrial purposes (relating to the
Hällekis and Hässleholm production sites). We also lease certain other properties, including for industrial
purposes, landfill sites, office space and storage space. We also lease the property and buildings for our
Skövde production plant.
Poland
We own two land plots, and have a perpetual usufruct right (an ownership right limited in time (maximum
period is 99 years, subject to further extension) over 10 land plots, all of which are in Trzemeszno, Poland.
The land subject to the perpetual usufruct right is owned by the State Treasury or pertinent municipality,
while the structures and buildings located thereon are owned by the perpetual usufructuary). These rights
are generally scheduled to expire in 2089, unless extended. We also lease office premises in Poland.
Lithuania
We own 10 properties in Lithuania, all of which are in Vilnius. These properties include buildings on the
site of the Vilnius production plant, although the land on which those buildings are situated is leased to us
by the Republic of Lithuania. We also lease certain other properties, including a storage yard.
Russia
We own our production facility located in Tver, Russia, including several land plots. We also lease land in
Tver (for a landfill) and office premises in Moscow, St. Petersburg and Samara.
Insurance
We have obtained property, business interruption, public and products liability, directors’ and officers’ and
other insurance coverage, to the extent we believe necessary, to operate our business. We believe our
liability insurance is sufficient to meet our needs in light of potential future litigation and claims asserted
against us. For certain risks that we believe are minor, we are self-insured and have, when deemed
commercially reasonable, insurance policies with deductibles. We are not insured against financial
liabilities arising from soil, water and other forms of contamination. We regularly review our insurance
program together with our insurance broker. We cannot guarantee, however, that we will not incur losses
beyond the limits or outside the coverage of our insurance policies. In addition, longer interruptions of
business in one or more of our plants can, even if insured, result in loss of sales, profit, customers and
market share.
Legal and Regulatory Proceedings
Litigation
We are party to various legal proceedings arising in the ordinary course of business. Other than as
described below under ‘‘—Tax dispute related to transfer pricing, write-downs of intragroup loans and VAT,’’
we are not currently involved in any legal proceedings nor are we aware of any threatened claims against us
which we expect to have a material adverse effect on our financial position and results of operations.
Tax dispute related to transfer pricing, write-downs of intragroup loans and VAT
There is an open case with regard to transfer pricing practices at Paroc Oy Ab during 2006-2008. The
Finnish tax authorities have made a tax reassessment concerning years 2006-2008, and based on tax
decisions rendered in 2012 and 2013, Paroc Oy Ab would be required to pay in A22.3 million in taxes,
penalties and interest. The amount includes A14.1 million of taxes, A2.3 million of surtax and A5.9 million of
accrued corporate interest and penalty interest (through December 31, 2013). Paroc Oy Ab has a different
view of the transfer pricing of the Group’s intra-group supply of raw materials, license fees and distributor
services than the tax authorities and in February 2013, Paroc Oy Ab filed an appeal against the tax
reassessment with the Board of Appeals. The company has been granted an interdiction of payment
140
related to the reassessed tax payments. This interdiction of payment is in force until the earlier of such
time when the Board of Appeals renders a decision on the matter or January 31, 2015. If the appeal is lost,
Paroc Oy Ab will be obligated to pay the taxes, penalties and interest, absent any successful subsequent
appeal by us. The Group has not made a provision in the 2013 financial statements since management
believes, supported by external legal advice that all transfer pricing guidelines have been followed and the
same method has been followed from 2009 to 2013. If Paroc Oy Ab loses the appeal and any subsequent
appeals, it may be required to pay additional taxes, penalties and interest for the period from 2009 to 2013.
See ‘‘Risk Factors—Risks Related to Our Business and Our Industry—We are subject to risks from legal
proceedings.’’
In addition to the appeal to the Board of Appeals, we have also made protective applications for a Mutual
Agreement Procedure (‘‘MAP’’). A MAP provides for a corresponding adjustment to be agreed in another
jurisdiction when a transfer pricing adjustment is applied, so that it is not a one-sided adjustment
(i.e., additional income in Finland would have resulted in reduced profits in the corresponding group
entity, based in another territory). A MAP does not cover surtaxes and interests. Due to, for example,
differences in tax rates and tax positions of the relevant affiliated entities, part of the additional taxes
payable in Finland cannot be recovered through a MAP. We have filed an application for a MAP with the
relevant authorities in Poland, Sweden, Lithuania, Estonia, Denmark, Germany and Latvia (all based on
the EU Arbitration Convention), and with the relevant authorities in Russia and Norway (based on tax
treaties). MAP procedures can take a considerable amount of time; MAP negotiations based on the EU
Arbitration Convention are limited to two years, after which time the case is referred to the advisory
commission for resolution within 12 months. For intra-EU MAP procedures, a decision is to be reached
between the two relevant tax authorities, providing relief for any additional income that is assessed in
Finland through the open tax case. The amount of tax recoverable through an intra-EU MAP is
approximately A8-12.1 million. For MAP negotiations based on tax treaties, there is no set time frame or
possibility to refer the case to an advisory commission in case the authorities do not reach a conclusion.
The amount of tax recoverable through a tax treaty based MAP is approximately A2 million. The surtaxes
and interest (A8.2 million) cannot be recovered through a MAP. The Finnish Competent Authorities will
not start the MAP negotiations in our case until the appeal process is complete.
In 2012, the Finnish tax authorities conducted an audit of Paroc Oy Ab’s tax return in respect of the
financial year ended December 31, 2011 and assessed A7.6 million of additional taxable income on the
basis that a deduction had been incorrectly claimed on write-downs of intragroup loans. The authorities
also imposed an additional penalty of A370,000, which we have paid. We have appealed this assessment and
the penalty and as a result of the appeal the penalty imposed has been reduced to A800. The Finnish tax
authorities have appealed the reduction of the penalty and we have appealed the assessment of additional
income to the taxable income. The proceedings before the Administrative Court in relation to the matter
are currently pending. If the Finnish tax authorities are successful in the pending proceedings before the
Administrative Court, we will not receive a refund of the penalty amount paid by us absent any successful
subsequent appeal by us. See ‘‘Risk Factors—Risks Related to Our Business and Our Industry—We are subject
to risks from legal proceedings.’’
We are also currently involved in a material dispute arising from our operations in Poland. In 2011, local
authority sought to impose real property taxes for 2009 to 2011 in respect of an investment project at our
Trzemeszno production facility in an amount totaling approximately PLN 2.2 million more than the
amounts declared and paid by us for such taxes. To date we have been unsuccessful in disputing the
imposition of these additional taxes in appeals to the Self-Government Appeal Court and Regional
Administrative Court in Poznań. We are currently awaiting the outcome of a further appeal to the
Supreme Administrative Court. While we await the outcome of our appeal, we have paid this additional
tax amount, and have booked a tax receivable for which 100% of the provision is booked. See ‘‘Risk
Factors—Risks Related to Our Business and Our Industry—We are subject to risks from legal proceedings.’’
We are also currently involved in a pending dispute with the Russian tax authorities in relation to the
refusal by such authorities to permit ZAO Paroc to recover RUB 11.8 million (approximately A262,222) of
VAT for the second quarter of 2013. ZAO Paroc expects to receive similar VAT recovery refusals for the
third and fourth quarters of 2013 for the amount of RUB 9.2 million (approximately A204,444) and
RUB 20 million (approximately A444,444), respectively. ZAO Paroc plans to settle this issue with the
Russian tax authorities out-of-court by providing a revised tax return. See ‘‘Risk Factors—Risks Related to
Our Business and Our Industry—Pending and future tax audits within our Group and changes in fiscal
regulations or the interpretations thereof could lead to additional tax liabilities.’’
141
REGULATION
Overview
In all of the jurisdictions in which we operate we are subject to numerous laws, rules and regulations at
national, state and municipal levels, particularly building, environmental and occupational health and
safety laws, rules and regulations, as well as technical standards. At the European level, the regulatory
environment of our business includes several EU directives and regulations, which are either implemented
in the individual Member States through national legislation or apply directly. As our business primarily
comprises the manufacturing of building materials, such as insulation materials and sandwich panel
products, laws, rules and regulations and technical standards that affect our operations mostly relate to
energy efficiency, raw material extraction, environmental protection (in particular, in relation to soil,
ground and surface water contaminations and air emissions), recultivation, reclamation and renaturation,
as well as occupational health and safety.
We expect that in almost all of the countries in which we do or intend to do business laws, rules and
regulations, including environmental laws and regulations, will over time become more comprehensive and
stringent. We further expect that many environmental laws and regulations will be harmonized at the
EU-level over the near- to medium-term. Further, the EU focus on raw materials supply may also result in
new legislation targeting the extractive industry. Member States will, however, remain free to adopt laws
and regulations that are more stringent than those required by the EU.
We are also required to obtain and maintain permits from governmental authorities for many of our
operations, such as environmental permits, mining permits and emission permits. As the regulatory
framework applicable to us is subject to revision and continuous development, it is very difficult to
accurately predict the future cost of compliance with applicable regulatory requirements and technical
standards. Additional or more stringent laws, rules, regulations and technical standards could increase our
cost or limit our ability to continue our business operations in the same manner as we did in the past. See
‘‘Risk Factors—Risks Related to Our Business and Our Industry—We are subject to numerous environmental,
building, health and safety regulations, technical standards and other regulations.’’
Finland
In Finland, we are subject to a number of environmental laws and regulations which include the Finnish
Environmental Protection Act (86/2000, Ympäristönsuojelulaki), the Finnish Waste Act (646/2011, Jätelaki),
the Finnish Chemicals Act (599/2013, Kemikaalilaki), the Finnish Mining Act (621/2011, Kaivoslaki) and
the Act on Compensation for Environmental Damage (737/1994, Laki ympäristövahinkojen korvaamisesta).
We must also comply with numerous workplace safety and accident prevention statutes, such as the Finnish
Occupational Safety and Health Act (738/2002, Työturvallisuuslaki). We are also subject to EU and national
legislation on technical approval and unified criteria for construction products.
Soil and Groundwater Contamination
In Finland, we are subject to several laws relating to the use and contamination of soil as well as ground
and surface water.
For example, the Finnish Environmental Protection Act regulates emissions into the environment,
including surface water. Emissions into soil and groundwater are as a rule prohibited. Operations that may
change or alter surface water such as the water level or flow of a river require a water permit in accordance
with the Finnish Water Act (587/2011, Vesilaki).
Adverse effects to the environment resulting from industrial operations may lead to financial responsibility
for the remediation of contaminated soil or groundwater. This responsibility is based on the Finnish
Environmental Protection Act and is imposed by the environmental authorities irrespective of possible
contractual arrangements. A contaminated area must be restored to a condition in which it will not cause
harm to health or the environment or represent a hazard to the environment. Either the party that has
originally caused the contamination (even if not negligent) or the party currently in possession of the
contaminated area (for example, the current owner or tenant) may be required to assess the need for
remediation and take the necessary actions required by the authorities. If contamination of groundwater
occurs or is discovered, the responsible party is usually subject to a comprehensive range of remediation
obligations, which may be costly. In addition, in respect of environmental damage caused by operations
carried out after June 1, 1995, a broad range of parties (including, for example, a parent company of the
operator or equivalent of a facility) can be held strictly liable for such damage under the Act on
Compensation for Environmental Damage (737/1994, Laki ympäristövahinkojen korvaamisesta).
The implementation of European Directive 2010/75/EC on industrial emissions (‘‘IED Directive’’) in 2014
will put more focus on soil contamination monitoring and remediation levels in connection with
142
environmental permits. Operators will be required to complete a baseline report regarding the condition of
soil and groundwater at the facility site that includes handling of relevant hazardous substances. The
baseline report must be submitted to the permit authority as part of the permit application in connection
with the review of an environmental permit or before new operations are initiated. This obligation is with
respect to activities to which the IED applies. Lappeenranta, which will shut down operations in 2016, is
required to conduct a baseline report on soil contamination by the end of October 2015, based on its
current environmental permit obligations.
Some Finnish environmental laws and regulations may impose liability and responsibility on present and
former owners or operators of facilities and sites for contamination at such facilities or sites without regard
to causation or knowledge of contamination. Our historical and current operations involve the use of
hazardous substances and we operate or have operated production plants that are or have been located on
sites with a long history of industrial use by third parties. Such previous activities have resulted in soil and
groundwater contamination at some of our current and former sites or land adjacent to such sites. In some
cases, we are responsible for further investigations, remediation and clean up actions, even though we may
not have caused the contamination. Although we believe that we are generally in compliance with our legal
obligations at our Finnish sites, soil and/or groundwater contamination has been detected at some of the
sites (including Oulu and Parainen) and additional contamination of soil and groundwater may be
discovered at these or other sites in the future, including in connection with the baseline studies described
above. Such discovery of previously unknown contamination, or the imposition of new obligations to
investigate or remediate soil or groundwater contamination, could have a material adverse effect on our
business, financial condition or results of operation. Moreover, regulatory authorities could suspend our
operations or refuse to renew the permits and authorizations we require to operate. They could also
mandate upgrades or changes to our processes that could result in significant costs to us. We anticipate
that the countries where we do business will continue to develop increasingly strict environmental laws and
regulations and to interpret and enforce existing laws and regulations more aggressively. This trend could
have a material adverse effect on our business, financial condition or results of operations.
Emissions and Environmental Permits
Laws and regulations governing the emission of air pollutants, noise, odors and vibrations subject our
industrial facilities to permitting and other compliance obligations. In some cases, a continuous
improvement or retrofitting of installations to maintain facilities at ‘‘state of the art’’ safety standards may
be required. Compliance with these requirements is monitored by local authorities and operators may be
required to submit emission reports on a regular basis. Non-compliance with maximum emission levels
may result in administrative fines, other administrative compulsion or, in Finland, criminal investigations.
In Finland, emissions to the environment and operations with environmental impacts are regulated by the
Finnish Environmental Protection Act. The act contains a generally applied system of integrated pollution
control based on an integrated environmental permit (‘‘IPPC-type’’ permit). Pursuant to the Act, an
environmental permit is required for activities that pose a threat of environmental pollution, including
impacts to all environmental media (e.g., soil, water and air). Activities subject to an environmental permit
are non-exclusively listed in more detail in the Finnish Environmental Protection Decree (169/2000,
Ympäristönsuojeluasetus). The scope of activities covered is broader than in the EU’s IED Directive or
European Directive 2008/1/EC on Integrated Pollution Prevention and Control (‘‘IPPC Directive’’). Among
others, the production of mineral products, waste disposal and mining are considered subject to an
environmental permit. An environmental permit may be awarded if operations requiring the permit are
not in conflict with a local detailed plan covering the area and do not result (either individually or in
combination with other operations) in:
• harm to health;
• other significant environmental pollution or risk thereof;
• soil contamination or groundwater pollution;
• deterioration of special natural conditions or risk to water supply or other potential use important to
the public interest in the operation’s area of impact; and
• an unreasonable burden to adjacent or nearby properties.
Nature conservation requirements, such as the conservation of species, must also be taken into account in
the consideration of the permit. In addition, an environmental permit may not be granted if the planned
project is contrary to a local detailed plan (being a form of land use plan). The current and future purpose
of land use as indicated in a valid land use plan is hence assessed as part of the consideration of a permit
application, and may affect the granting of a permit and the permit conditions.
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Permit conditions regarding the prevention of pollution and emission thresholds are based on ‘‘best
available techniques.’’ Permit conditions for existing operations will be required to be updated in
accordance with any new, more stringent, standards that are promulgated. However, the permit
authorities, in accordance with their discretionary powers, usually require old facilities to fulfill new
standards only after certain transition periods, which can be flexible. The anticipated production amounts
are described in environmental permit applications and repeated in permit decisions. If we increase our
earlier notified production levels or waste or emission levels we will need to apply for a new environmental
permit or a change to the current permit.
In January 2011, the IED, which repealed the IPPC Directive and requires best available techniques (‘‘BATs’’)
to control emission levels, and sets out rules on the prevention and control of pollution from industrial activities
and includes rules aimed at reducing emissions into the air, water and land, entered into force. The IED also
aims to prevent the generation of waste in order to achieve a high level of overall environmental protection.
The mineral industry (production of mineral fibers), the chemical industry and the waste management industry,
among others, will potentially need to make changes to their operations in order to comply with the new
obligations deriving from the IED. The IED is not applicable to mining operations, however.
Member States were required to implement the IED through national legislation by January 7, 2013.
However, the implementation of the IED is currently ongoing in Finland. The IED is to be implemented
by a revision of the Finnish Environmental Protection Act, which is ongoing, and the new act is expected to
enter into force during 2014. The new act will replace and repeal the earlier Finnish Environmental
Protection Act. Upon the entry into force of the new act, permit conditions will be required to be based
upon the ‘‘BAT conclusions’’ set out in the BAT reference documents (‘‘BREFs’’). At that time, existing
permits that are not in compliance with such standard will not be grandfathered in but will be adjusted with
respect to the new standard. According to the current legislative draft of the Finnish Environmental
Protection Act, the new BAT conclusions will be included in existing environmental permits through a
permit review procedure and, as a general rule, implemented within four years from the publishing of the
BREFs by the Commission.
All our production plants have in the past emitted, and will continue to emit, dust, odors, and hazardous
and non-hazardous substances into the air, caused and will continue to cause noise, handled and stored
and will continue to handle and store chemicals and hazardous substances, and generated and will
continue to generate waste. We re-use process water at our facilities in large amounts. The process water
loop is therefore as a rule closed and our waste water discharges to surface waters and sewers are
correspondingly limited. No waste water is as a starting point discharged to ground water at our Finnish
facilities. Therefore, we do not regularly discharge process waste water. Sanitary waste water is discharged
to the municipal sewers. The quarrying operations do not generate any waste water. Our air emissions
originate mainly from the melting, spinning and curing processes. Our most significant air emissions
include particulates, sulfur oxide, phenol, formaldehyde and ammonia.
Our Finnish facilities hold IPPC-type permits, which include restrictions on air emissions, wastewater
discharges and noise. The air emissions, water discharges and pollution control requirements of the
permits for our operations in Finland are based on BAT standards. These are defined in the BREFs of the
IPPC Directive. We believe we are in material compliance with our permits and applicable environmental
laws and regulations. However, due to forthcoming implementation of the IED, we may need to incur
capital expenditures in order to upgrade our systems to remain compliant with BAT requirements. We
have been, and will continue to be, required to incur significant capital expenditures and operating costs in
order to maintain and upgrade our production sites and facilities to comply with applicable laws,
regulations and permits, and to obtain and maintain all necessary permits. We believe we will need to make
certain IED-related improvements at our Oulu and Parainen facilities, which may require significant
capital expenditures—we currently expect to expend approximately A0.7 million on such improvements at
our Oulu facility, and A2.6 million on such improvements at our Parainen facility. In addition, we may be
required to incur significant capital expenditures to upgrade production plants by installing or improving
technical equipment in order to match the decreasing amount of free emissions allowances available in the
EU Emission Trading System. The maximum quantity of emission allowances will be reduced each year.
See ‘‘—Climate Change Law—Emission Trading Law in the European Union.’’
Violations of the Finnish environmental laws could lead to substantial costs and liabilities, including civil
liabilities and criminal fines and penalties. Environmental compliance is an increasingly important
consideration in our businesses as the enforcement environment has become more stringent in the past years,
and we expect to continue to incur significant capital expenditures and operational and maintenance costs for
environmental compliance, including costs related to reductions in air emissions such as carbon dioxide and
other greenhouse gases, wastewater discharges and solid and hazardous wastes. We closely monitor the
potential for changes in pollution control laws and take actions with respect to our operations accordingly.
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Waste
In Finland, we are subject to statutory provisions regarding waste management. These provisions may
govern permissible methods of, and responsibility for, the generation, handling, possession, discharge and
recycling of waste depending, among other things, on the dangers posed by the waste. In particular, the
discharge of waste is often restricted to licensed facilities. In many European jurisdictions, plants must use
licensed contractors for the disposal of hazardous or nonhazardous waste. Under the Finnish Waste Act
(646/2011, Jätelaki) the producer and holder of waste are responsible for organizing waste management.
This includes the obligation to see to the appropriate disposal of waste to landfills and waste processing
facilities. Product manufacturers are also responsible for obligations regarding the waste management of
packaging waste. In accordance with the Finnish Waste Act, all waste management should comply with the
order of priority, meaning that waste should primarily be reused, and secondarily recycled. If these options
are not available, the waste should be ‘‘recovered,’’ for example as energy. Disposal of waste is to be
considered as a ‘‘last resort.’’ In accordance with the ‘‘polluter-pays’’ principle, the original producer of
waste is also liable for the costs of the waste management. The waste holder’s responsibility for organizing
waste management is terminated and transferred to a new holder when the waste is delivered to a lawful
consignee, for example a professional waste treatment facility. The operator of a landfill is responsible for
the waste, as well as the environmental impacts of the landfill after the closure of the landfill. The operator
is obligated to keep a record of waste if the activity generates at least 100 tons of waste per year, generates
hazardous waste or is subject to an environmental permit. With regard to hazardous waste there are special
regulations regarding the packaging, labeling, mixing, storage and transport. The waste management and
treatment of waste is generally undertaken by professional waste management and treatment companies.
Due to our manufacturing and mining operations we generate, inter alia, dust waste, stone wool waste,
stone waste, industrial waste, iron waste and household waste. We are currently reusing and recycling large
amounts of our non-hazardous waste in our production. Our hazardous waste contains mainly of high
fluoride concentration containing filter dust. The hazardous waste is mainly disposed of by authorized
hazardous waste management and treatment companies. Non-hazardous waste is either disposed of at our
own landfills or by contracted waste management companies. We are responsible for the environmental
impacts of our operative and closed landfills. We believe that we are in material compliance with
applicable waste management laws and continuously attempt to reduce waste at our sites.
Hazardous Substances
Operators of facilities storing hazardous substances in large quantities are required to comply with safety
standards set forth in Council Directive 96/82/EC on the control of major-accident hazards involving
dangerous substances (the ‘‘Seveso II Directive’’) and the respective national implementing law. The Seveso
II Directive has been implemented into national legislation by the Finnish Hazardous Chemicals and
Explosives Safety Act (390/2005, Laki vaarallisten kemikaalien ja räjähteiden käsittelyn turvallisuudesta). The
Finnish Safety and Chemicals Agency (TUKES) considers our facilities in Oulu and Parainen to be Seveso
II Directive facilities. This means that the municipal authority for planning and building is required to take
the facilities into consideration when drafting land use plans and granting building permits in the vicinity of
the facilities. The Seveso II Directive will be amended and replaced by Directive 2012/18/EU (‘‘Seveso III
Directive’’), which must be transposed and implemented into national law by Member States by June 2015.
In Finland, the handling and storage of hazardous substances might be subject to an environmental permit
if such activities pose a threat of environmental pollution in accordance with the Finnish Environmental
Protection Act. The storage and handling of hazardous substances is also regulated by the Finnish
Hazardous Chemicals and Explosives Safety Act, which aims to prevent damages caused by the production,
usage, transfer, storage and other handling of hazardous chemicals and explosives. The industrial
processing and storage of hazardous chemicals on a large scale is subject to a permit granted by TUKES.
In this case the operator is also required to prepare an internal emergency plan. If the industrial processing
and storage of hazardous chemicals is on a smaller scale, the operator is still required to notify TUKES of
its activities. Prevention of industrial accidents is regulated under the Finnish Environmental Protection
Act. The environmental permit authority is obligated to include adequate permit conditions regarding the
prevention of accidents and the limitation of their consequences. These permit conditions usually include
obligations to submit adequate safety plans for exceptional situations such as accidents.
At our sites and facilities, we frequently handle and use hazardous substances. Explosive materials may be
used for blasting in connection with the extraction of raw materials in our quarries. Although we believe
that our operations are in material compliance with safety requirements, findings of insufficient protection
against spills and uncontrolled release of substances could result in capital expenditures for technical
improvements or maintenance to ensure future compliance.
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Excavation of Stone Resources
In Finland, the excavation of stone resources is subject to the Mining Act (621/2011, Kaivoslaki), which
governs the extraction and exploitation of mining minerals. Mining minerals include metal minerals,
industrial minerals, marble and soapstone. The minerals extracted to make stone wool are considered to be
industrial minerals, but may also contain certain metal minerals. Industrial scale exploration and extraction
of mining minerals may only be carried out pursuant to various mining rights.
Title to minerals is obtained through a claim system where the first applicant of a mining right receives a
priority over later applications in respect of the deposit in question. All mining right applications are
handled on a first-come, first-served basis and the Finnish State does not have discretion in respect of the
applicant or its perceived capability (compared to others) to carry out exploration or mining activities. The
extent of actions that can be taken based on each different mining right varies, but the extraction of mining
minerals is only possible based on a mining permit (the permits granted to companies based on
applications made prior to July 1, 2011 are called ‘‘mining district decisions’’) and the stipulations provided
therein. The permit enables the permit holder to exploit the minerals found within the mining permit area
as well as the by-products obtained in connection with mining (overburden, waste rock and tailings). The
exploitation also requires that the holder of the mining permit secures the necessary surface rights for such
exploitation. The surface rights may either be purchased or leased from private landowners or alternatively
the right to use the land can be expropriated in connection with the permitting process. However,
expropriation in connection with mining permit applications filed on or after July 1, 2011 requires a permit
from the Council of State (Cabinet). Mining district decisions are valid until further notice, although the
review of permit stipulations is done at regular intervals. Mining permits can be awarded for a fixed time
(e.g., if the resource is limited) but are as a general rule awarded until further notice.
All mining operations are subject to the requirements in the Finnish Environmental Protection Act. Mining
is possible only if the relevant operator company is awarded an environmental permit for its operations.
Further, other required permits include, for example, a mining safety permit. The drainage of the mining
area and the right to take water from bodies of water are subject to permitting procedures in the Water Act
(587/2011, Vesilaki). Building all relevant road connections, as well as intersections, requires specific permits
from the transportation authorities. Chemicals usage requires its own permits from TUKES.
Such permits may be subject to stringent requirements to ensure an environmentally sound excavation
process in compliance with environmental laws. Operational permits such as land extraction permits,
mining permits and environmental permits typically require remediation, recultivation and renaturation of
the mining areas after excavation of raw materials, and operators are obliged to bear any cost in
connection with such obligations including the post-closure monitoring of the closed sites. Moreover,
under Finnish tort law, the operator of a permitted quarrying operation may be held liable for damage
resulting from such operations to third parties if the causality between the operations and the damage is
probable. In the Finnish context liability is limited to full compensation for all damage caused
(i.e., punitive damages are not awarded) including economic damage, if such damage is not insignificant.
Mining permits expire when the operations end. If the permit holder has not initiated mining activity or
such preparatory work which indicates that the permit holder is seriously intending to conduct mining
operations, the Mining Authority may terminate the permit. If the operations have been suspended for a
minimum of five years or if the mining operations are considered to have actually ended, the Mining
Authority may terminate the permit.
The Mining Authority may within its discretion, under certain circumstances, choose not to terminate a mining
permit due to inactivity of the operator. In these cases the mining authority may delay the expiry of the permit
for two years at a time up to a total of 10 years. During this time, the permit holder has the obligation to pay an
increased excavation fee. The increased annual fee is A100 per hectare for the duration of the delay.
Raw materials used in the production of stone wool are excavated from mining areas (quarries and pits) by
surface mining. Closure obligations of mining areas are subject to regulations governing remediation,
recultivation and renaturation obligations. Expected costs for the closure of quarries and pits are covered by
accounting provisions. Moreover, the Finnish Environmental Protection Act (86/2000, Ympäristönsuojelulaki)
provides that we must provide security over our waste management obligations related to our mining
operations. The amount of the security for the waste areas varies depending on the quality and quantity of
the waste rock in question. Typically the security is euros per square meter of waste rock area used. The
amount per square meter in practice currently varies from A0.4/m2 (inert waste rock) to A30/m2 (hazardous
waste landfills).
Furthermore, the Mining Act requires that we also provide collateral to secure our obligations related to
the closure of the mining area. Under the Mining Act this collateral may be in the form of an
unencumbered bank deposit, bank guarantee, insurance guarantee, group guarantee or other similar
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commitment or right, though the form and amount to be provided in any particular case is subject to
determination by the Mining Authority in a pending administrative decision to amend our mining district
decisions. These obligations include, among other actions, tidying up the area, landscaping, refurbishing
the area to meet public safety criteria, removing extracted minerals and buildings and equipment, as well as
other obligations provided for in the mining permit. The obligation as regards the security was introduced
in the 2011 mining legislation reform and the transitional period ends at the end of June 2014. The Mining
Authority has accepted our proposal that we provide a three-year bank guarantee in the amount of A50,000
to cover all of our mining districts.
We are not subject to statutory royalties. However, we have an obligation to pay fees to the landowners of
the area covered by our mining permits. No such fees have to be paid in respect of those properties which
we own within the mining area. With respect to payments regarding mining permits, the landowners of a
mine site are entitled to an extraction fee, which must be paid annually. The fee consists of two parts: one
part is a land area based fee (A50 per hectare) and the other part is a variable fee, which is based on the
amount of the extracted minerals and the reasonable value thereof. The latter part of the extraction fee is
paid only once mining is commenced. Futhermore, we may be required to pay a byproduct fee, if such
byproducts are sold by us for use outside the mining operations. The by-product fee must be reasonable
and based on the value of the byproducts. The variable fee is either agreed with the landowners or the
authority responsible for granting mining rights makes a decision on reasonable compensation for the
extracted minerals, taking into account the factors affecting the value of such extracted minerals.
Under Finnish law we are not subject to any legal requirements as regards the classification of deposits.
The Finnish association of extractive resources industry recommends that mining companies use the
Fennoscandian review board’s standards of disclosure for mineral projects when they make reports of their
mineral projects. The standards are based on the Canadian NI 43-101. However, most mining companies
use the reporting standards which are typically employed in the jurisdictions where the companies are
listed or systems for which their personnel have accreditation.
Health and Safety
In all of the jurisdictions in which we operate we must comply with applicable laws and regulations to
protect employees against occupational injuries. Under such laws and regulations, employers typically must
establish working conditions that effectively prevent dangers to employees. In particular, employers must
observe certain medical and hygienic standards and comply with certain occupational health and safety
requirements, such as permissible maximum levels for noise in the workplace, the use of personal
protective equipment and requirements relating to maximum temperatures and air ventilation.
Corresponding requirements are found in the Finnish Occupational Safety and Health regulation. Our
operations in Finland are regulated by the safety requirements set out in the Finnish Occupational Safety
and Health Act (738/2002, Työturvallisuuslaki). As employers we are required to take care of the safety and
health of our employees. As the employer we have a duty to establish an occupational safety and health
policy in order to promote safety and health issues. We are also required to assess the hazards and risk
factors caused by the work, the premises and other working conditions and eliminate such risks. In order to
comply with the applicable requirements, we regularly conduct training and medical examinations and
implement and monitor safety measures. If we detect any unsafe condition in one of our sites, local
management is authorized to act without further permission, up to certain defined expenditure limits.
Asbestos Containing Material (ACM)
In Finland, the use of asbestos containing materials (‘‘ACMs’’) was partly prohibited in 1977 and completely
banned in 1994 due to the negative health effects associated with asbestos dust. Asbestos containing articles
are prohibited in general by the EU REACH regulation (No 1907/2006). There are some exceptions from
the general prohibition regarding, among others, existing building structures and parts of structures
containing asbestos, which are permitted until they are disposed of or reach the end of their service life.
Hence, in Finland, there is no explicit legal obligation to remove ACMs in structures unless their condition
and presence is such that the ACMs are considered to be hazardous to health. Currently, ACMs are not
considered to constitute a health risk when found in intact materials which are in normal use. Modification
and demolition work of ACMs include special obligations on safety as regulated by law.
We are aware that ACMs exist at some or all of our Finnish sites, especially in our older facilities and
structures. We are not aware of any enquiries by the occupational safety and health authorities relating to
any asbestos issues at the Finnish facilities, and our internal policy in Finland is that an asbestos assessment
is performed before any modification or renovation work is undertaken at the facilities. During the closure
of our Lappeenranta site, special asbestos demolition work might be required due to ACMs, which is likely
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to cause additional demolition costs. We may be subject to similar demolition or abatement costs in
connection with closure or construction activities at our sites in the future.
We have not been engaged in any manufacturing or other operational business activities regarding
products containing asbestos, but products containing asbestos have historically been manufactured at the
Finnish sites by earlier operators, including the former owner of a business we acquired through a business
transfer in 1998. In Finland, the Product Liability Act (696/1990, Tuoteturvallisuuslaki) sets out strict
liability (i.e., liability without regard to fault) for products manufactured on or after the Product Liability
Act entered into force on September 1, 1991. However, liability for damages caused by products before the
Product Liability Act entered into force would generally require culpability (intent or negligence). The
asbestos containing products were manufactured before asbestos prohibitions were introduced and before
the enactment of the Product Liability Act. We are not aware of any claims for compensation regarding
liability for asbestos containing products produced by preceding entities.
In addition, asbestos related diseases incurred by employees are compensated by Statutory Worker’s
Compensation Insurance. An employee may claim damages only for the amount of lost salary and other
damages that are not covered by the insurance. Pursuant to the Act on the Finnish National Register on
Occupational Exposure to Carcinogens (717/2001, Laki syöpäsairauden vaaraa aiheuttaville aineille ja
menetelmille ammatissaan altistuvien rekisteristä) the employer is responsible for notifying the Finnish
National Register on Occupational Exposure to Carcinogens, which was established in 1979, of employees
that have been exposed to certain substances, such as asbestos. A small number of current and former
employees of the Finnish Group companies and their predecessor entities, including five of our current
employees, have probably worked in the past under circumstances that exposed them to asbestos
containing materials associated with the activities conducted by certain of our predecessor entities.
However, none of our employees are registered on the register in question. Discussions regarding this
matter are ongoing with the Finnish Occupational Safety and Health Administration. We currently intend
to file a notification with the Finnish Occupational Safety and Health Administration’s National Register
of the relevant current employees, and those former employees of our predecessor entities that probably
worked in the past (but only since 1979) under circumstances that exposed them to asbestos containing
materials. The Finnish Occupational Safety and Health Administration is already, based on our earlier
communications, aware of this matter in relation to the five current employees. No claims by such
employees, insurers or other parties have to date been made or threatened under the Statutory Worker’s
Compensation Insurance scheme or otherwise, and we do not currently anticipate any such claims.
Regulation of Chemicals
The European Union requires control of the use of chemical products within the European Union, requiring
all affected industries to ensure and demonstrate the safe manufacture, use and disposal of chemicals. The
Regulation (EC) No. 1907/2006 on Registration, Evaluation, Authorization and Restriction of Chemicals
(‘‘REACH’’), which came into force in 2007, requires the registration of all chemicals manufactured in, or
imported into, the EU in quantities of more than one tonne per annum with the European Chemicals
Agency (‘‘ECHA’’). The import or manufacture of certain so-called highly hazardous chemicals must be
authorized by ECHA. REACH requires formal documentation of the relevant data required for hazard
assessments for each substance registered as well as development of risk assessments for their registered
uses. Under certain circumstances, the performance of a chemical safety assessment is mandatory and a
chemical safety report (‘‘CSR’’) assuring the safe use of the substance must be submitted. If there is no
pre-registration of a substance, it is impermissible to produce such chemical in the EU or to import it (i.e.,
‘‘no data no market’’ principle). Therefore, registration is vital for the future use of any substance used in
technically important processes by manufacturers or importers. The data by importers or manufacturers is
collected in substance information exchange forums (‘‘SIEF’’), to allow a vital exchange among producers
and users of chemicals. Therefore, purchasers of registered chemicals must inform their sellers about the
intended use of the chemicals, as the importer or producer must add this information to its documentation.
Furthermore, REACH contains prohibitions on bringing substances to market that have been identified as
substances of very high concern. If necessary, raw materials or their manufactured substances will be listed
on the so-called candidate list or on Annex XIV to REACH which may mean a full ban or requirement for
authorization, which may or may not be granted by the European Commission. In addition, REACH was
accompanied by legislation providing for a comprehensive system on the classification, labeling and
packaging of substances and mixtures (CLP Regulation and related European legislation).
We produce considerable quantities of loose wool, slabs, mats, rolls, bats, etc., which contain substances
that are subject REACH. We believe that we have fulfilled our obligations under the relevant SIEF of the
ECHA. Our registrations have been finalized on time and their completeness has been confirmed by
ECHA. None of our products is affected by substances of very high concern.
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National regulations on chemicals may impose further obligations on producers, processors and handlers
of chemical agents. We are subject to various notification and labeling requirements and have to comply
with certain safety obligations arising, for example, under the Finnish Chemicals Act (599/2013,
Kemikaalilaki) and the Finnish Chemicals Safety Act (390/2005, Laki vaarallisten kemikaalien ja räjähteiden
käsittelyn turvallisuudesta), which mainly reflects and accompanies REACH at the national level, but also
establishes national requirements.
Technical Approvals for Construction Products
As we manufacture building materials, the regulation on constructions products is relevant to our
activities. In Finland, the manufacture and sale of construction materials is subject to technical regulations
and approval requirements.
To establish that particular construction materials conform to the relevant technical approvals, in many
jurisdictions manufacturers must implement and document a factory production control system. Moreover,
applicable law may require an initial type testing of the construction product to be performed by an
authorized body. In addition, applicable law frequently requires that the competent organization maintain
a continuous surveillance, assessment and approval of the construction products. If construction materials
that do not comply with applicable regulations have been used in a building, applicable law in many
jurisdictions may require such buildings to be upgraded, reconstructed or even demolished.
The European Construction Products Regulation (No 305/2011) (the ‘‘EU Construction Regulation’’)
provides the EU-level framework for the approvals and unified criteria for construction products. The fact
that a product fulfills these criteria is shown through the ‘‘CE’’ marking, which became obligatory for most
construction products in 2013 through the new EU Construction Regulation. All products that belong
under a harmonized European standard (‘‘hEN’’) adopted by the European Committee for
Standardization must be CE marked for commercialization. For example, there are harmonized European
standards regarding mineral wool products. The European NLF Regulation (Decision 768/2008/EC on a
common framework for the marketing of products) forms the general basis for the legislation governing
the CE marking. The Finnish municipal building supervision authority monitors the use of CE-marked
building materials in Finland and reports possible flaws to TUKES that acts as the market surveillance
authority in accordance with the European Construction Products Regulation.
The EU Construction Regulation also has provisions on the granting of European technical assessments
(‘‘ETAs’’) for construction materials that are not under a harmonized European standard, in order to allow
them to be distributed within the EU with the CE marking. Acquiring an ETA for a product is voluntary.
The basic requirements of construction products listed in the EU Construction Regulation form a basis for
the drafting of both harmonized European standards and ETAs. The technical assessment body granting
ETAs in Finland is VTT Expert Services Ltd.
In addition to assessment mechanisms for construction materials based on ETAs, other approval
mechanisms are also in use in Finland. There is a national approval procedure for construction products
which are not under any harmonized product standard and which do not have ETA and thus cannot be CE
marked. The purpose of the national approval procedure is to determine whether a product fulfills the
substantial technical requirements imposed on construction products by the Finnish Land Use and
Building Act (the ‘‘LBA’’, 132/1999). The procedure is governed by the Finnish Act on the Product
Approval of Certain Construction Products (954/2012) and by the related Decree (555/2013). The
acceptability of construction products can be verified by VTT Expert Services Ltd, by way of either type
approval, verification certificate or manufacture quality control, depending on the product. These
procedures are voluntary, but if no verification procedure has been conducted, the municipal building
supervision authority may require verification for the construction materials used on a construction site.
Most of our construction products are under harmonized product standards and are hence CE marked.
Some of our products are certified in the Finnish procedure. We believe that we are in material compliance
with applicable EU and Finnish legislation on construction materials.
Climate Change Law
General
In many regions in which we operate, a constantly developing body of law and regulatory requirements
addresses the challenges of global climate change. The primary objectives of climate change regulation are
the reduction of greenhouse gas emissions, higher efficiency in the use of energy from conventional
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sources and the increasing use of energy from renewable sources. In the EU, regulations attempt to both
reduce greenhouse gas emissions and to establish a mechanism for trading in carbon dioxide emission
certificates.
Emission Trading Law in the European Union
The EU has, through the Emission Trading Directive 2003/87/EC, launched the European Union Emission
Trading System (‘‘EU ETS’’) for certain greenhouse gas emissions in order to fulfill its greenhouse
emission reduction targets. The EU ETS was partly established to ensure that the emission reduction
commitments set under the Kyoto protocol were met during Phase II of the ETS. The EU ETS involves a
trading system for emission allowances based on a cap-and-trade system. Industrial sites to which the
EU ETS applies receive a certain number of emissions allowances to emit greenhouse gases and must
surrender one allowance for each tonne of CO2, the main greenhouse gas, or the CO2 equivalent amount
of another greenhouse gas emitted. Sites that emit fewer tonnes of greenhouse gases than their allocated
emissions allowances are allowed to sell their excess allowances in the open market, and sites that emit
more than their allocated emissions allowances are required to buy additional allowances through the
EU ETS. Participation in this system has been mandatory since 2005 for industries with high energy
consumption levels.
For the second trading period under the ETS (2008 through 2012), national allocation plans were
implemented in all Member States. The total volume of emission allowances was reduced by 6.5% for the
second period compared with the 2005 level. In addition, the overall availability of emission allowances
allocated free of charge during the second trading period was reduced. However, due to the recent
economic downturn, emissions were reduced, and demand for allowances was also reduced. This led to a
surplus of unused allowances, which affected the carbon price throughout the second trading period.
The EU ETS has been further revised for the third trading period that began in January 2013. Under the
revised EU ETS, the EU-wide quantity of emission allowances allocated each year will be reduced by a
linear factor of 1.74% of the average total quantity of allowances issued annually in 2008-2012 as adjusted
due to the change in scope of the scheme as of 2013.
The full auctioning of emissions is undertaken progressively for the manufacturing industry. The quantities
of emission allowances allocated free of charge will generally be reduced from 80% in 2013 to 30% in 2020
and to 0% in 2027. As a result, affected companies whose emissions exceed their emission allowances will
from 2013 onwards have to purchase a significant, and steadily increasing, share of emission allowances in
auctions or otherwise from the market, which will result in substantial additional cost for such companies.
The amount of emission allowances allocated free of charge for each installation will be determined, in
part, by an adjusting factor (a so-called ‘‘benchmark value’’) that will be based on the 10% most energyefficient installations in the particular industry.
Finland is a party to the Kyoto Protocol both individually and as a part of the EU. As a member of the EU,
Finland has implemented the Emissions Trading Directive through the Finnish Emissions Trading Act
(311/2011, Päästökauppalaki), which means that most sectors of heavy industry are subject to the EU ETS.
About 600 facilities in Finland are currently subject to the EU ETS. Due to amendment of the Emission
Trading Directive in 2009, mineral wool insulation material producing facilities using glass, rock or slag
with a melting capacity exceeding 20 tonnes per day was included in the activities subject to the EU ETS. A
corresponding amendment was added to the Finnish Emissions Trading Act. The amendments entered into
force in 2013 and apply to the third emissions trading period. The Finnish Energy Authority
(Energiavirasto) is responsible for maintaining a register that controls the registration, ownership,
transferring and annulment of allowances in Finland. A facility that is subject to the EU ETS is required to
apply for an emissions permit from the Finnish Energy Authority to be allowed to emit greenhouse gases
to the atmosphere.
Our base operations in Parainen and our operations in Lappeenranta and Oulu are subject to the EU ETS.
Our panel system operations in Parainen are not subject to the EU ETS because the thermal output power
of the site’s boiler does not exceed 20 MW. The sites in Parainen and Lappeenranta began to participate in
the EU ETS during the second ETS period from 2008 to 2012 as combustion plants (thermal output more
than 20 MW). Since the beginning of the third ETS period (2013-2020), production of mineral wool from
rock has been included as an industry in the EU ETS if the melting capacity is at least 20 tonnes per day.
The base operations in Parainen and our operations in Lappeenranta and Oulu are also considered subject
to the EU ETS in accordance with this provision. Correspondingly, we have been granted three emissions
permits by the Finnish Energy Authority.
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In order to address the competitiveness of industries subject to the EU ETS, certain energy-intensive
industries which are exposed to a significant risk of relocation of plants to countries with less stringent
climate protection laws (a phenomenon known as ‘‘carbon leakage’’) will receive more free allowances.
The European Commission will determine every five years which industries are threatened by carbon
leakage. The designated industries will be allocated emission allowances free of charge for the period
determined. The quantity of emission allowances allocated for free is determined based on certain
benchmarks. These benchmarks are set in accordance with the most efficient production methods in a
particular industry. The next determination on the carbon leakage status by the European Commission will
be made in 2014 and apply from 2015 to 2019.
Our mineral wool production operations fall under the European Parliament and Council decision
(2010/2/EU) determining a list of sectors and subsectors which are deemed to be exposed to a significant
risk of carbon leakage. The sites have therefore been entitled to receive free allowances. The first carbon
leakage list was adopted in 2009 and is applicable for the free allocation of allowances in 2013 and 2014.
Although the mineral wool sector has again been specified as a sector deemed to be exposed to a
significant risk of carbon leakage in the draft European Commission decision published on May 5, 2014
regarding the 2015-2019 carbon leakage list, there is no guarantee that the sector will be included in the list
ultimately adopted by the European Commission following scrutiny by the EU Climate Change
Committee, the European Parliament and the Council. There is also no certainty that the mineral wool
sector will be considered to be threatened by carbon leakage at the time of any subsequent revision of the
carbon leakage list. If the European Commission held that no such threat of carbon leakage exists in 2014
or at the time of any later revision, the regular emissions reduction scheme would also apply to our
facilities. The allocation of free emissions allowances would be reduced from 80% in 2013 to 30% in 2020
on a linear basis. In this case, our mineral wool business would be required to participate in the auctioning
system and purchase emission allowances in the amount required for production purposes, which could
result in material cost to us.
On February 27, 2014, the Commission Regulation No 176/2014 amending Regulation No 1031/2010
entered into force. The new regulation altered the previously determined volumes of emissions allowances
to be auctioned in 2013-20. In accordance with the new regulation, the Commission is postponing the
auctioning of 900 million emissions allowances from 2014 to 2016 until 2019-2020 to allow the demand to
pick up (‘‘Back-loading’’). The Back-loading does not affect the overall volume of emissions allowances to
be auctioned in the third trading period—it only affects the distribution of auction volumes over the
period. In accordance with the new regulation, allowances are reduced by 400 million in 2014, 300 million
in 2015 and 200 million in 2016. Emissions allowances to be auctioned are correspondingly increased by
300 million in 2019 and 600 million in 2020.
All of our Finnish sites subject to the EU ETS have been granted the appropriate emissions permits by the
Finnish Energy Authority and the required monitoring of emissions has been appropriately conducted and
reported to the relevant authorities. We believe that we are in compliance with the emissions trading
legislation. We may, however, be required to incur significant capital expenditures to upgrade our facilities
in the future to comply with the maximum emission levels. The price trend of emission allowances may also
have a significant adverse effect on our business.
Energy efficiency regulations
The EU has also adopted directives regulating the energy efficiency of buildings, for example, the EU
Directive 2012/27/EU on energy efficiency and the EU Directive 2010/31/EU on the energy performance
of buildings. The Energy Efficiency Directive (the ‘‘EED’’) targets a 20% increase in energy efficiency by
2020. The EED entered into force in December 2012, and obliges Member States to set national energy
efficiency targets and report any progress achieved towards these targets to the European Commission by
April 30 of each year. Alternatively, under the EED Member States may opt to take other policy measures
to achieve energy savings among final customers, provided that the amount of such savings is equivalent to
the amount of new energy savings required by the energy efficiency obligation scheme option. New energy
efficient goals for 2030, which are likely to be in excess of the present 20% reduction target, are also
currently under review by the European Commission. The Energy Performance of Buildings Directive (the
‘‘EPBD’’) instructs Member States to set minimum standards for energy efficiency in new and renovated
buildings, which must be quantifiable and subject to a specified calculation methodology which takes into
account multiple factors that influence energy use (e.g., thermal characteristics of the building, heating
installation and hot water supply). However the EPBD does not specify what the specific performance
standards should be. Detailed performance requirements are set at a national level, within the confines of
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certain EU guidelines, such as the requirement that all new buildings must be ‘‘near zero energy buildings’’
by 2020.
The Finnish Land Use and Building Act (the ‘‘LBA’’, 132/1999) implements the requirements set out in the
latter Directive by providing that new buildings must fulfill the minimum energy efficiency requirements
set out in the Finnish Building Regulations adopted by the Ministry of the Environment. Accordingly,
construction developers must choose their construction materials with energy efficiency in mind. The same
applies to repair constructions. The new energy efficiency regulation might have a favorable effect on the
demand for our heat-insulating products.
Sweden
In Sweden, we are primarily subject to the provisions in the Swedish Environmental Code (Sw. miljöbalken
1998:808) and related ordinances and regulations, for example, the Environmental Proceedings Ordinance
(Sw. Miljöprövningsförordningen 2013:251). See ‘‘—Finland’’ above for information on European-wide
regulations. The Swedish Environmental Code includes provisions regarding matters such as
environmental permits, environmental liability and handling of chemicals and waste.
Soil and Groundwater Contamination
In Sweden, the person who carries out an activity which causes contamination (the ‘‘operator’’) is primarily
liable for remedial actions, i.e. investigations and remediation. If contamination was caused by several
operators, they are jointly and severally liable and the supervisory authorities are free to request
remediation from any of the liable operators. If no operator can be made liable, the purchaser of real
property may be liable if she/he knew or should have known about the contamination at the time of the
acquisition and the purchase was made after December 31, 1998. Regardless of the owner’s liability
regarding remediation, the owner of the real property may be liable for the part of the costs for the
remediation which are proportionate to the increase in value of the real property after remediation is
carried out. The liability for contamination in Sweden is not limited in time. Although we believe that we
are generally in compliance with our legal obligations at our Swedish sites, groundwater contamination has
been detected at our Hässleholm site, and additional contamination of soil and groundwater may be
discovered at these or other sites in the future. Such discovery of previously unknown contamination, or
the imposition of new obligations to investigate or remediate soil or groundwater contamination, could
have a material adverse effect on our business, financial condition or results of operation.
In Sweden, the IED Directive primarily was implemented through the Industrial Emissions Ordinance
(Sw. Industriutsläppsförordningen 2013:250). Our Hällekis and Hässleholm facilities in Sweden will be
required to conduct baseline studies to evaluate soil and groundwater contamination by 2016 or in
connection will the application for an environmental permit application or an amendment to an existing
permit. We believe that our Hässleholm site will need to make IED improvements.
Emissions and Environmental Permits
In Sweden, an operational permit is issued pursuant to the Swedish Environmental Code (Sw. miljöbalken
1998:808). Such permit includes both production limits and precautionary conditions, for example,
regarding emissions to air and water as well as the handling of waste and chemicals. Normally, a permit
issued pursuant to the Swedish Environmental Code is not limited in time. However, the Swedish
Environmental Code contains provisions which establish a possibility for the permitting or supervisory
authorities to request withdrawal or updates of valid environmental permits. Our Hässleholm plant is
expected to renew its environmental permit by the end of 2014. Non-compliance with a permit condition
issued pursuant to the Swedish Environmental Code may result in a penalty or imprisonment. A new or
amended permit must be applied for if the stipulated production limits are planned to be exceeded. New or
amended environmental permits are likely to include more stringent permit conditions.
In Sweden, the emission limits stipulated pursuant to the provisions in the IED Directive will not adjust the
existing permit provisions, but will apply to the operations in parallel with existing environmental permit
conditions. We believe that our Hässleholm site will need to make IED improvements in order to comply
with BAT standards, which may require significant capital expenditures.
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Waste
In Sweden, the handling of waste is primarily regulated by the Swedish Environmental Code and the Waste
Ordinance (Sw. avfallsförordningen 2011:927). However, as regards an operation required to hold an
environmental permit, parts of the waste management of such an operation are often governed by
conditions regarding waste handling contained in the environmental permit. The Swedish Environmental
Code and the Waste Ordinance also includes specific relevant provisions regarding sorting, transport,
handling of hazardous and non-hazardous waste, and documentation.
Hazardous Substances
In Sweden, specific permits to handle inflammable and explosive goods must be obtained pursuant to the
Inflammable and Explosive Goods Act (Sw. lag om brandfarliga och explosiva varor 2010:1011). Such
permits are always limited in time.
Health and Safety
The primary pieces of legislation relating to health and safety are the Swedish Work Environment Act (Sw.
arbetsmiljölagen 1977:1160), the Swedish Work Environment Ordinance (Sw. arbetsmiljöförordningen
1977:1166) and regulations from the Swedish Work Environment Authority (Sw. arbetsmiljöverket). An
employer has, as a starting point, a duty to implement systematic work environment management
procedures, including, for example, processes for the assessment of risk and taking of preventive measures.
In addition, there are several detailed regulations relating to health and safety, including obligations
imposed on the employer regarding the workers’ environment.
Regulation of Chemicals
In addition to REACH, Swedish legislation includes provisions regarding the use and handling of
chemicals, such as those in Chapter 14 of the Swedish Environmental Code and regulations from the
Swedish Chemical Inspectorate (Sw. kemikalieinspektionen). Moreover, Chapter 2, Section 4 of the
Swedish Environmental Code provides that persons who pursue an activity or take a measure, or intend to
do so, shall avoid using or selling chemical products or biotechnical organisms that may involve risks to
human health or the environment if products or organisms that are assumed to be less dangerous can be
used instead.
Technical Approvals for Construction Products
The EU Construction Regulation, discussed in ‘‘—Finland’’ above, also applies to the Swedish market.
Emission Trading Law in the European Union
In Sweden, the EU ETS has been primarily implemented by the Trading of Emission Allowances Act (Sw.
lag om handel med utsläppsrätter 2004:1199).
Our operations in Hällekis and our operations in Hässleholm are subject to the EU ETS (our operations at
Skövde are not subject to the EU ETS). The site in Hällekis have participated in the EU ETS during the
second EU ETS period from 2009 to 2012 as a combustion plants (thermal output more than 20 MW).
Since the beginning of the third EU ETS period (2013-2020) production of mineral wool from rock has
been included as an industry in the EU ETS if the melting capacity is at least 20 tons per day. The site in
Hässleholm is also subject to the EU ETS in accordance with this provision. According to the decision
allocating emission rights in Sweden, the site in Hällekis will be provided with 38,544 tonnes of free
allowances for 2014. The free allowances will decrease in subsequent years, and in 2020 34,302 tonnes of
free allowances will be allocated to the Hällekis facility. A similar decrease has been determined for the
Hässleholm facility. According to the decision, the site in Hässleholm will be provided with 22,106 tonnes
of free allowances for 2014, but not more than 19,081 tonnes for 2020.
Energy efficiency regulations
The EU directives on energy efficiency discussed in ‘‘—Finland’’ above are proposed to be implemented in
several pieces of legislation in Sweden, including, for example, the Energy Mapping in Lagre Corporation
Act (Sw. lag om energikartläggning i stora företag) and the Energy Measurement in Buildings Act (Sw. lag
om energimätning I byggnader). The necessary legislation is propsed to enter into force June 1, 2014.
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Lithuania
Our Lithuanian facilities are subject to extensive environmental regulation. The permit requirements on
air emissions, water discharges and pollution control regarding our operations in Lithuania are based on
Lithuanian and EU legislation. See ‘‘—Finland’’ above for information on European-wide regulations.
Soil and Groundwater Contamination
Operations in Lithuania that produce emissions into the environment, including surface water, are
regulated by the Lithuanian Environmental Protection Act (I-2223, Aplinkos apsaugos ˛istatymas), Water
Act (VIII-474, Vandens ˛istatymas), Drinking Water Supply and Waste Water Management Act (X-764,
Geriamojo vandens tiekimo ir nuotek˛
u tvarkymo ˛istatymas) and Act on Subsoil Resources (I-1034, Žemės
gelmi˛
u ˛istatymas). Such operations are subject to an environmental permit. In accordance with the Water
Act, the operations that may change or alter bodies of water and wetlands as well as water level require an
environmental impact assessment in accordance with requirements defined by the Order of the Minister of
Environment.
When using water resources and bodies of water directly for industrial and economic purposes, the
operator is required to observe thresholds set for the use of water and technological norms and rules and
conditions aimed at avoiding waste water pollution. The operator must also implement measures intended
to reduce water use and the pollution of waste water, to improve production technologies, water supply
and waste water treatment systems as well as implement recycling water supply systems.
The aforementioned laws also regulate the use of water areas for waste water discharge. Waste water must
be collected and treated using the best available technology and discharged so that will have a minimal
impact on the environment. The rules on the conditions for waste water discharge and granting of permits
are regulated by an order of the Minister of Environment. Waste water discharge to surface water is
permitted if it is not in contradiction with environmental protection purposes set out in the Water Act. It is
prohibited to directly discharge waste water to groundwater, underground cavities and sinkholes. Waste
water can be discharged to soil under the rules set out by an order of the Minister of Environment.
Responsibility for contamination of soil and groundwater is based on the Lithuanian Environmental
Protection Act and is imposed by the environmental authorities. State authorities have the right to, among
other things, restrict the activities of legal and natural persons or impose administrative penalties thereon,
where laws on environmental protection are being violated or where such activities do not comply with the
normative standards, rules, limits and other conditions established in respect of environmental protection.
Adverse effects to the environment resulting from economic activities may lead to civil or administrative
responsibility, including compulsory remediation obligations. Entities performing economic activities may
be subject to civil liability irrespective of their culpability for any environmental damage or any imminent
threat thereof resulting from their economic activities, except as otherwise provided by Lithuanian
Environmental Protection Act.
Entities performing economic activities must take all necessary measures to prevent damage to the
environment, human health and life, or the property and interests of other persons. Persons guilty of
causing such damage to the environment must, where possible, restore the state of the environment to its
undamaged (or ‘‘baseline’’) condition, and compensate for all losses. This baseline condition is determined
on the basis of the information available on the state of the environment before the relevant damage was
caused. The state of the environment must be restored by rehabilitating the damaged environment, or
elements or impaired functions thereof. In the event of land damage (either surface or underground), any
threat of adverse effects on human health must be eliminated. Environmental damage is assessed and
calculated according to the methods approved by the Minister of Environment, having regard to the
baseline condition, the significance of the adverse effect on the environment, and the possibility and likely
duration of natural restoration of the environment.
If there is an imminent threat of environmental damage, an entity must, without delay, take all necessary
preventive measures. Where the imminent threat of environmental damage is not dispelled, despite the
preventive measures taken by the entity, the entity must forthwith inform the Ministry of Environment or
an institution authorized by it.
Where environmental damage has occurred, the economic entity must, without delay, notify the Ministry
of Environment or an institution authorized by it and take all the necessary actions to immediately control,
contain, remove, remediate or otherwise manage contaminants and/or other causes of damage in order to
limit or prevent further environmental damage and adverse effects on human health. The entire cost of
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preventive and/or remedial measures shall be borne by the entity which has caused environmental damage
or the imminent threat thereof, including where the appropriate measures have been implemented by
institutions authorized by a municipality or the State (on their own account or with the help of third
parties).
The entity shall not be required to bear the cost of preventive and/or remedial measures solely in the case
when environmental damage or an imminent threat thereof occurred due to force majeure, where it proves
that environmental damage or imminent threat was caused by the acts or omissions of a third party
(despite the fact that all appropriate safety measures were in place), or resulted from strict compliance
with a compulsory instruction emanating from an institution authorized by the law, other than an
instruction consequent upon contamination or some other incident caused by the economic entity’s own
acts or omissions. The costs incurred by the entity in implementing preventive and/or remedial measures
shall be compensated for in the aforementioned cases by the persons who have caused the environmental
damage or, where these persons cannot be identified, by state or municipal institutions.
Emissions and Environmental Permits
Under the Lithuanian Environmental Protection Act, an environmental permit is required for activities
that pose a threat of environmental pollution. All environmental effects of the activity are considered
within the same permit procedure, regardless of the environment medium where the effects occur
(i.e., regardless of whether soil, water or air is affected). An environmental permit may be granted if
activities requiring the permit do not result in soil contamination or groundwater pollution, harm to health
or any other significant environmental pollution or risk thereof. The rules for granting environmental
permits are approved by the appropriate orders of the Minister of Environment.
The granting, amendment and revocation of integrated pollution prevention and control permits are
regulated by the Order No. D1-528 of the Minister of Environment, dated July 15, 2013. This order
regulates the integrated pollution caused by industrial activities and the prevention and control of such
pollution. The system of granting, amending and revoking IPPC permits seeks to ensure avoidance of
greenhouse gas emissions, pollutants release into the air, water and soil, or, if not possible, to reduce the
quantities and to prevent the generation of waste, and by this achieving a high level of environmental
protection. The granting, amendment and revocation of pollution permits are regulated by the Order
No D1-259 of the Minister of the Environment, dated March 6, 2014. The rules established by this Order
address the planning and implementation of environmental protection measures for the extraction of water
from surface water and pollution control measures provided for in the Water Act, air pollution control
measures provided for in the Ambient Air Protection act (VIII-1392, Aplinkos oro apsaugos ˛istatymas),
waste prevention and management measures provided for in Act on Waste Management (VIII-787, Atliek˛
u
tvarkymo ˛istatymas), climate change management measures provided for in the Lithuanian Act on
Financial Instruments for Climate Change Management (XI-329, Klimato kaitos valdymo finansini˛
u
instrument˛
u ˛istatymas), and the implementation of other environmental protection measures.
The aforementioned rules are in compliance with the IED and the Emission Trading Directive 2003/87/EC.
An environmental permit is granted either for a fixed period or until further notice. The environmental
permit contains necessary permit conditions in order to ensure that the requirements for granting a permit
will be met. An environmental permit usually contains threshold values for air, water and other emissions.
Permit conditions regarding the prevention of pollution and emission thresholds are based on ‘‘best
available techniques’’ (‘‘BATs’’). The IED amended the IPPC Directive to require best available techniques
to control emission levels, and sets out rules on the prevention and control of pollution from industrial
activities and includes rules aimed at reducing emissions into the air, water and land, as well as preventing
the generation of waste in order to achieve a high level of overall environmental protection. The mineral
industry (production of mineral fibers), the chemical industry and the waste management industry, among
others, will potentially need to make changes to their operations in order to comply with the new
obligations deriving from the IED.
Member States were required to implement the IED through national legislation by January 7, 2013. In
Lithuania, the IED was implemented through amendments of the Lithuanian Environmental Protection
Act, which came into force in May 2013. Following the entry into force of these amendments permit
conditions are required to be based upon the ‘‘BAT conclusions’’ set out in the BAT reference documents
(‘‘BREFs’’). According to our permit, the Lithuanian site complies with the applicable BAT requirements
set out in the BREF document for the Glass Manufacturing Industry.
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Waste
The waste management is regulated by the Act on Waste Management (VIII-787, Atliek˛
u tvarkymo
˛istatymas), the Act on the Management of Packaging and Packaging Waste (IX-517, Pakuoči˛
u ir pakuoči˛
u
atliek˛
u tvarkymo ˛istatymas) and related regulations in Lithuania. The Lithuanian legislation is based on the
provisions of appropriate EU directives.
In Lithuania, we are subject to statutory provisions regarding waste management. These provisions
regulate permissible methods of, and responsibility for, the generation, handling, possession, discharge and
recycling of waste depending, among other issues, on the dangers posed by the waste. The discharge and
disposal of waste is usually restricted to licensed facilities. In accordance with the Act on Waste
Management, both the producer and holder of waste are responsible for organizing waste management.
This includes the obligation to see to the appropriate disposal of waste to landfills and waste processing
facilities. Product manufacturers are also subject to obligations regarding the management of packaging
waste. All waste management must comply with the statutorily prescribed order of priority, meaning that
preventive measures must be implemented to minimize the generation of waste, and that generated waste
should primarily be reused and secondarily recycled. If this is not possible, the waste should be utilized in,
for example, the generation of energy. Disposal of waste is to be considered as a ‘‘last resort.’’ In
accordance with the ‘‘polluter-pays’’ principle, the original producer of waste is also liable for the costs of
waste management. The waste holder’s responsibility for organizing waste management is terminated and
transferred to a new holder when the waste is delivered to a lawful consignee, for example, a professional
waste treatment facility. The waste holder must report waste generation (on the basis of waste generation
accounting log data) if the entity meets at least one of the following criteria: 1) it is obliged to obtain an
IPPC permit; 2) it conducts activities that, within a calendar year, produce more than 12 tons of
non-hazardous waste or 0.6 tons of hazardous waste, 3) it conducts motor vehicle maintenance and repair;
4) it has 10 or more employees engaged in activities involving pharmaceuticals, human or animal health;
5) it generates oil waste; 6) it is obliged to keep records of waste in accordance with the Rules on
construction waste management adopted by the Order No. D1-637 of the Minister of the Environment. A
Waste Management Report (based on the waste management accounting journal data) must be provided
by an entity which meets at least one of the following criteria: 1) it is engaged in the processing of waste;
2) it is engaged in waste export from or imports to Lithuania; 3) it stores the waste at its generation place,
where that wasted is either hazardous waste stored for longer than 6 months, or nonhazardous stored for
longer than 1 year; 4) it is engaged in the collection or transportation of waste; or 5) it is a hazardous waste
dealer or intermediary. There are also specific regulations regarding the packaging, labeling, mixing,
storage and transport of hazardous waste. The management and treatment of waste is generally
undertaken by professional waste management and treatment companies.
Due to our manufacturing operations, we generate industrial and household waste. We believe that we are
in material compliance with applicable waste management laws and continuously attempt to reduce waste
at our sites.
Hazardous Substances
In Lithuania, the handling and storage of hazardous chemical substances might be subject to an
environmental permit if such activities pose a threat of environmental pollution in accordance with the
Lithuanian Environmental Protection Act. This act provides that persons using hazardous chemicals must
comply with established rules on the use of these substances. These rules apply to storage, accounting,
disposal, treatment, transportation, transit, entry and exit procedures. The producer or user of the
hazardous substance is responsible for the cost arising from the storage, disposal and treatment of such
substances. The rules regarding the use of hazardous chemical substances and granting of permits are
regulated by an order of the Minister of Environment. Prevention of industrial accidents is regulated under
the Lithuanian Act on Civil Safety (VIII-971, Civilinės saugos ˛istatymas) and under the Environmental
Protection Act.
Health and Safety
Corresponding requirements are found in the Lithuanian legislation. Our operations in Lithuania are
regulated by the safety requirements set out in the Act on Safety and Health at Work (IX-1672, Darbuotoj˛
u
saugos ir sveikatos ˛istatymas). Employers are required to take care of the safety and health of our
employees. The employer shall establish a safety and health at work policy in order to promote safety and
health issues. The employer is also required to assess the hazards and risk factors caused by the work, the
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premises and other working conditions and eliminate such risks. In order to comply with the applicable
requirements, we regularly conduct training and medical examinations and implement and monitor safety
measures. If we detect any unsafe condition in one of our sites, local management is authorized to act
without further permission up to certain defined expenditure limits.
Regulation of Chemicals
We are subject to various notification and labeling requirements and have to comply with certain safety
obligations arising, for example, under the Act on Chemical Substances and Preparations (VIII-1641,
Chemini˛
u medžiag˛
u ir preparat˛
u ˛istatymas). The Act on Chemical Substances and Preparations mainly
reflects and supplements REACH at the national level, but also establishes national requirements on the
handling of chemicals.
Technical Approvals for Construction Products
As we manufacture building materials the regulation on construction products is relevant to our activities.
In Lithuania, the manufacture and sale of construction materials is subject to technical regulations and
approval requirements.
To establish that particular construction materials conform to the relevant technical approvals, as in many
other jurisdictions manufacturers must implement and document a factory production control system in
Lithuania. Depending on the produced product, Lithuanian law may require the initial testing of the
construction product to be performed by an authorized body, continuous surveillance by a competent
organization and/or assessment and approval of the construction products by such an organization. If
construction materials that do not comply with applicable regulations have been used in a building, then
such building must be reconstructed or, if the materials used cannot be changed, demolished.
On July 1, 2013 the European Construction Products Regulation (No 305/2011) (the ‘‘EU Construction
Regulation’’) entered in the force in the whole EU. EU Construction Regulation provides the EU-level
framework for the approvals and unified criteria for construction products. The fact that a product fulfills
these criteria is shown through the ‘‘CE’’ marking. All products that belong under a harmonized product
standard (‘‘hEN’’) adopted by the European Committee for Standardization must be CE marked for
commercialization.
Public Institution Enterprise Lithuania (Versli Lietuva) branch Business Gateway (Verslo vartai) is a
responsible institution for the communication of implementing EU Construction Regulation. As this
function is quite new for this institution, all practical issues are solved through the Construction Production
Certification Center (Statybos produkcijos sertifikavimo centras, ‘‘SPSC’’).
The EU Construction Regulation also contains provisions on the granting of European technical
assessments (‘‘ETAs’’) for construction materials that are not under a harmonized product standard, in
order to allow them to be distributed within the EU with the CE marking. Acquiring an ETA for a product
is voluntary. The basic requirements of construction products listed in the EU Construction Regulation
form a basis for the drafting of both harmonized product standards and ETAs.
The traditional technical assessment body granting ETAs in Lithuania is SPSC. The list of competent
companies who are permitted to perform the technical assessment are enumerated in orders of the
Minister of Environment.
There are three main orders of the minister of Environment, related to construction product certification:
•
Order No. D1-656 on Regulated construction products list (Reglamentuojam˛
u statybos produkt˛
u
s˛
arašas), dated 5/9/22013;
•
Order No. D1-612 on Construction products, which do not have harmonized technical specifications,
exploiting characteristics evaluation, verification and declaration. Tests laboratories and certification
companies assignment (Statybos produkt˛
u, neturinči˛
u darni˛
uj˛
u technini˛
u specifikacij˛
u, eksploatacini˛
u
savybi˛
u pastovumo vertinimas, tikrinimas ir deklaravimas. Bandym˛
u laboratorij˛
u ir sertifikavimo ˛istaig˛
u
paskyrimas), dated 26/09/2013;
•
Order No. D1-871 on Appointment of bodies carrying out third party tasks in the assessment and
verification of performance of construction products (Dėl ˛istaig˛
u, atliekanči˛
u treči˛
uj˛
u šali˛
u užduotis
vertinant ir tikrinant statybos produkt˛
u eksploatacini˛
u savybi˛
u pastovum˛
a, paskyrimo), dated 27/11/2013.
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In addition to assessment mechanisms for construction materials based on ETAs, other approval
mechanisms are also in use in Lithuania. There is a national approval procedure for construction products
which are not under any harmonized product standard and which do not have ETA, and thus cannot be CE
marked. The purpose of the national approval procedure is to determine whether a product fulfills the
substantial technical requirements imposed on construction products by the Lithuanian Act on
Construction (I-1240, Statybos ˛istatymas). The procedure is governed by the Lithuanian Act on Assessment
of Conformity (VIII-870, Atitikties ˛ivertinimo ˛istatymas) and Act on Standardization (VIII-1618,
Standartizacijos ˛istatymas). The acceptability of construction products can be certified by a competent
company. These procedures are voluntary, but the sale of products that have not been certified may be
prohibited by the decision of the State Non Food Products Inspectorate.
Most of our construction products are under harmonized product standards and are hence CE marked.
Some of our products are certified in the Lithuanian procedure. We believe that we are in material
compliance with applicable EU and Lithuanian legislation on construction materials.
Emission Trading Law in the European Union
Lithuania is a party to the Kyoto Protocol both individually and as part of the EU. The Emission Trading
Directive 2003/87/EC has been implemented through the Lithuanian Act on Financial Instruments for
Climate Change Management (XI-329, Klimato kaitos valdymo finansini˛
u instrument˛
u ˛istatymas). Our
operations at Vilnius are subject to the EU ETS. The site at Vilnius has participated in the EU ETS since
the second EU ETS period from 2008 to 2012 as a combustion plant (thermal output more than 20 MW).
Energy efficiency regulations
The EU has also adopted directives regulating the energy efficiency of buildings, for example, the EU
Directive 2012/27/EU on energy efficiency and the EU Directive 2010/31/EU on the energy performance
of buildings. The Energy Efficiency Directive (the ‘‘EED’’) targets a 20% increase in energy efficiency by
2020. The EED entered into force in December 2012, and obliges Member States to set national energy
efficiency targets and report any progress achieved towards these targets to the European Commission by
April 30 of each year. Alternatively, under the EED Member States may opt to take other policy measures
to achieve energy savings among final customers, provided that the amount of such savings is equivalent to
the amount of new energy savings required by the energy efficiency obligation scheme option. New energy
efficient goals for 2030, which are likely to be in excess of the present 20% reduction target, are also
currently under review by the European Commission. The Energy Performance of Buildings Directive (the
‘‘EPBD’’) instructs Member States to set minimum standards for energy efficiency in new and renovated
buildings, which must be quantifiable and subject to a specified calculation methodology which takes into
account multiple factors that influence energy use (e.g., thermal characteristics of the building, heating
installation and hot water supply). However the EPBD does not specify what the specific performance
standards should be. Detailed performance requirements are set at a national level, within the confines of
certain EU guidelines, such as the requirement that all new buildings must be ‘‘near zero energy buildings’’
by 2020.
The Lithuanian Act on Construction (I-1240, Statybos ˛istatymas) implements the requirements set out in
the latter Directive by providing that new and renovated buildings must fulfill the minimum energy
efficiency requirements set out in the Lithuanian Technical Construction Regulations adopted by the
Ministry of the Environment. These Regulations govern the evaluation and certification of energy
efficiency of heated residential and non-residential buildings. Accordingly, construction developers must
choose their construction materials with energy efficiency in mind. The same applies to repair and
renovation constructions.
Poland
Our Polish facilities are subject to extensive environmental regulation. The permit requirements on air
emissions, water discharges and pollution control regarding our operations in Poland are based on Polish
and EU legislation. See ‘‘—Finland’’ above for information on European-wide regulations. The key Polish
legislation covering the main areas of environmental protection is the Environmental Protection Law
(ustawa Prawo ochrony środowiska), while waste management issues are regulated by the Waste Act
(ustawa o odpadach) and water contamination issues are governed by the Water Law (ustawa Prawo
wodne). There are also numerous other acts and secondary legislation dealing with specific environmental
issues.
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Soil and Groundwater Contamination
In Poland, the use of water requires a permit and is strictly regulated to avoid any contamination of ground
or surface water, such as through the disposal of sewage or waste water and the handling of potentially
dangerous materials. For example, the discharge of any pollutant substances into the surface water may be
subject to a permit, whereas the discharge of any such substances into the ground water in principle is
impermissible. Under Polish law, water permits are generally granted for specific periods of time and must
be renewed frequently. In certain circumstances, such water permits may be revoked without
compensation.
Under Polish law (the Act on prevention and remediation of environmental damage) the obligations
related to potential soil contamination rest with the person making use of the environment (irrespective of
the legal title to the land). In other words, it is the person using the environment and whose activity causes
the occurrence of environmental damage or an imminent threat of such damage that is obliged to
undertake actions limiting such damage and preventing further damage, and to undertake remedial actions
(the so-called ‘‘polluter pays principle’’). Consequently, all costs of preventive or remedial actions are borne
by the person using the environment, unless such person proves that the damage to the environment was
caused by another party and occurred despite the fact that the person using the environment applied
appropriate safety measures. This general rule applies to contamination of land that occurred on and after
April 30, 2007. However, in respect of so-called ‘‘historical contamination,’’ i.e., the contamination that
occurred prior to April 30, 2007 or that could be attributed to the activity completed prior to that date, the
provisions of the Environmental Protection Law (‘‘EPL’’) will apply. Pursuant to the EPL, if the soil
contamination exceeds statutory limits (set forth in the secondary legislation to the EPL), the person who
is currently in control of the land (i.e., the person revealed in the land register, in principle the owner or
the perpetual usufructuary) is obligated to undertake remediation in order to reduce contamination to
acceptable standards. There may be exceptions to this general rule (for example, where the contamination
was caused by a third party after the acquisition of rights to the land by the person in control of the land or
where it can be proved that the contamination arose before September 1, 1980), in which case any
remediation required may be limited. In the case of groundwater contamination, strict remediation
obligations do not apply (unless the water is used drinking purposes). This is because the groundwater is
owned by the State Treasury (in accordance with the Water Law). As such, the principle of imposing
remediation obligations on the owner is not applied. Instead, the remediation obligation is generally
imposed on the entity actually causing the contamination.
Although we believe that we are generally in compliance with our legal obligations at our Polish sites,
groundwater contamination has been detected at our Trzemeszno site, and additional contamination of soil
and groundwater may be discovered at these or other sites in the future. Such discovery of previously
unknown contamination, or the imposition of new obligations to investigate or remediate soil or
groundwater contamination, could have a material adverse effect on our business, financial condition or
results of operation. Following the implementation of the IED in Poland, a baseline report will also have to
be prepared in respect of our Trzemeszno site, which could trigger remediation obligation if any
contamination is discovered. See ‘‘—Emissions and Environmental Permits’’ below.
Emissions and Environmental Permits
Under the EPL and the Water Law, an environmental permit is required if, among other things, operation
of an installation results in: (i) discharge of gases and particulates into air; (ii) discharge of sewage into
water and soil; (iii) extraction of water for industrial purposes; and/or (iv) generation of waste. Certain
types of installation which do not cause substantial risks to the environment are exempted from the permit
requirement. If a permit is required, an operator is required to obtain either a single integrated permit
(IPPC permit) or an emission-specific permit. The requirement to obtain an IPPC permit applies to
installations which might cause significant pollution to the environment. The exhaustive list of categories of
such installations is set forth in the applicable implementing legislation under the EPL.
At our Trzemeszno facility in Poland, our Base Production operations operate under IPPC, EU-ETS and
waste permits, and our TI operations have emission and waste permits. The Trzemeszno site has a water
discharge (sewage and rain water) permit.
The IED implementation process in Poland is delayed and it is expected to be completed during 2014. The
main assumptions for the proposed amendment to the EPL are as follows. Generally, there will be a
twelve-month period to review the terms of existing IPPC permits (in respect of certain terms, this period
is shortened to three months). Any subsequent review must occur within six months after publication of the
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relevant BAT conclusions. If a change of IPPC permit is necessary, the relevant authority may either
(i) inform the installation operator of the obligation to adapt the installation during a period of no more
than four years from publication of the BAT conclusions or, as the case may be, of entry into force of the
new law, or (ii) summon the installation operator to file a motion to change the IPPC permit, in such case,
there is also an adjustment period of no more than four years, however there will be a one-year period to
file the motion, beginning from the date of the summons.
Waste
In Poland, plants must use licensed contractors for the disposal of hazardous or nonhazardous waste.
Under the Polish Waste Act, only disposal to licensed contractors releases the plant from liability in respect
of proper waste management. Furthermore, generation of waste over certain threshold requires an
environmental permit to be held by the plant. The generation of waste requires detailed evidencing and
reporting on annual basis (regardless of whether there is a permit requirement).
Hazardous Substances
In Poland, substances are rated by risk with different resulting requirements relating to storage and
handling in order to prevent accidents or injury and ensure a high degree of safety. Certain hazardous
substances must not be produced or used at all. Title IV of the Polish Environmental Protection Law
implements the Seveso II Directive.
Recultivation
In Poland, a number of formal steps, including approvals of administrative authorities must be completed
in connection with the closure of the operation plant. They follow from the Environmental Protection Law,
the Act on Protection of Agricultural and Forest Land and the Mining and Geological Law (if applicable).
The general aim of these procedures is to ensure full recultivation and revitalization of the degradated
land.
Waste Selection
Moreover, in Poland, there are additional regulations concerning packaging waste under the Packaging
and Waste Packaging Management Act. In particular, entities which market products (provided that the
total annual weight of packaging exceeds 1 ton) are obliged to ensure the collection of a specific quantity
of post-use and packaging waste from the market and subsequently recover or recycle it. It is possible,
however, to delegate this obligation to a recovery organization (organizacja odzysku), which, in exchange
for a determined fee, assumes an entity’s obligations relating to the collection of waste and its subsequent
recovery or recycling.
Fees for Pollutant Discharges
Under the Polish regulatory regime in the EPL, we are obliged to keep records of pollutants discharged
into the environment and, on the basis of such records as well as reports submitted to the relevant
Voivodeship Marshal (marszałek województwa), calculate and pay annual charges for using the
environment.
Entities using the environment are obliged to keep records of pollutants introduced into the air, discharged
sewage, intaken water, stockpiled waste and packaging and other items released into the market, where
their waste is subject to special management rules (e.g., tires, batteries, vehicles, and electric and electronic
equipment). The obligation to keep such records is connected with the requirement to provide relevant
authorities with periodic reports. On the basis of the above-mentioned records as well as reports submitted
to the relevant Voivodeship Marshal, such entities are obliged to calculate and pay annual charges for
using the environment.
Health and Safety
Our operations in Poland are regulated by the safety requirements set out in Chapter 10 of the Labor Code
(Kodeks pracy) as well as a number of other legislative acts. As an employer, we are required to take care of
the safety and health of our employees. We are required to assess the hazards and risk factors caused by
the work, premises and other working conditions and eliminate such risks. In order to comply with the
applicable requirements, we are required to conduct training and medical examinations, and implement
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and monitor safety measures. If we detect any unsafe condition in one of our sites, local management is
authorized to act without further permission, up to certain defined expenditure limits.
Regulation of Chemicals
The Polish Act on Chemical Substances and their Mixtures implements the REACH regulations at the
Polish national level and also establishes some additional requirements, including examination of
hazardous substances, their packaging and storage.
Technical Approvals for Construction Products
The key regulation is the EU Construction Regulation, which is directly applicable in Poland. It is
complemented by the Act on Construction Products (ustawa o wyrobach budowlanych).
Additional quality standards, known as Polish Norms (Polskie Normy), may also be applicable to our
products in Poland. Their application is not, however, obligatory unless they have been included in an act
or secondary legislation (including, in particular, the regulation of the Minister of Infrastructure on
technical conditions of buildings and their location (rozporz˛
adzenie w sprawie warunków technicznych, jakim
powinny odpowiadać budynki i ich usytuowanie)).
Emission Trading Law in the European Union
In Poland, the Emission Trading Directive 2003/87/EC has been implemented by the Act on Greenhouse
Gases Allowances Trading System and the Act on Emissions Management System of Greenhouse Gases
and Other Substances. Our operations at Trzemeszno are subject to the EU ETS. The site at Trzemeszno
has participated in the EU ETS since the second EU ETS period from 2009 to 2012 as a combustion plant
(thermal output more than 20 MW).
Energy efficiency regulations
Polish regulations are gradually being amended to implement EU requirements, as discussed in
‘‘—Finland’’ above. The regulation on technical conditions of buildings and their location
(rozporz˛
adzenie w sprawie warunków technicznych, jakim powinny odpowiadać budynki i ich usytuowanie) has
accordingly been amended with effect from January 1, 2014. The relevant amendments are aimed at a
gradual increase in the requirements for thermal insulation, and reducing the ratio of total solar energy
transmittance.
Pursuant to the Act on support of energy efficiency and modernization (Ustawa o wspieraniu
termomodernizacji i remontów), a special program has been introduced providing financial support to the
owners of buildings who decide to modernize them in order to raise the energy efficiency of the building.
In order to receive financial support, such modernization must lead to improvements to a building which
result in energy and heat savings.
Russia
In Russia, we are subject to numerous laws, rules and regulations at the national, state and municipal
levels, particularly building, environmental and occupational health and safety laws, rules and regulations,
as well as technical standards.
As our business primarily comprises the operation of production plants for stone wool insulation products,
laws, rules and regulations and technical standards that affect our operations mostly relate to product
safety, environmental protection (in particular, in relation to soil, ground and surface water
contaminations and air emissions), waste management, recultivation, reclamation and renaturation, energy
efficiency, as well as occupational health and safety.
In Russia, we are subject to a number of federal and regional acts and governmental decrees, as well as
numerous environmental and sanitary-epidemiological regulations, which include the Federal Act ‘‘On
Protection of Environment,’’ the Water Code, the Land Code, the Federal Act ‘‘On Production and
Consumption Waste,’’ Federal Act ‘‘On Technical Regulation,’’ the Federal Act ‘‘On Sanitary and
Epidemiological Welfare of Population’’ and the Labor Code.
In Russia, as in many other jurisdictions, rules and regulations, including environmental laws and
regulations, are becoming more comprehensive and stringent. The law making process in Russia is quite
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intense and amendments may be so dramatic that they seriously affect the existing business and investment
decisions.
Moreover, the laws and regulations are sometimes vague and require hiring and continuous training of
technically qualified personnel to ensure compliance with applicable requirements. As our production in
Russia is in ‘‘start-up’’ mode with limited operations underway, we are currently in the process of obtaining
necessary authorization documents that may take some time and we may not be in compliance with certain
regulations during this transition period.
We have been, and will continue to be, required to incur significant capital expenditures and operating
costs in order to maintain and upgrade our production sites and facilities to comply with applicable laws,
regulations and permits, and to obtain and maintain all necessary permits and certificates.
We are also required to obtain and maintain various permits from governmental authorities for our
operations in Russia. As the federal and regional regulatory framework applicable to us is sometimes
contradictory, unclear and incomplete and continues to experience frequent changes, it is very difficult to
accurately predict the future cost of compliance with applicable regulatory requirements and technical
standards. Additional or more stringent laws, rules, regulations and technical standards could increase our
costs or limit our ability to continue our business operations in the same manner as we did in the past.
Substantial gaps in the regulatory framework due to the delay or absence of implementing regulations for
certain legislation, as well as the lack of judicial and administrative guidance on interpreting applicable
rules, cause uncertainty with respect to many of the legal and business decisions that we make. See ‘‘Risk
Factors