The instability of the business environment continues

The year 2011 will be recorded in history as a year of exceptional international volatility. Even though turbulent financial times are by no means a novelty, the events and phenomena seen in the euro zone during the past year were quite unprecedented.

Itella's finances and business operations faced extremely conflicting trends and pressures. While there was a substantial amount of solid and healthy growth in the business, there were also signs of negative trends as we prepared ourselves for an increasingly tough competitive environment. Financial performance was exceptionally weak, weighed down significantly by non-recurring items in all of our business operations. These were the result of a need to increase efficiency, related to future market development. In addition, they include measures that shed operations which have failed to meet our expectations. A focus on the productive core of all of our business operations will also be necessary in the coming years. The company's solvency remains strong.

Magazine volumes decline, parcel volumes increase

The trend with the strongest impact on future operations in 2011 was the influence that electronic communications has had on print media's delivery volumes. Although this trend in itself is hardly a surprise, the simultaneous drop in the volumes of both newspapers and magazines was significant enough to attract attention. Despite the fact that the parcel volumes grew splendidly and that total net sales remained stable, profitability declined significantly.

Seemingly unavoidable trends prompted us to initiate large-scale efforts to increase efficiency. These efforts also entailed substantial reductions in the workforce and, consequentially, the non-recurring cost items that dragged profits down. It is reasonable to expect the share of business related to online commerce and the transport of small items to grow significantly in relation to letter deliveries.

An assessment of the effects of the Postal Services Act that took effect in June is still difficult since issues related to it, such as the funding of the universal service obligation, remain unresolved. From the perspective of business operations, there is the threat that legislation and political deliberations will not be able to keep up with the pace of changes in customers' behavior. In terms of public discussion, we can expect a difficult phase since, while the majority of customers are using electronic services to an increasing degree, segments of the population still prefer to take care of their errands in the traditional way.

Net sales of Logistics increased in Finland and Russia

Volumes in our Logistics business group continued recovery to pre-financial crisis levels and, correspondingly, net sales developed favorably. This was particularly evident in Finland and Russia. In this respect, the positive trends continued until the end of the year, without any significant impact attributable to market fluctuations. Itella's role as a consolidator between Finland and the other Nordic countries and, on the other hand, of Russian logistics services, plays an important role in the company's strategy.

The greatest challenges for the Logistics business group involve the Swedish and Danish markets, where large-scale measures are still required. Not taking into account the related non-recurring items, profitability improved, but a lot remains to be done. The year saw us concluding a number of important deals, particularly in Finland and Russia. This is a crucial signal for us, indicating that our range of services and strategy are on the right track.

Ready for a new generation of financial management services

Itella Information's transformation into a supplier of diverse and comprehensive financial management solutions continued. Important events related to business development and renewal included the acquisition of OpusCapita, a company specialized in the automation of cash flows. In terms of our international network, Poland's role as a major center of service production grew. Because Itella Bank was granted a deposit bank license during the past year, we can say that Itella now has a unique ability to produce and develop a new generation of financial management services.

Itella Information's net sales declined markedly due to the business group's restructuring and the related non-recurring items as well as due to a rapid drop in the volumes of traditional business, which corresponded to the changes in the market. The brisk growth of new business operations had a negative impact on the results of Itella Information in 2011.

Responsible business operations, sound management culture

Responsibility lies at the very core of our strategy. Itella's mission is to produce services required by society by securing its customers' important information and product flows. Our responsibility lies in carrying out this task with as little environmental impact as possible, in a way that also supports the well-being of our personnel and good leadership.

Now and in the future, climate change requires us to invest in the continuous improvement of the energy efficiency of our transport operations and properties and in the increasing utilization of renewable energy sources. Our goal is to reduce carbon dioxide emissions by 30% by 2020.

Initiatives related to enhanced efficiency reduced our personnel by 740 people in Finland. Thanks to voluntary severance packages, pension schemes, and organizational restructuring, we were able to reduce the number of layoffs to 460.

The past year saw us focusing heavily on values and the leadership. Judging by the improvements in the results of our personnel survey (in spite of a difficult year), this seems to have paid off. We will continue to emphasize leadership and management during the year ahead. Itella is a pioneer in measuring leadership. We have adopted a personal leadership index developed for the purposes of management. This index also functions as a basis for awarding bonuses. Already, this has resulted in leadership having claimed its place among issues considered important by the management and on the management's daily agenda.

Itella's desire for profitable growth will continue to characterize its operations. Only a financially sound company can realize its responsibility towards society, its personnel, the environment, all stakeholder groups, and, in particular, its customers, with an eye to their needs.

Jukka Alho
President and CEO