From the CEO On March 3, 2017
The Russian economy has been struggling for a long time, due to oil price and a weak currency. In recent years, this has also had a major impact on Tikkurila’s business activities. Although our euro-denominated revenue has decreased due to weak currencies, we have managed to keep the group’s profitability at a good level and maintained our ability to pay dividends. This has required the continuous adaptation of our operations and streamlining at a time when we have directed resources at developing the group’s business operations and strategic growth projects.
Our business performance in four countries – Sweden, Russia, Finland and Poland – has a particular effect on the development of Tikkurila Group. These countries account for almost 80 percent of our revenue. Due, mainly, to the difficult situation in Russia, the western business area – whose largest markets are Sweden, Finland and Poland – rose in importance to account for around 70 percent of revenue and almost 80 percent of operating profit.
Revenue remained at the previous year’s level in our western markets. Despite the generally favorable economic conditions, we did not perform as well as expected in our largest individual market, Sweden. Revenue continued to grow in Poland and remained the same in Finland, where we radically overhauled our management team and the organizational structure of our business operations. These changes were aimed at creating greater agility and developing our operations across a range of sectors.
In the east, our euro-denominated revenue fell due to divestments and weak currencies. Key measures taken in Russia included stepping up the use of local manufacturing and local raw materials. Weakening purchasing power led to lower demand for premium products made in Finland and exported to Russia, but demand for locally produced premium products clearly grew. This played a major role in Tikkurila remaining the clear market leader, in extremely challenging circumstances. Our sales structure also remained favorable due to the measures taken. We sought operational efficiency by measures such as streamlining our organization and making cost savings.
Strategic growth projects
We continued to invest in our strategic growth projects. We are seeking versatile growth in different product categories and geographic areas. The focus is on organic growth achieved through strong brands.
Favorable development in China continued, despite lower overall demand in the market. We opened more than 100 new sales outlets during the year. At the end of 2016, there were over 400 Tikkurila stores operated by third parties in China. Demand is expected to grow for low-emission and high-quality products, which are safer from the environmental and health perspective. Our key strengths in China include the high quality and product safety associated with the Nordic Countries, which are signaled by the allergy, asthma and environmental labels on our products.
In terms of skills, we reinforced our industrial sector resources, developed operating models and launched new products for the metal and wood industry. We embarked on projects to strengthen our project portfolio and create new concepts. At the initial stage, we are focusing on a few key markets – Poland, Russia and China. Our longer-term goals include expanding our metal industry business into new segments such as infrastructure, power generation and the oil and gas industry.
In recent years, we have invested in functional surface treatment solutions that can be used to improve the energy efficiency of buildings and address construction problems with respect to humidity and noise, for example. We invested in sales and marketing activities of our functional Drytech and ClimateCooler products in several of the countries in which we operate. During the year, our main focus was on obtaining external certificates and customer references, as well as training our customers and other stakeholders. We also concentrated the manufacture of functional products in Lunderskov in Denmark.
As well as expanding our operations in our current export countries, we aim to find completely new markets. During the year, we enhanced our export resources, clarified our product portfolio and built marketing and service concepts to promote exports. We won new customers in areas such as the Middle East and Western Europe.
Greater flexibility and efficiency
We continued with the harmonization of our raw material basket and product portfolio. In the first phase, we are harmonizing our interior products in our western business segment; we have also begun to analyze our raw material basket in exterior paints.
Last year, we engaged in a project to change our ERP system at group level, involving migration to a common system and the harmonization of practices. The system’s roll-out began in the spring of 2016 and will be completed sometime this year.
We transformed our business model in Ukraine and Belarus by selling our local subsidiaries to a company established by the local management. The new company will continue to distribute our products in both countries. The transaction has the aim of streamlining and developing our operations in Ukraine and Belarus.
Back onto a growth track
All of our operations are firmly guided by improving the user experience. This means that our products must be among the highest quality and user-friendliest on the markets, as well as being environmentally sustainable. We are committed to supporting our customers at all stages of painting, to ensure a successful result. We will continue with stakeholder training and the development of solutions facilitating the selection, sale and purchase of paint.
Tikkurila has a strong position; over two thirds of our revenue comes from countries in which we are the clear market leader in decorative paints. Tikkurila is known for quality; our premium brand accounts for over 70 percent of our revenue. These factors provide a good basis for returning to our growth track. The worst seems to be over in Russia, the Finnish economy is showing signs of recovery and last year’s positive economic trends are continuing in Sweden and Poland. We are confident that our investment in growth projects will show as a positive trend in our revenue and profitability in the coming years.