Purmo Group Oyj

743700JHE9365SIHRE722022-01-012022-12-31743700JHE9365SIHRE722021-01-012021-12-31743700JHE9365SIHRE722022-12-31743700JHE9365SIHRE722021-12-31743700JHE9365SIHRE722020-12-31743700JHE9365SIHRE722021-12-31ifrs-full:IssuedCapitalMember743700JHE9365SIHRE722021-12-31purmo:ReserveOfInvestedUnrestrictedEquityMember743700JHE9365SIHRE722021-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember743700JHE9365SIHRE722021-12-31ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMemberiso4217:EURiso4217:EURxbrli:shares743700JHE9365SIHRE722021-12-31ifrs-full:ReserveOfSharebasedPaymentsMember743700JHE9365SIHRE722021-12-31ifrs-full:RetainedEarningsMember743700JHE9365SIHRE722021-12-31ifrs-full:EquityAttributableToOwnersOfParentMember743700JHE9365SIHRE722021-12-31ifrs-full:NoncontrollingInterestsMember743700JHE9365SIHRE722022-01-012022-12-31ifrs-full:RetainedEarningsMember743700JHE9365SIHRE722022-01-012022-12-31ifrs-full:EquityAttributableToOwnersOfParentMember743700JHE9365SIHRE722022-01-012022-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember743700JHE9365SIHRE722022-01-012022-12-31ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember743700JHE9365SIHRE722022-01-012022-12-31ifrs-full:IssuedCapitalMember743700JHE9365SIHRE722022-01-012022-12-31purmo:ReserveOfInvestedUnrestrictedEquityMember743700JHE9365SIHRE722022-01-012022-12-31ifrs-full:ReserveOfSharebasedPaymentsMember743700JHE9365SIHRE722022-01-012022-12-31ifrs-full:NoncontrollingInterestsMember743700JHE9365SIHRE722022-12-31ifrs-full:IssuedCapitalMember743700JHE9365SIHRE722022-12-31purmo:ReserveOfInvestedUnrestrictedEquityMember743700JHE9365SIHRE722022-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember743700JHE9365SIHRE722022-12-31ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember743700JHE9365SIHRE722022-12-31ifrs-full:ReserveOfSharebasedPaymentsMember743700JHE9365SIHRE722022-12-31ifrs-full:RetainedEarningsMember743700JHE9365SIHRE722022-12-31ifrs-full:EquityAttributableToOwnersOfParentMember743700JHE9365SIHRE722022-12-31ifrs-full:NoncontrollingInterestsMember743700JHE9365SIHRE722020-12-31ifrs-full:IssuedCapitalMember743700JHE9365SIHRE722020-12-31purmo:ReserveOfInvestedUnrestrictedEquityMember743700JHE9365SIHRE722020-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember743700JHE9365SIHRE722020-12-31ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember743700JHE9365SIHRE722020-12-31ifrs-full:ReserveOfSharebasedPaymentsMember743700JHE9365SIHRE722020-12-31ifrs-full:RetainedEarningsMember743700JHE9365SIHRE722020-12-31ifrs-full:EquityAttributableToOwnersOfParentMember743700JHE9365SIHRE722020-12-31ifrs-full:NoncontrollingInterestsMember743700JHE9365SIHRE722021-01-012021-12-31ifrs-full:RetainedEarningsMember743700JHE9365SIHRE722021-01-012021-12-31ifrs-full:EquityAttributableToOwnersOfParentMember743700JHE9365SIHRE722021-01-012021-12-31ifrs-full:ReserveOfExchangeDifferencesOnTranslationMember743700JHE9365SIHRE722021-01-012021-12-31ifrs-full:ReserveOfGainsAndLossesOnFinancialAssetsMeasuredAtFairValueThroughOtherComprehensiveIncomeMember743700JHE9365SIHRE722021-01-012021-12-31ifrs-full:IssuedCapitalMember743700JHE9365SIHRE722021-01-012021-12-31purmo:ReserveOfInvestedUnrestrictedEquityMember743700JHE9365SIHRE722021-01-012021-12-31ifrs-full:ReserveOfSharebasedPaymentsMember743700JHE9365SIHRE722021-01-012021-12-31ifrs-full:NoncontrollingInterestsMember Financials Annual Report 2022 11 Report of the Board of Directors 2022 Purmo Group is a leader in sustainable indoor climate comfort solutions. The Group provides complete heating and cooling solutions to residential and non-residential buildings, including underﬂoor heating and cooling systems, a broad range of radiators, heat pumps, ﬂow control and hydronic distribution systems, as well as smart products. Our mission is to be the global leader in sustainable indoor climate comfort solutions. Our 3,400 employees operate in 24 countries, manufacturing and distributing top- quality products and solutions to our customers in more than 100 countries globally. Purmo Group’s shares are listed on Nasdaq Helsinki with the ticker symbol PURMO. Key ﬁgures EUR million 2022 2021 Change, % Net sales 904.1 843.6 7% Adjusted EBITDA 92.9 103.9 -11% Adjusted EBITDA margin 10.3% 12.3% Adjusted EBITA 64.6 76.6 -16% Adjusted EBITA margin 7.1% 9.1% EBIT 39.0 3.5 1025% EBIT margin 4.3% 0.4% Proﬁt for the period 13.1 -18.8 170% Adjusted proﬁt for the period 34.9 51.4 -32% Earnings per share, basic, EUR 0.32 -0.65 149% Adjusted earnings per share, basic, EUR 0.85 1.77 -52% Cash ﬂow from operating activities 31.1 35.4 -12% Adjusted operating cash ﬂow, last 12 months 1 51.9 50.2 6 3% Cash conversion 2 55.9% 48.3% 6 Operating capital employed 3 305.0 271.8 12% Return on operating capital employed 4 12.8% 1.3% Net debt 275.2 239.5 15% Net debt / Adjusted EBITDA 5 2.96 2.31 29% 1 Adjusted EBITDA on a rolling 12-month basis less by the change in net working capital and capex on a rolling 12-month basis. 2 Adjusted operating cash ﬂow divided by Adjusted EBITDA, both on a rolling 12-month basis. 3 Net working capital, other intangible assets, property, plant and equipment, and right-of-use-assets. 4 EBIT based on a rolling 12-month calculation divided by operating capital employed. Return on operating capital employed without non-recurring items was 1.0% (22.0%). 5 Adjusted EBITDA based on a rolling 12-month basis. 6 Figures for 1-12/2021 restated for comparability reasons. Group ﬁnancial overview Net sales EUR million 2022 2021 Change, % Net sales, by segment Radiators 478.7 506.3 -5% ICS 425.3 337.2 26% Total 904.1 843.6 7% In January–December 2022, Purmo Group’s net sales amounted to EUR 904.1 million (843.6), an increase of 7 per cent. Organic net sales growth was 3 per cent. Thermotech and Evroradiator acquistions contributed 3 per cent to net sales growth. The net currency effect was positive 1 per cent. The Group’s net sales in 2022 were supported by strong growth in the ICS division while weak demand in the Radiators division during the second half of the year reduced net sales growth in 2022. Annual Report 2022 2 2 In January–December 2022, Purmo Group’s adjusted EBITDA reached EUR 92.9 million (103.9); a decrease of 11 per cent. The adjusted EBITDA margin was 10.3 per cent (12.3). Comparability adjustments amounted to EUR 21.7 million (70.2). The ICS division generated strong growth in Adjusted EBITDA, driven by strong volume growth, pricing improvements, and cost control, while adjusted EBITDA declined for the Radiators division primarily due to low sales volumes and decreased the Group’s Adjusted EBITDA for 2022. Net financial items amounted to EUR -17.4 million (-8.6). Profit before tax was EUR 21.6 million (-5.1). Income tax expenses were EUR -8.4 million (-13.7) corresponding to an effective tax rate of 39.1 per cent (29.1 without IFRS 2 merger impact). When excluding certain non-deductible items, the effective tax rate was 20.1 per cent (25.8). Profit for the review period was EUR 13.1 million (-18.8) and adjusted profit for the period was EUR 34.9 million (51.4). Earnings per share were EUR 0.32 (-0.65) and adjusted earnings per share were Results and proﬁtability EUR million 2022 2021 Change, % Adjusted EBITDA, by segment Radiators 50.3 66.0 -24% ICS 51.9 43.7 19% Other -9.4 -5.8 62% Total 92.9 103.9 -11% Adjusted EBITDA margin, % 10.3% 12.3% EUR 0.85 (1.77). The earnings per share in the comparison period are based on Purmo Group Ltd shares amounting to 29,249,105 shares, using the 31 December 2021 conversion ratio. After the merger on 31 December 2021 between Virala Acquisition Company Plc and Purmo Group Ltd, the combined company’s shares amounted to 40,374,531 class C shares and 1,565,217 class F shares. The directed share issue of 671,779 class C shares in March 2022 and the directed share issue of 66,403 class C shares in October 2022 also diluted the earnings per share in the review period. The share issues were related to the acquisition of Thermotech and the new share- based incentive plan for the key personnel. Cash flow and financial position In January–December 2022, cash flow from operating activities was EUR 31.1 million (35.4). The decrease was due to lower profitability despite positive development in net working capital. The typical seasonal low point for net working capital is December, after which it builds up during the first and second quarters before reducing again during the third and fourth quarters. Adjusted operating cash flow for the last 12 months increased by 3 per cent to EUR 51.9 million (50.2) and the cash conversion increased to 55.9 per cent (48.3). The change was a result of increased capex spend in the last 12 months of EUR -24.0 million (-14.8) mainly related to strategic projects but was offset by a favourable change in net working capital of EUR -16.9 million (-38.8). The adjusted EBITDA during the last 12 months decreased slightly to EUR 92.9 million (103.9). Cash flow from investment activities was EUR -32.9 million (-18.6). The change was primarily attributable to the Thermotech acquisition of EUR -14.6 million (2021: EUR -4.5 million related to the acquisition of Evroradiator) as well as investments in property, plant and equipment, and intangible assets of EUR -24.0 million (-14.8). The increased investments were offset by EUR 3.1 million (0.7) proceeds from the sale of property, plant and equipment, and intangible assets mostly from the sale of the Irish production site as well as EUR 2.7 million (0.0) proceeds from the divestment of a discontinued Chinese subsidiary. Cash flow from financing activities was EUR -110.8 million (105.4), mostly from the repayment of the EUR 95.0 million bridge-loan facility in January and an increase in short-term funding of EUR 10.0 million during the year. In May the first instalment of the return of capital of EUR 0.18 per class C share and EUR 0.03 per class F share was paid, totalling EUR 7.4 million. The second instalment of EUR 0.18 per class C share and EUR 0.04 per class F share was paid in October 2022, totalling EUR 7.5 million. At the end of December 2022, the Group’s net debt was EUR 275.2 million (239.5) and the equity ratio was 41.0 per cent (37.3). The net debt to adjusted EBITDA ratio, based on the last 12 months' adjusted EBITDA, was 2.96 (2.31). At the end of 2022, the liquidity position in terms of cash and cash equivalents totalled EUR 56.3 million (177.6). The decline in cash and cash equivalents was driven by the repayment of the bridge loan facility of EUR 95.0 million at the beginning of the financial year. The company had a Finnish commercial paper programme totalling EUR 100.0 million of which EUR 10.0 million was outstanding at the end of 2022. As of 31 December 2022, Purmo Group also had EUR 80.0 million undrawn committed revolving credit facility and EUR 20.5 million of undrawn overdraft facilities with core financial institutions. Equity attributable to owners of the parent company totalled EUR 403.3 million (390.6). Radiators Division EUR million 2022 2021 Change, % Net sales 478.8 506.3 -5% Adjusted EBITDA 50.3 66.0 -24% Adjusted EBITDA margin, % 10.5% 13.0% Depreciations, amortisations and impairments -28.1 -21.1 33% Purmo Group’s Radiators division is a leading manufacturer of premium-quality radiators with strong local brands around the world. Demand is driven by residential repair and maintenance (about 60 per cent of sales) and new construction (about 40 per cent of sales). The division manufactures panel, tubular and electrical radiators, which are sold mainly to installers through wholesalers, either as individual units or as part of complete indoor climate comfort solutions. Annual Report 2022 3 3 Market overview For the full year 2022, the markets for radiators developed favourably in the first half, when wholesalers were increasing their inventories after the lifting of COVID-19 lockdowns. In the latter half of the year, a correction in the supply chain occurred, as high inventory levels were met by weaker demand. This led to a decline in sales and profitability in the Radiators division. As a response of the weaker demand in the latter half of the year, Radiators division implemented significant price increases and introduced several, rapid cost-saving actions, including workforce reduction but also limiting operational expenses and relocating production to facilities with lower production cost. Net Sales In January–December 2022, net sales for the Radiators division decreased by 5 per cent to EUR 478.8 million (506.3), of which decline of organic net sales was of 7 per cent. An increase in sales prices of 17 per cent offset 22 per cent organic volume declines. Acquisitions contributed 1 per cent to the division’s net sales growth. The currency impact was positive 1 per cent. Profitability In January–December 2022, adjusted EBITDA of the Radiators division declined by 24 per cent to EUR 50.3 million (66.0). The adjusted EBITDA margin was 10.5 per cent (13.0). Adjusted EBITDA of the Radiators division for 2022 declined due to lower sales volumes, as a result of weak demand, especially in the latter half of the year. Key activities during the year The Radiators division completed several profitability actions, including the implementation of price increases, optimising the workforce, and moving production to facilities with lower production cost, as a response to the challenging market environment. The expansion of the division’s largest manufacturing plant in Rybnik, Poland was completed during the year. The installation of machinery for the facility will be finalised in 2023. The exit from our business in Russia is ongoing. The Russian subsidiary operates as a stand-alone business with a separate, local brand (EVRA). The Radiators division introduced new products to the EU market in 2022: Purmo Flex, a panel radiator with middle connection, and Tinos H, the decorative radiator that was introduced to new markets. ICS Division EUR million 2022 2021 Change, % Net sales 425.3 337.2 26% Adjusted EBITDA 51.9 43.7 19% Adjusted EBITDA margin, % 12.2% 13.0% Depreciations, amortisations and impairments -11.4 -9.0 26% Purmo Group’s Indoor Climate Systems (ICS) division is one of the leading indoor climate comfort solution providers offering a broad range of components as well as products and systems to specifiers, developers, installers and wholesalers primarily in the residential and the non-residential sector. Demand is driven by new construction (about 70 per cent of sales) as well as repair, renovation and maintenance of buildings (about 30 per cent of sales). The division offers Radiant Heating and Cooling (RHC) including underfloor heating systems, Air Heating and Cooling (including air-conditioning), heat pumps, fan convectors, ventilation, water- distribution and connection systems, and HVAC system components such as hydronic and electronic controls and flow balancing technology. Market overview In the full year 2022, ICS business developed strongly, showing double-digit growth in every quarter. Italy had the highest contribution to net sales growth, but other regions also performed well, including Germany and the Nordics which was supported by Thermotech, acquired in the beginning of the year. The demand for heat pumps was strong in each quarter, demonstrating a customer behaviour towards modern and sustainable heating and cooling solutions. In the latter part of the year, the ICS division faced supply chain constraints and high raw material prices due to high inflation. These were compensated by several price increases. Net sales In January-December 2022, net sales for the ICS division increased by 26 per cent to EUR 425.3 million (337.2), of which 19 per cent was organic net sales growth. Thermotech contributed 6 per cent to the division’s net sales growth and the net currency effect was 1 per cent. Net sales growth for full year 2022 was a result of successful and gradual price increases in the division. Furthermore, sales volumes were achieved in Italy, Benelux countries and Central Europe. Profitability In January–December 2022, adjusted EBITDA of the ICS division increased by 19 per cent to EUR 51.9 million (43.7). The adjusted EBITDA margin was 12.2 per cent (13.0). The strong growth in Adjusted EBITDA was driven by volume growth, price increases, and cost control. Key activities during the year On 1 March 2022, Purmo Group acquired TT Thermotech Intressenter AB (Thermotech), the Nordic heating-systems company. In line with Purmo Group’s growth strategy, Thermotech strengthens the ICS division’s offering of smart technologies, it improves focus on solution sales and it strengthens ICS’s position in the Nordic underfloor heating market. In 2021 the company’s total net sales were EUR 23.8 million. In June, ICS successfully completed Annual Report 2022 4 4 the plant relocation of its brass site in Ireland. The efficiency in the production of brass components improved through the relocation of the production from Ireland, to other existing ICS sites in Italy and Sweden. The site in Ireland was closed in June and the property was sold to a third party. During 2022, the ICS division developed the Unisenza PLUS control range, built upon the original Unisenza underfloor heating platform solution. Unisenza PLUS is designed to allow multiple Purmo Group products to be inter- connected as part of a common indoor climate comfort control system. The new control range is available from Q1 2023. Investments, acquisitions, structural changes and R&D Investments Capital expenditure for the full year, excluding business combinations and leased assets, totalled EUR 24.0 million (14.8). The investments were related primarily to strategic projects and maintenance. Acquisitions and disposals During the third quarter, a subsidiary of Purmo Group was divested to a third party. It owned real estate property and land area in Tianjin, China. The subsidiary was divested due to its discontinued use for production, sales and distribution. On 1 March 2022, Purmo Group announced that it had acquired the entire share capital of the Nordic heating system company TT Thermotech Intressenter AB. The company manufactures and supplies customised and prefabricated underfloor heating systems to customers in the Nordic region. Thermotech is reported under the ICS segment. The acquisition supports Purmo Group’s growth strategy by bringing smart technologies to the company’s Indoor Climate System (ICS) offering, supporting its solution-selling approach and strengthening Purmo Group’s position on the Nordic underfloor heating market. Structural changes At the end of March 2022, Purmo Group made the decision to exit its business in Russia. The company is seeking to divest and complete an orderly transfer of the business to a new owner in compliance with international and local laws in Russia. Upon completion of the divestment, the company will no longer have a manufacturing operation or sales in Russia. Purmo Group has classified its Russian business as assets held for sale, resulting in a non- recurring impairment and write-down of EUR 6.9 million in March 2022 and an additional write-down of EUR 6.0 million in December 2022, totalling EUR 12.9 million. For accounting purposes, the Russian business is presented as continuing operations as it does not meet the criteria for discontinued operations. Russia represented less than 4 per cent of Purmo Group’s total net sales in 2022. Research and development Product development of Purmo Group focuses on connecting smart HVAC equipment from the energy source to thermal emitters in one unified and intelligent system. Additionally, the focus is on minimising material usage including product packaging, and on smart design that improves emitter system performance. Purmo Group also continues collaboration with its network in the field of control systems. In line with its strategy, Purmo Group’s Smart Products pipeline continued to focus on three clear strategic priorities during the fourth quarter: intelligence and connectivity, sustainability and aesthetics. Purmo Group’s research and development expenditure totalled EUR 6.1 million (5.9) in January– December 2022. In 2022, the ICS division introduced panels for radiant floor systems in the Southern Europe. The panel is suitable for renovation purposes, offers an improved thermal output and is made partly from recycled materials. Furthermore, the ICS division developed the Unisenza PLUS control range which is built upon the original Unisenza underfloor heating platform solution. Unisenza PLUS is designed to allow multiple Purmo Group products, such as electronic radiator valves and wireless thermostats, to be inter- connected as part of a common indoor climate comfort control system. The hardware is adapted to future third-party home automation platforms. The new control range is available from Q1 2023. In 2022, the Radiators division launched the Purmo Flex radiator, which offers flexibility in planning and installation due to a valve insert of choice. Purmo Flex is a high-quality product available in a wide range of dimensions, colours and designs (profiled, flat and fine-profiled). In addition, the Radiators division introduced a new vertical model of the ULOW E2 radiator, the energy-efficient ultralow temperature radiator by Purmo Group. The model is ideal in combination with underfloor heating for rooms in e.g., modern buildings with limited space under windows or in spaces that are not in continuous use and hence require short heat- up time. The radiator is fully compatible with heat pumps and Purmo Group’s home automation system. During 2022, the division also focused on developing on new versions of radiators including fan-assisted and low-cost units which are compatible with heat pumps. Strategy The company’s growth strategy is built on three pillars: (i) scaling-up of solution-selling in order to provide complete solutions and to capture growth potential in underpenetrated markets; (ii) launching and delivering smart products that are more intelligent, connectable, sustainable and aesthetic; and (iii) focusing on growth markets to capture the biggest opportunities outside of current markets. Annual Report 2022 5 5 M&A is an important enabler supporting the realisation of Purmo Group's strategy. The strategy is further supported by continuous improvement of operational excellence and by investments in people and culture. Strategy acceleration programme On 5 October 2022, Purmo Group announced a strategy acceleration programme, “Accelerate PG”, to strengthen the execution of the strategy. The programme focuses on improving net sales growth, profitability and net working capital efficiency to support reaching its financial targets. To support the execution of the programme, align resources with the strategic direction and to strengthen customer focus, the company announced a new organisational structure which came into effect on 1 January 2023. The new organisation will consist of two business divisions: Climate Products & Systems, which will sell through the wholesaler channels; and Climate Solutions, which will sell integrated solutions directly to installers, served by the company’s Emmeti business in South Europe and Thermotech business in the Nordic region. Purmo Group’s management team in the new organisational structure is: • John Peter Leesi, Chief Executive Officer • Erik Hedin, Chief Operating Officer; leading also the strategy acceleration programme • Mike Conlon, President, Climate Solutions division • Barry Lynch, President, Climate Products & Systems division • Linda Currie, Chief People Officer Matts Rosenberg was appointed interim CFO of Purmo Group Plc, effective as of 1 January 2023. On 22 February 2023, Purmo Group announced that Jan- Elof Cavander (MSc. Ind. Eng.) has been appointed Chief Financial Officer of Purmo Group Plc and a member of the Management team. He will join Purmo Group on 22nd of June 2023, the latest. Mr. Cavander will report to Chief Executive Officer John Peter Leesi and will be based in Helsinki, Finland. On 8 November 2022, Purmo Group announced that due to the weak market environment, the company expands its earlier announced strategy acceleration programme. The targeted adjusted EBITDA run-rate improvements are EUR 20 million (upgraded from EUR 15 million) by the end of 2023, and cumulatively EUR 40 million (upgraded from EUR 35 million) by the end of 2024. The upgraded profitability improvements will include both variable and fixed cost savings, excluding areas where market growth is expected to continue. Additionally, the company will continue to evaluate accelerating its footprint optimisation, covering both manufacturing and supply chain. The costs for the programme are expected to be approximately EUR 43 million (previously EUR 40 million), of which EUR 33 million (previously EUR 30 million) is expected to be incurred before the end of 2023 and the remainder in 2024. The programme is currently progressing according to plan. By the end of 2022, Purmo Group had already validated over 150 initiative roadmaps which support the achievement of the targeted improvements. Implemented run-rate EBITDA improvements at the end of 2022 amounted to EUR 1.4 million, which is according to expectations given the phasing of the programme’s initiatives. Financial targets and dividend policy Purmo Group has set the following financial targets and dividend policy: Growth Purmo Group is targeting organic net sales growth in excess of market growth. In addition, Purmo Group aims for notable inorganic growth through acquisitions. In January–December 2022, organic net sales grew by 3 per cent, while total net sales increased by 7 per cent to EUR 904.1 million (843.6). The Group’s net sales in 2022 were supported by strong growth in the ICS division while a supply chain correction and weak demand in the Radiators division especially during the second half of the year decreased net sales growth during 2022. Profitability Purmo Group is targeting an adjusted EBITDA margin above 15 per cent in the medium- to long-term. In January–December 2022, the adjusted EBITDA margin was 10.3 per cent (12.3). The Group’s profitability was supported by the ICS division’s solid performance throughout the year, while the high inventory levels of wholesalers and low market sentiment overall led to modest demand in the Radiators division, and decreased the Group’s Adjusted EBITDA margin for 2022. The strategic transition to a solutions business and the introduction of the strategy acceleration programme in the fourth quarter of 2022 are expected to expand the adjusted EBITDA margin towards the 15 per cent medium to long-term target. Leverage The leverage ratio is targeted not to exceed 3.0x, measured as interest-bearing net debt / Adjusted EBITDA on a rolling twelve-month basis. However, leverage may temporarily exceed the target level, for example in conjunction with acquisitions or restructuring actions. At the end of December 2022, net debt / adjusted EBITDA was 2.96 (2.31). The increase in the ratio was due to lower adjusted EBITDA and an increase in net debt. Dividend Purmo Group’s aim is to distribute at least 40 per cent of annual net profit as dividends or return of capital, intended to be paid out after considering earnings trends for the Group, its financial position and future growth potential. Annual Report 2022 6 6 For financial year 2022, the Board of Directors of Purmo Group Plc proposes to the Annual General Meeting planned to be held on 12 April 2023 that a return of capital of EUR 0.36 per class C share and EUR 0.07 per class F share shall be paid. Financial guidance for 2023 Purmo Group’s adjusted EBITDA in 2023 is expected to be on a similar level as in 2022 (EUR 92.9 million). Similar means being within +/- 5 per cent from the previous year. Visibility for 2023 is limited due to the geopolitical and macroeconomic uncertainties impacting Purmo Group’s addressable markets. The company continues to actively manage the situation and improve its financial performance through, for example, pricing and cost reduction initiatives. Purmo Group reiterates the previously communicated targets for the strategy acceleration programme – targeted adjusted EBITDA run-rate improvements of EUR 20 million by the end of 2023 and cumulatively EUR 40 million by the end of 2024. Non-Financial information This section describes Purmo Group’s non-financial information as required in Chapter 3a of the Finnish Accounting Act on non-financial information (NFI). Business model Purmo Group, headquartered in Finland, is a leading manufacturer and supplier of sustainable indoor climate comfort solutions, specialising in heating and cooling solutions. Purmo Group makes embedded radiant-heating and cooling systems, air-based heating and cooling systems (including ventilation), hydronic and electric radiators, dedicated hydronic and electronic controls and piping distribution systems. Purmo Group products are manufactured for residential buildings (both new builds and renovations), commercial buildings, industrial buildings, and public spaces such as airports, schools, and hospitals. The products are mainly sold via sanitary and heating wholesalers, but also directly to installers. The company's strategy is to leverage its leadership position in sustainable indoor comfort climate solutions with a well-known brand portfolio and strong relationships with key technical wholesalers to increasingly provide integrated solutions. With heating and cooling of household buildings making up 17% of total energy consumption in Europe, the company’s vision is that indoor climates should not cost the planet’s climate. The industry can help to create a significant positive impact on the planet’s future, which is why Purmo Group’s aim is to create value for society by delivering smart, connectable, sustainable, and aesthetic solutions. Purmo Group’s Complete Care sustainability strategy puts climate at the heart of its business and covers four key areas, our production, our solutions, our people, and our communities. These are enabled by strong governance, safe working practices, and ethical behaviour. Material issues in sustainability In 2021, Purmo Group founded its sustainability function and ran an extensive stakeholder engagement survey consisting of over 130 interviews, a landscape assessment and workshops for Purmo Group’s employees, customers, peers, competitors and suppliers. The assessment was completed to analyse and define material issues for sustainability. Key issues were prioritised, targets were set, and roadmaps and governance were created for implementation. The implementation was developed together with reporting capabilities. All of which led up to the launch of the sustainability strategy, Complete Care. Material issues identified in 2021: • 301: Materials • 302: Energy • 303: Water and effluents • 305: Emissions • 306: Waste • 308: Environmental compliance • 403: Occupational Health and Safety • 404: Training and education • 405: Diversity and equal opportunity • 406: Non-discrimination • 408: Child labour • 409: Forced or compulsory labour • 413: Local communities • 414: Supplier social assessment Code of Conduct and policies Purmo Group respects in all activities the International Labour Organisation’s (ILO) Declaration on Fundamental Principles and Rights at Work and complies with local and international laws, regulations and guidelines to ensure the well-being and rights of Group personnel. The Purmo Group Code of Conduct sets the ethical principles that lead all activities in the Group. The Code of Conduct is aligned with the United Nations Global Compact. Purmo Group expects its employees, suppliers and other business partners to comply with the same ethical principles. In addition, specific policies have been established on Group and local levels where relevant to ensure sustainable compliance with the Code of Conduct. Purmo Group has a whistleblowing channel for both internal and external parties where anyone can anonymously report any suspected wrongdoing via a link found in the Group intranet and corporate website. The channel provides the opportunity for personnel and external parties to report any suspected breach of laws or principles laid out in the Code of Conduct. All reports are treated as confidential and in accordance with legal requirements. Promoting the importance to report observations is part of continuous internal communication. Annual Report 2022 7 7 Risk management Purmo Group’s risk management approach is a Group-wide process that is guided by the Enterprise Risk Management Policy and encompasses all business units. The risk management process maps Group-wide risks annually. The process is monitored by the Core Leadership Team and reviewed by the Board of Directors. Sustainability issues are assessed as their own risk category, which is the responsibility of the Head of Sustainability. Governing sustainability Purmo Group’s Board of Directors approves the Sustainability Policy and decides on the Group-level sustainability strategy and target-setting that will guide the annual business planning. They also review Purmo Group’s sustainability performance and reporting. Purmo Group’s Management Team (“CLT”) is responsible for setting the sustainability objectives and proposing Purmo Group’s sustainability targets for approval by the Board of Directors. The CLT monitors the sustainability performance on a bi- monthly basis. Purmo Group’s Head of Sustainability & Corporate Social Responsibility (CSR), with the support of the ESG steering Group, is responsible for coordinating and developing sustainability at the Purmo Group level. This includes the Sustainability Policy and related Group-level instructions and manuals. The Head of Sustainability & CSR is also responsible for monitoring the policy implementation and for performance reporting to CLT on a bi-monthly basis. Purmo Group’s Head of Sustainability & CSR leads sustainability in the development of common goals, targets, instructions, and procedures in the whole company. Purmo Group’s Extended Leadership Team is responsible for defining detailed sustainability targets based on ambition defined by CLT and the Head of Sustainability & CSR, developing action plans in accordance with Group-level targets, and ensuring the inclusion of these in the business goals. The divisions compare their sustainability performance against the targets monthly or bi- monthly. Environment Purmo Group’s environmental commitments are to align its operations to a 1.5 C future, increase resource efficiency, reduce waste, and source key materials responsibly. All Purmo Group’s manufacturing plants manage environmental impacts through environmental management systems that have locally determined procedures in place to monitor and continuously promote its environmental performance. All the manufacturing plants are ISO14001 certified. In addition, Purmo Group aims to achieve ISO 50001 energy management certification in all its plants. Sustainability & CSR Risk management Legal HR Finance Communications ESG Governance model ESG Governance model illustrates the relationship between management, ESG steering group, company functions and business divisions. ESG steering group Stakeholders Investors Radiators Indoor Climate Systems Board of Directors Audit Committee Core Leadership Team Annual Report 2022 88 Environmental risks deal with increasing regulation on topics such as the energy efficiency of products and the EU’s Carbon Border Adjustment Mechanism (CBAM) which enters its transitional phase from October 2023 with the permanent system in force from 1 January 2026, which may negatively impact Purmo Group’s business operations and investments. To mitigate these risks Purmo Group aims to develop and source products that comply with the highest energy efficiency ranking in their category. Purmo Group also plans to take the possibility of a carbon tax into consideration in the Group’s investment activities, where the carbon tax would be relevant to the planned operating model. The risk of a potential carbon tax is further diminished by the fact that Purmo Group's business units primarily serve their home region, mainly to and from Europe. EU taxonomy assessment Purmo Group is subject to the Non-Financial Reporting Directive (NFRD) and is required, under EU Taxonomy Regulation 2020/852, to disclose the extent to which its economic activities have a substantial positive environmental impact. Taxonomy-eligibility describes if an economic activity is included in the scope of activities recognised in the Taxonomy Regulation. In the Annual Reports for 2022, published in 2023, companies are obligated to report also the share of Taxonomy-alignment in their operations. Taxonomy-alignment describes if an economic activity is sustainable based on defined science based technical screening criteria specified for the activity. During the first two reporting years of the EU Taxonomy, the focus is on activities contributing to climate objectives, climate change mitigation and adaptation, according to the EU Climate Delegated Act. An economic activity is classified as taxonomy aligned if it: • Contributes substantially to one or more of the taxonomy’s six environmental objectives: climate change mitigation, climate change adaptation, the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems; • Does not do any significant harm to any other environmental objective; • Is in alignment with the OECD Guidelines for Multinational Enterprises and UN Guiding Principles on Business and Human Rights, including the International Labour Organisation’s (‘ILO’) declaration on Fundamental Rights and Principles at Work, the eight ILO core conventions and the International Bill of Human Rights. Minimum safeguards Taxonomy Regulation specifies that in addition to substantial contribution and 'do nosignificant harm' criteria, an economic activity can be considered environmentally sustainable only if it is carried out in compliance with the minimum safeguards. The minimum safeguards prevent activities from being labelled sustainable if they violate human or labour rights, engage in corrupt, anti-competitive or non- compliant taxation practices. The compliance can be assessed by ensuring there are adequate processes and controls in place in the areas of human rights, corruption, taxation and fair competition and there are no breaches or violations existing Purmo Group assessed compliance with minimum safeguards by reviewing the company processes for human rights, corruption, taxation and fair competition. Whilst we recognise the need to continuously improve Purmo Group considers its processes to be on a robust level and with no violations to meet the alignment with the minimum safeguards. Purmo Group expects formalised human rights due diligence process to be in place by the end of 2023. EU taxonomy eligible products of Purmo Group based on 2021 assessment: • Radiators: Radiators are included under economic activity 3.5 Manufacture of energy efficiency equipment, where the description refers to, among others, NACE ** code C25 (including C25.21 Manufacture of central heating radiators and boilers as defined in chapter 1.1.3.1. in Annex I to the Taxonomy regulation Delegated Act.). Electric radiators have been excluded as they are not part of central heating. • Heating and cooling: Cooling and ventilation systems are included under economic activity 3.5 where the technical screening criteria refers in particular to 3.5 (i) cooling and ventilation systems, 3.5(k) heat pumps • Convectors: Included under economic activity 3.5 (Manufacture of central heating radiators and boilers) • Radiant heating and cooling: Underfloor heating systems (UFH) are included under economic activity 3.5 Manufacture of energy efficiency equipment as they are part of central heating systems. • System components: Included under economic activity 3.5, in particular 3.5(m) energy-efficient building automation and control systems, 3.5(n) zoned thermostats and devices for the smart monitoring of the main electricity loads and heat loads, 3.5(o) products for heat metering and thermostatic controls for individual homes, and for central heating systems. • Water distribution systems: The product category mainly includes generic pipes and related equipment, which are not listed as relevant economic activities. • Chimneys: Chimneys are not listed as a relevant economic activity. Annual Report 2022 9 9 EU taxonomy aligned products of Purmo Group based on 2022 assessment: During 2022 Purmo Group formed a working group to assess if the eligible activities recognised in the EU Taxonomy are fulfilling the criteria for Taxonomy alignment. For each economic activity, Purmo Group conducted assessment for substantial contribution and ‘do no significant harm’ criteria to determine the alignment. The alignment was determined for the climate change mitigation objective. Minimum safeguards were assessed on the Group level. Purmo Group’s taxonomy aligned turnover consists mostly of solution sales (total package installations) under the activity 3.5. Manufacture of energy efficiency equipment for buildings. The total package deliveries include underfloor heating equipment, automation, control valves and in some cases also heat pumps. Purmo group identified the following as EU taxonomy aligned products and carried out the assessments for Taxonomy-eligibility and Taxonomy- alignment based on the best interpretation of the Taxonomy Regulation and the Climate Delegated Act and the currently available guidelines from the European Commission. The Human Resources Department is responsible for monitoring and updating the global policies, whereas local policies and procedures are subject to monitoring and continuous improvement at the country level. Purmo Group operates many factories and warehouses with heavy equipment and materials that can pose risks on employees’ health if proper procedures and processes are not followed. To tackle this risk, safe working practices have been embedded in the sustainability strategy, and all Purmo Group’s operations are covered by health and safety policies and procedures implemented on the country level. In 2022 the implementation of a new Health and Safety organisational structure across Purmo Group was completed. Every manufacturing plant now has a Health and Safety senior sponsor and manager who focus to reduce accidents in the workplace and improve employee wellbeing. Loss of key people or inability to attract talent can have an adverse impact on Purmo Group’s business and operations. To continue to attract and retain top talent, Purmo Group aims to offer a mix of interesting career opportunities and employee benefits at an industry-leading and fast-developing company. Employee turnover and satisfaction are monitored regularly and in 2022 Purmo Group carried out a companywide employee survey achieving an eNPS score of -8, up from -9 in the previous year. Human rights Purmo Group is committed to respecting internationally acknowledged human rights and has so far focused on human rights matters in its own operations such as labour rights and health and safety. The implementation of the sustainability programme will expand the human rights work under the topic of responsible sourcing. Accordingly in 2022, Purmo Group continued to evaluate and improve supplier evaluation, and the target is that all major suppliers will be on-boarded and audited against responsible sourcing standards by 2024. Purmo Group complies with all relevant local and international regulations, such as the Modern Slavery Act 2015 in the United Kingdom, and has prepared and published the Modern Slavery Statement accordingly. Anti-corruption and bribery Ethical behaviour and strong governance are part of the foundation for Purmo Group’s sustainability strategy. Purmo Group has zero tolerance towards bribery and corruption. The Code of Conduct outlines the approach for ethical business conduct and is complimented by global policies such as Anti- Corruption and Anti-Bribery Policy, Competition Law Compliance Policy, and Financial Crime Risks Policy. • Radiant heating and cooling: underfloor heating systems under economic activity 3.5; underfloor heating systems specifically sold through the company’s business Thermotech in the Nordics. • System components: in particular solutions sold by the company’s business Emmeti in Italy, which includes a FEBOS system. The portion of the aligned turnover is lower than that of the eligible turnover, due to the fact that Purmo Group’s radiator and underfloor heating product categories initially identified as eligible do not fulfill the substantial contribution criteria due to the fact that there is no required energy labeling currently available for these products. Social and employee matters Purmo Group is committed to building and maintaining a diverse workforce and inclusive work environments, opposing all forms of bullying and discrimination, and fostering equal opportunities in recruitment, learning and development, and remuneration, where decisions are made against objective selection criteria. These commitments are outlined in our global Equality, Diversity, and Inclusion Policy. Other global policies specific to social and employee-related matters include Health and Wellbeing Policy as well as policies on recruitment and onboarding, learning and development, and employee engagement, for which policies are complemented with local policies and, where relevant, with additional global guidelines. Annual Report 2022 10 10 All Purmo Group employees are expected to familiarise themselves with the Anti-Corruption and Anti-Bribery Policy, conduct mandatory training on the Code of Conduct’s anti-corruption elements, and speak up and report concerns. Employees at greatest risk of facing corruption – especially those in the supply chain, international sales, contracting or procurement – are provided with additional training on avoiding, preventing, recognising, and reporting bribery and corruption. All business units are also expected to reasonably investigate intermediaries and to include anti-corruption clauses in contracts. Purmo Group’s most significant risks in corruption and bribery deal with corrupt arrangements that may involve extortion or collusion by Purmo Group’s employees and other individuals to steal, falsify, or destroy company assets or business information for personal gain. Purmo Group mitigates these risks through annual training to increase risk awareness, via internal procedures, implementation of prevention processes, and investigation of red flags. Summary of key non-ﬁnancial performance indicators 2022 2021 8 Change, % Production Scope 1 and 2 GHG emissions, tCO 2 e 1 79,035 86,780 -9% Scope 3 GHG emissions from procured steel, tCO 2 e 2 279,578 381,166 -27% Scope 1 and 2 carbon intensity 3 87.4 102.9 -15% Solutions Customer Net Promoter Score, cNPS 4 33 N/A -3% Customer Sustainability Net Promoter Score, sNPS 5 8 N/A N/A People Lost Time Injury Frequency Rate, LTIFR 6 4.9 5.2 -6% Number of safety observations 1,218 1,013 20% Number of accidents 28 32 -13% Proportion women in senior management positions 27% 24% Employee Net Promoter Score (eNPS) -8 -9 -11% Anti-corruption policy training coverage 7 94% completion 74% pass 99% completion 83% pass Communities Number of volunteering hours 6,680 N/A N/A 1 Market-based GHG emissions based on Purmo Group’s procurement mix of electricity and gas in countries with manufacturing operations. 2 2021 World Steel Association data of 1.89 tCO2e embodied carbon produced for every tonne of crude steel cast. 3 tCO2e/net sales in EUR million. 4 Question asked: ‘How likely is it that you would recommend to a friend or colleague?’ 5 Question asked: ‘How likely is it that you would recommend to a friend or colleague as a leader in sustainable indoor climate comfort?’ 6 Lost Time Injury Frequency Rate (LTIFR) is the number of lost time injuries occurring in a workplace per 1 million hours worked. 7 Of Purmo Group people in a position to make decisions on behalf of the company 8 Certain data from the comparison periods are unavailable as the data collection for these sustainability focus areas began only after the comparison periods. Annual Report 2022 1111 Substantial Contribution criteria DNSH criteria ("Does Not Signiﬁcantly Harm") Economic activties Codes Absolute turnover, MEUR Propor- tion of turnover, % Climate Change Mitigati- on, % Climate Change Adapta- tion, % Water marine resource, % Circular Econom, % Pollution, % Biodiver- sity and ecosys- tems, % Climate Change Miti- gation, (Y/N) Climate Change Adap- tation, (Y/N) Water marine resources, (Y/N) Circular Economy, (Y/N) Pollution, (Y/N) Biodi- versity and eco- systems, (Y/N) Mini- mum safe- guards, (Y/N) Category (enabling activity (E) Category (transi- tional activity) (T) A. TAXONOMY-ELIGIBLE ACTIVITIES A.1. Environmental sustainable activities (Taxonomy aligned) Manufacture of energy eciency equipment for buildings 3.5 51.7 6% 100% N/A Y Y Y Y Y Y 3% E Turnover of environmental sustainable activities (Taxonomy-aligned) (A.1.) 51.7 6% A.2. Taxonomy-Eligible but not environmental sustainable activites (not Taxonomy-aligned activities) Manufacture of energy eciency equipment for buildings 3.5 710.5 79% Turnover of Taxonomy-eligible but not environmental sustainable activities (not Taxonomy-aligned activities) (A.2.) 710.5 79% Total (A.1. + A.2) 762.2 84% B. TAXONOMY-NON-ELIGIBLE ACTIVITIES Turnover of Taxonomy-non-eligible activities (B) 141.9 16% Total (A+B) 904.1 100% Proportion of Turnover from products or services associated with Taxonomy-aligned aconomic activities 2022 Taxonomy- aligned proportion of turnover year N, % Taxonomy- aligned proportion of turnover year N-1, % Annual Report 2022 1212 Substantial Contribution criteria DNSH criteria ("Does Not Signiﬁcantly Harm") Economic activties Codes Absolute turnover, MEUR Propor- tion of turnover, % Climate Change Mitigati- on, % Climate Change Adapta- tion, % Water marine resource, % Circular Econom, % Pollution, % Biodiver- sity and ecosys- tems, % Climate Change Miti- gation, (Y/N) Climate Change Adap- tation, (Y/N) Water marine resources, (Y/N) Circular Economy, (Y/N) Pollution, (Y/N) Biodi- versity and eco- systems, (Y/N) Mini- mum safe- guards, (Y/N) Category (enabling activity (E) Category (transi- tional activity) (T) A. TAXONOMY-ELIGIBLE ACTIVITIES A.1. Environmental sustainable activities (Taxonomy aligned) Manufacture of energy eciency equipment for buildings 3.5 0.6 3% 100% N/A Y Y Y Y Y Y 3% E Turnover of environmental sustainable activities (Taxonomy-aligned) (A.1.) 0.6 3% A.2. Taxonomy-Eligible but not environmental sustainable activites (not Taxonomy-aligned activities) Manufacture of energy eciency equipment for buildings 3.5 15.1 78% Turnover of Taxonomy-eligible but not environmental sustainable activities (not Taxonomy-aligned activities) (A.2.) 15.1 78% Total (A.1. + A.2) 15.6 81% B. TAXONOMY-NON-ELIGIBLE ACTIVITIES Turnover of Taxonomy-non-eligible activities (B) 3.6 19% Total (A+B) 19.3 100% Proportion of CapEx from products or services associated with Taxonomy-aligned aconomic activities 2022 Taxonomy- aligned proportion of turnover year N, % Taxonomy- aligned proportion of turnover year N-1, % Annual Report 2022 1313 Substantial Contribution criteria DNSH criteria ("Does Not Signiﬁcantly Harm") Economic activties Codes Absolute turnover, MEUR Propor- tion of turnover, % Climate Change Mitigati- on, % Climate Change Adapta- tion, % Water marine resource, % Circular Econom, % Pollution, % Biodiver- sity and ecosys- tems, % Climate Change Miti- gation, (Y/N) Climate Change Adap- tation, (Y/N) Water marine resources, (Y/N) Circular Economy, (Y/N) Pollution, (Y/N) Biodi- versity and eco- systems, (Y/N) Mini- mum safe- guards, (Y/N) Category (enabling activity (E) Category (transi- tional activity) (T) A. TAXONOMY-ELIGIBLE ACTIVITIES A.1. Environmental sustainable activities (Taxonomy aligned) Manufacture of energy eciency equipment for buildings 3.5 0.4 2% 100% N/A Y Y Y Y Y Y 2% E Turnover of environmental sustainable activities (Taxonomy-aligned) (A.1.) 0.4 2% A.2. Taxonomy-Eligible but not environmental sustainable activites (not Taxonomy-aligned activities) Manufacture of energy eciency equipment for buildings 3.5 17.6 91% Turnover of Taxonomy-eligible but not environmental sustainable activities (not Taxonomy-aligned activities) (A.2.) 17.6 91% Total (A.1. + A.2) 18.1 93% B. TAXONOMY-NON-ELIGIBLE ACTIVITIES Turnover of Taxonomy-non-eligible activities (B) 1.3 7% Total (A+B) 19.4 100% Proportion of OpEx from products or services associated with Taxonomy-aligned aconomic activities 2022 Taxonomy- aligned proportion of turnover year N, % Taxonomy- aligned proportion of turnover year N-1, %* Annual Report 2022 1414 issuance of a maximum of 8,000,000 class C shares as well as the issuance of special rights entitling to class C shares referred to in Chapter 10, Section 1 of the Finnish Companies Act in one or several tranches. The proposed number of shares corresponds to approximately 20 per cent of all class C shares in the company. However, a maximum of 25 per cent of the authorisation, i.e., a maximum of 2,000,000 class C shares (including shares to be received based on special rights) may be used for incentive arrangements and remuneration schemes. The Annual General Meeting authorised the Board of Directors to repurchase a maximum of 4,000,000 of the company’s own class C shares as well as on the acceptance of them as a pledge. The shares shall be repurchased with funds from the company’s Transaction day Shareholder Direct holding after the transaction Direct holding before the transaction Total holding 5 Jan 2022 Rettig Group Ltd. 66.64% 68.28% 66.64% 17 Aug 2022 Virala Corporation 1 15.09% 12.32% 15.14% 1 Virala Corporation held 4,895,000 class C and 1,565,217 class F shares of Purmo Group on 31 December 2022. unrestricted shareholders’ equity. The number of shares corresponds to approximately 10 per cent of all class C shares in Purmo Group. The authorisation may be used to improve Purmo Group’s capital structure, to finance or carry out corporate acquisitions or other arrangements, for incentive arrangements and remuneration schemes or for other purposes resolved by the Board of Directors. The authorisations are effective until the end of the next Annual General Meeting, however, no longer than until 30 June 2023. Flagging notifications During 2022, Purmo Group received the following notifications from major shareholders: More information on flagging notifications is available on the company’s website. Shares and shareholders Basic share information 31 Dec 2022 Listed on Nasdaq Helsinki Trading code PURMO ISIN code FI4000507488 Number of class C shares 41,112,713 Number of class F shares 1,565,217 High, EUR 15.65 Low, EUR 8.12 Volume-weighted average price 10.45 Closing price, EUR, 31 December 2022 8.22 Market capitalisation, class C share, EUR million, 31 December 2022 337.9 Number of shareholders 3,315 (31 Dec 2021: 3,095) Number of traded shares 11,872 Purmo Group Plc has two share classes of which class C shares are listed and class F shares are held by Purmo Group Plc’s founding shareholder, Virala Corporation. The company’s class F shares are subject to redemption and consent clauses in accordance with the Articles of Association, which restrict the rights to transfer or acquire class F shares. The holder of class F shares has the right to demand conversion into class C shares subject to certain price hurdles calculated in accordance with the Articles of Association. Further class F shares carry a right to asset distribution equivalent to a certain proportion of assets distributed to class C shares in accordance with the Articles of Association. Purmo Group Plc (former Virala Acquisition Company Plc) announced on 20 September 2021 that the first share price hurdle as set out in the company’s Articles of Association had been exceeded, pursuant to which 18.75 per cent of class Fshares held by the company’s founding shareholder, Virala Corporation, have become eligible for conversion into class C shares starting from 28 June 2024. The number of shares outstanding on 31December 2022 was 41,112,713 class C shares and 1,565,217 class F shares. The company’s registered share capital on 31 December 2022 was EUR 3,080,000. The company has no treasury shares. Trading in Purmo Group Plc’s shares commenced in Nasdaq Helsinki on 3 January 2022. On 31 December 2022, the five largest shareholders were Rettig Group Ltd (61.80 per cent of total shares), Virala Corporation (15.14 per cent), Ahlström Invest B.V. (2.81 per cent), Varma Mutual Pension Insurance Company (2.34 per cent) and Jussi Capital Oy (1.44 per cent). Board authorisation regarding share issue and share repurchase The Annual General Meeting of 25 April 2022 authorised the Board of Directors to resolve the Annual Report 2022 15 15 Shareholders by type on 31 December 2022 Owner type Number of shares % of shares Family-owned investment companies 36,043,763 84.46% Private Individuals 2,060,841 4.83% Pension & insurance 1,713,453 4.01% Other 979,935 2.30% Fund companies 779,627 1.83% Foundation 717,770 1.68% Unknown type 382,541 0.89% Total number of shares 42,677,930 100.00% Shareholders by holding on 31 December 2022 Owner distribution by holdings Number of shares % of shares 1-100 96,586 0.23% 101-500 295,502 0.69% 501-1,000 185,590 0.43% 1,001-5,000 393,338 0.92% 5,001-10,000 253,313 0.59% 10,001-50,000 850,164 1.99% 50,001-100,000 364,246 0.85% 100,001-500,000 4,205,685 9.86% 500,001-1,000,000 1,616,077 3.79% 1,000,001- 34,034,888 79.75% Unknown holding size 382,541 0.89% Total 42,677,930 100.00% Shareholding by country on 31 December 2022 Country Number of shares % of shares Finland 39,033,162 91.46% Netherlands 1,201,678 2.82% Sweden 1,000,757 2.35% United Kingdom 728,347 1.71% Denmark 229,989 0.54% Luxembourg 51,000 0.12% Poland 35,628 0.08% Austria 3,960 0.01% Estonia 2,804 0.01% Belgium 2,603 0.01% Germany 1,874 0.00% Italy 1,784 0.00% France 670 0.00% South Africa 441 0.00% India 202 0.00% Russian Federation 150 0.00% Czech Republic 100 0.00% Thailand 100 0.00% Vietnam 100 0.00% Mexico 40 0.00% Unknown country 382,541 0.89% Total 42,677,930 100.00% Largest shareholders on 31 December 2022 Name Shares Change % of shares % of votes 1 Rettig Group Oy Ab 26,373,971 0 61.8% 61.8% 2 Virala Corporation 6,460,217 0 15.1% 15.1% 3 Ahlstrom Invest B.V. 1,200,700 0 2.8% 2.8% 4 Varma Mutual Pension Insurance Company 1,000,000 0 2.3% 2.3% 5 Jussi Capital Oy 616,077 0 1.4% 1.4% 6 Fennia Mutual Insurance Company 500,000 0 1.2% 1.2% 7 Svenska Litteratursällskapet i Finland 500,000 0 1.2% 1.2% 8 Oy Julius Tallberg Ab 442,000 0 1.0% 1.0% 9 John Peter Leesi 408,927 0 1.0% 1.0% 10 Aipa Invesco AB 337,208 0 0.8% 0.8% Total 10 37,839,100 0 88.7% 88.7% Others 4,838,830 0 11.3% 11.3% Total number of shares 42,677,930 0 100.0% 100.0% Managers' transactions Purmo Group's managers' transactions are published as stock exchange releases, and they are available on the company’s website. Share price performance in 2022 Annual Report 2022 1616 Personnel 2022 2021 2020 Number of employees at the end of the period 3,372 3,471 3,262 Average number of employees 3,476 3,360 3,287 Personnel by region 1 2022 2021 2020 Northern Europe 678 661 627 Western Europe 950 927 938 Central and Eastern Europe 1,265 1,421 1,232 Southern Europe 329 317 325 Rest of the world 150 145 140 Total 3,372 3,471 3,262 1 Figures for 2020-2021 restated for comparability reasons. Changes in the management team On 5 October 2022, Purmo Group announced a new organisational structure effective from 1 January 2023. The management team within the new organisational structure is as follows: • John Peter Leesi, Chief Executive Officer • Erik Hedin, Chief Operating Officer; leading also the strategy acceleration programme • Mike Conlon, President, Climate Solutions division • Barry Lynch, President, Climate Products & Systems division • Linda Currie, Chief People Officer On 25 November 2022, Purmo Group announced that Matts Rosenberg had been appointed interim CFO of Purmo Group Plc, effective as of 1 January 2023. He reports to CEO John Peter Leesi. On 22 February 2023, Purmo Group announced that Jan- Elof Cavander (MSc. Ind. Eng.) has been appointed Chief Financial Officer of Purmo Group Plc and a member of the Management team. He will join Purmo Group on 22nd of June 2023, the latest. Mr. Cavander will report to Chief Executive Officer John Peter Leesi and will be based in Helsinki, Finland. On 4 July 2022, Barry Lynch was appointed Senior Vice President of the Radiators division and member of the Management Team. He succeeded Tomasz Tarabura, who left the company. Share-based incentive plans On 20 July 2022, Purmo Group announced that the Board of Directors had decided to launch a new share-based incentive plan for management and key employees. The purpose of the plan is to align the targets of shareholders and key employees in order to increase the long-term value of the company, retain key employees and offer a competitive incentive plan that is based on company share ownership and successful performance. On 27 September 2022, Purmo Group announced that the Board approved a total of 66,403 subscriptions of new class C shares in the share issue for management and key employees. The subscription price of EUR 10.23 per share was based on the trade volume weighted average price of the Company’s share on Nasdaq Helsinki Ltd during 12 July–5 September 2022. The total subscription price of the new class C shares was EUR 679,302.69. The performance criterion of the plan is the Total Shareholder Return (TSR) of the class C share. The minimum threshold for reward pay-out is a share price of EUR 16.00, and maximum reward shares are earned at a share price of EUR 24.00. Paid dividends and return on capital during the plan are added to the share price when calculating the TSR. The reward will be paid in both Purmo Group class C shares and in cash to cover taxes and statutory social security contributions arising from receipt of the reward. The rewards payable according to the incentive plan, including the proportion to be paid in cash, correspond to the Governance A Corporate Governance Statement, required by the Corporate Governance Code 2020, is presented as a separate report in connection with the Financial Statements. In addition, it is publicly available on the company's website. Personnel The number of Group full-time-equivalent employees averaged 3,476 (3,360) in January– December. At the end of the period, the Group had 3,372 (3,471) full-time-equivalent employees. The decrease in full-time-equivalent employees was mainly due to organisational effectiveness related to Accelerate PG. Board of Directors’ shareholdings on 31 December 2022 Class C shares Class F shares Tomas von Rettig 0 0 Matts Rosenberg 2,496 0 Alexander Ehrnrooth 5,560 0 Carina Edblad 1,784 0 Carlo Grossi 1,784 0 Jyri Luomakoski 1,970 0 Catharina Stackelberg 2,476 0 Total 16,070 0 Out of total shares outstanding (class C shares) 0.04% 0.00%  Inﬂuence in Rettig Group Ltd which held 26,373,971 class C shares in Purmo Group on 31 December 2022.  Inﬂuence in Virala Corporation which held 4,895,000 class C shares and 1,565,217 class F shares in Purmo Group on 31 December 2022. Management Team's shareholdings on 31 December 2022 Class C shares Class F shares John Peter Leesi 408,927 0 Erik Hedin 245,356 0 Mike Conlon 31,770 0 Linda Currie 23,582 0 Barry Lynch 31,718 0 Total 741,353 0 Out of total shares outstanding (class C share) 1.80% 0.00% Wages and salaries EUR million 2022 2021 2020 Wages and salaries total 127.6 128.2 120.1 Annual Report 2022 1717 value of an approximate maximum total of 1,500,000 class C shares of Purmo Group Plc. The final number of reward shares is subject to each participant’s personal share ownership and achievement of set TSR targets. Purmo Group Plc has financed the subscriptions of the class C shares by offering interest-bearing loans to the participants to a maximum amount of 50 per cent of the subscription value of the subscribed shares. Participants have pledged the subscribed shares as security for performing their obligations under the concluded loan agreement. The performance period covers the financial years of 2022–2025 and the payout period covers the financial years of 2026–2027. The plan has 29 participants in total. Purmo Group Plc’s Remuneration Policy is available on the company’s website. Annual General Meeting The Annual General Meeting was held on 25 April 2022. The meeting adopted the Annual Accounts, including the Consolidated Annual Accounts for 2021, and discharged the members of the company’s Board of Directors and the CEO from the liability for the financial year 2021. The Annual General Meeting also adopted the remuneration policy. All resolutions of the Annual General Meeting are available on the company’s website. Return of capital The Annual General Meeting decided that a return of capital of EUR 0.36 per class C share is to be paid for the financial year 2021 in two instalments and that a return of capital for class F shares is to be paid in accordance with the Articles of Association of the company for the financial year 2021 in two instalments. The first instalment of the return of capital was EUR 0.18 per class C share and EUR 0.03 per class F share. The first instalment of the return on capital was paid on 4 May 2022. The second instalment of the return on capital was EUR 0.18 per class C share and EUR 0.04 per class F share. The second instalment was paid on 3 October 2022. Remuneration of the members of the Board of Directors The Annual General Meeting resolved that the following annual remuneration will be paid to the members of the Board of Directors: EUR 92,000 per year for the Chair of the Board, EUR 53,000 per year for the Vice Chair of the Board, EUR 53,000 per year for each of the Chairs of the Board Committees and EUR 48,000 per year for each ordinary board member. Approximately 40 per cent of the remuneration is to be used to acquire class C shares and the remainder is to be paid in cash. The annual remuneration shall be paid to the members of the Board of Directors in proportion to the length of their term of office. Board of Directors The Annual General Meeting resolved that the number of members of the Board of Directors shall be seven. Tomas von Rettig, Matts Rosenberg, Alexander Ehrnrooth, Catharina Stackelberg, Carlo Grossi, Carina Edblad and Jyri Luomakoski were re- elected to the Board of Directors for a term of office ending at the conclusion of the next Annual General Meeting. The Annual General Meeting elected Tomas von Rettig as the Chairman of the Board and Matts Rosenberg as the Vice-Chairman. Board authorisations Board authorisations decided by the Annual General Meeting are presented in the section ‘Shares and Shareholders’. Committees nominated by the Board Purmo Group Plc’s Board of Directors appointed the following members to its committees at its constitutive meeting on 25 April 2022: • Audit Committee: Jyri Luomakoski (Chair), Matts Rosenberg, Alexander Ehrnrooth • M&A Committee: Matts Rosenberg (Chair), Alexander Ehrnrooth, Carlo Grossi • Remuneration Committee: Tomas von Rettig (Chair), Catharina Stackelberg, Carina Edblad Shareholders’ Nomination Board In June 2022, Purmo Group Plc’s three largest shareholders nominated the following representatives to the Shareholders’ Nomination Board: • Matts Rosenberg (Chair) • Alexander Ehrnrooth • Peter Seligson Risks and uncertainties in the near future Purmo Group is affected by global supply chain disturbances which started during the COVID-19 pandemic. This involves uncertainties and may adversely affect the demand and delivery capability of the company’s products as well as the availability of financing. Possible new COVID restrictions in China in particular might have an effect on Purmo Group’s business. Purmo Group has been able to manage the adverse effect of the disturbances on its operations and hence, the impact of challenges in sourcing raw materials and components has been limited. Purmo Group’s costs have been affected by commodity and energy price increases caused, for example, by the sharp global increase in demand for commodities as well as other supply chain disturbances. The company has been able to manage profitability by implementing sales price increases with a reasonable delay. Inflation rates in Purmo Group’s core markets are high and there is no certainty whether the inflation rates will decrease in the near future. Fluctuations in the prices of raw materials, consumables, energy, and freight rates as well as problems with the availability of raw materials, supplies, labour and freight shipping may have a negative impact on profitability and operations in general. Annual Report 2022 18 18 to the expectations and requirements. The ongoing energy transition is expected to accelerate the demand for low-temperature systems and solutions which are compatible with energy sources other than fossil fuels. This is an opportunity for the execution of Purmo Group’s solution-selling strategy. There are differences between markets in how the transition changes the product mix demand, however, Purmo Group is well-positioned to manage the change and capture opportunities with the support of its wide product portfolio. The war in Ukraine has resulted in economic sanctions being imposed on Russia by many countries. Purmo Group has about 210 employees in Russia and two freelance sales representatives in Ukraine, based in Kyiv. The Group has been importing into both countries for several years and, in 2021, established sourcing, production and additional sales in Russia through its acquisition of 51 per cent of the shares in Euroradiators Holding B.V., a Dutch holding company holding all shares in the Russian Evroradiators LLC, from Bosch Group. Before suspending sales and operations in Russia, sales were generated both from Polish imports as well as an increasing portion of local production following the acquisition. Imports into Ukraine made up less than 1 per cent of total Group sales in 2022 and those into Russia, less than 4 per cent. On 31 March 2022, Purmo Group decided to exit its business in Russia. The economic downturn in Ukraine continues to have a significant negative impact on demand for Purmo Group’s products in the country. The company temporarily halted deliveries to Ukraine after the invasion but has later continued deliveries where arrangements have been possible. The health and safety of employees, customers and the business are, as always, a priority. The impact of the war has started to materialise in markets other than Russia and Ukraine, with effects including high inflation and a decline in the construction market. There is a risk that private and commercial investment decisions will continue to be postponed or cancelled due to high inflation, increased interest rates and/or general economic uncertainty. The length of the decline in the construction markets in areas other than Russia and Ukraine is hard to estimate. Events after the review period On 22 February 2023, Purmo Group announced that Jan-Elof Cavander (MSc. Ind. Eng.) has been appointed Chief Financial Officer of Purmo Group Plc and a member of the Management team. He will join Purmo Group on 22 June 2023, the latest. Mr. Cavander will report to Chief Executive Officer John Peter Leesi and will be based in Helsinki, Finland. On 16 February 2023, Purmo Group announced that it issues green capital securities of EUR 60 million in total (the “Capital Securities”). The Capital Securities will bear interest at a fixed rate of 9.5 per cent per annum until 23 February 2026 after which the Capital Securities will bear interest at a floating interest rate quarterly in arrears on each interest payment date. The Capital Securities do not have a specified maturity date, and Purmo Group is not under an obligation to repay, repurchase or redeem the Capital Securities at any specified date. Purmo Group has the possibility to redeem the Capital Securities on the reset date, 23 February 2026. Purmo Group’s major shareholder, Rettig Group Oy Ab, and its affiliates are participating in the issuance by subscribing for the Capital Securities in an amount of EUR five (5) million. The rationale for the issuance of the Capital Securities is to ensure funding for Purmo Group’s announced strategy acceleration programme. The net proceeds from the issue will be used in accordance with Purmo Group’s Green Finance Framework announced on 13 February 2023. The issue date for Capital Securities will be 23 February 2023. On 13 February 2023, Purmo Group announced that it has established a Green Finance Framework to integrate the company’s sustainability ambitions into its funding. The Green Finance Framework is designed to support financing or refinancing Eligible Assets and Expenditures, in part or in full, that enable energy efficiency improvements, such as equipment for heating and cooling systems, and components enabling smart controlling and monitoring of heating and cooling systems. The short-term demand for Purmo Group’s products depends on fluctuations in demand in the construction industry, which is cyclical in nature, especially in new building. Volumes and profitability may vary as a result of economic conditions and the amount of investments in real estate. Financial uncertainty in the global economy and rising inflation can increase volatility in foreign exchange rates as well as have an adverse effect on interest rates and the availability of funding. Due to Purmo Group’s global presence, it is exposed to currency risks. Purmo Group’s financial risk management approach is to hedge highly probable foreign currencies (Swedish krona, British pound, Polish zloty and Romanian leu) cash flows. Regardless of hedging activities, the Group may still encounter fluctuations in its financial position due to volatility in foreign exchange rates. The Central bank’s actions to tackle inflation with tightening monetary policy have had an impact on the cost of funding for Purmo Group. The company has encountered financial derivatives to reduce and manage the impact of interest rate fluctuations. The Group has sufficient short- and long-term committed funding to meet its short- and long-term obligations. Climate change-related impacts mean that Purmo Group must develop products that meet customer expectations and follow the changing regulations related to, for example, energy efficiency and product life cycle requirements. Purmo Group has a sustainability strategy and a function. Proactive, effective and right measures may mean that Purmo Group is able to use business opportunities relating Annual Report 2022 19 19 Board of Director's proposal for the distribution of proﬁt The parent company’s distributable equity on 31 December 2022 totalled EUR 407,036,848.65. The Board of Directors of Purmo Group Plc proposes to the Annual General Meeting convening on 12 April 2023 that a return of capital of EUR 0.36 per class C share be paid for the financial year 2022 and that a return of capital for class F shares be paid in accordance with the Articles of Association of the Company for the financial year 2022 from the reserve for invested unrestricted equity of the Company. All the class C shares in the Company are entitled to a return of capital except for treasury shares held by the Company on the return of capital record date. In accordance with the Articles of Association of the Company and as a consequence of the first share price hurdle for conversion of class F shares into class C shares having been exceeded in September 2021, class F shares currently carry a right to asset distribution equivalent to 0.69 per cent of the return of capital proposed to be distributed to class C shares, which corresponds to a return of capital of EUR 0.07 per class F share. According to the Company’s dividend policy, at least 40% of annual net profit will be distributed as dividends or return of capital. The return on capital is proposed to be paid in four instalments in Q2 2023, Q3 2023, Q4 2023 and Q1 2024. Annual Report 2022 20 20 Key ﬁgures Information about the share EUR million 1-12/2022 1-12/2021 1-12/2020 Net sales 904.1 843.6 671.2 EBITDA 78.5 33.6 71.9 EBITDA margin 8.7 % 4.0% 10.7% Adjusted EBITDA 92.9 103.9 85.1 Adjusted EBITDA margin 10.3 % 12.3% 12.7% EBITA 46.8 6.3 44.9 EBITA margin 5.2 % 0.8% 6.7% Adjusted EBITA 64.6 76.6 58.1 Adjusted EBITA margin 7.1 % 9.1% 8.7% EBIT 39 3.5 42.0 EBIT margin 4.3 % 0.4% 6.3% Proﬁt before tax 21.6 -5.1 31.9 Proﬁt for the period 13.1 -18.8 25.3 Adjusted proﬁt for the period 34.9 51.4 38.5 Earnings per share, basic, EUR 0.32 -0.65 0.86 Adjusted Earnings per share, basic, EUR 0.85 1.77 1.32 Cashﬂow from operating activities 31.1 35.4 68.9 Capex 24 14.8 11.6 Acquisitions 14.6 4.5 0.0 Adjusted Operating Cash Flow for the last 12 months 51.9 50.2 1 94.2 Cash conversion 55.9 % 48.3% 1 110.7% Cash and cash equivalents 56.3 177.6 55.0 Net working capital 91.4 72.3 33.5 Operating capital employed 305 271.8 235.6 Return on operating capital employed 12.8 % 1.5% 17.8% Net debt 275.2 239.5 75.1 Net debt / Adjusted EBITDA 2.96 2.3 0.9 Equity / Asset ratio 41.0 % 37.3% 61.7% Return on Equity 3.3 % -4.0% 4.8% 1 Figures for 1-12/2021 restated for comparability reasons. EUR million 31 Dec 2022 31 Dec 2021 31 Dec 2020 Share capital, at the end of the year, EUR million 3.1 3.1 0.0 Class C-shares outstanding at the end of the year 1 41,112,713 40,374,531 28,846,195 Class F-shares outstanding at the end of the year 1,565,217 1,565,217 N/A Weighted average adjusted number of shares, basic 41,244,426 29,124,487 28,787,686 Weighted average adjusted number of shares, diluted 41,244,426 29,124,487 28,964,881 Earnings per share, EUR 0.32 -0.65 0.86 Earnings per share, diluted, EUR 0.32 -0.65 0.86 Dividend payout per class C-share and return of capital, EUR 2 0.36 0.36 N/A Dividend payout per class F-share and return of capital, EUR 2 0.07 0.07 N/A Dividend and return of capital per earnings, class C-share, % 112.7% -83.0% N/A Dividend and return on capital per earnings, class F-share, % 0.3% -8.3% N/A Eective dividend yield, class C-share, % 4.4% 2.5% N/A Equity per share, EUR 9.45 9.31 18.94 Market capitalisation, class C-share, EUR million 337.9 413.6 N/A Price to earnings ratio (P/E) 25.69 -21.85 N/A Highest share price, EUR 15.65 14.50 N/A Lowest share price, EUR 8.12 9.78 N/A Volume-weighted average share price, EUR 10.45 11.40 N/A Share price, 31 December, EUR 8.22 14.20 N/A 1 2019-2020 converted with merger consideration ratio class K share to class C share 2,600334506. 2 The amount for 2022 is based on the Board of Directors' proposal to the AGM. Annual Report 2022 21 Calculation of key ﬁgures Key ﬁgure Deﬁnition Reason for use EBIT Proﬁt before tax and net ﬁnancial items (Operating proﬁt). EBIT is used to measure proﬁtability generated by operating activities of the Group. EBIT margin EBIT as per centage of net sales. EBITDA Operating proﬁt before depreciation, amortisation and impairment. EBITDA is an indicator to measure the operating performance of the Group, before depreciation, amortisation and impairment. EBITDA margin EBITA as per centage of net sales. EBITA Operating proﬁt before the amortisation of intangibles including trademarks. EBITA is an indicator to measure the operating performance of the Group, before amortisation of intangibles including trademarks. EBITA margin EBITA as per centage of net sales. Gross proﬁt Net sales less cost of sales. Comparability adjustments Comparability adjustments comprise of direct transaction and integration costs on M&A activities, restructuring costs and costs incurred in connection with performance improvement programmes, costs that have been incurred in connection with the formation of Purmo Group and costs incurred to achieve stand-alone readiness which will not continue post-merger as well as costs incurred as a result of Rettig Group’s ownership comprising of management fees and Rettig Group’s legacy incentive plans in addition to other one-o costs such as legal claims or signiﬁcant out-of-period adjustments and exceptional gains and losses on sale of ﬁxed assets. Comparability adjustments account for items that have been adjusted due to speciﬁc events that otherwise aect comparability between dierent periods. Provides a better understanding to management and investors of the comparable operating activities. Adjusted EBITDA, adjusted EBITDA margin, Adjusted EBITA and Adjusted EBITA margin are presented in addition to EBIT, EBITDA and EBITA to reﬂect the underlying business performance by adjusting for items that the Group considers impacting comparability (“Comparability adjustments”). Adjusted EBITDA EBITDA before comparability adjustments. Adjusted EBITDA margin Adjusted EBITDA as per centage of net sales. Adjusted EBITA EBITA before comparability adjustments. Adjusted EBITA margin Adjusted EBITA as per centage of net sales. Adjusted Proﬁt for the period Proﬁt before the period before comparability adjustments. Key ﬁgure Deﬁnition Reason for use Capex Capex is a measure of capital expenditure for the period which comprises the Group’s investments in property plant and equipment and intangible assets derived from the consolidated cash ﬂow statement. Capex is an indicator of the Group’s investments in property plant and equipment and intangible assets. Acquisitions (M&A) Acquisitions of subsidiaries and investments in associates derived from the consolidated cash ﬂow statement for the period. Acquisition capex is an indicator for investments in acquisition of businesses that are intended to grow the Group’s product or service oering, assets or technologies, productive capacity or performance. Adjusted operating cash ﬂow for the last 12 months Adjusted EBITDA on a rolling twelve-month basis less change in net working capital and capex on a rolling twelve-months basis. Adjusted operating cash ﬂow provides information on the Group’s operating cash ﬂow on an annualised basis, excluding adjusting items. Cash conversion Adjusted operating cash ﬂow divided by Adjusted EBITDA based on a rolling twelve-month calculation. Cash conversion is used to assess Purmo Group’s eciency to convert its operating results into cash. The ratio indicates the Group’s capacity to pay dividends and / or generate funds for acquisitions or other transactions. Net working capital Purmo Group’s inventories, operative receivables less trade and other operative liabilities. Net working capital is a useful measure to monitor the level of direct net working capital tied to the operations and changes therein. Operating capital employed Net working capital, other intangible assets, property, plant, equipment and right-of-use assets. Capital employed presents the total investment in the Group’s business operations. Return on operating capital employed EBIT based on a rolling twelve-month calculation divided by operating capital employed. Measures the return on the capital tied up in the business. Net debt Non-current and current borrowings (including shareholder loan) and non-current and current lease liabilities less cash and cash equivalents. To show the net of interest-bearing assets and interest-bearing liabilities. Net debt/Adjusted EBITDA Net debt divided by Adjusted EBITDA based on a rolling twelve-month calculation. The ratio indicates how fast the Group can repay its net debt using adjusted EBITDA (expressed in years), and it is a useful measure to monitor the level of the Group’s indebtedness. Equity to Asset ratio Total equity attributed to the owners of the company divided by total assets derived from the IFRS consolidated ﬁnancial statements. The ratio is a useful indicator to measure how much of the Group’s assets are funded by issuing shares rather than through external borrowings. Return on equity Group’s proﬁt for the period attributable to the owners of the Parent based on a rolling twelve-month basis divided by the average total equity attributable to owners of the company. Shows owners the return on their invested capital. Annual Report 2022 22 Reconciliation of Alternative Performance Measures EUR million unless otherwise indicated 2022 2021 2020 Comparability adjustments IFRS 2 merger impact - 52.3 - M&A related transactions and integration costs 2.2 0.1 0.4 Restructuring costs and one-o costs related to eciency programs 6.3 1 8.9 7.8 Formation of Purmo group and standalone preparations 0.3 6.6 2.0 Management fee to owners and legacy Rettig Group incentive plans 0 2.4 2.9 Impairment and write-down 12.9 - - Other 0.2 0.0 0.1 Total adjustments 21.7 70.2 13.2 Net sales 904.1 843.6 671.2 EBIT 39.0 3.5 42.0 EBIT margin 4.3% 0.4% 6.3% Amortisation and impairment 7.9 2.9 2.9 EBITA 46.8 6.3 44.9 EBITA margin 5.2% 0.8% 6.7% Depreciation and impairment 31.6 27.3 27.0 EBITDA 78.5 33.6 71.9 EBITDA margin 8.7% 4.0% 10.7% Adjusted EBITDA EBIT 39.0 3.5 42.0 Depreciation, amortisation and impairment excluding comparability adjustments 32.1 30.2 29.9 Adjustments 21.7 70.2 13.2 Adjusted EBITDA 92.9 103.9 85.1 Adjusted EBITDA margin 10.3% 12.3% 12.7% EUR million unless otherwise indicated 2022 2021 2020 Adjusted EBITA EBIT 39.0 3.5 42.0 Amortisation excluding comparability adjustments 3.9 2.9 2.9 Adjustments 21.7 70.2 13.2 Adjusted EBITA 64.6 76.6 58.1 Adjusted EBITA margin 7.1% 9.1% 8.7% Adjusted proﬁt/loss for the period Proﬁt/loss for the period 13.1 -18.8 25.3 Adjustments 21.7 70.2 13.2 Adjusted proﬁt/loss for the period 34.9 51.4 38.5 Adjusted Operating cash ﬂow for the last 12 months Adjusted EBITDA in the last 12 months 92.9 103.9 85.1 Change in net working capital compared to previous year same period -16.9 -38.8 20.7 Capex for last 12 months -24.0 -14.8 -11.6 Adjusted Operating cash ﬂow for the last 12 months 51.9 50.2 94.2 Cash conversion Adjusted Operating cash ﬂow for the last 12 months 51.9 50.2 1 94.2 Adjusted EBITDA 92.9 103.9 85.1 Cash conversion 55.9% 48.3% 110.7% Net working capital Inventories 174.1 157.4 105.3 Operative receivables 1 110.5 104.7 70.7 Operative liabilities 2 193.1 189.7 142.5 1 Includes EUR 5.7 million non-cash expenses 1 Includes trade receivables and EUR 21.3 million (31 Dec 2021: EUR 27.0 million and 31 Dec 2020: EUR 17.1 million) other current operative receivables included in other receivables and EUR 0.1 million (31 Dec 2021: EUR 0.5 million and 31 Dec 2020: EUR 0.5 million) non-current operative receivables in other receivables. 2 Includes EUR 192.0 million (31 Dec 2021: EUR 188.6 million and 31 Dec 2020: EUR 141.3 million) included in current trade and other payables and EUR 1.1 million (31 Dec 2021: EUR 1.2 million and 31 Dec 2020: EUR 1.2 million) in non-current other payables. Annual Report 2022 23 EUR million unless otherwise indicated 2022 2021 2020 Operative capital employed Net working capital 91.4 72.3 33.5 Other intangible assets 47.0 36.3 38.0 Property, plant and equipment 127.3 131.9 133.3 Right-of-use assets 39.3 31.3 30.9 Operative capital employed 305.0 271.8 235.6 Return on operating capital employed Operative capital employed 305.0 271.8 235.6 EBIT for the last 12 months 39.0 3.5 42.0 Return on operating capital employed 12.8 % 1.3% 17.8% Net debt Loans and borrowings (non-current) 278.1 285.7 0.0 Loans and borrowings (non-current) 11.3 95.0 94.5 Loans and borrowings, assets held for sale 7.2 - - Lease liabilities (non-current) 34.3 30.7 29.7 Lease liabilities (current) 9.4 5.6 5.9 Lease liabilities, assets held for sale 0.4 Cash and cash equivalents -56.3 -177.6 -55.0 Cash and cash equivalents, assets held for sale -9.1 - - Net debt 275.2 239.5 75.1 Net debt/Adjusted EBITDA Net debt 275.2 239.5 75.1 Annualised adjusted EBITDA 92.9 103.9 85.1 Net debt/Adjusted EBITDA 2.96 2.31 0.88 Equity/Asset ratio Equity attributable to owners of the Company 403.3 390.6 515.5 Total assets 983.7 1,046.2 836.2 Equity/Asset ratio 41.0% 37.3% 61.7% Return on equity The cumulative last 12 month proﬁt attributable to owners of the company 13.1 -18.8 24.9 Equity attributable to owners of the company beginning of period 390.6 515.5 516.7 Equity attributable to owners of the company end of period 403.3 390.6 515.5 Equity attributable to owners of the company average 396.9 453.1 516.1 EUR million unless otherwise indicated 2022 2021 2020 Return on equity 3.3% -4.2% 4.8% Basic earnings per share Proﬁt/loss attributable to shareholders of the parent company for class C shares (EUR million) 13.0 -18.7 24.9 Proﬁt/loss attributable to shareholders of the parent company for class F shares (EUR million) 0.1 -0.1 - Proﬁt/loss attributable to the owners of the Company (EUR million) 13.1 -18.8 24.9 Weighted average number of shares outstanding (pcs) 2 41,244,426 29,124,487 28,787,686 2 Basic earnings per share, EUR 0.32 -0.65 0.86 Diluted earnings per share Proﬁt/loss attributable to shareholders of the parent company for class C shares (EUR million) 13.0 -18.7 24.9 Proﬁt/loss attributable to shareholders of the parent company for class F shares (EUR million) 0.1 -0.1 - Proﬁt/loss attributable to the owners of the company (EUR million) 13.1 -18.8 24.9 Diluted weighted average number of shares outstanding (pcs) 2 41,244,426 29,124,487 28,964,881 3 Diluted earnings per share, EUR 0.32 -0.65 0.86 Adjusted basic earnings per share Adjustments 21.7 70.2 13.2 Adjusted proﬁt/loss attributable to shareholders of the parent company for class C shares (EUR million) 34.6 51.1 37.8 Adjusted proﬁt/loss attributable to shareholders of the parent company for class F shares (EUR million) 0.2 0.4 0.3 Adjusted proﬁt/loss attributable to the owners of the company (EUR million) 34.9 51.4 38.0 Weighted average number of shares outstanding (pcs) 2 41,244,426 29,124,487 28,787,686 3 Adjusted basic earnings per share, EUR 0.85 1.77 1.32 Adjusted diluted earnings per share Adjustments 21.7 70.2 13.2 Adjusted proﬁt/loss attributable to shareholders of the parent company for class C shares (EUR million) 34.6 51.1 37.8 Adjusted proﬁt/loss attributable to shareholders of the parent company for class F shares (EUR million) 0.2 0.4 0.3 Adjusted proﬁt/loss attributable to the owners of the company (EUR million) 34.9 51.4 38.0 Diluted weighted average number of shares outstanding (pcs) 2 41,244,426 29,124,487 28,964,881 3 Adjusted diluted earnings per share, EUR 0.85 1.77 1.32 1 Figures for 2021 restated for comparability reasons. 2 Including 293,478 class F shares convertible to class C shares at the start of the conversion period on 28 June 2024. 3 Converted with merger consideration ratio class K share to class C share 2,600334506. Annual Report 2022 24 CONSOLIDATED FINANCIAL STATEMENTS 26 Consolidated statement of profit and loss 26 Consolidated statement of comprehensive income 26 Consolidated statement of balance sheet 27 Consolidated statement of cash flows 28 Consolidated statement of changes in equity 29 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 30 PROPOSAL OF THE BOARD OF DIRECTORS 82 AUDITOR’S REPORT 83 Table of Contents NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 30 1. Accounting principles for the consolidated financial statement 30 1.1 General information 30 1.2 Basis of preparation 30 1.3 Management judgement and use of estimates 31 1.4 New and amended IFRS standards and IFRIC interpretations 31 2. Group performance 32 2.1 Segment information 33 2.2 Net sales 33 2.3 Other income and expenses 35 2.4 Employment benefit expenses 36 2.5 Share-based payments 37 3. Goodwill, intangible and tangible assets 39 3.1 Goodwill and other intangible assets 39 3.2 Impairment testing of goodwill 41 3.3 Property, plant and equipment 43 3.4 Right-of-use assets 44 3.5 Depreciation, amortisation and impairment 46 4. Operational assets and liabilities 46 4.1 Inventories 46 4.2 Trade and other receivables 47 4.3 Trade and other payables 47 4.4 Provisions 47 4.5 Post-employment obligations 49 5. Capital structure and financial instruments 51 5.1 Financial income and expenses 51 5.2 Financial risk management 51 5.3 Financial assets and liabilities 55 5.4 Cash and cash equivalents 57 5.5 Equity 57 5.6 Interest-bearing liabilities 60 5.7 Derivative financial instruments 61 5.8 Commitments and contingent assets and liabilities 63 6. Group structure 63 6.1 Business combinations 63 6.2 Assets held for sale 66 6.3 Subsidiaries 67 6.4 Exchange rates 68 7. Other notes 69 7.1 Related party transactions 69 7.2 Taxes 70 7.3 Events after the balance sheet date 73 8. Parent company financial statements 74 Parent company income statement 74 Parent company balance sheet 74 Parent company cash flow statement 75 Notes to the Parent Company Financial Statements 76 Annual Report 2022 25 Consolidated statement of proﬁt and loss Consolidated statement of comprehensive income EUR million Note 2022 2021 Net sales 2.2 904. 1 843. 6 Cost of sales 2.3 -700 .8 -645.5 Gross proﬁt 203.3 198. 1 Sales and marketing expenses 2.3 -87 .9 -7 8.3 Administrative expenses 2.3 -51.5 -42. 0 Research and development expenses 2.3 -6.2 -5.9 Other income 2.3 4.9 2 .6 Other expenses 2.3 -23.7 -71.0 Operational expenses -164.3 -194.6 EBIT 3 9.0 3.5 Finance income 5.1 5.7 1 .1 Finance expenses 5.1 -23. 1 -9 .7 Net ﬁnancial items -17 .4 -8.6 Proﬁt before tax 21. 6 -5. 1 Income tax expense 7.2 -8.4 -13.7 Proﬁt for the period 13. 1 -18.8 Proﬁt for the period attributable to: Owners of the parent 13. 1 -18.8 Non-controlling interests - - Earnings per share for proﬁt attributable to the ordinary equity holders of the parent company: Earnings per share basic, EUR 5.5 0 .32 -0 .65 Earnings per share diluted, EUR 5.5 0 .32 -0 .65 The Notes are an integral part of these ﬁnancial statements. Consolidated financial statements EUR million 2022 2021 Proﬁt for the period 13. 1 -18.8 Other comprehensive income Items that will never be reclassiﬁed to proﬁt and loss Remeasurement of deﬁned beneﬁt liability (asset) 2.2 8.4 Related tax -0 .2 0. 2 Total items that will not be reclassiﬁed to proﬁt and loss 1.9 8 .6 Items that are or may be reclassiﬁed to proﬁt and loss Foreign operations – foreign currency translation dierences 0. 5 0. 4 Reclassiﬁcation of foreign currency translation dierences through proﬁt and loss 0. 4 - Cash ﬂow hedges – eective portion of changes in fair value 3.4 -1.9 Cash ﬂow hedges – reclassiﬁed to proﬁt and loss 0. 7 1.5 Related tax -0.8 0. 2 Total items that are or may be reclassiﬁed to proﬁt and loss 4.2 0 .1 Other comprehensive income, net of tax 6.2 8.7 Total comprehensive income for the period 19 .3 -1 0 .1 Total comprehensive income attributable to: Owners of the parent 19 .3 -1 0 .1 Non-controlling interests - - The Notes are an integral part of these ﬁnancial statements. Annual Report 2022 26 EUR million Note 2022 2021 Assets Non-current assets Goodwill 3.1,3.2 370.6 369 .2 Other intangible assets 3.1 4 7. 0 36.3 Property, plant and equipment 3.3 127 .3 131.9 Right-of-use assets 3.4 39 .3 31.3 Derivative assets 5.7 2.7 - Other receivables 4.2 0. 7 1 .0 Deferred tax assets 7.2 29 .2 26.5 Deﬁned beneﬁt assets 4.5 2.2 6.2 Total non-current assets 618.9 602.4 Current assets Inventories 4.1 17 4. 1 157 .4 Trade receivables 4.2 8 9.1 7 7. 1 Derivative assets 5.7 2.7 0. 7 Other receivables 4.2 25. 6 29.7 Current tax asset 7.2 3 .1 1.3 Cash and cash equivalents 5.7 56.3 177 .6 Total current assets 350 .7 443.8 Assets held for sale 6.2 14. 0 - Total assets 983.7 1, 046.2 Equity and liabilities Equity Share capital 5.5 3 .1 3 .1 Reserve of invested unrestricted equity 5.5 380 .8 385.9 Other reserves 5.5 -5. 0 -9 .3 Consolidated balance sheet EUR million Note 2022 2021 Retained earnings 11.3 29 .7 Proﬁt for the period 13. 1 -18.8 Equity attributable to owners of the company 403.3 390. 6 Non-controlling interests - - Total equity 403.3 390. 6 Liabilities Non-current liabilities Loans and borrowings 5.6 278. 1 285.7 Lease liabilities 3.4 34.3 30 .7 Deﬁned beneﬁt liabilities 4.5 18.7 23.5 Other payables 4.3 1.4 1.2 Provisions 4.4 7. 8 7. 6 Deferred tax liabilities 7.2 5.4 2 .6 Total non-current liabilities 345. 6 351.3 Current liabilities Loans and borrowings 5.6 11.3 95.0 Lease liabilities 3.4 9. 4 5 .6 Trade and other payables 4.3 193.4 192. 0 Derivative liabilities 5.7 1.5 2 .0 Provisions 4.4 0. 4 4.9 Current tax liabilities 7.2 8.8 4.8 Total current liabilities 224.8 304.3 Total liabilities 570.5 655. 6 Liabilities directly attributed to assets held for sale 6.2 10.0 - Total equity and liabilities 983.7 1,046.2 The Notes are an integral part of these ﬁnancial statements. Annual Report 2022 27 EUR million Note 2022 2021 Cash ﬂow from operating activities Proﬁt for the period 13. 1 -18.8 Adjustments Depreciation, amortisation and impairment losses 32. 1 30.2 Gain on sale of property plant and equipment and intangible assets - -0 .5 Gain and losses on sale of subsidiaries -1.2 0.0 Share-based payments - 1.9 Finance income and expenses 17 .4 8.6 Income tax expenses 8.4 13.7 Reverse recapitalization - 52.3 Other non-cash income and expenses 21. 0 5.7 Cash ﬂow before change in net working capital 90 .9 93. 1 Changes in net working capital Inventories, increase (-) / decrease (+) 4.1 -21.4 -48.7 Trade and other receivables, increase (-) / decrease (+) 4.2 25.4 -31.2 Trade and other payables, increase (+) / decrease (-) 4.3 -31.5 45. 0 Provisions and employee beneﬁts, increase (+) / decrease (-) 4.4 -4. 1 -1 .6 Changes in net working capital -31.5 -36.5 Net cash ﬂow from operating activities before ﬁnancial items and taxes 59 .4 56.7 Financial items, net -17 .4 -7. 8 Income tax paid, net -10.9 -13.5 Cash ﬂow from operating activities 31. 1 35.4 Consolidated statement of cash ﬂows EUR million Note 2022 2021 Cash ﬂow from investing activities Proceeds from sale of property, plant and equipment and intangible assets 3 .1 0.7 Proceeds from sale of subsidiaries 2.7 - Purchases of property, plant and equipment and intangible assets -2 4 . 0 -14.8 Acquisitions of subsidiaries, net of cash acquired -14.6 -4.5 Long-term loan receivables granted -0 .2 - Proceeds from long-term loan receivables 0 .1 - Cash ﬂow from investing activities -32.9 -18.6 Cash ﬂow from ﬁnancing activities Proceeds from long-term borrowings - 279 .0 Increase of equity 0. 7 0. 3 Proceeds from share issue - 99 .9 Dividends and group contributions paid to related party - -266.4 Return of capital paid -14.9 - Repayment of lease liabilities -11. 6 -9.6 Proceeds from short-term borrowings 197 .9 95.0 Repayment of short-term borrowings -282.9 -4.9 Proceeds from short-term borrowings from related party - 10 .2 Repayment of short-term borrowings to related party - -98. 0 Cash ﬂow from ﬁnancing activities -110.8 105.4 Change in cash and cash equivalents, increase (+) / decrease (-) -112.6 122.2 Cash and cash equivalents at beginning of the period 177 . 6 55.0 Impact of change in exchange rates 0. 3 0. 4 Cash classiﬁed as assets held for sale -9 .1 - Cash and cash equivalents at end of the period 56.3 177 .6 The Notes are an integral part of these ﬁnancial statements. Annual Report 2022 28 Consolidated statement of changes in equity Attributable to owners of the parent company Non-controlling interest Total equity Share Reserve of invested Share-based EUR million capital unrestricted equity Translation reserve Fair value reserve payments reserve Retained earnings Total Balance as at 1 Jan 2022 3 .1 385.9 -8.7 -0.6 - 10.9 390. 6 - 390 .6 Proﬁt for the period 13. 1 13. 1 13. 1 Other comprehensive income 0. 9 3.3 1.9 6.2 6.2 Total comprehensive income for the period - - 0 . 9 3.3 - 15. 1 19 .3 - 19.3 Dividends and and return of capital paid -14.9 -14.9 -14.9 Share issue 9. 7 9. 7 9. 7 Share-based payments 0. 2 0. 2 0. 2 Other changes -1.7 -1.7 -1.7 Balance as at 31 Dec 2022 3 .1 380 .8 -7. 8 2.7 - 24.4 403.3 - 403.3 Attributable to owners of the parent company Non-controlling interest Total equity Share Reserve of invested Share-based EUR million capital unrestricted equity Translation reserve Fair value reserve payments reserve Retained earnings Total Balance as at 1 Jan 2021 0.0 497 .5 -9 .1 -0.3 2.4 25. 1 515.5 1.8 517 .3 Proﬁt for the period -18.8 -18.8 -18.8 Other comprehensive income 0. 4 -0 .3 8 .6 8.7 8.7 Total comprehensive income for the period - - 0. 4 -0.3 - -10.3 -1 0 .1 - -1 0 .1 Dividend and return of capital paid -15.0 -251.5 -266.4 -266.4 Long term incentive plan 0. 4 2 .0 2.3 2.3 Reverse recapitalization 3 .1 -9 7. 0 -4.3 250 .3 152. 1 152. 1 Acqusition of minority -2.8 -2.8 -1.8 -4.6 Balance as at 31 Dec 2021 3 .1 385.9 -8.7 -0.6 - 10 .9 390 .6 - 390 .6 Annual Report 2022 29 Notes to the consolidated financial statements 1. Accounting principles for the consolidated ﬁnancial statement How should Purmo Group’s accounting principles be read? The accounting principles used for the financial statements of Purmo Group are described at the beginning of each note to help understand each area of the financial statements. The following table summarizes the notes to each accounting principle and the relevant IFRS standard related to the note. Accounting principle Note IFRS standard Segment information 2.1 Segment information IFRS 8 Revenue recognition 2.2 Net sales IFRS 15 Employment beneﬁt expenses 2.4 Employment beneﬁt expenses IAS 19 Share-based payments 2.5 Share-based payments IFRS 2 Reverse recapitalization 2.3 Other income and expenses IFRS 3, IFRS 2 Other intangible assets 3.1 Goodwill and other intangible assets 3.2 Impairment testing of goodwill IAS 36, IAS 38 Property, plant and equipment 3.3 Property, plant and equipment IAS 16, IAS 36 Leases 3.4 Right-of-use assets IFRS 16 Inventory 4.1 Inventories IAS 24 Financial risk management 5.2 Financial risk management IAS 32, IFRS 7, IFRS 9, IFRS 13 Financial assets and liabilities 5.3 Financial assets and liabilities IAS 32, IFRS 7, IFRS 9, IFRS 13 Equity 5.5 Equity IAS 1 Business combinations 6.1 Business combinations IFRS 3 Assets held for sale 6.2 Assets held for sale IFRS 5 Related party transactions 7.1 Related party transactions IAS 24 Income taxes 7.2 Taxes IAS 12 1.1 General information Purmo Group Plc, “Purmo Group” or the “Company”, business ID 2890898-5, is a public limited company domiciled in Helsinki. The registered address of Purmo Group is Bulevardi 46, 00120 Helsinki, Finland. These consolidated financial statements comprise the parent company Purmo Group Plc and its subsidiaries (collectively the “Group” and individually “Group companies”). The Company’s class C shares are listed on the NASDAQ OMX Helsinki Ltd as of 3 January 2022. The copies of the consolidated financial statements are available at www.purmogroup.com or the parent company’s head office, Bulevardi 46, 00120 Helsinki, Finland. Purmo Group is a leader in sustainable indoor climate comfort solutions in Europe. The Group provides complete heating and cooling solutions to residential and non-residential buildings, including radiators, underfloor heating, heat pumps, towel warmers, valves and controls. Our mission is to be the global leader in sustainable indoor climate comfort solutions. Purmo Group has approximately 3,400 employees in 24 countries, manufacturing and distributing top quality products and solutions to customers in more than 100 countries globally. Merger of Virala Acquisition Company Plc and Purmo Group Ltd The merger of Virala Acquisition Company Plc ("VAC") and Purmo Group Ltd was completed on 31 December 2021 and the combined company was re-named Purmo Group Plc. Following the merger, the combined company continued the business operations of Purmo Group Ltd and as a listed company on the official list of Nasdaq Helsinki. As VAC didn't meet the definition of a business, ther merger was not accounted for as a business combination but as a reverse recapitalization. A result of the application to IFRS 3 reverse acquisition guidance by analogy to the merger, Purmo Group Ltd’s operating history and financial performance forms the basis for the comparative financial information for the combined company. 1.2 Basis of preparation The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRSs, using the IAS and IFRS standards and SIC and IFRIC interpretations, as applicable at 31 December 2022 and adopted by the European Union. The International Financial Reporting Standards refer to the standards implemented in the EU by Regulation (EC 1606/2002), and the related interpretations. The notes to the consolidated financial statements also comply with the Finnish accounting and corporate Annual Report 2022 30 The Group’s management has continued to assess the potential accounting implications of the COVID-19 pandemic. The Group’s management has reviewed the carrying values of the balance sheet items and the review did not indicate need for asset impairments. The Group’s management has assessed the balance sheet impact of Russia’s war in Ukraine and the decision to divest the business in Russia. The management has considered indicators of impairment of goodwill and intangible assets, the recoverable amount of property plant and equipment and right-of-use assets, the valuation of inventories, trade and other receivables and redemption liability. Due to the significant uncertainties related to the business in Russia and Ukraine the Group has recognised impairment charges and write-downs of EUR 12.9 million on goodwill, intangible assets, property, plant and equipment, right-of- use assets, inventories, other assets and redemption liability. See further information note 6.2 Assets held for sale. The Group's management has assessed the impact of potential climate-related matters such as increased production costs as a result to reduce carbon emissions and site restoration provisions, that might have an impact on the fair value measurement of the assets and liabilities in the consolidated financial statements. The Group management also monitors changes in government legislation in climate-related matters. When preparing these consolidated financial statements the impact of related matters is not material to Purmo Group's condensed financial statements. The Group will adjust the key assumptions used in value-in-use calculations in future financial statements should a change be required. 1.4 New and amended IFRS standards and IFRIC interpretations Amendments and annual improvements to IFRS standards The amendments and annual improvements to IFRS standards published by IASB effective for financial reporting periods commening on 1 January 2022 has not had a material impact on the results, financial position or the presentation of Purmo Group's financial statements New and amended standards to be applied The Group has not applied any standards, amendments or interpretations published by IASB that will be effective for the financial reporting period commencing after 1 January 2022. Purmo Group does not expect any material impact on the financial statements from any published, but not yet effective, IFRS standard, IFRIC interpretation, IFRS annual improvement or change. legislation that supplements the IFRSs. The Board of Directors of Purmo Group Plc has approved the financial statements for publication on 20 March 2023. Under the Finnish Limited Liability Companies Act, the shareholders may accept or reject the financial statement in the Annual General Meeting of the shareholders held after the publication. The Annual General Meeting is also entitled to amend the consolidated financial statements. The consolidated financial statements have been prepared on the historical cost basis unless otherwise specified in the significant accounting policies section below. Items included in the financial statements of each of Group’s entities are measured using the currency of the primary economic environment in which the entity operates (“the functional currency”). These consolidated financial statements are presented in EUR, which is the Company’s functional currency. The consolidated financial statements are presented in EUR millions. As result of rounding differences, the figures presented in the tables may not add up to the total. 1.3 Management judgement and use of estimates The preparation of consolidated financial statements under IFRSs requires the use of judgements, estimates and assumptions affecting the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Although these estimates are based on management’s best view of current events and actions, the actual results may ultimately differ from these estimates. These estimates and assumptions are reviewed on an ongoing basis. Information about judgements, assumptions and estimates that have a significant risk of resulting in a material change to reported results are described below. Note Accounting estimates and management judgement Note 2.2 Net sales Note 2.5 Share-based payments Note 3.2 Impairment testing of goodwill Note 3.3 Property, plant and equipment Note 3.4 Right-of-use assets Note 4.1 Inventories Note 4.4 Provisions Note 4.5 Post-employment obligations Note 7.2 Taxes Annual Report 2022 31 2. Group performance ACCOUNTING POLICIES Operating segments are reported in a manner consistent with Purmo Group’s internal reporting provided to the chief operating decision maker. The chief operating decision maker has been identified as Purmo Group’s Board of Directors, assisted by the CEO. The operating segments are defined based on the information that the Board of Directors uses to make decisions about the resources to be allocated to the divisions and to assess their performance. The adjusted EBITDA has been derived from the reported EBITDA by deducting material and unexpected items outside the ordinary course of business that are considered to impact comparability of the underlying business operations and excludes costs and income incurred in the group functions as described above. Such items comprise of direct transaction and integration costs on M&A activities, restructuring costs and costs incurred in connection with performance improvement programs, the IFRS 2 merger impact, costs that have been incurred in connection with the formation of Purmo Group, exceptional gains and losses on sale of fixed assets, and costs incurred to achieve stand-alone readiness which will not continue post-merger. Group’s divisions Purmo Group’s business operations are run through two divisions: Radiators and ICS, which form Purmo Group’s segments. The Radiator division manufactures two broader product categories: panel radiators comprising of horizontal and decorative panel radiators and vertical decorative radiators, and other radiators comprising of towel warmers, decorative tubular radiators and electric radiators. ICS division provides a comprehensive range of components or full systems to wholesalers, specifiers and installers comprising of four product categories; radiant heating and cooling, air heating and cooling, water distribution systems and system components and controls. Other and unallocated comprises of corporate headquarter functions and other Group level costs including Group Finance, Group Legal, Group Sustainability, Group Communications and Group Human Resources and M&A. The head office costs comprise mostly of salaries, rent and professional fees that are operated for the benefit of the whole group and are not allocated to the divisions. 2.1 Segment information Group’s main products include panel radiators, tubular and electric radiators, underfloor heating and piping systems, system components and air conditioners. Purmo Group sells its products mainly to wholesalers and national merchants in both residential and non-residential sectors in northern, western, southern and eastern Europe but also in the rest of the world (including Brazil, China, Japan and the United States). 2022 EUR million Radiators ICS Other Group Net sales 478.8 425.3 - 904.1 Adjusted EBITDA 50.3 51.9 -9.4 92.9 Adjusted EBITDA, % of sales 10.5% 12.2% 10.3% Material items impacting period proﬁt and loss -14.4 Depreciation, amortisation and impairment charges -39.5 EBIT 39.0 Net ﬁnancial items -17.4 Proﬁt before tax 21.6 Additional information for segments Depreciation, amortisation and impairment charges by segment -28.1 -11.4 - -39.5 2021 EUR million Radiators ICS Other Group Net sales 506.3 337.2 - 843.6 Adjusted EBITDA 66.0 43.7 -5.8 103.9 Adjusted EBITDA, % of sales 13.0% 13.0% 12.3% Management fee to owners and legacy Rettig incentive plans -2.4 Material items impacting period proﬁt and loss -67.9 Depreciation, amortisation and impairment charges -30.2 EBIT 3.5 Net ﬁnancial items -8.6 Proﬁt before tax -5.1 Additional information for segments Depreciation, amortisation and impairment charges by segment -21.1 -9.0 - -30.2 Annual Report 2022 32 2.2 Net sales ACCOUNTING PRINCIPLES Sales of goods are recognised when the control is transferred to the customer. This is when the goods have been delivered to the customer, typically based on delivery terms. Delivery is deemed to have taken place when the products have been delivered to the agreed location and the risk of obsolescence and damage of products has been transferred to the customer. In addition, for certain contract terms, a transportation service is considered to be a separate performance obligation when control to the goods is transferred to the buyer before the goods are delivered. However, transportation service is typically performed during the same day as control is transferred to the customer, and therefore the revenue from goods and transportation service is recognised at the same time because the effect of the delay on the Group’s net sales is deemed to be immaterial. A receivable is recognised when the goods are delivered. This is the point in time that the consideration is unconditional because only the passage of time is required before the payment is due. Amounts disclosed as net sales are net of discounts, annual rebates, bonuses and sanctions as well as other variable elements effecting revenue. The Group grants its customers different discounts, of which some are granted on invoicing, like cash discounts and different volume-based and customer related discounts. Goods are often sold with annual rebates based on aggregate sales. The level or the percentage on annual discounts might also depend on the sales volume, in which case the amount increases when the sales increases. A refund liability is recognised (included in trade and other payables for the expected volume-based discounts payable to customers in relation to the sales made until the end of the reporting period. Advance payments from customers, if any, are included in trade and other payables. The Group provides warranties for its products and typical warranty period is between 2 -10 years depending on the product. Provision has been made for estimated warranty claims in respect of the products sold, see Note 4.4 Provisions. ACCOUNTING ESTIMATES AND JUDGEMENTS Recognition of sales may require judgement and transfer of control is mainly assessed based on the terms of delivery in accordance with IFRS 15. Revenue from sales is recognised based on the price specified in the contract, net of the estimated volume-based discounts, the estimates are updated each reporting date. Accumulated experience is used to estimate and provide for the discounts, annual rebates and other items effecting revenue, and revenue is only recognised to the extent that it is highly probable that a significant reversal will not occur. Group’s main products include panel radiators, tubular and electric radiators, underfloor heating and piping systems, system components and air conditioners. Purmo Group sells its products mainly to wholesalers and national merchants. Entity wide information Net sales by market area Net sales to external customers by market area is based on the location in which the net sales has originated. EUR million 2022 2021 Northern Europe 1 191.0 161.1 Western Europe 337.3 326.6 Central and Eastern Europe 174.6 201.5 Southern Europe 142.4 102.0 Rest of the world 58.9 52.4 Net Sales 904.1 843.6 1 Net sales in Finland (company’s country of domicile) totalled to EUR 17.8 million (14.0). Annual Report 2022 33 Net sales by market area for divisions The division sales divided into geographical areas is the primary aggregation criteria of sales that is monitored by the company. 2022 EUR million Radiators ICS Group Northern Europe 118.5 72.5 191.0 Western Europe 202.1 135.2 337.3 Central and Eastern Europe 126.3 48.3 174.6 Southern Europe 5.3 137.1 142.4 Rest of the world 26.7 32.3 58.9 Net Sales 478.7 425.4 904.1 2021 EUR million Radiators ICS Group Northern Europe 112.3 48.8 161.1 Western Europe 213.5 113.1 326.6 Central and Eastern Europe 150.6 50.9 201.5 Southern Europe 5.7 96.3 102.0 Rest of the world 24.3 28.1 52.4 Net Sales 506.3 337.2 843.6 Non-current assets by country Non-current assets by country excludes financial instruments and deferred tax assets. Goodwill has not been allocated to geographical areas. EUR million 2022 2021 Poland 45.8 39.7 Finland 27.2 21.3 UK 24.7 26.8 Germany 24.4 23.1 Italy 24.2 27.0 China 14.1 17.3 Belgium 12.3 14.1 Rest of the world 43.7 37.4 Goodwill 370.6 369.2 Deferred tax assets 29.2 26.5 Total 616.2 602.4 Assets and liabilities related to contracts with customers The Group has no contract assets on the balance sheet. Contract liabilities include EUR 0.8 (6.1) million of advance payments from customers and they are presented in Trade and other payables in the balance sheet. Prepayments recognised as liabilities in the balance sheet are recognised as revenue during the following financial year (please see also Note 4.3 Trade and other payables). Annual Report 2022 34 ACCOUNTING PRINCIPLES Other income and expenses are such items that are not derived from other than Group’s actual operations. Other income includes disposal gain of sold tangible and intangible assets, grants and rental income. Government grants relating to the purchase of property, plant and equipment or intangible assets are recognised as deferred income. This deferred income is recognised in profit and loss on a systematic basis over the estimated useful life of the underlying asset. Other government grants are recognised in the profit and loss on a systematic basis over the period in which the entity recognises the related costs that the grants are compensating. Net foreign exchange gains and losses are presented in other income or other expenses unless they relate to financing items or to qualifying cash flow hedges. As Virala Acquisition Company Plc (VAC) did not meet the definition of a business the merger between VAC and Purmo Group Ltd 31.12.2021 was not accounted for as a business combination but as a reverse recapitalization, in which no goodwill was recognized and Purmo Group Ltd obtained a public company status. The difference in the value in accordance with IFRS 2 of VAC’s listed C shares and unlisted F shares over the fair value of identifiable net assets of VAC represents a service of listing of Purmo Group’s shares and is accounted for as a share-based payment in accordance with IFRS 2 and recorded as a one-time, non-cash impact in other operating expenses. Other income EUR million 2022 2021 Gain on disposal of Group companies and business operations 1.2 - Gain on disposal of intangible and tangible assets 0.8 0.2 Other income 2.9 2.4 Total 4.9 2.6 2.3 Other income and expenses The Group has identified a number of items that are material due to the significance of their nature or amount which are listed below to provide a better understanding of the operating performance for the Group. Other expenses EUR million 2022 2021 Net foregin exchange losses 1.5 1.1 Loss on disposal of intangible assets and property, plant and equipment 0.5 0.0 Loss on impairment of intangible assets and property, pland and equipment 1 7.4 - IFRS 2 merger impact - 52.3 M&A related transaction and integration costs 2 2.2 0.1 Restructuring costs and one-o cff costs related to eciency prfficiency programs 3 7.5 8.9 Formation of Purmo Group and stand-alone preparations 4 0.3 6.6 Other expenses 4.4 2.0 Total 23.7 71.0 1 Impairment of the Russian entities classiﬁed as assets held for sale. 2 M&A related transaction and integration costs consist mainly of professional fees for pre-deal support and M&A advisory. 3 Restructuring costs and one-oosts and one-off costs related to eciency prfficiency programs consists of project management expenses and redundancy costs for Accelerate PG. In 2021 the costs mainly relate to professional fees for project management expenses and redundancy costs for the PGUP programme and a restructuring provision for the closure of the production facility in Newcastle West Ireland. 4 Formation of Purmo Group and standalone preparations costs consist of professional fees in relation to listing preparations in 2021. Audit fees The following table includes the fees paid to the Company’s statutory auditor KPMG: EUR million 2022 2021 Audit 0.6 0.7 Audit related services 0.1 0.1 Tax advisory 0.2 0.3 Other services 0.0 - Total 1.0 1.0 Annual Report 2022 35 ACCOUNTING PRINCIPLES Short-term employee benefits are expensed as the related service is provided. A liability is recognised for the amount expected to be paid if the Group has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably. Under the defined contribution plans, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. Contributions to defined contribution plans are expensed as the related service is provided. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. Defined benefit plans are pension plans that are not defined contribution plans. The Group’s net obligation in respect of defined benefit plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned in the current and prior periods, discounting that amount and deducting the fair value of any plan assets. Defined benefit obligations are calculated annually by a qualified actuary using the projected unit credit method. When the calculation results in a potential asset for the Group, the recognised asset is limited to the present value of economic benefits available in the form of any future refunds from the plan or reductions in future contributions to the plan. To calculate the present value of economic benefits, consideration is given to any applicable minimum funding requirements. Remeasurements of the net defined benefit liability, which comprise actuarial gains and losses, the return on plan assets (excluding interest and the effect of the asset ceiling (if any, excluding interest, are recognised immediately in other comprehensive income. The Group determines the net interest expense (income for the net defined benefit liability (asset for the period by applying the discount rate used to measure the defined benefit obligation at the beginning of the annual period to the then-net defined benefit liability (asset, taking into account any changes in the net defined benefit liability (asset during the period as a result of contributions and benefit payments. Net interest expense relating to defined benefit plans are recognised in profit or loss within finance income or expense . 2.4 Employment benefit expenses When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognised immediately in profit or loss. The Group recognises gains and losses on the settlement of a defined benefit plan when the settlement occurs. The Group’s net obligation in respect of long-term employee benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. That benefit is discounted to determine its present value. Remeasurements are recognised in profit or loss in the period in which they arise. Termination benefits are payable when employment is terminated by the Group before the normal retirement date, or when an employee accepts voluntary redundancy in exchange for these benefits. Termination benefits are expensed at the earlier of when the Group can no longer withdraw the offer of those benefits and when the Group recognises costs for a restructuring. If benefits are not expected to be settled within 12 months of the end of the reporting period, then they are discounted. Personnel expenses EUR million 2022 2021 Wages and salaries -127.6 -128.2 Social security contributions -29.0 -27.8 Pension expenses - deﬁned contribution plans -6.1 -5.2 Pension expenses - deﬁned beneﬁt plans -1.2 -1.2 Share-based payments -0.2 -1.9 Total -164.1 -164.3 Number of personnel 2022 2021 Average number of personnel 3,476 3,360 Annual Report 2022 36 ACCOUNTING PRINCIPLES The Group has share-based incentive programs that are accounted for as equity-settled share-based payment transactions. The Group’s share-based payment arrangements include different conditions, i.e. non-vesting conditions, market and non-market performance conditions as well as service conditions. The fair value of the equity-settled share-based payment is determined at the grant date and not revalued after the grant date. Market conditions as well as non-vesting conditions are taken into account when estimating the fair value of the equity instruments granted. Therefore, the expense is recognized irrespectively of whether the conditions are satisfied. Non-market performance conditions and the requirement to stay in service are not factored into the grant date fair value. If the non-marked performance condition or the service condition is not met, the cumulative share-based payment cost will be trued-up accordingly. The total cost is determined by reference to the fair value at grant-date multiplied by the estimated amount of equity instrument expected to be vested. At each balance sheet date, the Group revises the cumulative share-based cost expected to be paid out based on the likelihood of achieving non- market performance criteria and the service condition at the end of the performance period. The expenses related to the equity settled share-based incentive programs are recognised in the profit and loss statement as employee benefit expenses over the vesting period with a corresponding adjustment to equity. For share-based incentive programs in which awards vest in stages, the expense is calculated in award tranches and recognised over the various vesting periods. ACCOUNTING ESTIMATES AND JUDGEMENTS At each balance sheet date, management reviews its estimates for the number of shares that are expected to vest. As part of this evaluation, Purmo Group takes into account changes in the forecasted performance of the Group and its reporting segments, expected turnover of the personnel part of the incentive plan, and other pertinent information impacting the number of shares to be vested. 2.5 Share-based payments Long-term incentive plan On 20 June 2022 Purmo Group Plc's Board of Directors decided on the establishment of a share-based long-term incentive scheme for the company's management and key personnel. The Long-Term Incentive Plan 2022 (LTIP 2022) consists of an initial investment, followed by a performance period, whereafter a outcome determination period commences. The participants had the opportunity to receive reward shares depending on the company's performance. The Board of Directors decided separately the performance criteria, persons authorized to participate and the maximum amount invested into the plan per participant. The purpose of the plan is to align the targets of shareholders and key employees in order to increase the long-term value of the company, retain key employees and offer a competitive incentive plan that is based on company share owner-ship and successful performance. The performance criteria of the plan is total shareholder return (TSR) of the class C share. Paid dividend and return of capital during the plan are added to the share price when calculating the TSR. The potential reward will be paid during the years 2026-2027, depending on the achievement of the performance criteria and the service condition. Any reward earned for the LTIP will be paid partly in company shares and partly in cash. The purpose of the cash contribution is to cover taxes and tax-like payments incurred by the management and key personnel from the remuneration. On 27 September 2022 Purmo Group announced that the Board approved a total of 66,403 subscriptions of new class C shares in the share issue for management and key employees. The subscription price EUR 10.23 per share was based on the trade-volume weighted average price of the Company’s share on Nasdaq Helsinki Ltd during 12 July–5 September 2022. The total subscription price of the new class C shares was EUR 679,302.69. Purmo Group Plc has financed the subscriptions of the class C shares by offering interest-bearing loans to the participants to a maximum amount of 50 per cent of the subscription value of the subscribed shares. Participants have pledged the subscribed shares as a security for performing their obligations under the concluded loan agreement. Annual Report 2022 37 Share based plan information LTIP 2022 Grant date 22 Sep 2022 Maximum number of class C shares 1,500,000 Dividend adjustment Yes Earning period start date 1.1.2022 Earning period end date 31.12.2025 Commitment period end 31.12.2027 Vesting conditions Total Shareholder Return (TSR) of the Purmo Group class C share, continued employment Maximum contractual life 5.3 years Remaining contractual life 5 years Description of shares Gross share Number of persons in the arrangement at the end of the period 29 Payment method Cash and equity Changes in plan during the period Outstanding in the beginning of the reporting period 1 Jan 2022 - Changes during the period Granted 745,000 Forfeited - Exercised - Outstanding in the beginning of the reporting period 31 Dec 2022 745,000 Fair value determination The fair value of share based incentives have been determined at grant date and the fair value is expensed until vesting. Market condition, in this case total shareholder return has been taken into account when determining the fair value at grant and it will not be changed during the plan. The pricing of the share based incentives granted during the period was determined by the following inputs and had the following effect: LTIP 2022 Share price at grant date, EUR 10.23 Share price at end of the reporting period, EUR 8.22 Expected volatility, %1 31.61 % Maturity years 5.3 Risk free rate 2.23 % Expected dividends, EUR - Valuation model Monte Carlo Total grant date fair value, MEUR 2.9  1 Expected volatility was determined by calculationg the historical volatility of the Group's share using monthly observations over corresponding maturity. The effect of share-based incentive plans on profit and loss has been presented in Note 2.4 Employment benefit expenses. Annual Report 2022 38 3. Goodwill, intangible and tangible assets ACCOUNTING PRINCIPLES Goodwill and other intangible assets with and indefinite useful life Goodwill represents the excess of acquisition cost over the fair values of identified acquired assets and liabilities of acquired companies. Goodwill arises typically in connection with a major acquisition, and represents the value of the acquired market share, business knowledge and the synergies obtained in connection with the acquisition. Goodwill is measured at cost less accumulated impairment losses. Goodwill is allocated to cash-generating units and tested annually for impairment. The Group is not considered to have other intangible assets with indefinite useful lives . Other intangible assets Other intangible assets include , among others, trademarks, patents and software licences that are acquired by Purmo Group and have finite useful lives and are measured at cost less accumulated amortisation and accumulated impairment losses. Other intangible assets acquired in connection with business acquisitions are recognised in the balance sheet if they fulfil the definition of other intangible assets: the asset will yield future economic benefit, they can be specified or are based on agreements or legal rights. Other intangible assets recognised in connection with business acquisitions include brands and trademarks, customer agreements and customer relationships. Subsequent expenditure Subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognised in profit or loss as incurred . 3.1 Goodwill and other intangible assets Amortisation Amortisation is calculated so as to write off the cost of intangible assets less their estimated residual values applying the straight-line method over their estimated useful lives, and is generally recognised in profit or loss. Goodwill is not amortised. The estimated useful lives for current and comparative periods are as follows: Trademarks 25 years Capitalised development costs 5 years Allocations from business acquisitions 10-20 years Other intangible assets 5–10 years Amortisation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. Amortisation of the trademarks are included in sales and marketing expenses. Amortisation of patents and development costs is included in research and development costs. Research and development costs Research costs are recognised in profit or loss as incurred. Expenditure on development, in which research findings or other knowledge is applied to produce new or improved products or processes, is recognised as an asset in the balance sheet if the product or process is technically and commercially feasible and the company has intention as well as sufficient resources to complete development and then use or sell the intangible asset, the intangible asset will generate probable future economic benefits and the company is able to measure reliably the expenditure attributable to the intangible asset. Capitalised development costs are presented in the balance sheet and are carried at cost less accumulated amortisation and any accumulated impairment losses. Amortisation is recognised from the time when the asset is ready for use. Capitalised development costs for an asset that is not yet ready for use are tested for impairment annually. The estimated useful lives of development costs are reviewed at each reporting date and if these estimates differ significantly from previous estimates, the amortisation periods are adjusted accordingly. The amortisation period for capitalised development costs is 5 years. Development costs are capitalisdeted when a development project is likely to generate economic benefits for the company and the products are assessed to be technically feasible and commercially viable. Development projects are related to new or essentially improved technology. Annual Report 2022 39 2021 EUR million Goodwill Trademarks Development costs Other intangible assets Total Acquisition cost 1 Jan 2021 365.4 56.0 1.9 3.6 426.8 EEffects of exchange rates -0.1 0.0 0.0 0.0 0.0 Purchases of subsidiaries and business acquisitions 3.8 0.0 - 0.0 3.9 Additions - 0.8 - 0.3 1.1 Disposals - - - 0.0 0.0 31 Dec 2021 369.2 56.8 1.9 3.9 431.8 Accumulated amortisation and impairment losses 1 Jan 2021 - -18.7 -1.8 -3.0 -23.5 EEffects of exchange rates - 0.0 0.0 0.0 0.0 Amortisation - -2.5 -0.1 -0.3 -2.9 Transfers - - - 0.0 0.0 31 Dec 2021 - -21.2 -1.9 -3.3 -26.4 Carrying amount at 31 Dec 2021 369.2 35.6 0.0 0.6 405.5 Other intangible assets include other long-term capital expenditures and advance payments. Intangible assets 2022 EUR million Goodwill Trademarks Development costs Other intangible assets Total Acquisition cost 1 Jan 2022 369.2 56.8 1.9 3.9 431.8 EEffects of exchange rates -0.1 -0.1 0.0 0.0 -0.2 Purchases of subsidiaries and business acquisitions 5.5 2.6 - 10.1 18.2 Additions - 1.1 0.2 0.5 1.7 Disposals - -0.1 - -0.1 -0.2 Transfers 0.0 -1.1 - 0.0 -1.0 Impairment charges -4.0 - - - -4.0 31 Dec 2022 370.6 59.3 2.1 14.3 446.3 Accumulated amortisation and impairment losses 1 Jan 2022 - -21.1 -1.9 -3.3 -26.4 EEffects of exchange rates - 0.1 0.0 0.0 0.1 Amortisation - -2.5 0.0 -1.3 -3.9 Transfers - 1.3 - - 1.3 31 Dec 2022 - -22.3 -1.9 -4.5 -28.8 Carrying amount at 31 Dec 2022 370.6 37.0 0.2 9.8 417.5 Annual Report 2022 40 3.2 Impairment testing of goodwill ACCOUNTING PRINCIPLES At each reporting date, the Group reviews the carrying amounts of its non-financial assets (other than, inventories and deferred tax assets to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For impairment testing purposes, Purmo Group’s goodwill is allocated to cash-generating units (‘CGU’), which are also the divisions of the Group. The divisions represent the Group’s operating segments before aggregation determined in accordance with IFRS 8 Operating Segments. Impairment is measured at the level of cash generating units, which are the smallest groups of assets that independently generate cash flows and whose cash flows can be distinguished from other cash flows. The recoverable amount of an asset or cash generating unit is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or cash generating units. An impairment loss is recognised if the carrying amount of an asset or cash generating unit exceeds its recoverable amount. Impairment losses are recognised in profit or loss and initially allocated to reduce the carrying amount of any goodwill attributable to the cash generating unit, and then to reduce the carrying amounts of the other assets in the cash generating unit on a pro rata basis. At the end of each reporting period, the Group assesses whether there is any indication that an impairment loss recognised in prior periods for an asset other than goodwill may no longer exist or may have decreased. If any such indication exists, the Group estimates the recoverable amount of that asset, impairment losses in respect of goodwill are not reversed. For other assets, an impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. ACCOUNTING ESTIMATES AND JUDGEMENTS The goodwill and other intangible assets not yet available for use are subject to impairment testing on an annual basis, or more frequently, if events or changes in circumstances indicate that the assets might need to be impaired. In addition, the Group reviews the carrying amounts of its non-financial assets at each reporting date to determine whether there is any indication of impairment. If any such indications exist, then the asset’s recoverable amount is estimated. In the Group’s goodwill impairment testing, the recoverable amount of a cash generating unit (CGU) is determined based on fair value less costs of disposal calculations which require the use of assumptions. Estimation and judgment are required in determining the components of the recoverable amount calculation, including the discount rate, the terminal growth rate and development of the net sales and EBITDA (which is for impairment testing purposes defined as earnings before interest, taxes and depreciation and amortization). The discount rates reflect current assessments of the time value of money and relevant market risk premiums reflecting risks and uncertainties for which the future cash flow estimates have not been adjusted. The calculations use cash flow projections based on financial budgets approved by management covering a five-year period. Cash flows beyond the five-year period are extrapolated using estimated growth rates. These terminal growth rate assumptions are consistent with forecasts included in industry reports specific to the industry in which each CGU operates. Impairment testing The amount of goodwill allocated to each CGU is presented in the following table. Carrying amount of goodwill allocated to cash generating unit: EUR million 2022 2021 Radiators 254.4 252.0 ICS 116.1 117.2 Total 370.6 369.2 Annual impairment test 2022 As at 31 December 2022 goodwill totalled EUR 370.6 million. Given that the recoverable amount of each CGU significantly exceeded the carrying value of goodwill, no indication of impairment was found in 2022. The value in use calculations were derived from estimates, forecasts and strategy figures reviewed by Purmo Group’s management and approved by the Board of Directors. Annual Report 2022 41 The calculations are prepared using a fair value less costs of disposal model. In the impairment testing, the cash flows for the cash generating units were forecast for five years, based on operative plans. The financial plan is conducted annually and is approved by management. Cash flows beyond this forecast period were extrapolated using a constant 2% long-term growth rate, which reflects the sustainable long-term level of the operations. The forecasts in the financial plans for both CGU’s are based on management’s estimate of the sustainable profit margins. The forecasts take into account anticipated changes in market demand, sales prices and costs based on management’s past experience and are in line with available external market data and research. The terminal growth rate after the forecast period reflects an estimate of long-term inflation. Discount rates Discount rates represent the current market assessment of the risks specific to each cash generating unit and are determined using the weighted average cost of capital, based on industry peers. The components of the discount rate are: • Market-specific risk-free rate, based on a weighted average for the largest market • Market risk premium, based on a weighted average for the largest markets • Industry-specific risk, which is incorporated by applying asset beta factors that are annually derived from publicly available market data for peer companies • Required return of debt, based on market information • Debt-to-equity ratio, based on industry peers The discount rates determined are a post-tax rates as the company is using a fair value model to estimate the recoverable amounts. Below are presented the sales growth rate beyond the five-year period, the average EBITDA level and the post-tax discount rate, by CGU. 2022 2021 Long term growth rate, % Post-tax discount rate, % Average EBITDA level, % Long term growth rate, % Post-tax discount rate, % Average EBITDA level, % Radiators 2.0% 8.4% 10.7% 2.0% 7.5% 11.5% ICS 2.0% 8.4% 15.3% 2.0% 7.9% 11.6% Sensitivity analysis A sensitivity analysis was carried out by Purmo Group management using downside scenarios. The scenarios involved raising the applied discount rate and reducing the forecasted EBITDA margin level for the forecast and terminal periods. A change in an assumption that would cause the recoverable amount to equal the carrying amount is presented in the table below separately for each CGU. Change Radiators Forecasted EBITDA margin decrease more than 3.0 per centage points WACC increase more than 2.3 per centage points Residual growth decrease more than 1.5 per centage points ICS Forecasted EBITDA margin decrease more than 5.5 per centage points WACC increase more than 6.9 per centage points Residual growth decrease more than 12.0 per centage points In management’s opinion, the changes in the basic assumptions shall not be seen as an indication that these factors are likely to materialise. The sensitivity analyses are hypothetical and should therefore be treated with caution. Annual Report 2022 42 ACCOUNTING PRINCIPLES Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses. If significant parts of an item of property, plant and equipment have different useful lives, then they are recognised as separate items (major components of property, plant and equipment. Any gain or loss on disposal of an item of property, plant and equipment is recognised in profit or loss. Subsequent expenditure Subsequent expenditure is capitalised only when it is probable that the future economic benefits associated with the expenditure will flow to the Group. Major repairs and renovations of property, plant and equipment are capitalized and depreciated over the useful lives of the underlying asset. Ordinary expenses for repairs and maintenance are expensed as incurred. Depreciation Depreciation is calculated to write off the cost of items of property, plant and equipment less their estimated residual values applying the straight-line method over their estimated useful lives and is recognised in profit or loss. Land is not depreciated. The estimated useful lives of property, plant and equipment for current and comparative periods are as follows: Buildings 10–40 years Machinery and equipment 3–10 years Large processing machines 15–25 years Depreciation methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. ACCOUNTING ESTIMATES AND JUDGEMENTS Assessing the probability of expected future economic benefits and useful lives of property, plant and equipment require management judgement. The estimated useful lives and residual values are reviewed at least at the end of each reporting period, and if they differ significantly from previous estimates, the depreciation periods are adjusted accordingly. Also, assessing any indication of impairment requires management judgement . 3.3 Property, plant and equipment Property, plant and equipment 2022 EUR million Land and water Buildings Machinery and equipment Other tangible assets Assets under construction Total Acquisition cost 1 Jan 2022 8.4 118.8 465.3 10.2 9.5 612.1 EEffects of exchange rates 0.0 -1.3 -5.6 -0.2 -0.1 -7.2 Purchases of subsidiaries and business acquisitions - - 0.6 - 0.5 1.1 Additions - 0.6 15.4 0.4 7.2 23.7 Disposals -0.1 -10.4 -15.1 -0.1 - -25.8 Transfers 0.8 0.1 1.2 0.0 -1.5 0.7 Impairment charges - - -3.0 - - -3.0 31 Dec 2022 9.1 107.8 458.8 10.4 15.7 601.7 Accumulated depreciation and impairment losses 1 Jan 2022 0.3 -77.6 -394.8 -8.2 - -480.1 EEffects of exchange rates 0.0 0.7 4.6 0.1 - 5.4 Depreciation - -3.2 -15.2 -0.7 - -19.1 Depreciation on disposals - 5.7 14.7 - - 20.4 Transfers -0.9 - - - - -0.9 31 Dec 2022 -0.5 -74.4 -390.7 -8.7 - -474.4 Carrying amount at 31 Dec 2022 8.6 33.4 68.0 1.6 15.7 127.3 Annual Report 2022 43 2021 EUR million Land and water Buildings Machinery and equipment Other tangible assets Assets under construction Total Acqusition cost 1 Jan 2021 8.5 118.5 451.7 9.9 5.0 593.5 EEffects of exchange rates 0.0 0.4 2.1 -0.2 -0.1 2.3 Purchases of subsidiaries and business acquisitions - 0.4 2.5 0.0 0.0 2.9 Additions - 0.2 6.4 0.6 4.6 11.9 Disposals -0.1 -0.6 -1.0 -0.1 -0.1 -1.9 Transfers - -0.1 3.6 - 0.1 3.6 31 Dec 2021 8.4 118.8 465.3 10.2 9.5 612.2 Accumulated depreciation and impairment losses 1 Jan 2021 0.4 -74.0 -379.1 -7.4 - -460.2 EEffects of exchange rates 0.0 -0.2 -0.8 0.1 - -1.0 Depreciation - -3.7 -15.3 -0.9 - -19.9 Depreciation on disposals - 0.4 0.4 0.0 - 0.8 Transfers - 0.0 - - - 0.0 31 Dec 2021 0.3 -77.6 -394.8 -8.2 0.0 -480.3 Carrying amount at 31 Dec 8.7 41.3 70.4 2.0 9.5 132.0 ACCOUNTING PRINCIPLES In accordance with IFRS 16 the Group assess at contract inception whether a contract is, or contains, a lease. The Group leases production equipment, real estate, vehicles and other equipment used in its operations. The Group recognises lease liabilities representing the obligation to make lease payments and right-of-use assets representing the right to use the underlying asset. For leases with lease terms of 12 months or less or leases of low-value assets the Group uses the short-term and low-value lease recognition exemptions. Right-of-use assets The Group recognises right-of-use assets at the commencement date of the lease. Right-of-use assets are measured at cost, comprising the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any direct costs incurred and an estimate of cost to dismantle the underlying asset, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. Leased assets are depreciated over the shorter of the lease term and their useful lives unless it is reasonably certain that the Group will obtain ownership by the end of the lease term. The lease term varies between 1-70 years. Lease liabilities The Group recognises a lease liability measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments less any receivable lease incentives, amounts expected to be paid under residual value guaranties, and variable lease payments dependent on a rate or index. Lease payments to be made under reasonably certain extension options are also included in the measurement of the liability. The present value is calculated by discounting the payments with the interest rate implicit in the lease. If the interest rate implicit for the lease is not readily determinable, the incremental borrowing rate applicable for the lease is used. Lease payments are allocated between the principal repayment and finance cost. The finance cost is charged to profit or loss over the lease period so as to produce a constant 3.4 Right-of-use assets Annual Report 2022 44 periodic rate of interest on the remaining balance of the liability for each period. Lease liability is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group’s estimate of the amount expected to be payable under a residual value guarantee, if the Group changes its assessment of whether it will exercise a purchase, extension or termination option or if there is a revised in-substance fixed lease payment. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero. Short-term leases and leases of low-value assets The Group applies the short-term lease recognition exemption to its leases that have a lease term of 12 months or less and the low-value assets recognition exemption to leases where the leased asset value is below EUR 5 thousand. The lease payments on short-term leases and low-value asset leases are recognised as expense on a straight-line basis over the lease term. ACCOUNTING ESTIMATES AND JUDGEMENTS The management also applies judgement in determining the lease term. In determining the lease term, management considers all facts and circumstances that create an economic incentive to exercise an extension option, or not exercise a termination option. Extension options (or periods after termination options are only included in the lease term if the lease is reasonably certain to be extended (or not terminated. The following factors are normally the most relevant: • If there are significant penalty payments to terminate (or not extend, the group is typically reasonably certain to extend (or not terminate. • If any leasehold improvements are expected to have a significant remaining value, the group is typically reasonably certain to extend (or not terminate. Otherwise, the group considers other factors including historical lease durations and the costs and business disruption required to replace the leased asset . Right-of-use assets 2022 EUR million Land and water Buildings Machinery and equipment Total Acquisition cost 1 Jan 2022 1.1 37.4 15.2 53.7 EEffects of exchange rates 0.0 -0.7 -0.2 -0.9 Purchases of subsidiaries and business acquisitions - 2.6 0.3 2.9 Classiﬁed as assets held for sale - - 0.0 0.0 Additions - 11.2 3.2 14.4 Disposals -0.2 - - -0.2 Impairment charges - 0.4 0.0 0.4 31 Dec 2022 0.9 50.9 18.6 70.4 Accumulated depreciation and impairment losses 1 Jan 2022 -0.1 -14.1 -8.2 -22.4 EEffects of exchange rates 0.0 0.3 0.2 0.5 Depreciation 0.0 -5.6 -3.6 -9.2 31 Dec 2022 -0.1 -19.4 -11.6 -31.1 Carrying amount at 31 Dec 2022 0.8 31.5 7.0 39.3 2021 EUR million Land and water Buildings Machinery and equipment Total Acquisition cost 1 Jan 2021 1.1 33.8 11.2 46.1 EEffects of exchange rates 0.0 0.6 0.0 0.6 Purchases of subsidiaries and business acquisitions - 0.5 - 0.5 Additions 0.0 2.6 4.0 6.5 31 Dec 2021 1.1 37.4 15.2 53.7 Accumulated depreciation and impairment losses 1 Jan 2021 -0.1 -9.7 -5.5 -15.2 EEffects of exchange rates 0.0 0.0 0.1 0.1 Depreciation 0.0 -4.5 -2.8 -7.4 31 Dec 2021 -0.1 -14.2 -8.2 -22.5 Carrying amount at 31 Dec 2021 1.0 23.2 7.0 31.3 Annual Report 2022 45 3.5 Depreciation, amortisation and impairment Depreciation, amortisation and impairment EUR million 2022 2021 Amortisation and impairment on intangible assets -7.9 -2.9 Tangible assets -22.5 -19.9 Right-of-use assets -9.2 -7.4 Total -39.5 -30.2 Lease liabilities EUR million 2022 2021 Non-current 34.3 30.7 Current 9.4 5.6 Total lease liabilities 43.7 36.4 Amounts recognised in proﬁt or loss EUR million 2022 2021 Depreciation of right-of-use assets -9.2 -7.4 Interest on lease liabilities -2.2 -2.1 Expense related to short-term leases -1.2 -1.3 Expense related to leases of low-value assets -0.5 -0.4 Total -13.1 -11.2 Amounts recognised in statement of cash ﬂows EUR million 2022 2021 Total cash outﬂow for leases -11.6 -9.6 4. Operational assets and liabilities ACCOUNTING PRINCIPLES Purmo Group’s inventories consist of raw materials and consumables, work-in-progress and finished goods. Inventories are measured at the lower of cost and net realisable value. The cost of inventories is based on the first-in first-out (FIFO method or weighted average cost formula and includes expenditure incurred in acquiring the inventory items and bringing them to their existing location and condition. The cost of purchased inventory are determined after deducting rebates and discounts. In the case of manufactured inventories and work in progress, cost includes direct materials, directs labour and an appropriate share of production overheads based on normal operating capacity. The Group recognises an allowance for obsolete inventory items at the end of the reporting period based on the latest information. The allowance is based on a systematic and continuous monitoring of the inventory. The nature, state, and age structure if the inventory is taken into consideration when estimating the amount of allowance for the obsolescence. ACCOUNTING ESTIMATES AND JUDGEMENTS Inventory valuation requires management to make estimates and judgments particularly relating to obsolescence and expected selling prices in different market conditions. It also entails management’s assessment of the general market trends in global markets. 4.1 Inventories Inventories EUR million 2022 2021 Raw materials and consumables 55.0 60.6 Work in progress 21.6 21.7 Finished goods 105.2 82.8 Inventory value - gross 181.7 165.1 Inventory write-down -7.6 -7.7 Total 174.1 157.4 Write-downs of inventories to net realisable value amounted to EUR 7.6 (7.7) million. These were recognised as an expense and included in cost of sales in the profit and loss. Annual Report 2022 46 ACCOUNTING PRINCIPLES Trade and other receivables are recognized in the balance sheet at fair value which can be subsequently written down due to impairment. The impairment is expensed under sales and marketing expenses. Non-recourse factoring Purmo Group has entered into factoring agreements to sell trade receivables. Sold trade receivables are derecognised once significant related risks and rewards of ownership have been transferred to the factoring counterparty. The Group does not have any material trade receivables on the balance sheet, which will be subject to factoring. Please refer to Note 5.3 Financial Assets and Liabilities for further details. 4.2 Trade and other receivables Credit risk and impairment losses Information about the Group’s exposure to credit risks and impairment losses for trade and other receivables is included in Note 5.2 Financial risk management. Trade and other receivables EUR million 2022 2021 Trade receivables 89.1 77.1 Prepayments and accrued income 6.5 8.5 Other receivables 19.7 22.2 Total 115.3 107.8 Non-current 0.7 1.0 Current 114.6 106.8 Total 115.3 107.8 ACCOUNTING PRINCIPLES Accruals and deferred income consist mainly of personnel-related accruals, sales adjustments and other accrued liabilities. Trade and other payables EUR million 2022 2021 Trade payables 102.1 116.8 Accruals and deferred income 92.6 76.4 Total 194.8 193.2 Non-current 1.4 1.2 Current 193.4 192.0 Total 194.8 193.2 4.3 Trade and other payables 4.4 Provisions ACCOUNTING PRINCIPLES0 Recognition and measurement of provisions A provision is recognized when a present legal or constructive obligation exists as a result of a past event and it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. Actual outflows can differ from estimates due to changes in law, regulations, technology, prices and conditions. The carrying amounts of provisions are regularly reviewed and adjusted to take into account any such changes. The unwinding of the discount is recognised as a finance cost. Annual Report 2022 47 Warranties A provision for warranties is recognised when the underlying products or services are sold. The provision is calculated based on historical experience of levels of repairs and replacements. Provisions for warranties cover the estimated costs to repair or replace products that are still under warranty on the balance sheet date. Group provides warranties for its products and typical warranty periods is between 2–10 years depending on the product. Restructuring A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. The Group provides for the estimated cost to restructure when a detailed formal plan of restructuring has been completed, approved by management, and announced. Restructuring costs consist primarily of personnel restructuring charges. The other components are costs associated with costs of terminating certain other contracts directly linked to the restructuring. The majority of the restructuring cash outflows are expected to occur within 12 months. Site restoration Estimated future expenses for the site or area restoration are capitalised. Capitalised amounts comprise estimated expenses, calculated at current value, which are simultaneously reported as provisions. Effects of subsequent events that result in costs that exceed the provision are discounted, capitalised, and added to the provisions, and then written off over the remaining life of the asset. Other provisions Other provisions consist mainly of legal provisions, agent leaving indemnity provisions and a tax liability recorded in accordance with IFRIC 23 for an uncertain tax position arising from the Group’s global operations. Provisions also include a regulatory Commercial agents indemnity risk provision in Italy. Other provisions are expected to be realised during the next five years . ACCOUNTING ESTIMATES AND JUDGEMENTS Provisions for present obligations require management judgment. Estimation is required in determining the value of the obligation as the amount recognised as a provision is based on the best estimate of unavoidable costs required to settle the obligation at the end of the reporting period When estimating unavoidable costs, management may be required to consider a range of possible outcomes and their associated probabilities, risks and uncertainties surrounding the events and circumstances as well as making assumptions of the timing of payment. Estimation is also required in determining the rate used to discount provisions to present value. Provisions 2022 EUR million Warranties and guarantees Restructuring Other provisions Total Balance at 1 Jan 2022 1.5 4.8 6.2 12.5 EEffects of exchange rates -0.0 - 0.0 0.0 Increase of provisions 0.3 0.0 0.2 0.5 Provisions utilised - -4.4 -0.4 -4.7 Balance at 31 Dec 2022 1.7 0.5 6.0 8.2 Non-current 1.6 0.2 6.0 7.8 Current 0.1 0.3 - 0.4 2021 EUR million Warranties and guarantees Restructuring Other provisions Total Balance at 1 Jan 2021 1.5 0.6 6.4 8.5 EEffects of exchange rates 0.0 0.0 0.0 0.0 Increase of provisions 0.1 4.4 0.2 4.8 Provisions utilised -0.1 -0.2 -0.5 -0.8 Balance at 31 Dec 2021 1.5 4.8 6.2 12.5 Non-current 1.4 0.0 6.2 7.6 Current 0.1 4.8 - 4.9 Annual Report 2022 48 4.5 Post-employment obligations Items recognised in the balance sheet EUR million 2022 2021 Deﬁned beneﬁt asset 2.2 6.2 Total employee beneﬁt asset 2.2 6.2 Deﬁned beneﬁt liability 15.9 20.5 Liability for long-service leave 2.6 2.9 Other employee beneﬁts 0.2 0.0 Total employee beneﬁts liabilities 18.7 23.5 Non-current 18.7 23.5 Current - - Total 18.7 23.5 ACCOUNTING PRINCIPLES The Group has a number of pension plans covering its operations in various countries, all of which comply with the relevant country’s rules and obligations. The Group operates defined contribution and defined benefit pension plans. The major defined benefit plans are located in the United Kingdom Austria and Germany. Together these plans account for 90 per cent of the Group’s total defined benefit obligation and 98 per cent of the total plan assets. The present value of pension obligations depends on a number of factors determined on an actuarial basis by using a number of financial and demographic assumptions, and changes in these assumptions impact the carrying amount of pension obligations. The key financial assumption used in determining the net cost (income for pensions is the discount rate). The appropriate discount rate is determined at the end of each reporting period and is used in calculating the present value of estimated cash outflows to settle the pension obligation. In determining the appropriate discount rate, the Group considers the yields of high-quality corporate or government bonds, depending on the country, that are denominated in the currency in which the benefits will be paid and that have terms to maturity approximating the terms of the related pension obligation. Other key assumptions related to pension obligations include financial assumptions such as estimated increases in salaries and pensions, and demographic assumptions such as mortality rates. ACCOUNTING ESTIMATES AND JUDGEMENTS The defined benefit obligation is calculated by independent authorised actuaries. The discount rate for actuarial calculations is determined by reference to market yields on high-quality corporate bonds or government bonds taking into account the duration of the defined benefit obligation. The applied discount rates are country-specific. Pension benefits are normally based on the number of years’ service and salary. The Group is exposed to a number of risks through its defined benefit plans. A decrease in bond yields would increase plan liabilities. Some of the Group’s pension obligations are linked to inflation, an increase in which would lead to higher liabilities. The majority of the plans’ obligations are to provide benefits over the lifetime of the plan member, which means that increases in life expectancy will increase the plan liabilities. Annual Report 2022 49 Movement in net deﬁned beneﬁt (asset) liability Deﬁned beneﬁt obligation Fair value of plan assets Net deﬁned beneﬁts liability (asset) EUR million 2022 2021 2022 2021 2022 2021 1 Jan 97.0 96.9 82.7 73.5 14.3 23.3 Included in proﬁt or loss Current service cost 1.2 1.2 - - 1.2 1.2 Interest income - - 1.4 0.9 -1.4 -0.9 Interest expense (income) 1.4 1.0 - - 1.4 1.0 Settlements -9.1 - -12.8 - 3.7 - Included in other comprehensive income Actuarial loss (gain) arising from change in demographic assumptions -1.1 0.4 - - -1.1 0.4 Actuarial loss (gain) arising from change in ﬁnancial assumptions -26.8 -3.8 -26.5 5.2 -0.3 -9.1 Actuarial loss (gain) arising from experience adjustments -0.9 0.7 - - -0.9 0.7 Translation dieranslation differences -2.4 4.5 -2.7 4.4 0.3 0.1 Other Contributions paid by the employer 0.0 0.0 1.9 1.9 -1.9 -1.8 Beneﬁts paid -5.0 -3.8 -3.2 -3.2 -1.7 -0.6 31 Dec 54.4 97.0 40.7 82.7 13.7 14.3 Plan assets The Group’s post-employment benefits plan assets mainly consist of equity and debt instruments. Plan assets don’t include the Group’s own financial instruments or assets which are occupied by the Group. Approximately 98 % of plan assets have a quoted market price. Actuarial assumptions The following were the principal actuarial assumptions at the reporting date (expressed as weighted averages). 2022 2021 Discount rate 4.36% 1.42% Expected salary growth 3.46% 2.50% Expected future pension growth 2.58% 2.67% At 31 December 2022, the weighted-average duration of the defined benefit obligation was 13.1 (16.1) years. In 2023 the Group expects to pay EUR 1.5 million to the defined benefit plans. Sensitivity analysis Reasonably probable changes at the reporting date to one of the relevant actuarial assumptions, all other assumptions remaining unchanged, would have affected the defined benefit obligation by the amounts shown below. 31 Dec 2022 31 Dec 2021 EUR million Increase Decrease Increase Decrease Discount rate (0.5% movement) -6.2 6.2 -15.0 15.0 Future salary growth (0.5% movement) 1.0 -1.0 1.5 -1.5 Future pension growth (0.5% movement) 4.2 -4.2 10.9 -10.9 While the analysis does not take account of the full distribution of cash flows expected under the plan, it does provide an approximation of the sensitivity of the assumptions shown. Annual Report 2022 50 5.2 Financial risk management Principles and process The nature of Purmo Group’s global operations exposes the Group to a variety of business and financial risks. Financial risks are managed centrally by the Group Treasury (Treasury) under annually reviewed Group Treasury Policy approved by the Board of Directors. The objective of financial risk management is to mitigate potential adverse effects of financial risks on Group’s financial performance. Treasury identifies, evaluates and hedges financial risks in close co-operation with the subsidiaries. Treasury operates as counterparty to the subsidiaries, manages centrally external funding and is responsible for the management of financial assets and appropriate hedging measures. Treasury uses only hedging instruments whose market value can be reliably monitored and are in line with the Group Treasury Policy. In addition Treasury provides consultation and services to Group companies in all financing related matters. The Group’s risk management policy is essentially risk averse. Credit and counterparty risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Credit risk arises mainly from the Group’s receivables due from customers. It also relates to cash and cash equivalents, derivative financial assets and other related party receivables. The objective of the credit risk management is to mitigate the Group’s credit risk exposure. Trade receivables The Group’s exposure to credit risk stems mainly from the individual characteristics of each customer. However, management also considers the factors that could influence the credit risk of its customer base, including the default risk of the industry and country in which customers operate. The Group has processes in place to mitigate credit risk under which each new customer is analysed individually for creditworthiness, before the Group’s standard payment and delivery terms and conditions are offered to the customer. The Group’s review includes external ratings, when available, and in some cases bank references. If the analysis results in that credit could not be granted to a customer, the Group may request advance payments before shipment. Most of the Group’s customers have been trading with the Group for years, and no major credit losses have occurred with these customers. Credit risk is monitored by grouping customers according to their credit characteristics, including whether they are individuals or legal entities and whether they are wholesale, retail or end-user customers, as well as by geographic location, industry and the existence of previous financial difficulties. The Group has one customer that amounts to more than 10 per cent of the Group’s net sales. EUR million 2022 2021 Interest income on items measured at amortised cost 1.0 0.4 Interest income on foreign exchange derivatives 3.8 0.7 Exchange gains related to ﬁnancial items - - Exchange gains from foreign exchange derivatives 1.0 - Other ﬁnance income 0.0 0.0 Financial income 5.7 1.1 Interest expense on items measured at amortised cost -8.5 -3.2 Interest expense, lease liabilities -2.2 -2.1 Interest expense on foreign exchange derivatives -6.8 -1.6 Interest expense on interest rate derivatives -0.4 - Exchange loss related to ﬁnancial items, net -2.3 -0.3 Exchange loss from foreign exchange derivatives - -1.0 Other ﬁnance expense -2.8 -1.5 Financial expenses -23.1 -9.7 Net ﬁnancial items recognised in proﬁt or loss -17.4 -8.6 ACCOUNTING PRINCIPLES Net financial items comprise net interest expenses, foreign exchange gains and losses and other financial income and expenses mainly arising from interest-bearing assets and liabilities. 5. Capital structure and ﬁnancial instruments 5.1 Financial income and expenses Annual Report 2022 51 The Group applies the provision matrix to assess the expected credit losses for trade receivables. The expected credit loss is based on historical and forward-looking information and is estimated at the end of each reporting period. In the provision matrix, loss rates are determined separately for the aging categories of the trade receivables, based on the experienced historical credit losses and management’s future expectations. The Group has also entered into several trade receivable factoring arrangements. These arrangements transfer the significant risks and rewards of to the factoring counterparty fulfilling the criteria of derecognition from balance sheet and further decreasing Group’s credit risk related to trade receivables. At the reporting date, the ageing of trade receivables, including the loss allowance, were as follows: 31 Dec 2022 31 Dec 2021 EUR million Gross carrying amount Loss allowance Loss rate Gross carrying amount Loss allowance Loss rate Not overdue 80.2 66.4 Overdue 1–30 days 4.5 0.0 1% 8.0 -0.1 1% Overdue 31–60 days 1.7 -0.2 12% 1.9 -0.2 12% Overdue 61–90 days 1.2 -0.5 40% 1.1 -0.4 40% Overdue 91–179 days 4.7 -2.6 50% 3.6 -3.1 87% More than 180 days 0.1 -0.1 90% 0.0 0.0 87% Total trade receivables 92.4 -3.3 3.6% 81.0 -3.8 4.7% Reconciliation of the loss allowance: EUR million 2022 2021 1 Jan 3.8 3.7 Increase in loss allowance recognised in proﬁt or loss during the year -0.7 0.6 Receivables written oen off during the year as uncollectible 0.2 -0.5 31 Dec 3.3 3.8 Counterparty risk related to financing items Purmo Group is exposed to credit risk when using derivative instruments and depositing its cash and equivalents. Financial credit risk is managed actively by limiting counterparties to a sufficient number of major banks and financial institutions, and by monitoring the creditworthiness and the size of exposures continuously. According to management assessment, no significant credit losses are anticipated on the liquidity reserves. Derivatives are subject to netting agreements such as ISDA (Master agreement of International Swaps and Derivatives Association). Netting agreement allows for settling on a net basis all outstanding items within the scope of the agreement, such as in the event of default. As the Company does not meet IFRS right of set-off, these amounts are presented gross on the balance sheet. At the reporting date, the remaining net settlement, as allowed by the netting arrangements, was EUR 0.0 (1.4) million for the derivative liabilities and EUR 3.8 (0.1) million for derivative assets. Liquidity and refinancing risk Liquidity risk is the risk that the Group will encounter difficulties in meeting the obligations associated with its financial liabilities. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to settle its liabilities when these become due, under both normal and stressed conditions. Treasury monitors bank account structures, cash balances and forecasts of the subsidiaries and manages the utilisation of the consolidated cash resources. 31 December 2022 Group’s cash and cash equivalents amounted to EUR 65.4 (177.6) million of which EUR 9.1 million classified as assets held for sale. In January 2022 the Group repaid an EUR 95 million bridge loan facility with the proceeds released from the escrow account related to the initial public offering of VAC. To secure its short term liquidity, the Group maintains the following lines of credit: • EUR 80.0 (80.0) million undrawn committed revolving credit facility maturing in 2024 with two one year extension options • EUR 100.0 (0.0) million Finnish commercial paper program of which EUR 10 million was utilised • EUR 20.5 (17.4) million undrawn overdraft facilities that are unsecured Refinancing risk, or the risk that maturing debt is not refinanced in the markets, is mitigated by Purmo Group’s target of maintaining an even maturity profile of outstanding debt with no more than 20% of the outstanding debt to mature within the following 12 months. Diversification of funding among different markets and an adequate number of financial institutions are used to safeguard the availability of liquidity at all times. The Group’s long term funding consists of a syndicated term loan facility of EUR 280.0 million, which is due on 2024, including two one year extension options. The facility is subject to customary financial covenants related to leverage and equity ratio. Purmo Group is in compliance with all covenants and other terms of its debt instruments. The Group manages its liquidity also by having entered into several trade receivable factoring arrangements that provide for the accelerated receipt of approximately EUR 34.3 (35.5) million of cash at the financial year Annual Report 2022 52 end on available trade accounts receivable. Under the factoring agreements the Group sells on a revolving and non-recourse basis certain of its trade receivable to a financial institution. These factored trade receivables are derecognised from the balance sheet because the Group has transferred the significant risks and rewards to the counterparty and the Group does not maintain any continuing involvement with the sold receivables. The Group incurs commission and interest expenses for the transferred receivables balance which are recognised as other finance expenses in the period in which they are incurred, to the extent the fee exceeds the fair value loss related to the transferred trade receivables. Exposure to liquidity risk 31 Dec 2022 EUR million Carrying amount Total 1-12 months 1-2 years 2-5 years More than 5 years Non-derivative ﬁnancial liabilities Loans from ﬁnancial institutions 279.4 308.2 14.7 293.5 - - Commercial papers 10.0 10.0 10.0 - - - Lease liabilities 43.7 43.7 9.4 3.9 7.7 22.8 Trade payables 102.1 102.1 102.1 - - - Total 435.2 464.0 136.2 297.3 7.7 22.8 Derivative ﬁnancial liabilities Forward exchange contracts 1.5 -0.4 -0.4 - - - Total 1.5 -0.4 -0.4 - - - 31 Dec 2021 EUR million Carrying amount Total 1-12 months 1-2 years 2-5 years More than 5 years Non-derivative ﬁnancial liabilities Loans from ﬁnancial institutions 372.7 390.0 100.0 5.0 285.0 - Lease liabilities 1 36.4 36.4 7.4 5.8 12.3 11.0 Trade payables 116.7 116.7 116.7 - - - Total 525.7 543.0 224.1 10.7 297.3 11.0 Derivative ﬁnancial liabilities Forward exchange contracts 2.0 3.1 3.1 - - - Total 2.0 3.1 3.1 - - - The previous table shows maturity analysis for the Group’s financial liabilities according to the contractual cash flows of the liabilities. The maturity table for derivatives shows the net cash flow amounts for derivatives because they are net cash-settled. Foreign exchange risk The Group operates globally and is exposed to foreign exchange risk arising from several different currencies. Foreign exchange risk arises mainly of receivables and payable, intra-group transactions, deposits and bank account balances. The currencies in which the transactions within the Group are primarily denominated are euro, Polish zloty, Sterling pound and Swedish krona. Transaction risk Foreign exchange transaction risk arises when a Group company has commercial or financial transaction and payments in other than its own functional currency and when related cash inflow and outflow amounts are not equal or concurrent. In Purmo Group these transaction risks arise mainly in Poland, the UK, Sweden and in the parent company Purmo Group Plc due to centralised Group Treasury. According to Group Treasury Policy, Group companies forecast their foreign currency net cash flows quarterly. These foreign currency exposures denominated in other than the Group company’s functional currency, are hedged with internal foreign exchange contracts with Group Treasury. Group Treasury hedges on average 40 to 70 per cent of the net foreign currency exposure for the time period of up to 15 months. All external hedging actions, foreign exchange forward contracts and foreign exchange options, are executed by Group Treasury. Due to the centralised risk management operated by Group Treasury, the parent company is exposed to foreign exchange transaction risk in various currencies mainly related to financial assets and liabilities. According to Group Treasury Policy, these net positions by currency pair are hedged 70- 100% by using foreign exchange forwards contracts and options. Translation risk Foreign exchange translation exposure arises when the assets, liabilities and income of a subsidiary is denominated in a currency other than the functional currency of the parent company, please see Note 6.4 Exchange rates for further information. Translation risk is reduced by funding the assets with, whenever feasible, in the same currency as the asset itself. According to Group Treasury Policy, translation risk will only be hedged with approval from the Board of Directors. At reporting date, there was no translation risk hedging in place. 1 Maturity analysis restated compared to ﬁnancial statements 2021. Annual Report 2022 53 Exposure to foreign currency risk Sensitivity to a -/+ 10 percent change in the exchange rates is shown for the net currency position per currency. The table below presents the exposures in main currencies translated to euro at foreign exchange rates of the reporting date. The balance sheet exposures are presented in accordance with IFRS 7 requirements including internal and external transactions. Foreign currency risk 2022 EUR million GBP PLN SEK CNY RON Forecast transactions, net 14.0 -111.6 23.1 - 26.1 Balance sheet exposure, ﬁnancing items 31.2 54.0 35.7 8.8 -3.8 Hedging instruments under hedge accounting, nominal amount -9.0 77.1 -15.4 - -17.3 Hedging instruments, no hedge accounting, nominal amount -31.1 -54.0 -35.7 -8.8 3.8 Net balance sheet exposure -8.9 77.1 -15.4 0.1 -17.3 Sensitivity analysis (+/- 10%) Proﬁt and loss -/+ 0.0 -/+ 0.0 -/+ 0.0 -/+ 0.0 -/+ 0.0 Equity (hedge reserve) -/+ 0.5 -/+ 3.4 -/+ 0.8 -/+ 0.0 -/+ 0.9 2021 1 EUR million GBP PLN SEK CNY RON Forecast transactions, net 26.0 -46.4 31.9 - 25.7 Balance sheet exposure, ﬁnancing items 1 15.9 40.5 13.8 9.1 -2.1 Hedging instruments under hedge accounting, nominal amount -13.4 30.8 -16.9 - -15.6 Hedging instruments, no hedge accounting, nominal amount -16.3 -40.5 -13.9 -9.0 2.1 Net balance sheet exposure -13.8 30.8 -16.9 0.2 -15.7 Sensitivity analysis (-/+ 10%) Proﬁt and loss -/+ 0.0 -/+ 0.0 -/+ 0.0 -/+ 0.0 -/+ 0.0 Equity (hedge reserve) -/+ 1.3 -/+ 1.6 -/+ 1.5 -/+ 0.0 -/+ 1.0 1 Presentation of table restated compared to ﬁnancial statement 2021. Interest rate risk The Group is exposed to an interest rate risk that is the risk of fluctuating interest rates affecting the interest expense of the Group and value of its assets and liabilities. Purmo Group’s interest rate risk arises mainly from its interest-bearing assets and liabilities, such as loans, financial instruments and lease liabilities. According to Group Treasury Policy Purmo Group may use interest-rate swaps, cross-currency swaps or options to manage the interest-rate risk either by synthetically converting floating-rate loans into fixed-rate loans through the use of derivatives or buying an option or options to set limits to interest rate fluctuation. Group Treasury manages and controls interest risk by following average months to interest fixing and ratio between fixed and floating rate loans. At the end of 2022 average interest fixing was 15 months for all interest bearing assets and liabilities excluding cash and cash equivalents and financial lease liabilities. Cash flow sensitivity analysis for variable rate instruments The basis for the interest sensitivity is a parallel shift of 1 percentage points up and down in interest rates on all interest bearing (non-current and current) variable rate instruments excluding lease liabilities and cash and cash equivalents during the financial year 2022 with all other variables being constant. For all the variable rate instruments the one percentage point change upwards or downwards would have had the following impact in financial expenses and trough change in the fair market value of the interest rate derivatives in hedge accounting in other comprehensive income. Proﬁt and loss Other comprehensive income 2022 EUR million 1 percentage point increase 1 percentage point decrease 1 percentage point increase 1 percentage point decrease Variable rate instruments -3.0 0.0 - - Interest rate swaps 0.3 -0.3 2.4 -2.4 Cash ﬂow sensitivity (net) -2.7 -0.2 2.4 -2.4 Proﬁt and loss Other comprehensive income 2021 EUR million 1 percentage point increase 1 percentage point decrease 1 percentage point increase 1 percentage point decrease Variable rate instruments -0.4 0.0 - - Cash ﬂow sensitivity (net) -0.4 0.0 - - Annual Report 2022 54 5.3 Financial assets and liabilities ACCOUNTING PRINCIPLES The Group classifies financial assets into the following categories: financial assets at fair value through profit or loss and amortised cost. The classification of financial assets is based on the cash flow characteristics and the business model the asset is managed in. The Group classifies financial liabilities into the following categories: financial liabilities at fair value through profit or loss and amortised cost. Financial assets and financial liabilities – recognition and derecognition The Group initially recognises financial assets and financial liabilities when the entity becomes a party to the contractual provisions of the instrument. The Group derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred, or it neither transfers nor retains substantially all of the risks and rewards of ownership and does not retain control over the transferred asset. Any interest in such derecognised financial assets that is created or retained by the Group is recognised as a separate asset or liability. The Group has entered into factoring arrangements, whereby significant risks and rewards are transferred to the counterparty. The Group derecognises a financial liability when its contractual obligations are discharged, cancelled or expire. Financial assets and financial liabilities are offset and the net amount presented in the statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle them on a net basis or to realise the asset and settle the liability simultaneously. Financial assets – measurement At amortised cost A financial asset is classified and subsequently measured at amortised cost if its cash flows consist solely payments of principal and interest, in other words, meets the SPPI criterion, and is managed within a held to collect business model. Trade and other receivables, which are not subject to factoring, and vendor note receivable from the ultimate parent company are included in this category. Interest income on these items is recognised using effective interest method and presented as finance income. At fair value through profit or loss Financial assets that do not meet the criteria for classification as subsequently measured at either amortised cost or fair value through other comprehensive income are classified and subsequently measured at fair value through profit or loss. In Purmo Group derivative assets and such trade receivables which are subject to non-recourse factoring arrangement but not yet derecognised on the balance sheet date are classified within this category. Impairment The Group recognises a loss allowance for the expected credit losses for financial assets not classified as fair value through profit or loss. The loss allowance is estimated as the full lifetime expected credit loss if the credit risk of the instrument has increased significantly since initial recognition, otherwise the loss allowance is estimated as the 12 months expected credit loss at the reporting date. Possible increase in credit risk for said assets is assessed at the end of each reporting period. The loss allowance for trade receivables is estimated using the simplified method and measured as life time expected credit losses. The expected credit loss is based on historical and forward-looking information and is estimated at the end of each reporting period. Financial liabilities – measurement Financial liabilities are classified as at fair value through profit or loss or amortised cost. Financial liabilities measured at amortised cost are initially recognised at fair value less any directly attributable transaction costs. After initial recognition, these liabilities are measured at amortised cost using the effective interest method. Loans and trade and other payables are included in this category. Only derivative liabilities are classified at fair value through profit and loss. Annual Report 2022 55 Carrying amount 31 Dec 2022 EUR million Fair value through OCI Fair value through proﬁt or loss Amortised cost Total Fair value Fair value hierarchy Financial assets Forward foreign exchange contracts 2.0 0.7 - 2.7 2.7 Level 2 Interest rate derivatives 2.7 - - 2.7 2.7 Level 2 Trade receivables - - 89.1 89.1 89.1 Level 2 Cash and cash equivalents - - 65.4 1 65.4 65.4 Total assets 4.7 0.7 154.5 159.8 159.8 Financial liabilities Forward foreign exchange contracts 1.4 0.1 - 1.5 1.5 Level 2 Loans from ﬁnancial institutions - - 279.4 279.4 279.4 Level 2 Commercial papers - - 10.0 10.0 10.0 Level 2 Redemption liability2 - - 7.6 7.6 7.6 Level 3 Trade payables - - 102.1 102.1 102.1 Level 2 Total liabilities 1.4 0.1 399.1 400.6 400.6 1 Cash and cash equivalents include EUR 9.1 million classiﬁed as assets held for sale. 2 The redemption liability has been classiﬁed as liabilities related to assets held for sale. Carrying amounts and fair values of financial instruments The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair-value hierarchy. It does not include fair value information for trade receivables and payables or other current financial assets and financial liabilities, as their carrying amount is a reasonable approximation of fair value. Items where the carrying amount equates to the fair value are categorised to three levels: • Level 1. Quoted (unadjusted) market prices in active markets for identical assets or liabilities • Level 2. Fair value determined by observable parameters • Level 3. Fair value determined by non-observable parameters Carrying amount 31 Dec 2021 EUR million Fair value through OCI Fair value through proﬁt or loss Amortised cost Total Fair value Fair value hierarchy Financial assets Forward foreign exchange contracts 0.5 1 0.1 1 - 0.7 0.7 Level 2 Trade receivables - - 77.1 77.1 77.1 Level 2 Cash and cash equivalents - - 177.6 177.6 177.6 Total assets 0.5 0.1 254.7 255.4 255.4 Financial liabilities Forward foreign exchange contracts 1.4 0.6 - 2.0 2.0 Level 2 Loans from ﬁnancial institutions - - 372.7 372.7 372.7 Level 2 Redemption liability - - 8.1 8.1 8.1 Level 3 Trade payables - - 116.7 116.7 116.7 Level 2 Total liabilities 1.4 0.6 497.5 499.4 499.4 1 Comparative ﬁgures restated to correct ﬁgures. The Group does not have any material trade receivables on the balance sheet, which will be subject to factoring. Annual Report 2022 56 5.4 Cash and cash equivalents ACCOUNTING PRINCIPLES Cash and cash equivalents comprise cash in hand, deposits held at call with banks and other highly liquid investments with original maturities of three months or less. These are readily convertible to a known amount of cash and the risk of changes in value is low. Bank overdrafts in use, if any, are included in current liabilities in the consolidated statement of financial position. ACCOUNTING PRINCIPLES The Group’s equity consists of share capital, reserve of invested unrestricted equity, translation differences, fair value reserve, and retained earnings. Other reserves The Company’s other reserves include fair value reserve, cumulative translation difference reserve and share-based payments reserve. The fair value reserve includes fair value changes of derivative instruments used for cash flow hedging. The translation difference reserve comprises all foreign exchange differences arising from the translation of the financial statements of foreign operations. The share-based payments reserve represents the portion of the grant date fair value of share-based incentive plans granted to the key management personnel of the Group that has been recognised in accordance with the accounting policy adopted for share-based payments. Profit distribution Profit distribution includes dividends and return of capital repayments. Dividends and return of capital proposed by the Board of Directors are recognised in the consolidated financial statements when they were approved by the shareholders at the General Meeting. Cash and cash equivalents EUR million 31 Dec 2022 31 Dec 2021 Bank balances 56.3 177.6 Total 56.3 177.6 31 December 2022 Group had cash and cash equivalents by the amount of EUR 9.1 million classified as assets held for sale. At the end of 2021 cash and cash equivalents included EUR 96.8 million of proceeds in the initial public offering in blocked bank accounts. As the terms and conditions of the escrow agreement were met end of 2021, funds were already booked to bank balances. On the basis of escrow agreement the funds were released to Purmo Group Plc’s bank account on 3 January 2022. 5.5 Equity Share capital and number of shares The Company’s registered share capital on 31 December 2022 was EUR 3,080,000. The Company has two share classes of which class C shares are listed and class F shares are held by Purmo Group Plc’s founding shareholder, Virala Corporation. The shares have no nominal value. The Founder Shares are not publicly traded. The company has no treasury shares. The Company’s class F shares are subject to redemption and consent clauses in accordance with the Articles of Association, which restrict the rights to transfer or acquire class F shares. The holder of class F shares have right to demand conversion into class C shares subject to certain price hurdles calculated in accordance with the Articles of Association. Further class F shares carry a right to asset distribution equivalent to a certain proportion of asset distributed to class C shares in accordance with the Articles of Association. Annual Report 2022 57 Authorisation of the Board of Directors to resolve on the issuance of shares as well as on the issuance of special rights entitling to shares On 24 April 2022 the Annual General Meeting decided that the Board of Directors is authorised to resolve on the issuance of class C shares as well as the issuance of special rights entitling to class C shares referred to in Chapter 10, Section 1 of the Finnish Companies Act in one or several tranches. The number of class C shares to be issued based on this authorisation shall not exceed 8,000,000 shares (including shares to be received based on special rights), which corresponds to approximately 20 per cent of all of class C shares in Purmo Group. The authorisation may be used to improve Purmo Group’s capital structure, to finance or carry out corporate acquisitions or other arrangements, for incentive arrangements and remuneration schemes or for other purposes resolved by the Board of Directors. However, a maximum of 25 per cent of the authorisation, i.e., a maximum of 2,000,000 class C shares (including shares to be received based on special rights) may be used for incentive arrangements and remuneration schemes. The Board of Directors shall decide on all the conditions of the issuance of shares and of special rights entitling to shares. The issuance of shares and of special rights entitling to shares may be carried out in deviation from the shareholders' pre-emptive rights (directed issue). The authorisation is effective until the end of the next Annual General Meeting, however no longer than until 30 June 2023. The authorisation revokes the previous authorisation granted by the Extraordinary General Meeting on 13 December 2021 to resolve on the issuance of shares as well as on the issuance of special rights entitling to shares. Authorisation to purchase own shares On 24 April 2022 the Annual General Meeting decided that the Board of Directors is authorised to resolve on the repurchase of the Company’s own class C shares as well as on the acceptance of them as pledge. The number of class C shares to be repurchased or accepted as pledge by virtue of this authorisation shall not exceed 4,000,000 own class C shares in the Company, which corresponds to approximately 10 per cent of all of class C shares in Purmo Group, subject to the provisions of the Finnish Companies’ Act on the maximum amount of own shares owned by or pledged to the company and its subsidiaries. The shares may be repurchased or accepted as pledge in one or several instalments and either through a tender offer made to all shareholders on equal terms or otherwise than in proportion to the shares held by the shareholders (directed repurchase) in public trading at the prevailing market price or at a price otherwise formed on the market. The shares would be repurchased with funds from the Company’s unrestricted shareholders’ equity. Purmo Group Plc (former Virala Acquisition Company Plc) announced on 20 September 2021 that the first share price hurdle as set out in the company’s Articles of Association had been exceeded, pursuant to which 18.75 per cent of class F shares held by the company’s founding shareholder, Virala Corporation, have become eligible for conversion into class C shares starting from 28 June 2024. At the General Meeting of shareholders, one share of either class carries one vote. Class C shares carry a preferential right to dividends and to other distributions of assets until an aggregate amount of EUR 60,000,000 has been distributed to class C shares whereafter class C shares and class F shares carry equal right to dividends and to other distributions of assets unless otherwise stipulated in the Articles of Association of Purmo Group. On 1 March 2022 Purmo Group announced a directed share issue of 671,779 class C shares to the sellers of TT Thermotech Intressenter AB in connection with the acquisition of the company. The subscription price was EUR 13.50 per class C share and the subscription price totalling EUR 671,779 has been recorded to the reserve of invested unrestricted equity. On 27 September 2022 Purmo Group announced that the board approved a total of 66,403 subscriptions of new class C shares in the directed share issue to management and key employees. The sub-scription price was EUR 10.23 per class C share and the subscription price totalling EUR 671,302.69 has been recorded to the reserve of invested unrestricted equity and was entered in the Finnish Trade Register on 25 October 2022. Changes in share capital Number of outstanding shares (pcs) Share capital (EUR million) Reserve of unrestricted equity (EUR million) Class C share Class F share 1 Jan 2022 40,374,531 1,565,217 3.1 385.9 1 Mar 2022 Directed share issue of class C shares 671,779 - - 9.1 4 May 2022 Return of capital - - - -7.3 3 Oct 2022 Return of capital - - - -7.6 25 Oct 2022 Directed share issue of class C shares 66,403 - - 0.7 31 Dec 2022 41,112,713 1,565,217 3.1 380.8 Annual Report 2022 58 The shares will be repurchased to be used to improve Purmo Group’s capital structure, to finance or carry out corporate acquisitions or other arrangements, for incentive arrangements and remuneration schemes or to be retained by the Company as treasury shares, transferred, cancelled or for other purposes resolved by the Board. The Board of Directors shall decide on all other terms and conditions regarding the repurchase of the Company’s own shares and acceptance thereof as pledge. The authorisation is effective until the end of the next Annual General Meeting, however no longer than until 30 June 2023. The authorisation revoked the previous authorisation granted. Dividends and return of capital After the balance sheet date, the Board of Directors proposed a payment of funds from the invested unrestricted equity reserve as a return of capital of EUR 0.36 per share for class C share and EUR 0.07 per share for class F share totalling approximately EUR 14.9 million and that no dividend will be paid for the financial year 2022. The company paid EUR 0.36 per share for class C share and EUR 0.07 per share for class F share totalling approximately EUR 14.9 million from the invested unrestricted equity reserve as a return of capital for the financial year 2021. Additional information on equity is presented in Notes to the parent company financial statements, in Note 8. Earnings per share The basic earnings per share are calculated by dividing the profit attributable to the equity owners of the parent company by the weighted average number of shares outstanding during the period. The diluted earnings per share are calculated by adjusting the weighted average number of ordinary shares with the dilutive effect of all the potential dilutive shares, such as shares from share-based payments. Earnings per share, basic 2022 2021 Proﬁt/loss attributable to shareholders of the parent company for C shares, EUR million 13.0 -18.7 Proﬁt/loss attributable to shareholders of the parent company for F shares, EUR million 0.1 -0.1 Proﬁt/loss attributable to the owners of the Company, EUR million 13.1 -18.8 Weighted average number of shares outstanding, pcs 1 41,244,426 29,124,487 2 Basic earnings per share, EUR 0.32 -0.65 Earnings per share, diluted 2022 2021 Proﬁt/loss attributable to shareholders of the parent company for C shares, EUR million 13.0 -18.7 Proﬁt/loss attributable to shareholders of the parent company for F shares, EUR million 0.1 -0.1 Proﬁt/loss attributable to the owners of the Company, EUR million 13.1 -18.8 Weighted average number of shares outstanding, pcs 1 41,244,426 29,124,487 2 Diluted earnings per share, EUR 0.32 -0.65 1 Including 293,478 class F shares convertible to class C shares at the start of the conversion period on 28 June 2024. 2 The number of shares in the comparison period are those of Purmo Group Ltd. Before the merger 31 December 2021 Purmo Group Ltd shares amounted to 11,073,834 which have been converted using the 31 December 2021 merger consideration ratio 2.600334506. The earnings per share for 2021 was negative due to the EUR 52.3 million non-cash IFRS 2 merger impact which was recognised in other operating expenses and equity. Annual Report 2022 59 Non-current liabilities EUR million 31 Dec 2022 31 Dec 2021 Loans from ﬁnancial institutions 278.1 277.7 Redemption liability 1 - 8.1 Lease liabilities 34.3 30.7 Total 312.4 316.5 1 In 2022 included in liabilities directly attributable to assets held for sale . 5.6 Interest-bearing liabilities ACCOUNTING PRINCIPLES Long-term debt is initially recognised at fair value, net of transaction costs incurred and subsequently measured at amortised cost using the effective interest method. The difference, between the debt amount recognised and the redemption amount, is recognised in profit and loss as interest expense over the period of the borrowings. The fair value changes in borrowings covered by fair value hedge are, in respect of hedged risk, recognised through profit and loss. A portion of long-term debt is classified as short-term debt, when the settlement of the liability is due within 12 months from the balance sheet date. Borrowings are derecognised only, if the contractual obligation is discharged, cancelled or expired. Fees paid on the establishment of loan facilities are recognised in profit and loss as other finance expenses over the period of the facility, or, if withdrawal of the loan is probable, as part of the transaction cost. Fees paid on the establishment of credit facilities are recognised in profit and loss as other finance expenses over the period of the facility, or, if withdrawal of the loan is probable, as part of the transaction cost. Current liabilities EUR million 31 Dec 2022 31 Dec 2021 Loans from ﬁnancial institutions 1.4 95.0 Commercial papers 10.0 - Lease liabilities 9.4 5.6 Total 20.7 100.6 Total liabilities 333.1 417.1 Changes in ﬁnancial liabilities arising from cash ﬂow from ﬁnancing activities EUR million Loans from ﬁnancial institutions Lease liabilities Total 1 Jan 2022 372.7 36.4 409.1 Changes from ﬁnancing cash ﬂows Purchases of subsidiaries and business acquisitions - 2.9 2.9 Classiﬁed as assets held for sale - -0.4 -0.4 Divestments - -0.2 -0.2 Proceeds from short-term borrowings 199.2 - 199.2 Repayment of short-term borrowings -282.9 - - Repayment of lease liabilities - -7.7 -7.7 Total -83.6 -5.4 191.5 New leases - 13.4 13.4 Interest expense 0.4 - 0.4 EEffects of exchange rates 0.0 -0.7 -0.7 31 Dec 2022 289.4 43.7 613.6 Annual Report 2022 60 ACCOUNTING POLICIES Derivative instruments, fair value and hedge accounting Derivatives Derivatives are initially recognised in the balance sheet at fair value and subsequently measured at their value at each balance sheet date. Derivatives are designated at inception either as hedges of firm commitments or forecasted transactions (cash flow hedges) or as derivatives at fair value through profit and loss that do not meet the criteria of hedge accounting. Interest component of all foreign exchange derivatives are included in financial items. Derivatives are presented as assets when the fair value is positive and as liabilities when the fair value is negative. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months; it is classified as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Fair value The fair value of foreign exchange forward contracts is determined using forward exchange market rates at the balance sheet date. The fair value of interest rate derivatives is calculated as the present value of the estimated future interest cash flows based on market yield curves. Cash flow hedge The Group applies cash flow hedging to interest rate swaps and certain foreign exchange forward contracts. At inception of the hedge relationship, the group documents the economic relationship between hedging instruments and hedged items, including whether changes in the cash flows of the hedging instruments are expected to offset changes in the cash flows of hedged items. The group documents its risk management objective and strategy for undertaking its hedge transactions. The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in the cash flow hedge reserve within equity. Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss. The hedging results of foreign exchange forward contracts are recycled from other comprehensive income and presented on a net basis either in other income or other expenses. The gain or loss related to the 5.7 Derivative financial instruments Changes in ﬁnancial liabilities arising from cash ﬂow from ﬁnancing activities EUR million Loans from related party Loans from ﬁnancial institutions Lease liabilities Total 1 Jan 2021 90.0 4.5 35.7 130.2 Changes from ﬁnancing cash ﬂows Proceeds from long-term borrowings - 280.0 - 280.0 Proceeds from short-term borrowings from related party 8.0 - - 8.0 Proceeds from short-term borrowings - 95.0 - 95.0 Repayment of short-term borrowings - -4.9 - -4.9 Repayment of short-term borrowings from related party -98.0 - - -98.0 Repayment of lease liabilities 1 - - -7.2 -7.2 Total -90.0 370.1 -7.2 273.0 New leases - - 7.8 7.8 Interest expense - -2.3 - -2.3 EEffects of exchange rates - 0.4 - 0.4 31 Dec 2021 0.0 372.7 36.4 409.1 1 Comparability period restated. Terms and repayment schedule The terms and conditions of outstanding borrowings are as follows: 31 Dec 2022 31 Dec 2021 EUR million Currency Year of maturity Carrying amount Year of maturity Carrying amount Loans from ﬁnancial institutions EUR 2024 278.1 2024 372.7 Commercial papers EUR 2023 10.0 - - Loans from ﬁnancial institutions CNY 2023 1.4 2023 - Lease liabilities EUR 2023- 43.7 2022- 36.4 Total borrowings 333.1 409.0 Annual Report 2022 61 i neffective portion of hedging instruments is reported in other income or expenses, net or under financial items when related to interest rate swaps. Derivatives at fair value through profit and loss Certain hedging instruments do not qualify for hedge accounting regardless the proving to be effective in terms of risk management under Group Treasury Policy. The fair value change of these instruments is recognised in profit and loss. For non-hedge accounting derivatives hedging operative receivables or payables the changes in fair value is presented, in other income or expenses, and when hedging financial receivables or payables, in net financial items. Derivatives and hedge accounting The following table summarises the effects of the foreign-currency related hedging instruments on the Group’s financial position and performance, including amounts recycled to profit or loss during the year. EUR million unless otherwise stated 31 Dec 2022 31 Dec 2021 Foreign currency forward contracts Carrying amount, assets 2.0 0.5 Carrying amount, liabilities 1.4 1.4 Notional amount 160.8 114.1 Hedge ratio 1:1 1:1 Hedging results, recycled to other expenses -0.5 -1.9 Weighted average hedged rates (FX rate) GBP 0.90 0.87 PLN 4.96 4.70 SEK 10.79 10.25 RON 5.31 5.08 Maturity breakdown of notional amounts Between 1 and 6 months 115.0 80.2 Between 6 and 12 months 101.3 73.5 Over 12 months - - Total 216.3 153.7 The following table summarises the effects of the interest rate swaps, to which hedge accounting is applied, on the Group’s financial position and performance. The fixed interest rate of the interest rate swaps varied between 1.3 and 3.0 percent as at 31 December 2022. EUR million unless otherwise stated 31 Dec 2022 31 Dec 2021 Interest rate swaps Carrying amount, assets 2.7 - Carrying amount, liabilities - - Notional amount 100.0 - Hedge ratio 1:1 - Hedging results, recycled to other expenses -0.4 - Maturity breakdown of notional amounts Under 12 months - - Over 12 months 100.0 - Total 100.0 - Annual Report 2022 62 5.8 Commitments and contingent assets and liabilities ACCOUNTING PRINCIPLES Purmo Group has guaranteed obligations arising in the ordinary course of business. Typically, guarantees given to secure commercial contractual obligations, or received advance payments. The Group discloses contingent liabilities and commitments as off-balance sheet liabilities in the notes to the consolidated financial statements and recognises them also when the realisation of them is not probable. Guarantees EUR million 2022 2021 Bank guarantees 8.3 8.0 Parent guarantees 15.7 21.0 Total 24.0 29.0 Off-balance sheet leases include low-value leases, and leases that have not yet commenced. The Group does not have material lease agreements not yet commenced as at the balance sheet dates. Information on leases is disclosed in Note 3.4. Disputes and legal proceedings Purmo Group is involved in some minor legal actions, claims and proceedings. The final outcome of these matters cannot be predicted. Considering all available information to date the outcome is not expected to have material impact on the financial position of the Group. 6. Group structure ACCOUNTING PRINCIPLES The Group accounts for business combinations using the acquisition method when control is transferred to the Group. The consideration transferred in the acquisition is measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred. The consideration transferred does not include amounts relating to the settlement of pre-existing relationships. Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss. The Group recognises any non-controlling interest in the acquired entity on an acquisition-by- acquisition basis either at fair value or at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets. 6.1 Business combinations Annual Report 2022 63 Preliminary fair values of acquired assets and liabilities at time of acquisition: 2022 EUR million Purchase price Purchase price paid in cash 9.2 Purchase price paid in shares 7.4 Fair value of net identiﬁable assets acquired Goodwill 0.2 Other intangible assets 13.3 Tangible assets 1.3 Right-of-use assets 2.8 Inventories 5.9 Other current assets 3.9 Cash and cash equivalents 0.2 Total assets 27.7 Interest-bearing liabilities 9.4 Deferred tax liabilities 3.3 Current liabilities 3.7 Total liabilities 16.5 Net assets acquired 11.2 Less goodwill on acquired balance sheet 1 -0.2 Net assets acquired excluding goodwill 11.0 Earn-out 0.3 Goodwill 5.9 Cash ﬂow impact Purchase price paid in cash -9.2 Cash and cash equivalents of the acquired company 0.2 Expenses related to the acquisition -0.4 Impact on cash ﬂow -9.4 1 Goodwill on the acquired entities balance sheet is deducted as it is not an identiﬁable asset of Purmo Group according to IFRS. 6.1.1 Acqusitions 2022 TT Thermotech Intressenter AB Purmo Group acquired the entire share capital of the Nordic heating system company TT Thermotech Intressenter AB on 1 March 2022. The preliminary consideration paid was EUR 9.2 million in cash and EUR 7.4 million in shares, and the amount of cash and cash equivalents obtained was EUR 0.2 million. The acquisition includes an earn-out of EUR 0.3 million payable in cash subject to achievement of certain objectives. The preliminary identified other intangible assets relate to customer relationships, technology and trademarks amounting to EUR 8.5 million. The EUR 5.9 million goodwill arising from the acquisition reflects the synergies expected to be achieved in sales, purchasing, selections and operational efficiency. The goodwill is not tax deductible. The Group's profit and loss included EUR 0.4 million in acquisition-related costs under other operating expenses, presented as non-recurring items. TT Thermotech Intressenter AB had a EUR 21.4 million impact on net sales for March–December 2022 and the impact on net profit was EUR 0.5 million. If the acquisition had taken place on 1 January 2022, according to management estimates, the impact on Group net sales would have been EUR 25.7 million and on the net profit EUR 0.7 million. TT Thermotech Intressenter AB was merged into it's subsidiary TT Thermotech Scandinavia AB in December 2022. Annual Report 2022 64 2021 Merger of Virala Acquisition Compand Plc and Purmo Group Ltd On 31 December 2022 Virala Acqusition Company Plc ("VAC") and Purmo Group Ltd were merged according to the merger plan approved 13 December 2021. As VAC didn’t meet the definition of a business, the merger was not accounted for as a business combination but as a reverse recapitalisation, in which no goodwill was recognised and Purmo Group obtained a public company status- The difference of the fair value of the equity instruments issued by VAC and the fair value of VAC’s net assets was accounted for as a non- cash share-based payment in accordance with IFRS 2 Share-Based Payments and recorded as an expense through the profit and loss and was considered to represent a service for listing of Purmo Group’s shares. As a result of the application to IFRS 3 reverse acquisition guidance by analogy to the merger , Purmo Group’s operating history and financial performance forms the basis for the comparative consolidated financial information for the combined company. Euroradiators Holding B.V. On 4 November 2020 Purmo Group signed an agreement to acquire 51% of the issued share capital of Euroradiators Holding B.V. from Bosch Group. The closing date of the acquisition was 30 April 2021 when Purmo Group gained control over Euroradiators. Euroradiators is a factory that was established in 2014 for the production of radiators for the Russian market. The provisional fair value of the net assets acquired at the acquisition date was EUR 7.1 million and accordingly Purmo Group recognised a provisional goodwill of EUR 4.0 million, which has been allocated to Radiators cash-generating unit for impairment testing purposes. End of March 2022 Purmo Group decided to exit its business in Russia and the goodwill was impaired. The Russian business has been measured at fair value less costs to sell and classified as assets held for sale and continuing operations at the balance sheet date; see Note 6.2 Assets held for sale. The acqusition-related costs have been included under other operating expenses. The acquisition did not have a material impact on the Group’s revenue or profit for the period. The redemption liability to redeem the 49% minority has been increased by EUR 2.2 million post-acquisition. which corresponds to the cash injection to the investee by the minority shareholder. In accordance with the put and call option terms, the redemption liability is increased with a corresponding amount. The redemption liability has been measured at fair value and classified as liabilities related to assets held for sale. Fair values of acquired assets and liabilities at time of acquisition: 2021 EUR million Purchase price Purchase price paid in cash 5.5 Fair value of net identiﬁable assets acquired Intangible assets 0.0 Tangible assets 2.9 Right-of-use assets 0.5 Inventories 2.8 Other current assets 2.7 Total assets 8.9 Interest-bearing liabilities 1.0 Deferred tax liabilities 0.1 Current liabilities 0.7 Total liabilities 1.8 Net assets acquired 7.1 Redemption liability 5.6 Goodwill 4.0 Cash ﬂow impact Purchase price paid in cash -5.5 Cash and cash equivalents of the acquired company 1.0 Expenses related to the acquisition -0.0 Impact on cash ﬂow -4.5 Annual Report 2022 65 6.2 Assets held for sale 6.1.2 Disposals 2022 In September 2022 Purmo Group divested the shares in Lampo Heating (Tianjin) Co., Ltd., to a third party. The company owned a real-estate property and a land area in Tianjin, China. The impact of the divestment on the profit for the financial period is approx. EUR 1.3 million. EUR million Assets 2.9 Liabilities 0.3 Net assets disposed 2.6 Cash consideration received 4.3 Translation dieranslation differences reclassiﬁed to proﬁt and loss -0.4 Net assets sold -2.6 Sales gain 1.3 Cash ﬂow impact Purchase price received in cash 4.3 Cash and cash equivalents of the disposed company -1.5 Expenses related to the disposal 0.0 Impact on cash ﬂow 2.7 2021 No disposals during the period. EUR million 2022 2021 Assets held for sale 1 Tangible assets 0.0 - Inventories 4.4 - Other assets 0.6 - Cash and cash equivalents 9.1 - Total 14.0 - Liabilities related to assets held for sale Interest-bearing liabilities 7.6 - Other liabilities 2.4 - Total 10.0 - 1 Amounts are presented net of internal balances with other Purmo Group subsidiaries. ACCOUNTING PRINCIPLES Non-current assets or disposal groups and liabilities are classified as held for sale if their carrying amounts are expected to be recovered primarily through sale rather than through continuing use. Classification as held for sale requires that the following criteria are met; the sale is highly probable, the asset is available for immediate sale in its present condition subject to usual and customary terms, the management is committed to the sale and the sale is expected to be completed within one year from the date of classification. Prior to classification as held for sale, the assets or assets and liabilities related to a disposal are measured according to the respective IFRS standards. From the date of classification, non-current assets held for sale and liabilities are measured at the lower of the carrying amount and the fair value less costs to sell, and the recognition of depreciation and amortisation is discontinued. Non-current assets held for sale and liabilities are presented in the statement of financial position separately from other items. End of March 2022 Purmo Group took the decision to exit its business in Russia. The Group will seek to divest and complete an orderly transfer of the business to a new owner, in compliance with international and local laws and considering the wellbeing of our employees in Russia. Upon completion of the divestment, the Group will no longer have a manufacturing operation or sales in Russia. The Russian business has been measured at fair value less costs to sell and classified as assets held for sale and continuing operations. The Group’s management has assessed the balance sheet impact of the decision to divest the business in Russia. The management has considered indicators of impairment of goodwill and intangible assets, the recoverable amount of property plant and equipment and right-of-use assets, the valuation of inventories, trade receivables and the redemption liability. Due to the significant uncertain-ties related to the business in Russia the Group has recognised impairment charges and write-downs of EUR 6.9 million in March 2022 on goodwill, intangible assets, property, plant and equipment, right-of-use assets, inventories and the redemption liability and an additional write-down of EUR 6.0 million in December 2022 on inventories and other assets. Annual Report 2022 66 ACCOUNTING PRINCIPLES Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. When the Group loses control over a subsidiary, it de-recognises the assets and liabilities of the subsidiary, and any non-controlling interests and other components of equity. Any resulting gain or loss is recognised in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. Changes in the Group’s interest in a subsidiary that do not result in a loss of control are recognised as equity transactions. Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statement of profit or loss, statement of comprehensive income, statement of changes in equity and balance sheet respectively. All intercompany transactions, receivables, liabilities, unrealised profits and distribution of profits within the Group are eliminated in the consolidated financial statements. Purmo Group’s subsidiaries as at 31 December 2022 are set out below. Unless otherwise stated the portion of ownership interest held equals the voting rights held by the Purmo Group. Company Country of incorporation Activities % Equity interest Purmo Group Oyj Finland Parent company 100 Purmo Group Finland Oy Ab Finland Sales 100 Purmo Group Latvia SIA Latvia Sales 100 Purmo Group Estonia AS Estonia Sales 100 ZAO EVRA Varme RUS Russia Sales 100 Purmo Group Denmark ApS Denmark Sales 100 Company Country of incorporation Activities % Equity interest Rettig Heating Equipment (Jiangsu) Co. Ltd China Production and sales 100 Purmo Group Poland Sp. z o.o Poland Production and sales 100 Purmo Group Sweden AB Sweden Production and sales 100 Emmeti S.p.A Italy Production and sales 100 Emmeti Iberica S.L. Spain Sales 100 Fabricca Italiana Valvole S.r.l Italy Production and sales 100 SFERA Comercial e Importadora Brazil Sales 100 Sigarth GmbH Germany Sales 100 Sigarth Sp. z o.o. Poland Production and sales 100 PG Austria GmbH Austria Production and sales 100 PG Hungary Kft Hungary Production and sales 100 PG Hrvatska d.o.o. Croatia Sales 100 PG Slovenija d.o.o. Slovenia Sales 100 PG Germany GmbH Germany Production and sales 100 Hewing GmbH Germany Production and sales 100 NORAL Beteiligungs GmbH & Co. KG Germany Services 100 Rettig Heating Group UK Ltd United Kingdom Dormant 100 Purmo Group Belgium NV Belgium Production and sales 100 Purmo Group Ireland Limited Ireland Dormant 100 PG Ceska s.r.o Czech Republic Sales 100 Purmo Group USA Inc United States Sales 100 Purmo Group Turkey Ticaret ve Sanayi A.S. Turkey Production and sales 100 Purmo Group Romania srl Romania Sales 100 CAN Sp. z o.o Poland Services 100 Purmo Group France SAS France Production 100 Purmo Group (UK) Ltd United Kingdom Production and sales 100 Purmo Group UK Pension Trustee Limited United Kingdom Dormant 100 Vogel & Noot Products Ltd United Kingdom Dormant 100 Euroradiators Holding B.V. Netherlands Holding 51 Evroradiators LLC Russia 1 Russia Production and sales 51 TT Thermotech Management Services AB Sweden Holding 100 TT Thermotech Scandinavia AB Sweden Production and sales 100 Thermotech Scandinavia Finland Oy Finland Sales 100 Thermotech Pipeline Oy Finland Dormant 100 6.3 Subsidiaries 1 100% owned by Euroradiators Holding B.V Annual Report 2022 67 6.4 Exchange rates ACCOUNTING PRINCIPLES Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currencies of Group entities at the exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rate at the reporting date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are translated into the functional currency at the exchange rate at the date when the fair value was determined. Foreign currency differences are generally recognised in profit or loss. Non-monetary items that are measured based on historical cost in a foreign currency are not retranslated. Foreign exchange gains and losses, net that relate to operating items are presented in other income or expenses, depending of the net position. Foreign exchange gains and losses, net, that relate to financing items are presented in finance income or expenses, depending of the net position. Foreign operations Items included in the financial statements of each of the Group’s entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency). The consolidated financial statements are presented in euro, which is the Company’s functional and presentation currency. The assets and liabilities of foreign operations, including goodwill and fair value adjustments arising on acquisition, are translated into euro at the exchange rates at the reporting date. The income and expenses of foreign operations are translated into euro at the exchange rates at the dates of the transactions. Foreign currency differences arising from the translation of foreign entities are recognised in other comprehensive income and accumulated in the translation reserve, except to the extent that the translation difference is allocated to a non-controlling interest. When a foreign operation is disposed of in its entirety or partially such that control, significant influence or joint control is lost, the cumulative amount in the translation reserve relating to that foreign operation is reclassified to profit or loss as part of the gain or loss on disposal. If the Group disposes of part of its interest in a subsidiary but retains control, then the relevant proportion of the cumulative amount is reattributed to non-controlling interests. Average rates Closing rates 2022 2021 31 Dec 2022 31 Dec 2021 CNY Chinese yuan 7.0789 7.6298 7.3582 7.1947 GBP Pound sterling 0.8528 0.8598 0.8869 0.8403 HUF Hungarian forint 391.30 358.54 400.87 369.19 PLN Polish zloty 4.6861 4.5652 4.6808 4.5969 RON Romanian leu 4.9313 4.9213 4.9495 4.9490 RUB Russian ruble 71.87 87.17 77.30 85.30 SEK Swedish krona 10.6294 10.1459 11.1218 10.2503 USD US dollar 1.0530 1.1827 1.0666 1.1326 Annual Report 2022 68 Transactions with key management personnel The information of the key management personnel compensation and remuneration is disclosed only for the key management of Purmo Group. Purmo Group did not have any transactions with the key management personnel of Rettig Group Ltd or Rettig Capital Ltd. The information presented in the tables below are on an accruals basis. Remuneration to the members of the Board of Directors EUR thousand 2022 2021 Fees 475.8 168.2 Management incentive program (share-based payment) - 335.0 Total 475.8 503.2 Compensation and remuneration to the CEO and the members of the Management team 2022 EUR thousand CEO Members of the Management team Salaries and other short-term employee beneﬁts 486.3 1,119.1 Short term incentives 267.6 403.0 Post-employment beneﬁts 62.3 112.1 Management incentive program (share-based payment) - - Termination beneﬁts - 454.9 Total 816.2 2,076.2 2021 EUR thousand CEO Members of the Management team Salaries and other short-term employee beneﬁts 498.7 946.7 Short term incentives 352.7 477.5 Post-employment beneﬁts 63.5 67.5 Management incentive program (share-based payment) 247.0 660.3 Termination beneﬁts - - Total 1,161.9 2,151.1 1 7.1 Related party transactions Parties are considered to be related if one party has the ability to control or exercise significant influence on the other party, or if the parties exercise joint control in making financial and operating decisions. Purmo Group’s related parties include subsidiaries as well as the members of the Board of Directors and the CEO and members of the Group management. In addition, the immediate parent company Rettig Group Ltd and the ultimate controlling party Rettig Capital Ltd and their subsidiaries, associated companies and joint ventures are related parties. All transactions and outstanding balances with these related parties are priced on an arm’s length basis. Tomas von Rettig and Maria von Rettig have significant influence over Rettig Capital Ltd. Until the merger of Virala Acquisition Company Plc and Purmo Group Ltd 31 December 2021, Purmo Group's related parties also included Purmo Group Ltd.’s Board of Directors and the members of the management team, including the CEO, as well as their family members. Rettig Group Ltd held 61.80% of the Company's shares and voting rights on 31 December 2022 and 68.28% in 31 December 2021, respectively. Parent and ultimate controlling party EUR million 2022 2021 Items in proﬁt and loss Interest income 0.0 0.1 Interest expenses - -2.2 Purchases -0.1 -0.5 Derivative instruments, gain - -0.0 Items in the balance sheet Non-current receivables 0.2 0.0 Current liabilities - 0.0 Current receivables - - Items recognised in equity Dividend and repayment of capital -9.8 -266.4 Merger - 152.1 7. Other notes Annual Report 2022 69 1 Comparative ﬁgure restated 7.2 Taxes ACCOUNTING PRINCIPLES Income tax The income tax expense comprises current and deferred tax. Current and deferred tax is recognised in profit or loss, except to the extent that it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other comprehensive income or directly in equity, respectively. Current tax Current tax comprises the expected tax payable or receivable on the taxable income or loss for the year and any adjustment to tax payable or receivable in respect of previous years. The amount of current tax payable or receivable is the best estimate of the tax amount expected to be paid or received that reflects uncertainty relating to income taxes, if any. It is measured using tax rates enacted or substantively enacted at the reporting date. Current tax also includes any tax arising from dividends. Deferred tax Deferred tax is recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets are recognised for unused tax losses, unused tax credits and deductible temporary differences to the extent that it is probable that future taxable profits will be available against which they can be used. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that the related tax benefit will be realised; such reductions are reversed when the probability of future taxable profits improves. Unrecognised deferred tax assets are reassessed at each reporting date and recognised to the extent that it has become probable that future taxable profits will be available against which they can be used. Deferred tax is measured at the tax rates that are expected to be applied to temporary differences when they reverse, using tax rates enacted or substantively enacted at the reporting date. The measurement of deferred tax reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets and liabilities and where the deferred tax balances relate to the same taxation authority. Purmo Group has outstanding loan receivables from Group management of EUR 0.2 (0.2) million at the financial year end. In July 2022 Purmo Group announced that the Board of Director’s had decided to launch a new share- based incentive plan directed for management and key employees. Based on the share-based incentive plan the Company's CEO and management team subscribed a total of 10,752 new class C shares and tied 72,514 previously owned class C shares to the plan during 2022. For more information about the share- based incentive plan, please see Note 2.5 Share-based payments.The company provided the participants a possibility to finance 50 per cent of the subscription value through an interest-bearing loan from the company, which some of the Group management utilised. The loans were withdrawn in October 2022 and will be repaid in full on 30 May 2028, at the latest. The participants have pledged subscribed shares as a security for performing the obligations under the concluded loan agreement. The Annual General Meeting has authorised the Board of Director's to accept the Company's class C shares as a pledge, see Note 5.5 Equity. As a result, Purmo Group had 5,376 class C shares as a pledge at the end of the reporting period. The loans are subject to 12-month Euribor plus a margin of 1.00 per cent. The interest is due annually and interest payable by key management personnel totals to EUR 0.0 (0.0) million at the financial year end. Purmo Group has also granted loans to the Group management during 2018 and 2020 to make the initial personal investment to subscribe the Company’s former class K shares in connection of participants becoming eligible for the 2018 and 2020 incentive plans. he shares subscribed by the borrowers are pledged as security for the repayment of loan balance. The Annual General Meeting has authorised the Board of Director's to accept the Company's class C shares as a pledge, see Note 5.5 Equity. The loans are subject to 12-month Euribor plus a margin of 1.00 per cent. The interest is due annually and interest payable by key management personnel totals to EUR 0.0 (0.0) million at the financial year end. The loans and any accrued interest thereon are repayable on 30 June 2024 at the latest, or earlier if the borrower’s employment with the Group ends. Annual Report 2022 70 Reconciliation of ef effective tax rate EUR million 2022 2021 Proﬁt before tax 21.6 -5.1 Tax using the Company's domestic tax rate -4.3 1.0 EEffect of tax rates in foreign jurisdictions -0.7 -1.8 Non-deductible expenses -5.9 -3.5 IFRS 2 merger impact - -10.5 Tax-exempt income 1.4 2.5 Current year losses for which no deferred tax asset was recognised -0.2 -0.5 Change in unrecognised temporary diemporary differences (tax losses) 0.4 1.3 Prior year taxes 1.9 0.4 EEffect of tax consolidation/tax group in one country 0.0 0.0 Other -0.9 -2.7 Tax in proﬁt and loss statement -8.4 -13.7 EEffective tax rate 39.1% -269.7% 1 1 Without the non-cash IFRS 2 merger impact the comparable tax rate would have been 29.1% The total income tax expense of the Group for 2022 was EUR -14.8 million. Defining effective tax rate or comparing it to previous periods is not meaningful for 2022 as the 2021 Group result before taxes was negative due to the non-cash IFRS 2 merger impact of EUR 52.3 million. The comparable effective tax rate without the IFRS 2 listing expense was 39.1% (29.1%). The tax cost was burdened by significant profits in the countries with higher corporate income tax rate than Finland (especially Italy and Germany), tax rate based devaluation of deferred tax assets in France and Ireland as well as merger related real estate tax in Germany. The cost side was balanced by positive profit outlook in e.g. Austria and Sweden allowing recognising of deferred tax asset on losses for previous fiscal periods. ACCOUNTING ESTIMATES AND JUDGEMENTS Management judgement is required in assessing whether certain deferred tax assets and deferred tax liabilities are recognised on the balance sheet. Deferred tax assets are recognised only where it is considered probable that they will be recovered, which is dependent on the generation of sufficient future taxable profits. Significant management judgment is required to determine the amount of deferred tax assets that can be recognised for tax losses carried forward. Amounts recognised in proﬁt and loss EUR million 2022 2021 Income tax expense For the ﬁnancial period -14.8 -13.4 For previous ﬁnancial periods 1.9 0.4 Change in deferred taxes 4.5 -0.8 Total -8.4 -13.7 Amounts recognised in other comprehensive income EUR million 2022 2021 Items that will never be reclassified to profit or loss Tax related to post-employment deﬁned beneﬁt plans -0.2 0.2 Items that are or may be reclassified to profit or loss Cash ﬂow hedges -0.8 0.2 Total -1.1 0.3 Annual Report 2022 71 Deferred tax assets 2021 EUR million 1 Jan Recognised in proﬁt and loss Exchange dierdifferences Recognised in OCI Acquisitions and other 31 Dec Property, plant and equipment 1.9 -0.1 0.0 - - 1.7 Financial assets 0.5 -0.1 0.0 0.2 - 0.6 Inventories 1.7 0.8 - - - 2.4 Post-employment beneﬁt obligations/assets 3.7 -0.1 0.0 0.0 -0.1 3.5 Provisions 3.9 0.5 0.0 - 0.0 4.4 Tax losses carried forward 17.7 -2.3 0.3 - 3.5 19.2 Other temporary dierary differences 3.6 0.7 0.1 - -1.5 3.0 Deferred tax assets, total 33.0 -0.6 0.4 0.1 2.0 34.9 OsetOffset against deferred tax liabilities -7.6 - - - -0.8 -8.4 Total deferred tax 25.5 -0.6 0.4 0.1 1.1 26.5 Deferred tax liabilities 2021 EUR million 1 Jan Recognised in proﬁt and loss Exchange dierdifferences Recognised in OCI Acquisitions and other 31 Dec Intangible assets 0.5 0.4 - - 0.0 0.8 Property, plant and equipment 8.1 -1.1 0.0 - -0.4 6.5 Financial assets 0.6 -0.2 0.1 0.0 0.0 0.4 Inventories 0.0 0.0 0.0 - 0.0 0.0 Post-employment beneﬁt obligations/assets 0.2 0.0 - -0.2 -0.1 -0.1 Provisions 0.1 0.0 0.0 - - 0.1 Other temporary dierary differences 2.1 1.1 0.0 - 0.1 3.3 Deferred tax liabilities total 11.4 0.2 0.0 -0.2 -0.5 11.0 OsetOffset against deferred tax liabilities -7.6 - - - -0.8 -8.4 Total deferred tax 3.9 0.2 0.0 -0.2 -1.3 2.6 Deferred tax assets 2022 EUR million 1 Jan Recognised in proﬁt and loss Exchange dierdifferences Recognised in OCI Acquisitions and other 31 Dec Property, plant and equipment 1.7 0.4 0.0 - -0.0 2.1 Financial assets 0.6 0.4 0.0 -0.1 - 0.9 Inventories 2.4 -0.3 0.0 - -0.3 1.8 Post-employment beneﬁt obligations/assets 3.5 0.1 0.0 -0.3 - 3.3 Provisions 4.4 -0.4 0.0 - -0.0 4.0 Tax losses carried forward 19.2 - 5.2 - 1.7 26.1 Other temporary dierary differences 3.0 -0.1 -0.0 - -0.2 2.6 Deferred tax assets, total 34.9 -0.1 5.2 -0.4 1.0 40.7 OsetOffset against deferred tax liabilities -8.4 - - - -3.2 -11.6 Total deferred tax 26.5 -0.1 5.2 -0.4 -2.1 29.1 Deferred tax liabilities 2022 EUR million 1 Jan Recognised in proﬁt and loss Exchange dierdifferences Recognised in OCI Acquisitions and other 31 Dec Intangible assets 0.8 -0.3 0.5 - 2.6 3.7 Property, plant and equipment 6.5 -0.3 0.5 - 0.4 7.1 Financial assets 0.4 -0.5 1.0 0.7 - 1.7 Inventories -0.0 0.2 -0.3 - 0.1 -0.1 Post-employment beneﬁt obligations/assets -0.1 0.1 0.3 -0.0 0.4 0.6 Provisions 0.1 0.0 0.0 - - 0.1 Other temporary dierary differences 3.3 -0.0 0.0 - 0.5 3.8 Deferred tax liabilities, total 11.0 -0.9 2.0 0.7 4.0 16.9 OsetOffset against deferred tax assets -8.4 - - - -3.2 -11.6 Total deferred tax 2.6 -0.9 2.0 0.7 0.9 5.3 Annual Report 2022 72 7.3 Events after the balance sheet date As of 1 January 2023 Purmo Group's segment reporting will be changed based on the new organisation structure announced 5 October 2023. The new organisation will consist of two business divisions: Climate Products & Systems, which will sell through the wholesaler channels; and Climate Solutions, which will sell integrated solutions directly to installers served by the company’s Emmeti business in South Europe and Thermotech business in the Nordic region. The third reporting segment will be Other and unallocated items. The company will provide adjusted comparison figures for the new segments before the publication of the January–March 2023 interim report. On 16 February 2023 Purmo Group announced the issue of green capital securities of EUR 60.0 million. The Capital Securities will bear interest at a fixed rate of 9.5 percent per annum until 23 February 2026 after which the Capital Securities will bear interest at a floating interest rate quarterly in arrears on each interest payment date. The Capital Securities do not have a specified maturity date, and Purmo Group is not under an obligation to repay, repurchase or redeem the Capital Securities at any specified date. Purmo Group has the possibility to redeem the Capital Securities on the reset date, on 23 February 2026. Purmo Group’s major shareholder, Rettig Group Oy Ab, and its affiliates are participating in the issuance by subscribing for the Capital Securities in an amount of EUR 5.0 million. The rationale for the issuance of the Capital Securities is to ensure funding for Purmo Group’s announced strategy acceleration programme. The net proceeds from the issue will be used in accordance with Purmo Group’s Green Finance Framework announced on 13 February 2023. The issue date for the Capital Securities will be 23 February 2023. The Capital Securities are instruments that are subordinated to the company's other debt obligations and will be treated as equity in Purmo Group’s consolidated financial statements prepared in accordance with IFRS. The Capital Securities do not confer to its holders the rights of a shareholder and does not dilute the holdings of the current shareholders. An application will be made to have the Capital Securities listed on the official list of the Helsinki Stock Exchange maintained by Nasdaq Helsinki Ltd within three months from the issue date. On 22 February 2023 Purmo Group announced that Jan-Elof Cavander (MSc. Ind. Eng.) has been appointed Chief Financial Officer of Purmo Group Plc and a member of the Management team. He will report to Chief Executive Officer John Peter Leesi and will be based in Helsinki, Finland. Mr. Cavander will join Purmo Group on 22 June 2023, the latest. Deferred tax assets have been booked on the losses to the extent that it is probable that taxable profits will be available against which to utilise the benefits. On 31 December 2022, Purmo Group had EUR 10.0 (36.0) million of tax losses carried forward for which no deferred tax assets were recognised because it is not probable that future taxable profits will be available against which to utilise the benefits. For these tax losses EUR 0.0 (3.0) million will expire during the next five years and EUR 10.0 (33.0) million have no expiry date or will expire after five years. The Group does not provide for deferred taxes on the distributable earnings of non-Finnish subsidiaries, to the extent that such earnings are intended to be permanently reinvested in those operations and repatriation would give rise to tax expenses. Annual Report 2022 73 EUR thousand Note 2022 2021 Other operating income 8.2 22,068 - Employee beneﬁt expenses 8.3 -2,222 -137 Depreciations and amortisations 8.4 -3,712 - Other operating expenses 8.5 -32,968 -9,926 Operating proﬁt/loss -16,834 -10,063 Financial income and expenses 8.6 48,503 0 Proﬁt/loss before appropriations and taxes 31,669 -10,063 Appropriations 8.7 630 - Income tax expense 8.8 2,011 2,013 Proﬁt/loss for the period 34,310 -8,050 8. Parent company financial statements EUR thousand Note 2022 2021 Assets Non-current assets Intangible assets 8.9 25,682 28,933 Tangible assets 8.10 3 3 Investments 8.11 559,148 559,634 Total non-current assets 584,833 588,570 Current assets Long-term receivables 8.12 65,144 29,179 Short-term receivables 8.13 143,368 111,393 Cash and cash equivalents 46,189 163,304 Total current assets 254,701 303,876 Total assets 839,534 892,446 Equity and liabilities Equity Share capital 8.14 3,080 3,080 Unrestricted equity reserve 8.14 380,779 385,917 Retained earnings 8.14 -8,052 -2 Proﬁt/loss for the ﬁscal period 34,310 -8,050 Total equity 410,117 380,945 Liabilities Long-term liabilities 8.15 278,052 277,654 Short-term liabilities 8.16 151,365 233,847 Total current liabilities 429,417 511,501 Total equity and liabilities 839,534 892,446 Parent company income statement Parent company balance sheet Annual Report 2022 74 EUR thousand 2022 2021 Cash ﬂows from operating activities Proﬁt before appropriations and taxes 31,669 -10,063 Depreciations 3,712 - Finance income and expenses -48,503 0 Other adjustments 9,523 0 Operating proﬁt before change in working capital -3,599 -10,063 Change in working capital Increase (-) / decrease (+) of current receivables -4,104 -532 Increase (+) / decrease (-) of current non-interest bearing liabilities 21,624 2,660 Cash ﬂows from operating activities before ﬁnancial items and taxes 13,920 -7,936 Interests paid and other ﬁnance costs -14,379 0 Interests received 7,962 - Dividends received 53,689 - Direct income taxes paid -265 - Net cash from operating activities 60,927 -7,936 Cash ﬂows from investing activities Purchases of property, plant, equipment and intangible assets -460 - Change in long-term loan receivables -115 - Acquisition of subsidiaries -2,339 63,434 Sale of subsidiaries 4,226 - Net cash from investing activities 1,312 63,434 Parent company cash ﬂow statement EUR thousand 2022 2021 Cash ﬂows from ﬁnancing activities Capital returns paid -14,886 - Proceeds from share capital increase - 77 Proceeds from share issues 679 226 Proceeds from oering - 107,500 Change in short-term loans -85,000 - Change in subsidiary long-term loans -35,139 - Change in subsidiary short-term loans -45,008 - Net cash fom ﬁnancing activities -179,354 107,803 Change in cash and cash equivalents -117,115 163,302 Cash and cash equivalents at the beginning of the period 163,304 2 Cash and cash equivalents at the end of the period 46,189 163,304 Annual Report 2022 75 Notes to the Parent Company Financial Statements 8.1 Accounting principles The financial statements of the parent company, Purmo Group, have been prepared in accordance with the Finnish Generally Accepted Accounting Principles. The financial statements are presented in thousand euros. Foreign currency translations and derivatives Transactions in foreign currencies are recorded in euro at the exchange rate prevailing at the date of the transaction. At the end of the accounting period, monetary items are valued at the exchange rate prevailing at the end of period. Company uses derivatives to hedge its foreign exchange and interest rate risk. The fair value of derivative instruments is presented as off-balance sheet liability in note 8.14 Derivative contracts. Tangible and intangible assets Tangible and intangible assets are valued at historical cost, less accumulated depreciation according to plan. Depreciation and amortisation is calculated on a straight-line basis over the expected useful lives of the assets as follows: Trademarks 5–10 years Computer software 3–5 years Other intangible assets 20 years Machinery and equipment 3–5 years Receivables Receivables are valued to acquisition cost or to a lower probable value. Loan arrangement fee The loan arrangement fee is recognised at amortised cost using the effective interest method. Leases Lease payments are treated as rentals. Income taxes Income tax expense includes taxes calculated for the financial year, adjustments to prior year taxes, and changes in the deferred taxes. Deferred tax assets and liabilities have been recognized in the financial statements. Dividends and return of capital Dividends and return of capital proposed by the Board of Directors are not recorded in the financial statements until they have been approved by the Annual General Meeting. Acquisitions The merger of Virala Acquisition Company Plc and Purmo Group Ltd was completed on 31 December 2021. Virala Acquisition Company Plc continues as the parent company changing its name to Purmo Group Plc. The received assets and liabilities were recorded in book values. Annual Report 2022 76 8.5 Other operating expenses EUR thousand 2022 2021 Expenses related to the share issue - -6,114 Administration - -3,654 Loss on sale of subsidiary shares -1,744 - Write-down of subsidiary shares -7,754 - Other expenses -23,469 -158 Total -32,968 -9,926 Auditors' fees EUR thousand 2022 2021 Authorised Public Accountants KPMG Audit -171 -34 Audit related services -79 -22 Tax consultation -52 -2 Other services -0 -346 Total -302 -404 8.2 Other operating income EUR thousand 2022 2021 Service income 22,068 - Total 22,068 0 8.4 Depreciations and amortisations EUR thousand 2022 2021 Other intangible assets -3,707 - Machinery and equipment -4 - Total -3,712 0 8.3 Employee benefit expenses EUR thousand 2022 2021 Salaries and fees -1,912 -135 Social security costs -44 -2 Pension costs -267 - Total -2,222 -137 Salaries and fees to the management Chief Executive Ocer - - Board of Directors -496 -135 Personnel on average 14 - Annual Report 2022 77 8.8 Income taxes EUR thousand 2022 2021 Income tax for prior ﬁnancial years -265 - Change in deferred taxes 2,276 2,013 Total 2,011 2,013 8.7 Approriations EUR thousand 2022 2021 Group contributions received 630 - Total 630 - 8.6 Financial income and expenses EUR thousand 2022 2021 Dividend income From Group companies 53,689 - Interest income From Group companies 10,396 - From others 2,710 - Other ﬁnancial income From Group companies 8,981 - From others 25,005 - Total 100,781 - Interest expenses To Group companies -2,221 - To others -14,042 0 Other ﬁnancial expenses To Group companies -12,331 - To others -23,684 - Total -52,278 0 Financial income and expenses total 48,503 0 8.9 Intangible assets EUR thousand 2022 2021 Other intangible assets Acquisition cost 1 Jan 36,377 - Additions 0 Additions coming from the merger 36,377 Acquisition cost 31 Dec 36,833 36,377 Accumulated amortisation 1 Jan -7,443 - Accumulated amortisation of the merger - -7,443 Amortisations for the ﬁnancial year -3,707 Accumulated amortisation 31 Dec -11,151 -7,443 Book value 31 Dec 25,682 28,933 Annual Report 2022 78 8.10 Tangible assets EUR thousand 2022 2021 Machinery and equipment Acquisition cost 1 Jan 46 - Additions 4 - Additions coming from the merger - 46 Acquisition cost 31 Dec 50 46 Accumulated depreciation 1 Jan -43 - Accumulated depreciation of the merger - -43 Depreciations for the ﬁnancial year -4 - Accumulated amortisation 31 Dec -47 -43 Book value 31 Dec 3 3 8.12 Long-term receivables Long-term receivables Receivables from Group companies EUR thousand 2022 2021 Loan receivables 60,687 26,754 Total 60,687 26,754 Receivables from others EUR thousand 2022 2021 Loan receivables 529 413 Total 529 413 Deferred tax assets EUR thousand 2022 2021 Deferred tax assets 1 Jan 2,012 - From result for the ﬁnancial year 1,916 2,012 Deferred tax assets 31 Dec 3,929 2,012 Long-term receivables total 65,144 29,179 8.11 Investments EUR thousand 2022 2021 Investments in Group companies Acquisition cost 1 Jan 559,634 - Increases 13,239 - Increases coming from the merger - 559,634 Decreases -13,724 - Acquisition cost 31 Dec 559,148 559,634 Annual Report 2022 79 8.14 Equity EUR thousand Share capital Unrestricted equity reserve Retained earnings Equity total Equity 1 Jan 2022 3,080 385,917 -8,052 380,945 Capital return -14,886 -14,886 Share issue 9,748 9,748 Result for the ﬁnancial year 34,310 34,310 Equity 31 Dec 2022 3,080 380,779 26,258 410,117 Equity 1 Jan 2021 3 0 -2 2 Merger 278,191 278,191 Share issue 3,077 107,726 110,803 Result for the ﬁnancial year -8,050 -8,050 Equity 31 Dec 2021 3,080 385,917 -8,052 380,945 Distributable equity EUR thousand 2022 2021 Reserve for invested unrestricted equity 380,779 385,917 Retained earnings -8,052 -2 Net result for the ﬁnancial period 34,310 -8,050 Total 407,037 377,865 8.13 Short-term receivables Receivables from Group companies EUR thousand 2022 2021 Loan receivables 125,296 101,558 Interest receivables 3,957 428 Trade receivables 1,253 2,970 Other receivables 9,828 3,448 Total 140,334 108,403 Receivables from others EUR thousand 2022 2021 Interest receivables 6 - Income tax receivables 490 - Value added tax receivables 127 2,124 Loan receivables - 233 Other receivables 598 - Prepayments and accrued income 1,813 633 Total 3,034 2,989 Short-term receivables total 143,368 111,393 8.14 Long-term liabilities Liabilities to others EUR thousand 2022 2021 Loans from ﬁnancial institutions 278,052 277,654 Total 278,052 277,654 Long-term liabilities total 278,052 277,654 Annual Report 2022 80 8.17 Collaterals Commitments and contingencies EUR thousand 2022 2021 Guaranties given on behalf of group companies 28,079 21,006 Total 28,079 21,006 Lease commitments EUR thousand 2022 2021 Payments in the following year 139 65 Payments later 23 13 Total 162 78 8.18 Derivative contracts EUR thousand 2022 2021 Foreign exchange derivatives Foreign exchange forward contracts, nominal value 365,821 276,751 Interest rate derivatives Interest rate swaps, nominal value 100,000 - 8.16 Short-term liabilities Liabilities to Group companies EUR thousand 2022 2021 Loan payables 3,816 43,147 Interest payables 4 30 Trade payables 2,006 1,444 Cash pool payables 131,153 67,645 Other accruals and deferred income 302 18,475 Total 137,282 130,741 Liabilities to others EUR thousand 2022 2021 Loans from ﬁnancial institutions - 95 000 Commercial papers 9 960 - Interest payables 137 - Trade payables 1 155 3 425 Other liabilities - 983 Accruals and deferred income 2 832 3 698 Employee beneﬁt expenses 463 - Incom tax payables 105 - Other accruals and deferred income 2 264 3 698 Total 14 083 103 106 Short-term liabilitites total 151 365 233 847 Annual Report 2022 81 Proposal of the Board of Directors Purmo Group Plc’s distributable funds on 31 December 2022 total EUR 407,036,848.65 which includes EUR 34,309,926.59 in net profit for the year. The Board of Directors proposes to the Annual General Meeting convening that a return of capital of EUR 0.36 per class C share be paid for the financial year 2022 and that a return of capital for class F shares be paid in accordance with the Articles of Association of the Company for the financial year 2022 from the reserve for invested unrestricted equity of the Company. All the class C shares in the Company are entitled to a return of capital except for treasury shares held by the Company on the return of capital record date. In accordance with the Articles of Association of the Company and as a consequence of the first share price hurdle for conversion of class F shares into class C shares having been exceeded in September 2021, class F shares currently carry a right to asset distribution equivalent to 0.69 per cent of the return of capital proposed to be distributed to class C shares, which corresponds to a return of capital of EUR 0.07 per class F share. The dividend shall be paid in four instalments. The first instalment of EUR 0.09 per class C share and EUR 0.02 EUR per class F share, based on the class F shares right to asset distribution in accordance with the Articles of Association shall be paid to the shareholders who are registered in the list of shareholders maintained by Euroclear Finland Ltd on the dividend record date of 14 April 2023. The payment day proposed by the Board for this instalment is 21 April 2023. The second instalment of EUR 0.09 per class C share and EUR 0.02 per class F share, based on the class F shares right to asset distribution in accordance with the Articles of Association. The dividend record day for the second instalment as per the current rules of the Finnish book-entry system would be 15 September 2023 and the dividend payment day 22 September 2023. The third instalment of EUR 0.09 per class C share and EUR 0.02 per class F share, based on the class F shares right to asset distribution in accordance with the Articles of Association. The dividend record day for the second instalment as per the current rules of the Finnish book-entry system would be 12 December 2023 and the dividend payment day 19 December 2023. The fourth instalment of EUR 0.09 per class C share and EUR 0.01 per class F share, based on the class F shares right to asset distribution in accordance with the Articles of Association. The dividend record day for the second instalment as per the current rules of the Finnish book-entry system would be 15 March 2023 and the dividend payment day 22 March 2024. No significant changes have taken place in the company’s financial position since the end of the financial year. The company’s liquidity is good and in the opinion of the Board of Directors the proposed return of capital will not put the company’s solvency at risk. Helsinki, 20 March 2023 Tomas von Rettig Alexander Ehrnrooth Chair of the Board Carina Edblad Carlo Grossi Jyri Luomakoski Catharina Stackelberg-Hammarén Matts Rosenberg John Peter Leesi CEO Our auditor’s report has been issued today. Helsinki, 20 March 2023 KPMG Oy Ab Authorized Public Accountant Firm Kim Järvi APA Annual Report 2022 82 Auditor’s report To the Annual General Meeting of Purmo Group Plc Report on the Audit of the Financial Statements Opinion We have audited the financial statements of Purmo Group Plc (business identity code 2890898-5) for the year ended 31 December 2022. The financial statements comprise the consolidated balance sheet, statement of comprehensive income, statement of changes in equity, statement of cash flows and notes, including a summary of significant accounting policies, as well as the parent company’s balance sheet, income statement, statement of cash flows and notes. In our opinion • the consolidated financial statements give a true and fair view of the group’s financial position, financial performance and cash flows in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU • the financial statements give a true and fair view of the parent company’s financial performance and financial position in accordance with the laws and regulations governing the preparation of financial statements in Finland and comply with statutory requirements. Our opinion is consistent with the additional report submitted to the Audit Committee. Basis for Opinion We conducted our audit in accordance with good auditing practice in Finland. Our responsibilities under good auditing practice are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the parent company and of the group companies in accordance with the ethical requirements that are applicable in Finland and are relevant to our audit, and we have fulfilled our other ethical responsibilities in accordance with these requirements. In our best knowledge and understanding, the non-audit services that we have provided to the parent company and group companies are in compliance with laws and regulations applicable in Finland regarding these services, and we have not provided any prohibited non-audit services referred to in Article 5(1) of regulation (EU) 537/2014. The non-audit services that we have provided have been disclosed in note 2.3 to the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Materiality The scope of our audit was influenced by our application of materiality. The materiality is determined based on our professional judgement and is used to determine the nature, timing and extent of our audit procedures and to evaluate the effect of identified misstatements on the financial statements as a whole. The level of materiality we set is based on our assessment of the magnitude of misstatements that, individually or in aggregate, could reasonably be expected to have influence on the economic decisions of the users of the financial statements. We have also taken into account misstatements and/or possible misstatements that in our opinion are material for qualitative reasons for the users of the financial statements. Key Audit Matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. The significant risks of material misstatement referred to in the EU Regulation No 537/2014 point (c) of Article 10(2) are included in the description of key audit matters below. We have also addressed the risk of management override of internal controls. This includes consideration of whether there was evidence of management bias that represented a risk of material misstatement due to fraud. Annual Report 2022 83 This document is an English translation of the Finnish auditor’s report. Only the Finnish version of the report is legally binding. The key audit matter How the matter was addressed in the audit Valuation of goodwill (refer to accounting principles for the consolidated ﬁnancial statements and note 3.1) • At the end of the ﬁnancial year, the group had EUR 371 million of goodwill. The goodwill amounts to 92 % of the group equity and 38 % of the group’s total assets on 31 December 2022. • Goodwill is tested for impairment when indicators of impairment exist, or at least annually. Goodwill impairment testing is conducted by comparing the carrying value with the recoverable amount using a discounted cash ﬂow model. • Determining the key assumptions used in the cash ﬂow forecasts requires management judgement and estimates especially relating to long term growth, proﬁtability, and discount rates. • Valuation of goodwill is considered a key audit matter due to the signiﬁcant carrying value and high level of management judgement involved. • We assessed the impairment tests prepared by the Company. • Our detailed audit work with the involvement of KPMG valuation specialists included testing the integrity of the calculations and the technical model. We challenged the assumptions used by management in respect of forecasted growth rates and proﬁtability as well as the appropriateness of the discount rates used. We also validated the assumptions used in relation to market and industry information. • We also compared the cash ﬂows used in the testing to the group’s business plans to our views. • Furthermore, we have considered the adequacy of the group’s disclosures in respect of the impairment testing. Revenue recognition (refer to note 2.2 of the consolidated ﬁnancial statements) • Revenue is mainly generated through the sale of manufactured goods. The revenue is generated by subsidiaries in dierent countries. The revenue earned from the sale of goods is recognised when the control associated with ownership is transferred to the buyer in accordance with the terms of delivery. • In general, revenue recognition within the group is not complex but the large volumes of transactions and the fact that the revenue is generated through subsidiaries in dierent countries makes revenue recognition an area of focus in the audit and is therefore determined as a key audit matter. • Auditors of subsidiaries have performed testing of controls related to revenue recognition and performed substantive procedures such as testing of sales agreements and year- end transactions. • On group level we have assessed the revenue recognition principles and based on the work performed by the auditors in the subsidiaries evaluated compliance with group revenue recognition principles. The key audit matter How the matter was addressed in the audit Valuation of Inventories (refer to note 4.1 of the consolidated ﬁnancial statements) • The value of inventories amounted to EUR 174 million at the end of the ﬁnancial year. It is essential from an accounting perspective that the internal control related to inventory accounting and valuation is appropriately organized. • The valuation of inventories is based on management estimates in respect of slow moving and obsolescence assessment. • Due to the signiﬁcant carrying amount and management judgement involved, valuation of inventories is determined as a key audit matter that our audit is focused on. • In our audit the key focus has been on the pricing and valuation of inventories. Our component auditors carried out controls testing and substantive testing in relation to inventory costing and obsolescence provisions including monitoring of inventory levels. • On group level we have assessed the work performed by the auditors in the subsidiaries and on group level made an overall assessment of the valuation of inventories. Annual Report 2022 84 Responsibilities of the Board of Directors and the Managing Director for the Financial Statements The Board of Directors and the Managing Director are responsible for the preparation of consolidated financial statements that give a true and fair view in accordance with International Financial Reporting Standards (IFRS) as adopted by the EU, and of financial statements that give a true and fair view in accordance with the laws and regulations governing the preparation of financial statements in Finland and comply with statutory requirements. The Board of Directors and the Managing Director are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, the Board of Directors and the Managing Director are responsible for assessing the parent company’s and the group’s ability to continue as going concern, disclosing, as applicable, matters relating to going concern and using the going concern basis of accounting. The financial statements are prepared using the going concern basis of accounting unless there is an intention to liquidate the parent company or the group or cease operations, or there is no realistic alternative but to do so. Auditor’s Responsibilities for the Audit of Financial Statements Our objectives are to obtain reasonable assurance on whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with good auditing practice will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. As part of an audit in accordance with good auditing practice, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the parent company’s or the group’s internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of the Board of Directors’ and the Managing Director’s use of the going concern basis of accounting and based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the parent company’s or the group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the parent company or the group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events so that the financial statements give a true and fair view. • Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. Annual Report 2022 85 Other Reporting Requirements Information on our audit engagement We were first appointed as auditors by the Annual General Meeting for the financial period ended 31.12.2018. Purmo Group Plc (formerly Virala Acquisition Company Plc) has become a public interest entity on 29.6.2021. Other Information The Board of Directors and the Managing Director are responsible for the other information. The other information comprises the report of the Board of Directors and the information included in the Annual Report, but does not include the financial statements and our auditor’s report thereon. We have obtained the report of the Board of Directors prior to the date of this auditor’s report, and the Annual Report is expected to be made available to us after that date. Our opinion on the financial statements does not cover the other information. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. With respect to the report of the Board of Directors, our responsibility also includes considering whether the report of the Board of Directors has been prepared in accordance with the applicable laws and regulations. In our opinion, the information in the report of the Board of Directors is consistent with the information in the financial statements and the report of the Board of Directors has been prepared in accordance with the applicable laws and regulations. If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s report, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Helsinki, 20 March 2023 KPMG Oy Ab Kim järvi Authorised Public Accountant, KHT Annual Report 2022 86 We have undertaken a reasonable assurance engagement in respect of whether the consolidated financial statements for the year ended 31 December 2022 included in the digital financial statements 743700JHE9365SIHRE72-2022-12-31-en.zip of Purmo Group Plc (Business ID 2890898-5) have been marked up with iXBRL markups in accordance with the requirements of Article 4 of EU Delegated Regulation 2018/815 (ESEF RTS). The Responsibility of the Board of Directors and Managing Director The Board of Directors and Managing Director are responsible for preparing the report of the Board of Directors and financial statements (ESEF financial statements) that comply with the requirements of ESEF RTS. This responsibility includes: • preparation of ESEF financial statements in XHTML format in accordance with Article 3 of the ESEF RTS • marking up the primary statements and the notes to the consolidated financial statements, and the company identification data included in the ESEF financial statements with iXBRL tags in accordance with Article 4 of the ESEF RTS; and • ensuring consistency between ESEF financial statements and audited financial statements. The Board of Directors and the Managing Director are also responsible for such internal control as they deem necessary to prepare the ESEF financial statements in accordance with the requirements of the ESEF RTS. Auditor’s Independence and Quality Management We are independent of the company in accordance with the ethical requirements applicable in Finland, which apply to the engagement we have performed, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The auditor applies International Standard on Quality Management ISQM 1, which requires the firm to design, implement and operate a system of quality management including policies or procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulations requirements. Auditor’s Responsibility In accordance with the Engagement Letter our responsibility is to express an opinion on whether the marking up of the consolidated financial statements included in the ESEF financial statements comply in all material respects with the Article 4 of the ESEF RTS. We conducted our reasonable assurance engagement in accordance with International Standard on Assurance Engagements 3000. The engagement involves procedures to obtain evidence whether; • the primary statements of the consolidated financial statements included in the ESEF financial statements are, in all material respects, marked up with iXBRL tags in accordance with Article 4 of the ESEF RTS, and; • whether the notes to the consolidated financial statements and the company identification data included in the ESEF financial statements data, have been marked up, in all material respects, with iXBRL tags in accordance with Article 4 of the ESEF RTS; and • whether the ESEF financial statements and the audited financial statements are consistent with each other. The nature, timing and the extent of procedures selected depend on practitioner’s judgement. This includes the assessment of the risks of material departures from the requirements set out in the ESEF RTS, whether due to fraud or error. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion In our opinion, the primary statements of the consolidated financial statements, the notes to the consolidated financial statements and the company identification data included in the ESEF financial statements of Purmo Group Plc identified as 743700JHE9365SIHRE72-2022-12-31-en.zip for the year ended 31 December 2022 are, in all material respects, marked up in compliance with the ESEF Regulatory Technical Standard. Our audit opinion on the audit of the consolidated financial statements of Purmo Group Plc for the year ended 31 December 2022 is set out in our Auditor’s Report dated 20 March 2023. In this report, we do not express any audit opinion or other assurance conclusion on the consolidated financial statements. Helsinki 20 March 2023 KPMG Oy Ab Kim Järvi Authorised Public Accountant, KHT Independent Auditor’s Reasonable Assurance Report on Purmo Group Plc’s ESEF Financial Statements To the Board of Directors of Purmo Group Plc Annual Report 2022 87

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