INTERIM FINANCIAL REPORT for Bergs Timber AB (publ)

for the period 1 September 2017 – 31 August 2018*

Fourth quarter
(1 June 2018 – 31 August 2018)

• Net turnover for the fourth quarter was SEK 838.2 million (333.7), an increase of 151 %.
  
• The operating profit was SEK 68.0 million (11.3) and the profit after tax was SEK 58.8 million (8.6). Earnings per share amounted to SEK 0.17 (0.05).
  
• Cash flow for the period from operating activities was SEK 124.4 million (86.4).  
  
• The acquisition of Norvik's operations in the Baltic States and the UK was completed in May and are included the whole period.

Interim period
(1 September 2017 – 31 August 2018)

• During the interim period Bergs Timber achieved a net turnover of SEK 2,038.2 million (1,243.8), which is a 64 % increase.
  
• The operating profit was SEK 159.0 million (37.1). Profit after tax was SEK 126.8 million (25.0), and earnings per share amounted to SEK 0.58 (0.15).
• Cash flow for the period from operating activities continues to be strong and amounted to SEK 200.3 million (111.8).
• The acquired companies are included for a period of 3.5 months, from 15 May 2018.

CEO Comments
During the period 1 June-31 August (the fourth quarter) we started the integration of the newly acquired companies in the Baltics and the UK. We have decided to use a decentralized model for our organization. The five subsidiaries (Vika Wood, Byko-Lat, Bergs Timber Production, Leisti and CWL) will continue to operate with their own management and responsibilities. At the same time, the companies will cooperate in different areas where we can see clear synergies. We have identified some interesting possibilities and this will be further explored during the autumn.

This is the first quarter in which we fully report the financial results from the acquired companies. Quarter four is normally a weaker quarter due to low production during the summer and maintenance work carried out. The market for all our products remain strong and we can report a good increase in our profit. All units are performing in line with or better than expected. We are very satisfied with the management and the performance of our new companies.

Raw materials and production
There have been challenges with raw material supply during 2018. After the summer, we have a situation where all units including the Baltic mills have normal or even better stock levels than normal for the season. We have secured the required amount of logs for the rest of this year. At the same time, prices for logs are expected to be unchanged for the remainder of this year. The market for our by-products remains strong with some further price increases after the summer.

During the fourth quarter we have invested about SEK 30 million in a new saw line at the Vimmerby saw mill. The investment is now finalized. During the project, and as planned, we have had ten weeks of lost production but expect to be on planned production from September. We have also finalized the SEK 25 million investment in a new boiler at our Mörlunda mill. During the autumn we are completing the SEK 25 million investment in the new planing line at Byko-Lat and the SEK 100 million investment in a new grading line at Vika Wood.

The market
The global timber production remains on a record high level. Consumption of timber continues to increase with 1-3 per cent on an annual basis. Stock of goods are still low at the producers. The stocks of timber in China have partly been high and we have had a period with destocking and lower purchasing activity. We have also had a clear price correction in the US market, where prices now are more in line with the rest of the markets. Sales in the UK market continues to be good and the activity in the building sector remains on a high level. The Swedish market was affected by less building activity during the unusually warm summer. Demand continuous to be good in the Baltics.

To summarise the market situation, we have during the fourth quarter gone from an unbalanced market with partly shortage of timber to a more balanced situation.

Future prospects
The market for all our products remains favourable. Prices for our raw material are stable and we expect good production volumes. During the autumn we will start to look at how we better can use our UK sales and distribution organization. We are also reviewing the strategy for our two Estonian saw mills.

Peter Nilsson

Chief Executive Officer

Net turnover and earnings for the fourth quarter (1 June 2018 - 31 August 2018)
During the fourth quarter, Bergs Timber had a net turnover of SEK 838.2 million (333.7). The increase in net turnover is due to the acquisition of the Norvik companies and the price of sawn timber and by-products being higher than the previous year. In this quarter, the acquired entities contributed with SEK 500.0 million (0.0) to the net turnover for the Group. Net turnover for comparable entities increased by SEK 16.3 million. Sales volumes are lower than previous year but have been compensated by higher sales prices. The lower sales volumes are explained by lower production volumes, related to the investment in the Vimmerby mill, and lower sales volumes in the Swedish market due to the warm summer.

The operating profit improved to SEK 68.0 million (11.3). The acquired entities contributed with an operating profit of SEK 36.9 million. For comparable entities, the improvement in profit amounts to SEK 19.8 million, primarily explained by higher prices for sawn timber and efficiency measures. On all of the markets to which the group delivers, increased prices can be seen. The prices for by-products are higher than for the corresponding period last year due to higher demand. The price of raw material has continued to increase during the quarter, affecting the result negatively.

Production volume for the Swedish business amounted to 87,000 cubic metres of sawn timber, 13,000 cubic meters lower than previous year. The lower production volume is due to the investment in the Vimmerby mill. Production volumes are on normal level from September 2018.

Net turnover and earnings for the interim period (1 September 2017 - 31 August 2018)
During the interim period, Bergs Timber achieved a net turnover of SEK 2,038.2 million (1,243.8). The increased net turnover is due to acquisition of the Norvik companies and higher prices for sawn timber and by-products. The acquired entities are included in the Group's net turnover as of 15 May and amounted to SEK 592.0 million. The net turnover for comparable entities increased by SEK 214.1 million due to higher selling prices. The sales volume was slightly lower than previous year.

The operating profit improved to SEK 159.0 million (37.1). The acquired companies contributed with SEK 44.3 million in operating profit for the period 15 May to 31 August. The improved result for the comparable entities, SEK 77.6 million, is primarily due to improved prices for sawn timber products and by-products as well as a good mix of products. The prices for raw materials have increased during the interim period, which has had a negative impact on earnings. Depreciation for comparable units is SEK 10.5 million lower than for last year. This is partly due to mechanical equipment being fully written off and partly because the depreciation period for mechanical equipment at the sawmill in Mörlunda has been adjusted to its estimated remaining economic life. The changes have been made following an individual review that is undertaken regularly. Transaction costs related to the acquisitions amounted to SEK 6.5 million.

Production in the Swedish business was 487,000 cubic metres of sawn timber, an increase of 25,000 cubic metres compared with the same period the previous year. The increase is due to the acquisition of the sawmill in Vimmerby, which has been part of the Group since 9 January 2017. Production was adversely affected by severe weather conditions this winter. This caused problems in the transport of timber from forest to sawmill.

Financing
The Group's main source of financing is a credit facility of SEK 364.8 million. This facility includes an overdraft facility with a credit limit of SEK 220.0 million, a fixed-term loan of SEK 119.8 million and a bank guarantee limit of SEK 25.0 million. This facility expires on 31 May 2019. The facility contains financial covenants with a first follow-up on 31 December 2018. During the agreement period, the agreed repayments total SEK 19.8 million. In addition to the above facility, the parent company has raised loans through two vendor loans from Norvik hf for a total of SEK 170.0 million: These promissory notes will be paid in instalments of SEK 100.0 million on 30 June 2019 and SEK 70 million on 30 June 2020. There is also local financing in the acquired Norvik companies.

Total net debt for the Group is SEK 516.5 million (122.3) as per 31 August 2018. The total net debt in the acquired companies amounts to SEK 176.8 million as per 31 August 2018. The increase in Group net debt is entirely attributable to the acquisition of the Norvik companies. In the autumn of 2018, the Group will initiate a review of the overall financing structure. The net debt ratio as at 31 August was 0.51 (0.31).

Cash flow and disposable assets
Cash flow from the current operations has improved and was SEK 200.3 million (111.8). Available cash and cash equivalents, including granted but unused overdraft facilities, totalled SEK 336,6 million (177.6), of which granted but unused overdraft facilities totalled SEK 279,5 million (176,5). In addition to this, there are granted but unused guarantee limits of SEK 24,2 million (15.5). Interest costs for the interim period is higher than in the previous year. This is due to new loans in connection with the acquisition. The improved cash flow from operating activities has contributed to a lower utilisation of the Group overdraft facilities.

Investments
The Group's investments in tangible fixed assets during the interim period total SEK 110.4 million (35.2). The majority of the investments relates to the ongoing investment in a new dry sorting line in Vika Wood, a new biofuel boiler in Mörlunda and the modernisation of the sawline in Vimmerby. Group investments in subsidiaries are described under the heading Acquisitions below.

Acquisition of Norvik hf's operations in the Baltic States and the United Kingdom
On 15 May the acquisition of Norvik hf's operations in the Baltic States and the United Kingdom was completed. The acquisition consists of all shares in Aktsiaselts Laesti and Aktiaselts EWP in Estonia (which operates two sawmills), SIA Vika Wood (which operates a sawmill in Latvia), BYKO-LAT SIA (which has a processing operation in Latvia) and Continental Wood Limited (which conducts distribution and port operations in the UK). All companies are named target companies below.

The acquisition has been paid for through 170 million is newly issued shares in Bergs Timber, and by a SEK 270 million cash payment. A cash payment of SEK 100 million was made on the completion of the acquisition on 15 May 2018. Then payments will be made on 30 June 2019 (SEK 100 million) and 30 June 2020 (SEK 70 million). In addition, the terms include a potential profit-based supplementary purchase price, which reach an amount of maximum SEK 40 million, based on the profits for the periods 2018, 2019 and 2020. It is estimated that the supplementary purchase price will be realised in full and in the acquisition analysis has been discounted at an interest rate of 5%, which corresponds to a risk-free interest rate with surcharge for an industry-specific risk premium. Based on a share price on the transaction date, 15 May 2018, of SEK 2,85 a share for Bergs Timber, and the exchange rates on 15 May, the acquisition price was SEK 788 million before acquisition costs.

A preliminary acquisition analysis has been prepared. The analysis is preliminary as individual items are subject to further analysis for fair value and may be adjusted.

Preliminary acquisition analysis (SEK million)
The total cost of completing the acquisition was SEK 13.8 million, of which SEK 6.5 million relates to transaction costs and has been charged to the interim results, while SEK 7.3 million relates to issue costs reported directly against Group shareholders' equity. Transaction costs are included in the line other operating costs.

Pro forma financial information
For the period June-August 2017/2018, the acquired companies are fully incorporated in the accounts. For the periods, June-August 2016/2017, September-August 2017/2018 and September-August 2016/2017, pro forma information has been compiled in the table below. The pro forma information is compiled both from audited financial statements and management accounts and is for illustration purposes only. For the pro forma periods, it is assumed that the acquisition has been effective in the beginning of the period.

Seasonal fluctuations
Berg Timber’s business is subject to seasonal fluctuations. The demand for sawn timber is generally higher in March-June and September-November. Sales volumes during the winter and summer months are normally lower. The demand for further processed products to the building sector is generally higher in May-October. Production volumes in the sawmills are lower in July and August due to holiday season and maintenance work.

Future prospects
The market for all our products remains favourable. Prices for our raw material are stable and we expect good production volumes.

Parent Company
The parent company's activities are directed at the management of shares in subsidiaries as well as Group-wide administrative tasks. During the interim period the parent company completed the acquisition of Norvik hf's operations in the Baltic States and the United Kingdom. Due to the acquisition, an extraordinary general meeting was held on 14 May, which adopted a motion to issue 170,000,000 shares. At the extraordinary general meeting, changes were also adopted regarding the composition of the board and Michael Bertorp was elected as new Chairman of the Board.

At the company's annual general meeting on 25 January 2018, it was decided to change the fiscal year. The decision means that the fiscal year will coincide with the calendar year. In accordance with this decision, the current fiscal year will be prolonged and cover the period 1 September 2017 – 31 December 2018. Upcoming reporting periods have been adjusted to match the change.

Notes 

Accounting principles
This interim report for the Group has been prepared in accordance with the Swedish Annual Accounts Act and IAS 34. Interim Financial Reporting, and for the parent company in accordance with the Annual Accounts Act. The Group applies IFRS and interpretations from IFRIC as they have been adopted by the EU Commission for application within the EU. From the financial year 2017/18, the Group applies hedge accounting according to IAS 39 regarding the reporting of financial instruments. Other accounting principles and calculation methods that are applied for the Group and the parent company conform to the principles that were used when preparing the most recent annual report. Disclosures according to IAS 34, Interim Financial Reporting, are provided both in notes and other parts of the interim report. Regarding the introduction of IFRS 9, "Financial Instruments" and IFRS 15, "Recognition of revenue" and IFRS 16, "Leasing" the Group's work on investigating the effect of these has not advanced further than that at the time for the publication of the annual report for 2016-2017. The work to investigate the effects will be concluded during the autumn of 2018.

The scope and character of financial assets and liabilities is in all essential aspects unchanged with respect to the annual accounts, 31 August 2017. In the same way as the reporting in the annual accounts, the recognised values agree with the fair value.

Amounts in brackets refer to the value for the same period in the previous financial year, unless otherwise stated.

Segment reporting
Bergs Timber previously identified five segments that are monitored on an ongoing basis, meeting the requirements for aggregation and thus only one operating segment has been reported. Following the acquisition, a review of the Group's monitoring structure and thus segment reporting is underway. During the interim period, no new segment breakdown has been made, so the activities in this report are reported as one segment.

Changed reporting of financial instruments
Effective from 1 September 2017, Bergs Timber applies hedge accounting to hedge currency risks in accordance with IAS 39. The transition to hedge accounting is being implemented to adjust the accounting to better mirror the Group's risk management. Unrealised changes in value of derivative instruments that are identified as cash flow hedging are otherwise recognised in the total income to the extent that hedging meets the efficiency requirements and the accumulated changes in value are recognised in the hedging reserve included in equity.

Information about risks and uncertainty factors 
Price trends
To a great extent the price trend of timber products is determined by how global consumption matches global production. The cost of raw materials is a very large component of the finished product's sales value, for which reason the product is very sensitive to changes in prices for forestry raw material. Raw material is best acquired locally and the supply and demand of raw material has a considerable effect on pricing in the short term.

Financial risks
Bergs Timber is exposed to financial risk, which is mainly related to liquidity and cash flow risk connected with liquidity and debt management and exchange rate risk connected with export deals. A large part of the financing is dependent on fulfilling financial undertakings, which are reported above under the heading Financing. Regarding exposure to exchange rate risk, the Group's policy is normally that 50-75 percent of the expected currency flow for the next six months shall be hedged. The fair value for the Group's currency future contracts total SEK -4.9 million per 31 August 2018. The fair value for currency future contracts is established according to level 2 and has been calculated based on prevailing market conditions.

Value of plant
In previous years, the Group has reported negative results, which has led to testing of the recognised value of plant by impairment testing. Testing is based on our best assessment of the future development. The testing performed shows that there is no need for impairment. A future negative deviation may affect the recognised value of plant. For a further description of impairment testing please refer to the annual report 2016/17.

For a complete presentation of the identified risk as well as the company's work to manage this, please refer to the annual report, 2016/17. There has not been any significant change in the company's risk exposure since the annual report was submitted.

Transactions with related parties and associates
Transaction with members of the board, senior executives and companies associated with them include purchases of forestry raw materials, forestry services, advisory services, timber products and construction services as well as sales of mechanical equipment, by-products and impregnation services. All transactions were at market value. In addition to the acquisition of Norvik's units in the Baltic states and the United Kingdom, no transactions have taken place between Bergs Timber and related parties that significantly affect the Group's position and profit.

The parent company has had transactions with associated Group subsidiaries in the form of sales of management and administration costs. The scope of transactions with related parties has not changed compared to the information provided in the annual report 2016/17.

Reporting periods

This interim report has not been subject to review by the company's auditors.

The undersigned declare that the interim report provides a true summary of the parent company’s and group’s activities, position and income and describes the significant risks and uncertainty factors facing the parent company and the group companies.

Mörlunda, 4 October 2018

_________________________

Peter Nilsson, Chief Executive Officer

The information in this interim financial report is such that Bergs Timber AB (publ) is obliged to disclose pursuant to the EU's Market Abuse Regulation and the Swedish Securities Market Act. The information was released for publication 4 October 2018 at 13:00. The interim financial report is available on the company's website, www.bergstimber.se

Further information regarding the interim financial report can be provided by the Chief Executive Officer, Peter Nilsson, on telephone number +46 70 315 09 27.

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