YEAR-END REPORT 1 September 2017 – 31 December 2018 for Bergs Timber AB (publ)
- The year has been characterised by the acquisition of the Norvik operations in the Baltic States and the UK that was completed in May 2018. The Norvik companies are now fully integrated in Bergs Timber.
- The fiscal year has been changed from 1 September – 31 August to calendar year. The last fiscal year was thereby extended to 31 December 2018 (16 months) whereas the acquired companies are included in the financial statements from 15 May 2018, all of which effects comparison with previous periods.
- Operating profit for the extended financial year 1 September 2017 – 31 December 2018 amounted to SEK 229 (55) million, representing an operating margin of 7.6 (3.3) per cent. Adjusted for transaction costs related to the acquisition, the operating profit was SEK 236 million.
- Profit after tax for the extended financial year 1 September 2017 – 31 December 2018 was SEK 188 (38) million, which corresponds to earnings per share of SEK 0.75 (0.22).
- Cash flow from operations for the 16 months period was SEK 236 million and capital expenditures amounted to SEK 173 million.
- Operating profit for the last four months of the financial year, 1 September – 31 December 2018 amounted to SEK 70 (18) million.
- The board proposes a dividend of SEK 0,10 (0,05) per share, corresponding to SEK 34 million.
- The saw mills operations in Broakulla, Sweden, and in Savi, Estonia, will be closed during 2019 resulting in an estimated positive effect on operating profit of SEK 20-25 million per year.
2018 is left behind and the new Bergs Timber is taking shape. The companies we acquired from Norvik during 2018 are now fully integrated in Bergs Timber. After the acquisition Bergs Timber has a better risk allocation with production in both SEK and EURO as well as an increased share of value-added products.
After the acquisition we have been evaluating our several companies going forward. We have decided to invest in our UK port and distribution activities. Our Latvian wood processing company Byko Lat enjoys a good position in its present markets. Sweden and other markets have been identified as a potential for further expansion.
Bergs Timber has today announced that two of our saw mills, Broakulla in Sweden and Savi in Estonia, will be closed during 2019. Cost savings related to the closure of these two mills will give an estimated annual improvement in the range of SEK 20 - 25 million. We have also decided gradually to convert the Broakulla site for further processing of sawn timber.
During the year, some SEK 200 million were invested in our several units. The single largest investment was at our Latvian sawmill, Vika Wood, where a new dry sorting unit was installed. We have also worked hard with a number of programs aimed at increasing our productivity and improving our customer performance.
2018 has generally been a good year for the sawmill industry. Bergs Timber had a record operating profit of SEK 229 million for the extended fiscal year and all units were profitable. We are pleased with our performance but can at the same time see a potential for further improvements in our operations.
With the new, enlarged group structure and an improved financial performance, we see the potential and possibility to continue our growth with new acquisitions.
UK is a very important market for Bergs Timber and we have been following the BREXIT negotiations closely. It is still unclear what will happen in the end. We have prepared for different scenarios and believe that we have a good position with our own port and distribution. In addition, demand from the UK market remains strong.
During the second half of 2018, prices in the US, Egypt and China declined. Partly this was unexpected as the stocks of timber were still relatively low. During the winter Canadian sawmills have announced production cuts and we can now see prices moving upwards again on these markets.
The market for sawn timber and further processed products remains in balance although prices have declined 3-5 per cent from the top levels achieved in autumn 2018. Supply of raw material is good at all our production units with minor to moderate price reductions to be expected during spring and summer. Demand for our several by-products is still favourable and we have achieved some price increases for the first half of 2019.
Given the slightly more uncertain development for the general economy and the still unknown effects from Brexit it is hard to give long term forecasts. At the same time 2019 has started in a reasonably good way for our industry.
Chief Executive Officer
Net sales and operating profit
During the prolonged financial year 1 September 2017-31 December 2018 (16 months), net sales amounted to SEK 3,031 (1,659) million. The increase of SEK 1,372 million is explained by the acquisition of the Norvik companies, included in the Group's net sales from 15 May 2018, with SEK 1,158 million and increase in net sales for comparable entities with SEK 214 million, primarily due to higher selling prices for timber and by-products.
The operating profit improved to SEK 229 (55) million, corresponding to an operating margin of 7.6 (3.3) per cent. The acquired companies contributed with SEK 78 million. The improved result for the comparable entities, SEK 96 million, is primarily due to higher 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 period, which has had a negative impact on operating profit. Adjusted for the transaction costs related to the acquisition, SEK 7 million, the operating profit for the period was SEK 236 million.
Sales volumes of sawn products for the period 1 September 2017-31 December 2018 from the Swedish sawmills amounted to 661,000 cubic meters, an increase with 13,000 cubic meters compared to the same period 2016/17. The sales volume from the Baltic sawmills from May 2018 was 239,000 cubic meters. Production in the Swedish sawmills for the period 1 September 2017-31 December 2018 was 663,000 cubic meters, an increase with 27,000 compared to the same period 2016/17. The increase is due to the acquisition of the sawmill in Vimmerby, which has been part of the Group since 9 January 2017. The production in the Baltic sawmills from May 2018 was 233,000 cubic meters.
Net sales for the last four months 2018, 1 September-31 December, amounted to SEK 993 (415) million and operating profit to SEK 70 (18) million. The operating margin was 7.0 (4.3) per cent. The increase in net sales and operating profit is attributable to the acquisition and higher sales prices.
Cash flow and financing
Cash flow from current operations totalled SEK 236 million for the period 1 September 2017-31 December 2018. Capital expenditures amounted to SEK 173 million. The majority of the investments relates to 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.
The Group’s financial net debt as per 31 December 2018 amounted to SEK 580 million. The net debt/equity ratio was 0.55. The financial net debt as per 31 August 2017 was SEK 122 million. The increase in Group net debt is entirely attributable to the acquisition of the Norvik companies.
The Group's main source of financing is a credit facility of SEK 365 million. This facility includes an overdraft facility with a credit limit of SEK 220 million, a fixed-term loan of SEK 120 million and a bank guarantee limit of SEK 25 million. This facility expires on 31 May 2019. During the agreement period, the agreed repayments total SEK 20 million. The facility contains financial covenants with a first follow-up on 31 December 2018. All covenants have been met.
In addition to the above facility, the parent company has raised two vendor loans from Norvik hf for a total of SEK 170 million to be paid in instalments of SEK 100 million on 30 June 2019 and SEK 70 million on 30 June 2020. There is also local financing in the acquired Norvik companies.
Available cash and cash equivalents, including granted but unused overdraft facilities, totalled SEK 340 million, of which granted but unused overdraft facilities totalled SEK 230 million. In addition to this, there are granted but unused guarantee limits of SEK 24 million.
Negotiations are taking place with banks and credit institutions in order to refinance the current credit facilities. It is anticipated that agreements are in place during April 2019.
Net financial items for the period 1 September 2017-31 December 2018 amounted to SEK -15 million.
Recognised tax for the period 1 September 2017-31 December 2018 was SEK -26 million. The effective tax rate was 12 per cent and is lower than Sweden’s corporation tax rate. In Latvia and Estonia, the corporate income tax is 0 per cent on reinvested profits. Corporate tax is applicable and payable when dividends are distributed. No corporate income taxes have been recorded for the Group companies in the Baltics. In addition, the Group has during the period used tax losses that have not been recognised as deferred tax assets.
Acquisition of Norvik hf's operations in the Baltic States and the United Kingdom
On 15 May 2018 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 in newly issued shares in Bergs Timber, and by a SEK 270 million cash payments in instalments. A cash payment of SEK 100 million was made on the completion of the acquisition on 15 May 2018. The remaining 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 contingent consideration of maximum SEK 40 million, based on the profits for the periods 2018, 2019 and 2020. It is estimated that the supplementary payment will be realised in full and in the acquisition analysis this payment has been discounted at an interest rate of 5% corresponding 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 per share for Bergs Timber, and the exchange rates prevailing on 15 May 2018, the acquisition price was SEK 788 million before acquisition costs.
The purchase method has been used for reporting of the acquisition. A purchase price allocation has been prepared as in the table below. Compared to the preliminary allocation, intangible assets related to trade mark and customer relations of SEK 14 million have been identified.
The total cost of completing the acquisition was SEK 14 million, of which SEK 7 million relates to transaction costs and has been charged to the income statement, whereas SEK 7 million relates to issuing costs reported directly against Group shareholders' equity. Transaction costs are included on the line other external costs.
The acquired companies were consolidated from 15 May 2018 and contributed with SEK 1,158 million in net sales and with SEK 78 million in operating profit for the period 1 September 2017-31 December 2018.
Pro forma financial information
The acquired companies are fully incorporated in the accounts from 15 May 2018. From 2019, the financial year will be the same as calendar year. In order to enable a comparison with corresponding reporting periods in 2019, pro forma information for calendar quarters 2018 and the full year January-December 2018 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.
In addition, information is shown for the reporting segments that will be made from 2019, Sawmills (sawmills, including integrated planning, in Bergs Timber Production, Vika Wood and Laesti), Further Processed (Byko-Lat and Bitus) and Other (Distribution business in the UK, Group common functions and eliminations).
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.
Given the slightly more uncertain development for the general economy and the still unknown effects from Brexit it is hard to give long term forecasts. At the same time 2019 has started in a reasonably good way for our industry.
The board of directors proposes that the annual general meeting, to be held on 8 May 2019, approve a dividend of SEK 0.10 per share. The dividend for the last financial year was SEK 0.05 per share. The proposed dividend amounts to SEK 34 million. The adjusted profit per share for the period, using the number of outstanding shares at year-end rather than the average number of shares, amounted to SEK 0.55.
This year-end 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.
The group will adopt IFRS 9 Financial Instruments standard effective from 1 January 2019. This replaces IAS 39 Financial instruments: Recognition and Measurement. The standard includes revised requirements for recognition and measurement of financial assets and liabilities, impairment and general hedge accounting. IFRS 9 categorises financial assets in a different way: measured at amortised cost, at fair value through other comprehensive income and at fair value through Income statement. For financial liabilities, the classification is based on amortised cost and fair value through Income Statement categories. The group have concluded that IFRS 9 will not give rise to any effects on the Income Statement or Balance sheet, with present and in the future expected transaction types. Any figures in the comparison periods will therefore not be affected.
The Group will adopt IFRS 15 Revenue from Contracts with Customers standard and related clarifications effective from 1 January 2019. The standard replaced IAS 18 Revenue and IAS 11 Construction Contracts standards. The new standard specifies how and when revenue is recognised. The standard is based on the principle that revenue is recognised when control of goods or services transfer to a customer. The Group has reviewed its revenue streams and evaluated if, and if so, how IFRS 15 would impact when revenue should be recognised and if so, the amount involved. The review shows that IFRS 15 do not affect the accounting of the group the way business is conducted today and with the types of customer contracts and the delivery terms used. It cannot be ruled out that this might be have to reconsidered in the future if new types of agreements are entered into, for example where goods and service deliveries are combined or where different delivery terms, obligations or guarantee clauses are negotiated.
IFRS 16 Leases replaces IAS 17 and is a significant change in accounting by lessees in particular. IFRS 16 requires lessees to recognise a lease liability reflecting future lease payments and a right-of-use (ROU) asset for, in effect, all lease contracts. The group will adopt the standard from 1 January 2019. In accordance IFRS 16, at inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Amendment in lease definition have no material effect to the Group. The group have opted to use the modified retrospective approach and therefore the comparative information will not be restated and continues to be reported under IAS 17.
Effect of initial application of IFRS 16 is recognized in balance sheet at 1 January 2019. At transition, lease liabilities are measured at the present value of the remaining lease payments, discounted at the Group’s incremental borrowing rates. ROU assets are measured an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments. The Group allocates the consideration in the contract to each lease component and will separate non-lease components if these are identifiable. The Group has elected not to recognise ROU assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low value assets. The Group has also applied the exemption not to capitalise contracts which are ending in 2019. Leases of low value assets are mainly including IT and office equipment and other low value items. The Group recognises the lease payments associated with these leases as operating expenses.
The estimated effect of implementing IFRS 16 is that a lease liability of approximately SEK 13 million will be recognised. It is expected that operating profit (IFRS) / operational EBIT will somewhat increase since the interest component of leasing payments will be presented in financial expenses. It is also assumed that operational EBITDA will increase, since both depreciation and interest component will be presented below EBITDA. Impact on earnings per share (EPS) is not expected to be material. Operating cash flow will increase and financing cash flow will decrease since most of the lease payments are shown in financing cash flow, no impact to total cash flow.
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.
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 has been done. Two segments will be monitored on an ongoing basis and reported from 1 January 2019. The segment “Sawmills” (including integrated planing) consist of the five sawmills Sweden, Vika Wood in Latvia and Laesti in Estonia. The segment “Further Processed” comprises Byko-Lat in Latvia and Bitus in Sweden. The distributions business in the UK together with group common functions and eliminations will be reported as “Other”.
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.
The effect of the hedge accounting during the financial year is that net turnover is reported SEK 2 million higher than if hedge accounting were not used.
Information about risks and uncertainty factors
To a large extent the price trend of timber products is determined by how global consumption matches global production. The cost of raw materials is a 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 sourced locally and the supply and demand of raw material has a considerable effect on pricing in the short term.
Brexit and related trade disturbances
Bergs Timber is exposed to the UK market, both in terms of sawn timber and more value-added products, and might be negatively affected should UK leave the European Union without a proper agreement securing a smooth handling of goods and no duties.
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 states that normally 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 2 million per 31 December 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.
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.
|- Annual report 2017/2018 is published on the Group’s website
||15 April, 2019|
|- Interim financial report for Q1 2019||8 May 2019|
|- Annual General Meeting||8 May 2019|
|- Interim financial report for Q2 2019
||28 August 2019|
|- Interim financial report for Q3 2019
||31 October 2019|
|- Year-end report for 2019
||5 February 2020|
This year-end report has not been subject to review by the company's auditors.
The undersigned declare that the year-end 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, 27 February 2019
Peter Nilsson, Chief Executive Officer
Press and analyst conference
On the publication of the year-end report, a press and analyst telephone conference will be held at 15.00 on Wednesday 27 February. The year-end report will be presented by Peter Nilsson, CEO and Anders Marklund, CFO.
|Sweden:||+46 8 566 426 51||PIN: 23444940#|
|UK:||+44 3333 000 804
Further information regarding the year-end report can be provided by the CEO, Peter Nilsson, on telephone number +46 70 315 09 27 or CFO, Anders Marklund, on +46 70 284 47 96.
The information in this year-end 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 27 February 2019 at 13:00. The year-end report is available on the company's website, www.bergstimber.se
Bergs Timber AB (publ), corporate registration number: 556052-2798, Bergs Väg 13
570 84 Mörlunda, Tel:+46 10 19 98 500