Raute Corporation - Half-Year Report January 1 - June 30, 2018

RAUTE CORPORATION HALF-YEAR REPORT JULY 31, 2018 AT 9:00 a.m.


RAUTE CORPORATION - HALF-YEAR REPORT JANUARY 1-JUNE 30, 2018

- The Group’s net sales, EUR 78.9 million (MEUR 71.6), increased 10% on the comparison period. Order intake was EUR 96 million (MEUR 52).
- Operating profit was EUR 5.9 million (MEUR 4.0), showing growth of 48% on the comparison period. The result before taxes was EUR 6.0 million (MEUR 4.1).
- Undiluted earnings per share were EUR 1.09 (EUR 0.69) and diluted earnings per share were EUR 1.08 (EUR 0.69).
- Net sales for the second quarter were EUR 43.7 million and operating profit was EUR 3.2 million. Order intake was EUR 28 million. The order book at the end of the reporting period came to EUR 127 million (MEUR 87), a significant proportion of which is scheduled for 2019 and a smaller fraction for 2020.
- Raute’s net sales and operating profit for 2018 are expected to be at the previous year’s level.

Tapani Kiiski, President and CEO: Q2 in line with expectations

The second quarter was good, in line with our expectations, both for net sales and the operating profit. Net sales came to approximately EUR eight million more than in the first quarter. Our result also improved thanks to net sales, as we predicted. A strong order book and its timing played a part in this development. Even large quarter-on-quarter fluctuations are normal for Raute’s project business and we will continue to experience similar movements over the second half of the year.

Demand for our technology and services continues to be strong. Demand is still focused on the traditional industrialized markets and especially on Europe. On the emerging markets, demand is looking up but still clearly leans towards more simple and inexpensive technology.

Our order intake in Q2 was lower than in the first quarter. The EUR 28 million order intake is still quite an achievement considering the lack of mill projects. Our order intake in technology services fell short of our target due to the postponement of some major modernization projects. The good market situation is causing some of our customers to invest in new equipment rather than modernizing their old equipment.

Due to high net sales and a normal order intake level, our order book fell to EUR 127 million. Despite the decline, this is a good level and our order book remains strong. A major proportion of it is scheduled for next year and a small fraction for 2020. We have succeeded in further increasing our production capacity and are able to serve our customers with reasonable delivery times. Strong economic growth in Finland is beginning to manifest itself as cost pressure and increasing challenges in terms of the availability of resources. Our goal is to preemptively minimize any harm that could result for our customers and our business. The uncertainty that has recently spread to global trade policies has not, so far, made its mark on our customers’ operations. Even during this period of heavy workload and brisk demand, we will continue to invest in developing new technologies, our service business and our presence and offering on the emerging markets.

H1’s realized net sales and operating profit, strong order book and continued active demand reinforce our outlook for the whole year and provide insight into the next year also. We are well on the way to reaching our goals for this year. Raute’s net sales and operating profit for 2018 are expected to be at the previous year’s level.

SECOND QUARTER OF 2018

Order intake and order book
The total order intake in the second quarter, EUR 28 million (MEUR 29), was at a good level, bearing in mind that it did not include major individual projects.

Technology services accounted for EUR 13 million (MEUR 15) of the order intake. This decline resulted from the timing of orders related to modernization deals.
 
The order book declined during the second quarter from a record level by EUR 15 million, but nevertheless ended the period at a strong EUR 127 million (MEUR 87).

Net sales
Second-quarter net sales amounted to EUR 43.7 million (MEUR 35.1). Technology services accounted for 30 percent (33%) of the total net sales and amounted to EUR 13 million (MEUR 12).

Result and profitability
Operating profit in the second quarter was EUR 3.2 million positive (MEUR 1.3 positive) and accounted for 7.2 percent (3.8%) of net sales. The result was EUR 2.4 million positive (MEUR 0.8 positive), and earnings per share were EUR +0.56 (EUR +0.19).

RAUTE CORPORATION – HALF-YEAR REPORT JANUARY 1–JUNE 30, 2018

BUSINESS ENVIRONMENT

Market situation in customer industries
Raute’s customers in the plywood and LVL (Laminated Veneer Lumber) industries are engaged in the manufacture of wood products used in investment projects and are thus highly affected by fluctuations in construction, housing-related consumption, international trade and transportation.

The situation in the global economy and the financial markets in the first half of 2018 did not change considerably with respect to Raute or Raute’s customer base. The positive development has continued in the key market areas, despite the growing political uncertainty and its expansion to global trade policies. Construction activity is continuing to improve in many market areas but the level is still relatively low despite the general economic development.

Demand for wood products technology and technology services
Thanks to the good economic and market situation, investment activity among Raute’s customers has remained high. Enquiry activity for new capacity projects and larger projects involving replacement and efficiency-boosting investments has remained brisk, and trade is being actively negotiated.

Demand is especially strong in industrialized market areas, Europe, North America and Russia. In the emerging markets of Asia, China included, and in South America, demand has not been as strong, and is even focusing more and more on products that use simpler and less expensive technology.

Demand for maintenance and spare parts services remained at a good level, which is an indication of the good capacity utilization rates of Raute’s customers’ production plants.

ORDER INTAKE AND ORDER BOOK

Raute serves the wood products industry with a full-service concept that is based on technology solutions that cover the customer’s entire production process and services throughout their life cycle. Raute’s business consists of project deliveries and technology services. Project deliveries encompass projects from individual machine or production line deliveries to deliveries of all the machines and equipment belonging to a mill’s production process. Additionally, Raute’s full-service concept includes comprehensive technology services ranging from spare parts deliveries to regular maintenance and equipment modernizations, as well as consulting, training and reconditioned machinery.

The good market situation is reflected in the volume of new orders Raute has received. The order intake during the review period was at an extremely good level and amounted to EUR 96 million (MEUR 52). The most significant new orders were a EUR 23 million order for an LVL mill expansion in Finland, and a EUR 20 million order for LVL line equipment for North-East Asia.

Of new orders, 51 percent came from Europe (56%), 22 percent from Asia-Pacific (1%), 15 percent from Russia (17%), 10 percent from North America (17%) and 2 percent from South America (9%). Sometimes even strong fluctuations in the distribution of new orders between the various market areas are typical for project-focused business. The second quarter accounted for EUR 28 million of the order intake.

Order intake in technology services amounted to EUR 28 million (MEUR 25), increasing 10 percent on the comparison period. 

The order book declined during the second quarter by EUR 15 million. The order book at the end of the reporting period amounted to a strong EUR 127 million (MEUR 87), however. A large part of the order book has already been scheduled for 2019 and a small portion for 2020.

COMPETITIVE POSITION

Raute’s competitive position has remained unchanged and is strong. Raute’s solutions help customers in securing their delivery and service capabilities throughout the life cycle of the production process or a part thereof. In such investments, the supplier’s overall expertise and extensive and diverse technology offering play a key role. The competitive edge provided by Raute plays a major role when customers select their cooperation partners. Raute’s strong financial position and long-term dedication to serving selected customer industries also enhance its credibility and improve its competitive position as a company that carries out long-term investment projects.

NET SALES

Net sales for the reporting period, EUR 78.9 million (MEUR 71.6), were up 10 percent on the comparison period.

Of the total net sales for the reporting period, Europe accounted for 45 percent (49%), Russia for 30 percent (33%), North America for 18 percent (12%), South America for 4 percent (4%), and Asia-Pacific for 3 percent (2%).

Technology services accounted for 30 percent (31%) of the Group’s total net sales and amounted to EUR 24 million (MEUR 22).

RESULT AND PROFITABILITY

During the period under review, operating profit was EUR 5.9 million positive (MEUR 4.0 positive) and accounted for 7.5 percent of net sales (5.6%).

The result before taxes for the reporting period was EUR 6.0 million positive (MEUR 4.1 positive). The result for the reporting period was EUR 4.6 million positive (MEUR 2.9 positive). Earnings per share (undiluted) were EUR 1.09 (EUR 0.69).

CASH FLOW AND BALANCE SHEET

The Group’s financial position remained good. At the end of the reporting period, gearing was –66 percent (9%) and the equity ratio 61 percent (58%). Fluctuations in balance sheet working capital items and the key figures based on them are due to differences in the timing of customer payments and the cost accumulation from project deliveries, which is typical of the project business.

The Group’s cash and cash equivalents amounted to EUR 27.1 million (MEUR 3.1) at the end of the reporting period. Operating cash flow was EUR 3.2 million positive (MEUR 15.1 negative). Cash flow from investment activities was EUR 1.3 million negative (MEUR 4.5 negative). Cash flow from financing activities was EUR 5.5 million negative (MEUR 1.1 negative), including dividend payments of EUR 5.3 million.

Interest-bearing liabilities amounted to EUR 1.3 million (MEUR 6.0) at the end of the reporting period.

The parent company Raute Corporation has a EUR 10 million commercial paper program, which allows the company to issue commercial papers maturing in less than one year.

The parent company Raute Corporation is prepared for future working capital needs and has long-term credit facility agreements with three Nordic banks totaling EUR 23.0 million. The main covenants for the credit facility are an equity ratio of >30% and gearing of <100%. Of the credit facility, EUR 22.7 million remained unused at the end of the reporting period.

EVENTS DURING THE REPORTING PERIOD

Raute Corporation published stock exchange releases on the following events:

January 29, 2018 Raute received orders worth approximately EUR 23 million to Finland
February 9, 2018 Raute receives order worth almost 20 million euros from North-East Asia
March 6, 2018 Disposal of Raute Corporation’s own shares
March 22, 2018 Second plan for Raute’s top management remuneration system, LTI 2018–2020, takes off
March 22, 2018 Decisions of Raute’s Annual General Meeting 2018
March 23, 2018 Changes in Raute Group’s Executive Board as of March 27, 2018.

RESEARCH AND DEVELOPMENT COSTS AND CAPITAL EXPENDITURE

Raute is a leading technology supplier for the plywood and LVL industries and focuses strongly on the development of increasingly efficient, productive, safe and environmentally friendly manufacturing technology and supporting measurement and machine vision applications. Opportunities provided by digitalization are also an essential part of R&D activities.

Research and development costs in the reporting period amounted to EUR 1.7 million (MEUR 1.8), representing 2.2 percent of net sales (2.5%).

Capital expenditure during the period came to EUR 2.2 million (MEUR 4.8) and accounted for 2.7 percent (6.6%) of net sales.

PERSONNEL

At the end of the reporting period, the Group’s personnel numbered 778 (705). Group companies outside Finland accounted for 32 percent (29%) of employees.

Converted to full-time employees (“effective headcount”), the average number of employees was 705 (652) during the reporting period.

SHARES

The number of Raute Corporation’s shares at the end of the reporting period totaled 4,263,194, of which 991,161 were series K shares (ordinary share, 20 votes/share) and 3,272,033 were series A shares (1 vote/share). Series K and A shares confer equal rights to dividends and company assets.

Series K shares can be converted to series A shares under the terms set out in section 3 of the Articles of Association. If an ordinary share is transferred to a new owner who has not previously held series K shares, the new owner must notify the Board of Directors of this in writing and without delay. Other holders of series K shares have the right to redeem the share under the terms specified in Article 4 of the Articles of Association.

Raute Corporation’s series A shares are listed on Nasdaq Helsinki Ltd. The trading code is RAUTE. Raute Corporation has signed a market making agreement with Nordea Bank AB in compliance with the Liquidity Providing (LP) requirements issued by Nasdaq Helsinki Ltd.

The company’s market capitalization at the end of the reporting period was EUR 135.1 million (MEUR 96.8), with series K shares valued at the closing price of series A shares on the final closing date June 29, 2018, i.e. EUR 31.70 (EUR 22.92).

RAUTE CORPORATION’S 2010 STOCK OPTIONS

The subscription period for Raute Corporation’s series C 2010 stock options ended on March 31, 2018.

REMUNERATION

The Group has performance-based bonus systems in place that cover the entire personnel.

Share-based incentive plans
The Group has valid long-term share-based incentive plans based on performance.

The company decided to launch a new performance-based, share-value-based, long-term incentive plan, LTI Plan 2018–2020, on March 22, 2018.

The terms and conditions of the incentive plans are available on the company’s website. More detailed and up-to-date information is presented in the Remuneration Statement on the company’s website.

SHAREHOLDERS

The number of shareholders totaled 4,797 at the beginning of the year and 4,722 at the end of the reporting period. Series K shares were held by 55 private individuals (55) at the end of the reporting period. Nominee-registered shares accounted for 6.7 percent (2.7%) of shares. The company did not receive any flagging notifications during the reporting period.

The Board of Directors, the President and CEO as well as the Executive Board held altogether 260,558 company shares, equaling 6.1 percent (5.9%) of the company shares and 11.6 percent (11.2%) of the votes at the end of the reporting period.

CORPORATE GOVERNANCE

As of January 1, 2016, Raute Corporation complies with the Finnish Corporate Governance Code 2015 for listed companies issued by the Securities Market Association on October 1, 2015.

EXECUTIVE BOARD

Raute Group’s Executive Board and the members’ areas of responsibility:

Tapani Kiiski, President and CEO, Chairman – sales
Arja Hakala, Group Vice President, Strategy – business development 
Marko Hjelt, Group Vice President, Human Resources – personnel and competence development
Mika Hyysti, Group Vice President, Technology – technology, products and R&D
Timo Kangas, Group Vice President, EMEA – market area EMEA
Antti Laulainen, Group Vice President, Technology Services and Sales Management – technology services and sales management
Petri Strengell, Group Vice President, Supply Chain – sourcing and production
Olli-Pekka Vanhanen, Group Vice President, Finance, CFO – Finance and administration.

ANNUAL GENERAL MEETING 2018

Raute Corporation’s Annual General Meeting was held on March 22, 2018. More detailed information on the decisions of the Annual General Meeting can be found in the stock exchange release issued on March 22, 2018.

DISTRIBUTION OF PROFIT FOR THE 2017 FINANCIAL YEAR

The Annual General Meeting held on March 22, 2018 decided to pay a dividend of EUR 1.25 per share for the financial year 2017. The total amount of dividends is EUR 5.3 million, with series A shares accounting for EUR 4,081,522.50 and series K shares for EUR 1,238,951.25. The dividend payment date was April 4, 2018.

BOARD OF DIRECTORS AND BOARD COMMITTEES

At the General Meeting on March 22, 2018, Mr. Erkki Pehu-Lehtonen was elected Chairman of the Board, Mr. Mika Mustakallio was elected Vice-Chair, and Mr. Joni Bask, Ms. Laura Raitio, Mr. Pekka Suominen, and Mr. Patrick von Essen were elected as Board members. The Board of Directors’ term of office will continue until the 2019 Annual General Meeting.

Based on the evaluation of independence by the Board of Directors, Chairman Mr. Erkki Pehu-Lehtonen and members Mr. Joni Bask, Mr. Patrick von Essen, Ms. Laura Raitio, and Mr. Pekka Suominen are independent of the company. Vice Chair of the Board of Directors Mr. Mika Mustakallio is not estimated to be independent of the company, as he has served on the Board of Directors for more than ten years. The Chairman of the Board (Mr. Erkki Pehu-Lehtonen) and two Board members (Mr. Patrick von Essen and Ms. Laura Raitio) are independent of major shareholders.

Raute Corporation’s Board of Directors has an Appointments Committee. The Appointments Committee is chaired by Mr. Erkki Pehu-Lehtonen and its members are Mr. Mika Mustakallio and Mr. Pekka Suominen. The Audit Committee’s tasks are handled by the Board of Directors.

EVENTS AFTER THE REPORTING PERIOD

No significant events took place after the reporting period.

BUSINESS RISKS

Risks in the near term continue to be driven by the uncertainty relating to the global economic situation and the development of the financial markets, as well as by international political instability, which has recently expanded to global trade policies. During the reporting period, there were no essential changes in the business risks described in the 2017 Board of Directors’ Report and Financial Statements.

The most significant risks for Raute in the near term are related to the completion of the very high order book, and especially the major mill-scale projects that are in the implementation phase, in accordance with the schedule determined in the contract terms, and the sufficiency and availability of skilled resources.

OUTLOOK FOR 2018

Due to the scheduling of the order book, Raute’s net sales and operating profit for 2018 are expected to be at the previous year’s level.

TABLES SECTION OF THE HALF-YEAR REPORT

Raute Corporation’s Board of Directors has on July 31, 2018 reviewed the Half-year report for January 1 – June 30, 2018, and approved it to be published.

The figures for the financial year 2017 presented in the figures section of the Half-year report have been audited. The presented interim financial report figures have not been audited. The figures for the comparative Half-year period and the financial year 2017 have been restated as a result of changes in IFRS standards.

NOTES TO THE HALF-YEAR REPORT

General information
Raute Group is a globally operating technology and service company serving the wood products industry, with core competence in selected wood products manufacturing processes. Raute’s customers are com­panies operating in the wood products industry that manufacture ve­neer, plywood, LVL and sawn timber.

Raute’s full-service concept is based on product life-cycle management and includes project deliveries and technology services. Raute’s tech­nology offering covers machinery and equipment for the customer’s entire production process. In addition to a broad range of machines and equipment, Raute’s solutions cover technology services ranging from spare parts deliveries to regular maintenance and equipment modernizations.

Raute Group’s Parent company, Raute Corporation, is a Finnish public limited liability company established in accordance with Finnish law (Business ID FI01490726). Its series A shares are quoted on Nasdaq Helsinki Ltd, under Industrials. Raute Corporation is domiciled in Lahti. The address of its registered office is Rautetie 2, FI-15550 Nastola, and its postal address is P.O. Box 69, FI-15551 Nastola.

All of the figures presented in the Half-year report are in thou­sand euro, unless otherwise stated. Due to the rounding of the figures in the financial statement tables, the sums of figures may deviate from the sum total presented in the table. Figures in parentheses refer to the corresponding figures in the comparison period.

Basis of preparation
Raute Corporation’s Half-year report for January 1 – June 30, 2018 has been prepared in accordance with standard IAS 34 Interim Financial Reporting.

The Half-year report does not contain full notes and other in­formation presented in the financial statements, and therefore the Half-year report should be read in conjunction with the Finan­cial statements published for 2017. Raute Corporation’s consolidated financial statements information is available online at www.raute.com and at the head office of the Parent company, Rautetie 2, FI-15550 Nastola.

Raute Corporation’s Half-year report for January 1 – June 30, 2018 has been prepared in accordance with the International Financial Reporting Standards, IFRS, accepted for application in the European Union, including related interpretations. The Half-year report has been drawn up according to the same accounting principles as in the consolidated financial statements for 2017, except for the adop­tion of standards effective as of January 1, 2018 or later.

IFRS 15 Revenue from contracts with customers, has been effective as of January 1, 2018. Raute Group has presented on March 23, 2018, with a separate bulletin the restated comparative figures for the finan­cial year 2018 and the restated income statement and balance sheet as well as restated key figures due to the adoption of the new IFRS 15 standard. Of Raute’s products and services, performance obligations to be satisfied over time under the IFRS 15 standard include, as a general rule, project deliveries and modernizations that are treated as long-term projects and recognized based on the percentage of completion method, designed and tailored to the needs of the customer. These performance obligations do not have the alternative use referred to in the IFRS 15 standard and they still form one performance obligation.

The company applies to performance obligations to be satisfied over time the same principle as in the percentage of completion method (proportion of costs incurred to the estimated costs of the project). An exception to the above-mentioned general rule are the individual long-term projects recognized based on the percentage of completion method in which the customer has not committed to paying the in­curred costs and a sufficient margin in situations where the customer unilaterally interrupts the performance of the contract or when the customer is unable to meet its contractual obligations. Going forward, these individual projects will be treated as performance obligations to be satisfied at a point in time. Based on current estimates, the number of these projects has been and will be limited.

IFRS 9 Financial instruments, has been effective as of January 1, 2018. The Group has adopted the standard non-retrospectively applying the simplified approach of the standard. The standard includes hedge ac­counting requirements, but these do not have significant effects on presenting the financial instruments nor on the Half-year re­port. The standard includes also changes in the recognition of impair­ments. An expected credit loss has been estimated on financial receiv­ables. Credit losses are based on the expected credit loss share, which has been measured based on the total outstanding amount of sales receivables, credit losses realized during previous interim periods and the Group’s estimate of the future development of economic condi­tions. The expected credit loss provision amount of EUR 0.1 million has been recognized as an adjustment to the opening balance of equity at January 1, 2018. During the interim period the change in the expected credit loss was EUR -68 thousand. The deferred tax related to this item has been recognized during the interim period.

IFRS 2 Share-based payments, has been adopted non-retrospectively applying the simplified approach of the standard. The standard in­cludes guidance on the basis of preparation when a share-based pay­ment plan has a net settlement payment and Raute Group has an ob­ligation to withhold a tax from the payment. The bonuses of this share reward have been recognized entirely as an equity-settled share-based payment at January 1, 2018. An expense adjustment related to these share-based payments has increased the Group’s opening balance sheet equity by EUR 0.1 million. The corresponding item decreased the item Trade and other payables in the liabilities by EUR 0.1 million.

When preparing the Half-year report in compliance with In­ternational Financial Reporting Standards, the company management has made estimates and assumptions. In addition, the management has exercised its judgment in selecting and applying the accounting policies. The forward-looking estimates and assumptions have been based on management’s best knowledge at the reporting date, and they comprise risks and uncertainties, therefore actual results may dif­fer from these estimate.

Net sales
Raute serves the wood products industry with a full-service concept based on service that encompasses the entire life cycle of the delivered equipment. Raute’s business consists of project deliveries and technology services. Project deliveries encompass projects from individual machine or production line deliveries to deliveries of all the machines and equipment belonging to a mill’s production process.

Additionally, Raute’s full-service concept includes comprehensive technology services ranging from spare parts deliveries to regular maintenance and equipment modernizations, as well as consulting, training and reconditioned machinery. Project deliveries and modernizations related to technology services include both product and service sales, making it impossible to give a reliable presentation of the breakdown of the Group’s net sales into purely product and service sales.

Large mill or production line scale delivery projects can temporarily increase the share of an individual customer of the Group’s net sales to more than 10 percent. At the end of the interim period, the Group had two (2) customers, whose customized share of the Group’s net sales temporarily exceeded ten percent.

RAUTE CORPORATION
Board of Directors


BRIEFING ON JULY 31, 2018 AT 2 P.M.:
A briefing will be organized for analysts, investors and the media on July 31, 2018 at 2 p.m. at Scandic Simonkenttä Hotel, Roba cabinet, Simonkatu 9, Helsinki. The half-year report will be presented by Mr. Tapani Kiiski, President and CEO, and Mr. Olli-Pekka Vanhanen, CFO.

NEXT INTERIM REPORT:
Raute Corporation’s interim report January 1–September 30, 2018 will be published on Wednesday, October 31, 2018.

FINANCIAL RELEASES IN 2019:
Raute Corporation will publish a release on its financial statements for 2018 on Thursday, February 14, 2019.                                                                  

Raute’s half-year report and two interim reports will be published as follows:
- Interim report January–March on Friday, May 3, 2019
- Half-year report January–June on Wednesday, July 31, 2019
- Interim report January–September on Wednesday, October 30, 2019

Raute Corporation’s Annual General Meeting is scheduled to be held in Lahti on Tuesday, April 2, 2019.

FURTHER INFORMATION:
Mr. Tapani Kiiski, President and CEO, Raute Corporation, mobile phone +358 400 814 148
Mr. Olli-Pekka Vanhanen, CFO, Raute Corporation, mobile phone +358 40 505 7515

DISTRIBUTION:
Nasdaq Helsinki Ltd, main media, www.raute.com

RAUTE IN BRIEF:
Raute is a technology and service company that operates worldwide. Raute’s customers are companies operating in the wood products industry that manufacture veneer, plywood, LVL (Laminated Veneer Lumber) and sawn timber. Its technology offering covers the entire production process for veneer, plywood and LVL and special measurement equipment for sawn timber. As a supplier of mill-scale projects, Raute is a global market leader both in the plywood and LVL industries. Additionally, Raute’s full-service concept includes technology services ranging from spare parts deliveries to regular maintenance and equipment modernizations. Raute’s head office is located in the Nastola area of Lahti, Finland. The company’s other production plants are located in Kajaani, Finland, the Vancouver area of Canada, the Shanghai area of China and in Pullman, Washington, USA. Raute’s net sales in 2017 were EUR 148.1 million. The Group’s headcount at the end of 2017 was 704. More information about the company can be found at www.raute.com.