HONKARAKENNE OYJ FINANCIAL STATEMENT RELEASE 14 February 2019 at 9:00 a.m.
HONKARAKENNE OYJ’S FINANCIAL STATEMENT RELEASE 1 JANUARY – 31 DECEMBER 2018
Honkarakenne increased its net sales and strengthened its financial position
SUMMARY
Full-year net sales for 2018 were up 13 per cent on the previous year and amounted to MEUR 48.9. Operating profit was MEUR 1.6, a year-on-year decrease of MEUR 0.1. The financial position strengthened, equity ratio was 61%, which was 10 percentage points better than a year earlier.
July-December 2018
- Honkarakenne Group's net sales for July-December amounted to MEUR 29.1 (MEUR 25.5 in 2017), a year-on-year increase of 14%.
- The operating result was MEUR 2.3 (MEUR 1.8). There were no significant adjustment items and adjusted operating result was MEUR 2.3 (MEUR 1.8).
- Profit before taxes was MEUR 2.3 (MEUR 1.8).
- Earnings per share amounted to EUR 0.38 (EUR 0.23).
January-December 2018
- Honkarakenne Group's net sales for January-December amounted to MEUR 48.9 (MEUR 43.4 in 2017), a year-on-year increase of 13%.
- The operating result was MEUR 1.6 (MEUR 1.7). There were no significant adjustment items (previous year adjustment items were MEUR +0.1). Adjusted operating result was MEUR 1.6 (MEUR 1.6).
- Profit before taxes was MEUR 1.5 (MEUR 1.7).
- Earnings per share amounted to EUR 0.20 (EUR 0.15).
The Board of Directors proposes to the Annual General Meeting that no dividend be paid for the financial year ending 31 December 2018.
In Honkarakenne’s view, net sales in 2019 will be on a par with 2018 and the profit before taxes will be better.
At the end of December, the Group's order book stood at MEUR 24.8, up 8% on the corresponding period of the previous year, when it stood at MEUR 23.0. The order book refers to orders whose delivery date falls within the next 24 months. Some orders may include terms and conditions relating to financing or building permits.
| KEY INDICATORS | 7–12/ 2018 | 7–12/ 2017 | 1-12/ 2018 | 1-12/ 2017 | ||
| Net sales, MEUR | 29.1 | 25.5 | 48.9 | 43.4 | ||
| Operating profit/loss, MEUR | 2.3 | 1.8 | 1.6 | 1.7 | ||
| Adjusted operating profit/loss, MEUR | 2.3 | 1.8 | 1.6 | 1.5 | ||
| Profit/loss before taxes, MEUR | 2.3 | 1.8 | 1.5 | 1.7 | ||
| Adjusted profit/loss before taxes, MEUR | 2.3 | 1.8 | 1.5 | 1.6 | ||
| Average number of personnel | 150 | 139 | 147 | 137 | ||
| Personnel in person-years, average | 139 | 124 | 130 | 117 | ||
| Earnings/share (EPS), EUR | 0.38 | 0.23 | 0.20 | 0.15 | ||
| Equity ratio, % | 61 | 51 | ||||
| Return on equity, % | 12 | 11 | ||||
| Shareholders' equity/share, EUR | 1.73 | 1.53 | ||||
| Gearing, % | -23 | 5 |
Marko Saarelainen, President and CEO of Honkarakenne Oyj, in connection with the financial statement release:
“In the second half of the year, net sales saw further positive development in Finland and we managed to catch up on the shortfall caused by the late spring and congestion in the processing of building permits in large cities. Finland accounted for 63 per cent of consolidated net sales.
The Honka care home projects launched in Finland in the previous year as design-and-build contracts were handed over successfully to satisfied customers. In addition, we implemented numerous log daycare centres during the year. Public construction expanded to log schools and other larger projects. For example, Energy company Rovakaira Oy is committed to log as ecological construction material. Honkarakenne sold a log head office building to Rovakaira Oy.
In Russia, net sales have decreased, but we continue to believe in the potential and appeal of our products in Russian area development projects. A good example of that is Copper Lake 2 area development project in St. Petersburg.
In Global Markets, we performed particularly well in Japan in year 2018. One large scale project was under way in Japan and consumer sales were also robust. We made fewer sales to China than we had anticipated, but we still believe there is market potential in China in the next few years. Central Europe remained problematic and the reorganisation of functions in that region is ongoing.
Honka’s updated strategy was completed in June. The action programmes for the updated strategy have been started up. The major strategic actions concern products, sales and production.”
NET SALES
Honkarakenne Group’s net sales for the year 2018 increased by 13 per cent to MEUR 48.9 (MEUR 43.4). In the second half of 2018 the Group’s net sales increased by 14 per cent to MEUR 29.1 (MEUR 25.5).
Geographical distribution of net sales:
| DEVELOPMENT OF NET SALES | |||||||
| Distribution of net sales, % | 1-12 /2018 | 1-12 /2017 | |||||
| Finland | 63 % | 59 % | |||||
| Russia & CIS | 15 % | 22 % | |||||
| Global Markets | 21 % | 19 % | |||||
| Total | 100 % | 100 % | |||||
| Net sales, MEUR | 7-12 /2018 | 7-12 /2017 | % change | 1-12 /2018 | 1-12 /2017 | % change | |
| Finland | 17.9 | 14.4 | 24 % | 31.0 | 25.8 | 20 % | |
| Russia & CIS | 5.0 | 7.1 | -30 % | 7.6 | 9.4 | -19 % | |
| Global Markets | 6.3 | 3.9 | 61 % | 10.3 | 8.3 | 24 % | |
| Total | 29.1 | 25.5 | 14 % | 48.9 | 43.4 | 13 % | |
Finland also includes billet sales and sale of process byproducts for recycling.
Russia & CIS includes the following countries: Russia, Azerbaijan, Kazakhstan and other CIS countries.
Global Markets includes other countries than the above-mentioned.
At the end of December, the order book was 8% better than a year earlier. At the end of December, the Group’s order book stood at MEUR 24.8. In the corresponding period of the previous year, it was MEUR 23.0.
TRENDS IN PROFIT AND PROFITABILITY
The operating profit for the July-December period was MEUR 2.3 (MEUR 1.8) and the result before taxes was NEYR 2.3 (MEUR 1.8.).
The full-year operating profit for 2018 was MEUR 1.6 (MEUR 1.7) and the result before taxes MEUR 1.5 (MEUR 1.7).
There were no significant adjustment items in year 2018.
In the first half of 2018, the Group’s result was weakened by the late spring and congestion in the processing of building permits in large cities, which led to delays in deliveries and some deliveries had to be postponed to the second half of the year. The Group’s full-year operating result for 2018 was positively impacted by the year-on-year increase in net sales and the implementation of efficiency-boosting measures. On the other hand, the consolidated operating result was weakened by tight competition in the business in Finland, lower-than-expected net sales in Russia and outlays on sales and marketing. Operating result was also weakened by the recognition of MEUR 0.3 (MEUR 0.3) in credit losses in the second half of the year.
FINANCING AND INVESTMENTS
Honkarakenne had a strong financial position at the end of the review period. The Group’s equity ratio was 61% (51%). Gearing was negative at -23% (5%). The Group’s net financial liabilities stood at MEUR -2.3 (MEUR 0.4); that is, liquid assets exceeded financial liabilities. Liquid assets totalled MEUR 4.1 (MEUR 3.1). The Group also has a MEUR 4.5 (MEUR 5.4) bank overdraft facility, MEUR 0.0 of which had been drawn on at the end of the report period (MEUR 0.3).
The Group’s capital expenditure totalled MEUR 1.1 in 2018 (MEUR 0.5). The largest of these investments were earmarked for production. In addition, the company developed several systems with a view to accelerate operations. Some of the systems were deployed in 2018 and some are expected to be taken into use in 2019.
UPDATED STRATEGY
In June, Honkarakenne announced that it had updated its strategy. The new strategy period extends until 2021. The company’s business areas, BA Finland, BA Russia & CIS and BA Global Markets, remain unchanged. Sales in all areas are based on an effective representative network.
The strategic objectives of Honkarakenne until 2021 are as follows:
- Profitable net sales growth
- Increase in net sales from service business
- Increase in the volume of exports
- Maintaining the strong equity ratio
- Enhancing production by means of improved competitive operating models and investments
However, these long-term objectives are not intended to be understood as market guidance for any one year.
The action programmes for the updated strategy have been started up and will extend until the end of the strategy period. The major strategic actions concern products, sales and production.
BUSINESS AREAS
In Finland, the trend in net sales was positive with year-on-year growth of 20 per cent. Sales of detached houses grew in particular. The Honka care home projects launched in the previous year as design-and-build contracts were handed over successfully to the pleased customers. Numerous log daycare centres were implemented during the year. Public construction expanded to log schools and other larger projects. For example, energy company Rovakaira Oy is committed to log as ecological construction material. Honkarakenne sold a log head office building to Rovakaira Oy.
In 2018, we bolstered our network of representatives; in particular, we enhanced our Swedish-language service in the latter half of the year. During the review year, we developed our service business to better meet the needs of customers and overhauled our order-delivery chain processes. In addition, we implemented a sales training and development programme for domestic sales representatives. Due to tight competition, we did not reach our profitability target in BA Finland, and our profitability-boosting programme is ongoing.
In Russia & CIS, net sales have decreased, but we continue to believe in the potential and appeal of our products in Russian area development projects. A good example of that is Copper Lake 2 area development project in St. Petersburg. During the review year, buildings delivered by Honka gained positive attention and won prizes in many competitions. In 2018, the company launched its revamped Russian Internet site, honka.ru, and made outlays on social media.
In Global Markets, the trend in net sales was in line with the company’s expectations. Sales performed best in Asia. A larger-scale project was carried out in Japan and sales to consumers went well. Fewer sales were made in China than anticipated, but we still believe there is market potential in China in the next few years. Central Europe remained problematic and the reorganisation of functions in that region is ongoing. In Global Markets, the company is continuing to make outlays on project sales. The company sought to accelerate sales in Global Markets by carrying out local marketing campaigns.
RESEARCH AND DEVELOPMENT
In 2018, Honkarakenne launched a new product: Honka Frame, which is based on timber frame technology. R&D focused on the development of wooden houses with a timber frame structure as well as on combining timber frame structures with log frame buildings.
The Group's R&D expenditure in January-December was 0.5% of net sales (0.6%). The Group did not capitalise any research and development costs during the financial year.
PERSONNEL
In the review year, the Group employed a total of 130 people (117) on average in terms of person-years, a year-on-year increase of 13. The Group had an average of 147 (137) employees during the report year. At the end of the year, the Group had 147 (138) employees.
In 2018, Honkarakenne conducted co-operation negotiations in preparation for cyclical variations that are typical in our industry. It was agreed that employees would work shorter weeks and that the company can lay off clerical and managerial employees for a maximum of 90 days.
EXECUTIVE GROUP
In 2018 there were no changes in the executive group. Honkarakenne’s executive group consisted of: President and CEO Marko Saarelainen, Vice President, Finance, CFO Leena Aalto, Vice President, Production Jari Fröberg and Vice President, BA Finland Jari Noppa.
HONKARAKENNE OYJ’S 2018 ANNUAL GENERAL MEETING, BOARD OF DIRECTORS, AND AUDITORS
The Annual General Meeting of Honkarakenne Oyj was held at Honkarakenne Mill in Karstula on 13 April 2017. The AGM approved the parent company's and the consolidated Financial Statements, and discharged the members of the Board of Directors and the CEO from liability for 2017. The AGM decided not to pay a dividend for the 2017 financial year.
Timo Kohtamäki, Arimo Ristola and Kyösti Saarimäki were re-elected to the company's Board of Directors. Helena Ruponen and Kari Saarelainen were elected as new board members. At the Board's constituent meeting, Arimo Ristola was elected Chairman of the Board. At the same meeting, the Board decided not to establish any committees.
Ernst & Young Oy, member of the Finnish Institute of Authorised Public Accountants, was appointed as auditor of the company, with Elina Laitinen, APA, as chief auditor.
AUTHORISATIONS OF THE BOARD OF DIRECTORS
On 13 April 2018, the AGM decided that the Board of Directors will be authorised to acquire a maximum of 400,000 of the company’s own B shares with assets included in the company’s unrestricted equity. In addition, the AGM authorised the Board to decide on a rights issue or bonus issue and on granting special rights to shares referred to in Section 1 of Chapter 10 of the Limited Liability Companies Act in one or more instalments. By virtue of the authorisation, the Board may issue a maximum total of 1,500,000 new shares and/or relinquish old B shares held by the company, including those shares that can be issued by virtue of special rights. Both authorisations will remain in force until the next Annual General Meeting, however expiring at the latest on June 30, 2019.
SHARES, SHARE CAPITAL AND OWN SHARES
During the review period, the total number of Honkarakenne Oyj shares amounted to 6,211,419, of which 300,096 were Series A shares and 5,911,323 Series B shares. The company’s share capital remained unchanged and was EUR 9,897,936.00. Each B share carries one (1) vote and each A share carries twenty (20) votes. Hence, Honkarakenne’s shares in aggregate at the end of the review period carried a total of 11,913,243 votes.
Honkarakenne’s Series B shares are quoted in the Small Cap list of NASDAQ OMX Helsinki Ltd under the short name HONBS. The closing price at the balance sheet date was EUR 1.99. The highest price of the Series B share in trading was EUR 4.02 and the lowest EUR 1.88 in year 2018. The market value of shares was MEUR 11.6 (unquoted Series A shares are valued as series B shares). The value of trading in quoted Series B shares was MEUR 7.6 with a turnover of 2.4 million shares in year 2018.
Honkarakenne has not acquired its own shares during the report period. At the end of the report period, the Group held 364,385 of its Honkarakenne B shares with a total purchase price of EUR 1,381,750.23. At the end of report period these shares represent 5.87% of the company's all shares and 3.05% of all votes. The purchase cost has been deducted from shareholders' equity in the consolidated financial statements.
CORPORATE GOVERNANCE
Honkarakenne Oyj follows the Limited Liability Companies Act and the Finnish Corporate Governance Code 2015 for listed companies issued by the Finnish Securities Market Association. The company’s website, www.honka.com, provides more information on the corporate governance systems.
FORTHCOMING RISKS AND UNCERTAINTIES
Demand for Honkarakenne’s products is significantly affected by the general development of the economy, exchange rates, consumer confidence in their own finances and competition in the industry. If demand falls sharply, this could have significant impacts on the company’s earnings trend.
Russia is one of Honkarakenne’s major business areas. The general economic situation, sanctions associated with the Ukrainian situation, coupled with strong exchange rate fluctuations, are causing instability in the Russian market. This might also have significant effects on Honkarakenne’s business.
The assessment of amounts in the balance sheet is based on current assessments by the management. If these assessments are changed, this may result in changes to the company’s result.
REPORTING
This report contains statements that relate to the future, and these statements are based on hypotheses that the company's management hold currently as well as on the decisions and plans that are currently in place. Although the management believes that the hypotheses relating to the future are well-founded, there is no guarantee that the said hypotheses will prove to be correct.
This financial statement release has been drafted in accordance with IAS 34. The financial statements release should be read together with the 2017 financial statements. This financial statement release has been drafted in accordance with the same accounting principles applied in the 2017 financial statements, with the exception of standards and interpretations that have come into force on 1 January 2018 or thereafter. The effect of new standards and interpretations is described in notes to the report under accounting principles. New standards and interpretations did not have a significant impact and the figures of the comparison period has not been adjusted.
The financial statements release has not been audited and the figures have not been examined by the auditor. The figures in the release are rounded, so the sum of individual figures may differ from the amount shown.
PROPOSAL OF THE BOARD OF DIRECTORS ON THE USE OF PROFIT FUNDS
The parent company has no distributable funds and no funds can be allocated as profits. The parent company posted loss of MEUR 0.4 for the financial year.
The Board of Directors proposes to the Annual General Meeting that no dividend be paid for the financial year ending 31 December 2018.
THE OUTLOOK FOR 2019
In Honkarakenne’s view, net sales in 2019 will be on a par with 2018 and the profit before taxes will be better.
ANNUAL GENERAL MEETING
Honkarakenne Oyj’s Annual General Meeting will be held on Friday, 12 April 2019 from 14:00 onwards in Tuusula.
HONKARAKENNE OYJ
Board of Directors
Further information:
Marko Saarelainen, President and CEO, tel. +358 (0)40 542 0254, marko.saarelainen@honka.com or
Leena Aalto, Vice President - Finance, CFO, tel. +358 (0)40 769 4590, leena.aalto@honka.com
This and previous releases are available for viewing on the company’s website at www.honka.com.
During week 12, Honkarakenne will publish the Board of Directors’ Report and the complete Financial Statements for 2018, as well as a separate Corporate Governance Statement on the company’s website at www.honka.com. The half year financial report for 2019 will be published on 8 August 2019.
DISTRIBUTION
NASDAQ OMX Helsinki
Key media
Financial Supervisory Authority
www.honka.com
Under its Honka® brand, Honkarakenne manufactures high-quality, healthy and ecological detached houses, holiday homes and public buildings using Finnish solid wood. The company has delivered 85,000 buildings to more than 50 countries. House packages are made in Finland, the companys’s own factory is located in Karstula, Finland. In 2018, the Honkarakenne Group had net sales of MEUR 48.9, of which exports accounted for 37%. www.honka.com
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME | ||||
| Unaudited | 7-12 /2018 | 7-12 /2017 | 1-12 /2018 | 1-12 /2017 |
| MEUR | ||||
| Net sales | 29.1 | 25.5 | 48.9 | 43.4 |
| Other operating income | 0.2 | 0.2 | 0.3 | 0.5 |
| Change in inventories | -1.0 | 0.5 | -0.6 | 1.5 |
| Work performed for own purposes and capitalised | 0.0 | 0.2 | 0.1 | 0.2 |
| Materials and services | -18.4 | -17.5 | -32.3 | -30.2 |
| Employee benefit expenses | -3.8 | -3.5 | -7.6 | -6.9 |
| Depreciations and amortisation | -0.6 | -0.9 | -1.2 | -1.7 |
| Impairment | -0.1 | -0.0 | -0.1 | -0.0 |
| Other operating expenses | -3.0 | -2.8 | -5.8 | -5.1 |
| Operating profit/loss | 2.3 | 1.8 | 1.6 | 1.7 |
| Financial income | 0.1 | 0.1 | 0.1 | 0.3 |
| Financial expenses | -0.2 | -0.1 | -0.4 | -0.3 |
| Share of associated companies' result | 0.1 | 0.1 | 0.1 | 0.1 |
| Profit/loss before taxes | 2.3 | 1.8 | 1.5 | 1.7 |
| Taxes | -0.1 | -0.5 | -0.3 | -0.8 |
| Profit/loss for the period | 2.2 | 1.3 | 1.2 | 0.9 |
| Other comprehensive income | ||||
| Translation differences | 0.0 | -0.0 | 0.1 | -0.1 |
| Total comprehensive income for the period | 2.2 | 1.3 | 1.3 | 0.8 |
| Result for the period attributable to | ||||
| Equity holders of the parent | 2.2 | 1.3 | 1.2 | 0.9 |
| Non-controlling interest | 0.0 | 0.0 | 0.0 | 0.0 |
| 2.2 | 1.3 | 1.2 | 0.9 | |
| Comprehensive income attributable to | ||||
| Equity holders of the parent | 2.2 | 1.3 | 1.3 | 0.8 |
| Non-controlling interest | 0.0 | 0.0 | 0.0 | 0.0 |
| 2.2 | 1.3 | 1.3 | 0.8 | |
| Calculated from the result for the period attributable to equity holders of parent Earnings/share (EPS): | ||||
| Basic, EUR | 0.38 | 0.23 | 0.20 | 0.15 |
| Diluted, EUR | 0.38 | 0.23 | 0.20 | 0.15 |
Honkarakenne Oyj has two series of shares: A shares and B shares, which have different right to dividend. Profit distribution of 0.20 EUR per share will be paid first for B shares, then 0.20 EUR per share for A shares, followed by equal distribution of remaining profit distribution between all shares.
| CONSOLIDATED BALANCE SHEET Unaudited | 31.12.2018 | 31.12.2017 |
| MEUR | ||
| Assets | ||
| Non-current assets | ||
| Property, plant and equipment | 8.1 | 8.5 |
| Goodwill | 0.1 | 0.1 |
| Other intangible assets | 0.2 | 0.1 |
| Investments in associated companies | 0.3 | 0.2 |
| Receivables | 0.1 | 0.1 |
| Deferred tax assets | 2.0 | 2.0 |
| 10.8 | 11.1 | |
| Current assets | ||
| Inventories | 4.6 | 5.3 |
| Trade and other receivables | 2.1 | 2.6 |
| Cash and cash equivalents | 4.1 | 3.1 |
| 10.8 | 11.0 | |
| Total assets | 21.6 | 22.1 |
| Shareholders’ equity and liabilities | 31.12.2018 | 31.12.2017 |
| Equity attributable to equity holders of the parent company | ||
| Share capital | 9.9 | 9.9 |
| Share premium account | 0.5 | 0.5 |
| Fund for invested unrestricted equity | 8.0 | 8.0 |
| Own shares | -1.4 | -1.4 |
| Translation differences | 0.1 | 0.0 |
| Retained earnings | -7.0 | -8.1 |
| 10.1 | 9.0 | |
| Non-controlling interests | 0.0 | 0.0 |
| Total equity | 10.1 | 9.0 |
| Non-current liabilities | ||
| Deferred tax liability | 0.1 | 0.1 |
| Provisions | 0.2 | 0.2 |
| Financial liabilities | 1.3 | 2.4 |
| 1.6 | 2.7 | |
| Current liabilities | ||
| Trade and other payables | 9.0 | 8.9 |
| Current tax liabilities | 0.3 | 0.2 |
| Provisions | 0.2 | 0.2 |
| Current financial liabilities | 0.5 | 1.2 |
| 9.9 | 10.5 | |
| Total liabilities | 11.5 | 13.1 |
| Total equity and liabilities | 21.6 | 22.1 |
STATEMENT OF CHANGES IN EQUITY abridged Unaudited | |||||||||||
| EUR thousand | Equity attributable to equity holders of the parent | ||||||||||
| a) | b) | c) | d) | e) | f) | Total | g) | Total equity | |||
| Total equity 1.1.2017 | 9898 | 520 | 6534 | 97 | -1382 | -8993 | 6674 | 4 | 6678 | ||
| Profit/loss for the period | 870 | 870 | 0 | 870 | |||||||
| Translation difference | -91 | -91 | -91 | ||||||||
| Directed issue | 1500 | 1500 | 1500 | ||||||||
| Total equity 31.12.2017 | 9898 | 520 | 8034 | 5 | -1382 | -8123 | 8953 | 4 | 8957 | ||
| Equity attributable to equity holders of the parent | |||||||||||
| a) | b) | c) | d) | e) | f) | Total | g) | Total equity | |||
| Total equity 1.1.2018 | 9898 | 520 | 8034 | 5 | -1382 | -8123 | 8953 | 4 | 8957 | ||
| Profit/loss for the period | 1176 | 1176 | 0 | 1176 | |||||||
| Translation difference | 96 | 96 | 96 | ||||||||
| Adoption of new standards | -99 | -99 | -99 | ||||||||
| Total equity 31.12.2018 | 9898 | 520 | 8034 | 102 | -1382 | -7046 | 10126 | 5 | 10131 | ||
a) Share capital
b) Share premium account
c) Fund for invested unrestricted equity
d) Translation difference
e) Own shares
f) Retained earnings
g) Non-controlling interests
| CONSOLIDATED STATEMENT OF CASH FLOWS abridged Unaudited | 1.1.- 31.12.2018 | 1.1.- 31.12.2017 |
| MEUR | ||
| Cash flow from operating activities | 3.8 | 3.5 |
| Cash flow from investing activities, net | -1.0 | -0.4 |
| Total cash flows from financing activities | -1.8 | -0.3 |
| Proceeds from share issue | 0.0 | 1.5 |
| Repayment of borrowings | -1.8 | -1.8 |
| Change in cash and cash equivalents | 1.0 | 2.8 |
| Cash and cash equivalents at the beginning of the year | 3.1 | 0.4 |
| Cash and cash equivalents at the close of the year | 4.1 | 3.1 |
NOTES TO THE REPORT
Accounting policies
This financial statement release has been drafted in accordance with IAS 34. The financial statements release should be read together with the 2017 financial statements. This financial statement release has been drafted in accordance with the same accounting principles applied in the 2017 financial statements, with the exception of standards and interpretations that have come into force on 1 January 2018 or thereafter. The effect of new standards and interpretations is described in more detail below under “new standards and interpretations.” New standards and interpretations did not have a significant impact and the figures of the comparison period has not been adjusted.
The financial statements release has not been audited and the figures have not been examined by the auditor. The figures in the release are rounded, so the sum of individual figures may differ from the amount shown.
Honkarakenne complies with the Guidelines on Alternative Performance Measures (APM) issued by the European Securities and Markets Authority (ESMA). An APM is a financial measure of performance other than a financial measure defined or specified in IFRS. Due to this recommendation, the term “adjusted” is used instead of “without non-recurring items”. As adjustment items, the company classifies significant business transactions that are considered to affect comparisons of business operations between different reporting periods. Such transactions include significant reorganisation expenses, significant impairment losses on non-current assets or reversals thereof, significant capital gains and losses on assets, and other significant non-customary income or expenses.
In Honkarakenne’s view, Alternative Performance Measures provide significant additional information to management, investors, securities analysts and other parties on Honkarakenne’s result of operations, financial position and cash flows, and are frequently used by analysts, investors and other parties. Return on equity, equity ratio, net financial liabilities and gearing are presented as supplementary key figures, as in the company’s view they are useful indicators for assessing Honkarakenne’s ability to acquire financing and pay its debts. In addition, gross investments and R&D expenditure provide additional information on needs related to Honkarakenne’s cash flow from operating activities.
Honkarakenne has three geographical operating segments that have been combined into one segment for reporting purposes. Geographically, sales are divided as follows: Finland, Russia & CIS and Global Markets. The internal reporting of the management is in line with IFRS reporting. For this reason, separate reconciliations are not presented.
New standards and interpretations
IFRS 9 Financial Instruments
Honkarakenne Group adopted IFRS 9 Financial Instruments on 1 January 2018 prospectively with the allowed transitional reliefs. IFRS 9 includes requirements on the classification and valuation of financial assets and liabilities, new guidance on hedge accounting, and a new model for determining impairment of financial assets based on expected credit losses. Honkarakenne has not applied hedge accounting and has not made a decision on starting hedge accounting in accordance with IFRS 9. In the first half of 2018, the company did not have any forward exchange contracts or interest rate swaps. At the Honkarakenne Group, IFRS 9 affects the valuation of trade receivables. The Group uses a simplified procedure for their valuation, in which trade receivables are categorised according to their due date and the assumed impairment is estimated for each category. The application of IFRS 9 did not have a significant impact on the opening balance sheet.
IFRS 15 Revenue from Contracts with Customers
The Honkarakenne Group adopted IFRS 15 Revenue from Contracts with Customers on 1 January 2018 and applies the cumulative effect method in accordance with the standard. The core principle of the new standard is that net sales are recognised when control over goods or services is transferred to the customer – previously net sales were recognised when risks and benefits related to goods or services were transferred to the customer. The customer is considered to obtain control when it is able to direct the use of goods or services and to obtain the benefit from them.
The Group sells and manufactures log and solid wood building packages as well as their design and construction services. In addition to house packages and construction services, the Group sells log billets and byproducts of the manufacturing process. Net sales from house packages, log billets and byproducts is recognised at a point in time when control of the goods is transferred to the customer.
Net sales from the sale of services is recognised either at a point in time or over time, depending on the service, the terms and conditions of the agreement, and the duration. Net sales are recognised at a point in time for such services where the service in under control of the customer and the customer is able to capitalise the service at one certain point. Net sales are recognised over time for agreements in which the asset item is under the control of the customer while the company creates or improves it and the customer obtains the benefits from the service as it is performed. Such customer agreements may include materials and services, or just services. Earlier, such agreements of major significance in terms of time and value were treated as long-term projects and recognised on the basis of percentage of completion. The revenue recognition principle for such customer agreements of major significance in terms of time and value (incl. design and build contracts) has remained almost unchanged, but in certain cases additional work, for instance, could be considered to constitute a performance obligation that is separate from the main product.
The company recognises net sales from customer agreements that are recognised over time by specifying the progress towards the fulfilment of each agreement. The Group deems that the progress towards the fulfilment describes the fulfilment of the entire performance obligation, that is, the transfer of control of the goods and services in question. The Group uses an input-based method to determine the progress towards the fulfilment, in which the costs incurred are compared with estimated total costs (cost-based input method, percentage-of-completion method).
The application of IFRS 15 did not have a significant impact on Honkarakenne Group and the figures for the comparison period have not been adjusted. IFRS 15 adoption had an positive impact of MEUR 0.1 on the result for 2018. The adoption of IFRS 185 standard increased net sales in year 2018 by MEUR 0.6 and use of material and services increased by MEUR 0.5. The extraction MEUR 0.1 of these was recognised in equity in the balance sheet as an adjustment to retained earnings.
IFRS 16 Leases
According to IFRS 16, lessees must recognise in their balance sheet a lease liability for future rents payable and a right-of-use asset for almost all lease agreements. The standard includes exemptions for short-term leases and asset items of low value, which Honkarakenne intends to apply. Honkarakenne intends to use a simplified procedure in the adoption of the standard, whereby the comparison figures for years prior to adoption are not adjusted, but the cumulative impact of application is presented in the opening balance sheet dated 1 January 2019.
Honkarakenne has made a preliminary assessment of the impacts of IFRS 16, but this may change once the final assessment has been completed. The major impact noted is that Honkarakenne recognises new assets and liabilities in the balance sheet that primarily comprise business premises, cars and office equipment included in other current lease agreements. In addition, the nature of the expenses associated with said lease agreements is changing. Going forward, an item that was previously presented as a lease expense will be replaced by fixed asset depreciation and interest expenses due to lease agreement liabilities which are reported under financial expenses.
The new standard has a significant effect on Honkarakenne Group’s balance sheet and part of the key figures calculated on the basis of the balance sheet will change.
A preliminary assessment indicates that Honkarakenne Group’s balance sheet total will increase by about MEUR 2 because Honkarakenne will recognise, as from 1 January 2019, an asset item amounting to about MEUR 2 for lease rights in fixed assets on the assets side of the balance sheet and the related leasing liabilities under financial liabilities on the liabilities side. The item recognised in financial liabilities is divided into short-term and long-term liabilities according to the due date.
The items recognised in the balance sheet affect part of the key figures calculated based on the balance sheet. The greatest changes affect the equity ratio, net financial liabilities and gearing, which weaken due to the growth in financial liabilities. A preliminary estimate indicates that equity ratio will weaken by about 7 percentage points, net financial liabilities will grow by about MEUR 2 and gearing will weaken by about 22 percentage points.
Calculated on the basis of the agreements at the time of adoption, the standard is not expected to have a significant profit impact. Other operating expenses will decrease, but depreciation and amortisation and financing expenses will increase. Operating profit will improve slightly, but not significantly.
The adoption of the new standard also affects the presentation of the Group’s cash flow statement, as realised rent payments are allocated to cash flow from financing for the portion corresponding to repayment of debt and to cash flow from operating activities for the portion corresponding to financial expenses. As a result of adoption, cash flow from operating activities is expected to rise and cash flow from financing to decrease.
The final assessment will be completed in the first half of 2019.
Other notes to the report
Events with related parties
The Group’s related parties consist of subsidiaries and associated companies; the company's management and any companies in which they exert influence; and those involved in the Saarelainen shareholder agreement and any companies controlled by them. The management personnel considered to be related parties comprise the Board of Directors, President & CEO, and the company's Executive Group. The pricing of goods and services in transactions with related parties conforms to market-based pricing.
During the financial year, ordinary business transactions with related parties were made as follows: sales of goods and services to related parties amounted to MEUR 0.2 (MEUR 0.3) and purchases from related parties to MEUR 0.4 (MEUR 0.5). Financial statements of the Group include MEUR 0.0 (MEUR 0.4) liabilities to related parties and MEUR 0.0 (MEUR 0.0) receivables from related parties. In 2019 no bad debts were recognised from related parties (previous year bad debts amounted EUR 18 thousand).
As part of Honkarakenne’s financial arrangements, the main shareholder of Honkarakenne, Saarelainen Oy, granted Honkarakenne Oyj an unsecured junior loan amounting to MEUR 0.3 in November 2016. The junior loan is subordinated to bank loans. The loan was repaid with interest in 2018.
In 2010 and 2011, the parent company Honkarakenne Oyj granted a long-term loan of MEUR 0.9 to Honka Management Oy. The parent company has made write-offs of MEUR 0.3 on this loan. The write-offs have no effect on the consolidated financial statements.
| Property, plant and equipment | |
| Unaudited | |
| MEUR | Property, plant and equipment |
| Cost 1.1.2018 | 48.6 |
| Increase | 0.9 |
| Disposals | -0.4 |
| Cost 31.12.2018 | 49.1 |
| Accumulated depreciation 1.1.2018 | -40.0 |
| Accumulated depreciation of disposals | 0.3 |
| Depreciation for the period | -1.3 |
| Accumulated depreciation 31.12.2018 | -41.0 |
| Carrying amount 1.1.2018 | 8.5 |
| Carrying amount 31.12.2018 | 8.1 |
The company has ordered production equipment valued at MEUR 2.1, for which prepayments of MEUR 0.6 have been made. The equipment will be delivered and installed later.
Own shares
Honkarakenne has not acquired its own shares during the report period. At the end of the report period, the Group held 364,385 of its Honkarakenne B shares with a total purchase price of EUR 1,381,750.23. At the end of report period these shares represent 5.87% of the company's all shares and 3.05% of all votes. The purchase cost has been deducted from shareholders' equity in the consolidated financial statements.
| Contingent liabilities | ||
| Unaudited | 31.12.2018 | 31.12.2017 |
| MEUR | ||
| For own loans | ||
| - Mortgages | 7.6 | 17.4 |
| - Other quarantees | 2.5 | 2.4 |
| Leasing liabilities | 0.2 | 0.2 |
| Key indicators | |||
| 1-12/ | 1-12 | ||
| Unaudited | 2018 | 2017 | |
| Earnings/share (EPS) | euro | 0.20 | 0.15 |
| Return on equity | % | 12 | 11 |
| Equity ratio | % | 61 | 51 |
| Shareholders equity/share | euro | 1.73 | 1.53 |
| Net financial liabilities | MEUR | -2.3 | 0.4 |
| Gearing | % | -23 | 5 |
| Gross investments | MEUR | 1.1 | 0.5 |
| % of net sales | 2 | 1 | |
| Order book | MEUR | 24.8 | 23.0 |
| Average number of personnel | White-collar | 79 | 71 |
| Blue-collar | 67 | 66 | |
| Total | 147 | 137 | |
| Personnel in person-years, average | White-collar | 76 | 67 |
| Blue-collar | 54 | 50 | |
| Total | 130 | 117 | |
| Adjusted number of shares (’000) | At period-end | 5847 | 5847 |
| Average during period | 5847 | 5677 |
Own shares held by the Group are excluded from the number of shares.
| Calculation of key indicators | ||
| Profit / loss for the period attributable to equity holders of parent | ||
| Earnings/share (EPS): | -------------------------------------------------------------------------------------- | Earnings/share (EPS): |
| Average number of outstanding shares | ||
| Profit / loss for the period | ||
| Return on equity %: | ------------------------------------------------------------------------------------- | Return on equity %: |
| Total equity, average | ||
| Shareholders’ equity | ||
| Shareholders equity/share: | ------------------------------------------------------------------------------------- | Shareholders equity/share: |
| Number of outstanding shares at the close of period | ||
| Total equity | ||
| Equity ratio, %: | ------------------------------------------------------------------------------------- | Equity ratio, %: |
| Balance sheet total - advances received | ||
| Net financial liabilities: | Financial liabilities – cash and cash equivalents | Net financial liabilities: |
| Financial liabilities – cash and cash equivalents | ||
| Gearing, %: | ------------------------------------------------------------------------------------- | Gearing, %: |
| Total equity | ||