Interim Report January - September 2018

• Book value on land and forest assets of 23.840 (21.062) TEUR
• Owners’ Equity per share was 1,125 (0,979) EUR
• Property holdings of 10.357 (9.416) hectares
• Timber volume was 1.016.600 (960.000) cubic meter
• Sales of 708 (136,4) TEUR
• Operating profit 305,3 (-151,4) TEUR
• Increase in forest value of 1.806,1 (505,3) TEUR
• Net profit was 2.020,5 (239,3) TEUR
• Felling of 10.433 cubic meters has been made, at a total income of 346 TEUR, equivalent to 33 EUR per cubic meter

(Figures in brackets show corresponding period previous year)

Latvian Forest Company

Latvian Forest Company AB (public) is a Swedish listed Company investing in and operating forestry on favourable valued forests in Latvia. The three main basics of the business are, besides forest being a sought-after real asset which grows by its own power.

• An expected increase in price levels for Latvian forest and agricultural properties
• To create value increase through active forest management
• To create value gains by building a larger property portfolio

The expansion is financed by new share issues as real estate is acquired and operations are being developed. The shareholders will through Latvian Forest Company become partners in many properties instead of an individual – resulting in good risk spreading. The activities undertaken in the ongoing forestry create the necessary revenue over time to cover the company's costs and eventually generate a surplus.

Latvian Forest Company AB has Euro as the accounting currency and all reporting is in Euro. Stock trading in the marketplace for shares, Spotlight Stockmarket (former Aktietorget), takes place in Swedish kronor. 

Status and property ownership

Investments in forest properties have taken place continuously, and the holdings at the end of the period totalled 10.357 (9.416) hectares. Of these, 7.554 (6.631) were forests and 2.803 (2.758) other land including 1.954 (2.033). The total growing stock was estimated to be approximately 1.016.600 (960.000) cubic meters after completed felling. 

During the third quarter, a total of 810 TEUR was invested and 468 hectares with a growing stock of approximately 7.440 cubic meters acquired, equivalent to 17 EUR per cubic meter. Half of the newly acquired growing stock is expected to be ready for felling within the next six months. The management of Latvian Forest Company still holds the opinion that the market is favourable for acquiring single properties, although the market for timber is at a record high.  

Company management has continued to convert agriculture land into forest land according to adopted strategy.  Management has also prepared and filed new forest inventory comprising 100 hectares to the local forestry board. Those are smaller agriculture land surrounded by forest land and naturally afforested, primarily by inferior wood, and will be completed with spruce planting during spring 2019. This will be shown in the new and revised report concerning the company’s forest holding that will be presented early in 2019. LFC also plans for an increased share of its forest land.

For the moment LFC owns 1.954 hectares agriculture land. Of these 332,36 hectares has been leased out to local farmers at an average of 50 EUR per hectare and year. Further 199 hectares has been leased for cultivation of willow trees to SIA Latvijas Bionergijas Kompanija, a subsidiary of Latvian Bioenergy AB. This primarily concern agriculture land of inferior quality with difficult access. LFC probes the market, according to the published strategy, to sell agriculture land to local farmers. Company management has noted an increased interest from local farmers to buy agriculture land. The average price for productive agriculture land in the area in which the company is active, is approximately 2.000 EUR.

Turnover and result

Total revenue for the period Jan-Sep 2018 amounts to 708 (136,4) TEUR and mainly relates to the sale of felling, that is standing forest timber. Costs for the ongoing operations have still developed satisfactory. An increase of external costs, raw material and supplies is explained with a more active forest management and felling.

Estimated fair value of the forest assets was 16.003 (13.706,3) TEUR.  The increase in value is mainly due to the purchase of property and to the average long-term price level of saw timber and pulpwood. The real value of growing forests has been calculated on the assets that existed in the company as per September 30, 2018. The value is calculated by discounting a 100-year series of estimated felling volumes / sales revenue and forest management costs at a discount rate of 7.25% (7.25%). 

Company management has decided to increase the average net income on sales of standing forest timber from 21 EUR per cubic meter to 22 EUR per cubic meter, due to a long-term positive trend in the business cycle for pulp wood and timber.

Otherwise, the results of operations are affected by normal costs for clearance, property related costs, such as new real estate measurements, inventories and stamping of stocks prior to felling, as well as certain costs associated with felling.  

External costs largely consist of other purchased services in connection with forest management, other consulting services such as accounting, auditing, legal advice, as well as travel, rent and transportation costs, etc. Variable cost for purchase commissions etc. has in part been booked as part of the acquisition cost of the individual properties and in these cases does not charge the result. Other variable remuneration for clearing are recorded under commodities and supplies (previously cost of goods sold).

Felling and clearing

During the third quarter felling of 10.433 cubic meters has been made, at an average income of 33 EUR per cubic meter and a total income of 346 TEUR. The average felling income per cubic meter during the third quarter has fallen from 36 EUR per cubic meter, a reduction of 3 EUR per cubic meter. Reason for this is that the company has sold felling items with inferior wood with difficult access. With forest management activities the result will be improved standing volume on the same time as we improve cashflow from forest land that in another market situation would be lower estimated. Felling is done through standing forest timber for sale.

The company has planned for a felling volume of 40.000 cubic meters during 2018. Remaining volume will be felled during the next quarter. Considering the advantageous market trend for felling, company management has been authorized to prepare for further 40.000 cubic meters to be felled during 2019. Company management has made the necessary preparations to implement felling according to plan.

LFC has delayed clearing, and only cleared 5 hectares during the third quarter. The plan is to clear further 80 hectares during the last quarter 2018. Reservation of 200.000 spruce plants has been made, to be planted during spring 2019, according to the strategy to improve the assortment of tree species in naturally afforested agriculture land.

Financing

No new share issues have been made and no loans have been raised during the first 3 quarters 2018.

Financial strategy

The Board has, following the views and probing among various shareholders and potential investors, decided that future funding in the form of new share issues will primarily take place with preference for existing shareholders. However, this does not prevent directed share issues from being completed, for example, when acquiring real estate portfolios or in special situations where a directed share issue may be required. (see also “Events after the end of the period”).

Share

Share capital at the end of period amounted to 2.297.307 EUR divided into 80.000 A-shares and 20.431.061 B-shares. A-shares represent ten votes and B-shares one vote each. Each share represents 0.112 Euro (1.0 SEK) in share capital. The five largest shareholders, according to the latest data, control approximately 50 % of the share capital.

Market

A change of ownership has occurred in the two largest forest companies in Latvia. In September the sell was announced of 53.902 hectares owned by the Norwegian finance company Storebrand and SPP Liv for approximately 120 million EUR. Forans possession consists of 40.000 hectares of forest land and 14.000 hectares of other land. The timber holdings estimate 4,6 million cubic meters. The new owner of Foran is IRI Investments, an investment company owned by IKEA.

Recently as well, Bergviks Latvian holdings has been sold to Södra. The deal comprises 111.081 hectares whereof 79.777 hectares forest land, 17.685 hectares agriculture land and 13.619 hectares of other land. Total timber holdings estimate 10,47 million cubic meters. The price that Södra paid was 324 million EUR corresponding to 30,95 EUR per cubic meter.

Despite above mentioned, the management of Latvian Forest Company still holds the opinion that the market is favourable for acquiring single properties, although the market for timber is at a record high. Quite opposite, the smaller local forest owners tend to sell their property after felling to avoid investments in different forest actions, creating an opportunity to acquire such properties at a favourable price. The big actors will most likely refrain from further acquisition from the smaller forest owners, creating good opportunities for Latvian Forest Company.

The strong international business cycle continues to favour the forest industry. Interest for wood products is at an all-time high. The price is high for timber as well as for wood pulp. Still, there is a growing risk concerning the global business cycle. Trade conflicts, political and financial instability in the emerging countries as well as   different measures aimed at reducing risk, can lead to a change in the business cycle and affect the price for timber and wood pulp.

The decisionmakers of the forest industry agree that the future for wood products increasingly will be as a substitute for oil products within packaging, logistics for goods and food as well as textile. Also new products such as Stora Ensos Lineo, a renewable lignin-based material that can replace oil-based phenol material. This material is used in resin for plywood, OSB-boards (Oriented Strand Board), laminated veneer lumber (LVL), paper laminating and isolating material. Lineo is bio based and perfect for companies wanting an alternative for oil-based products. We say that everything made from fossil-based material today can be made from forest products tomorrow. Stora Ensos new plant has a capacity of 50.000 ton per year, making Stora Enso the largest producer of lignin-products in the world.

The European Parliament has prohibited use of disposable products such as straws, dishes, cutlery and swabs from latest 2021. BillerudKorsnäs for instance, says that they have created a fibre-based bottle strong enough to withstand the pressure from carbonated liquids. All these products will lead to an increased demand for wood-products.   

The Russian state has decided to impose export quotas from January 1, 2019 limiting trade of birch timber that can be used in production of veneer and particle board. This will increase demand for birch on the local market around the Baltics. There is already hard competition from the Latvian high producers of veneer and particle board, Latvijas Finieris and Kronospan. This has already led to prices for birch timber comparable with those of spruce and pine.  

To sum up, the management of Latvian Forest Company holds the opinion that the favourable price level on wood products will remain during the first six months of 2019. This encourage us to implement the existing felling plan this year and to do similar for the first six months of 2019.   

Events after the end of the period

The property holdings amount to 10.388 (9.478) hectares at the time of this report. The company has also managed to sell 29.501 cubic meter felling rights generating an income of 1.011 TEUR until November 23, 2018.

Next report

Press release of Year-end report for 2018 is scheduled for publication on February 22, 2019.

About this report

This report has not been subject to special review by the company's auditor.

Stockholm, 2018-11-23

The Board

For further information please contact

Aleksandrs Tralmaks, VD

+37129203972

info@latvianforest.se

Visit our website: www.latvianforest.se

Accounting principle

This interim report has been prepared for the Group in accordance with IFRS (International Financial Reporting Standards) as adopted by the EU and the Swedish Annual Accounts Act. The parent company's accounts have been prepared in accordance with RFR 2 Accounting for Legal Entities and the Swedish Annual Accounts Act. 

Starting from January 1, 2018, the company practice IFRS 15, revenue from contracts with customers, with full retrospective approach. An entity recognises revenue when the customer receive control over purchased goods or services and able to make use of it. The effect for the company is as good as none.  See note 1 below and theYear-end report for 2017.

Note 1 - IFRS 15, Revenue from contracts with customers

The company mainly sell felling rights. These are well prepared by the company and the buyer can start felling immediately. Almost everything the company sell is available to the customer at the same time as payment is made. This means that the customer receives the full benefit of the goods or services directly upon payment.