2016 in brief

The Group's revenue exceeded NOK 10 billion for the first time, and the operating profit was the best since the record year of 2007.

Demand for products from the Group's timber processing operations in the Timber and Wood divisions was satisfactory throughout the year, and the activity level in the Building Systems project division was good and healthy.

Revenues increased by 6.4 per cent to NOK 10,309.7 million, and the operating profit improved from NOK 214.8 million to NOK 295.0 million. The rate of return on employed capital improved from 7.4 per cent to 10.3 per cent.

Efforts on internal improvement work and restructuring in accordance with the action plan that was drawn up in the autumn of 2014 proceeded with full strength in 2016, and is the main cause of the improved results. In the course of the year, part of the electrical installations business has been sold, and complementing business within boards have been acquired in Sweden. In addition, several organizational changes are ongoing, as well as major investment projects that will significantly improve efficiency and profitability. At the Group's two largest sawmills in Sweden, Moelven Valåsen AB and Moelven Notnäs AB, there are plans for investments of around SEK 164 million in machinery and equipment. Besides exploiting the opportunities afforded by new technology, competence development and organizational rationalization have high priority in these projects. The investments will be staggered. The improvement projects are scheduled for completion in the summer of 2019. At Moelven Byggmodul AB's factory in Säffle an investment project with a cost framework of SEK 72 million is ongoing, and is scheduled for completion in the second quarter of 2017. The investment will increase the overall capacity at the factory by 50 per cent and also allow for more rational production solutions, including through a significant degree of robotisation.

With exports to more than 40 countries and on several continents, the Moelven Group is obviously dependent on developments in the global economy. Combined, approx. 15 per cent of the Group's turnover is in markets beyond Scandinavia. The geographical spread is broad enough to have a diversifying effect. Through 2016 overall demand has been satisfactory, both on the home market in Scandinavia and in the export markets. Export is primarily from the units that use sawlogs as a raw material in their production, which is to say the sawmills in Timber and Wood. It is mainly sawn timber that is exported. For Timber the export share outside of Scandinavia is 45 per cent, and for Wood it is 10 per cent. Both price developments on the international market for sawn timber and exchange rate developments therefore have a major impact on the business. International price levels rapidly impact the home market in Scandinavia. In 2016 the prices for sawn timber increased somewhat compared to 2015, and in the export markets currency developments have contributed to maintain competitiveness. 

The Wood division mainly sells its processed wood products on the building materials market in Scandinavia. Demand from this market has been satisfactory, although activity in renovation, modernisation and extension market (RME) in Sweden dropped somewhat after changes to the tax rules related to deductions. Price levels for the division as a whole increased slightly compared to the previous year.

Access to raw material for the sawlog-consuming operations in the Group was good in the first half of 2016, while in the second half of the year access to spruce in Norway varied. The situation improved towards the end of the year. A year end sawlog inventories were at levels that provide a satisfactory basis for the planned production levels for the winter. In 2016 price levels for sawlogs have overall been somewhat higher than in the previous year in Norway, and somewhat lower in Sweden. Sales of chip and fibre products were good throughout the year, at prices on a par with or somewhat over 2015.

The Building Systems division operates exclusively in building and construction in Scandinavia. Deliveries are to professional players in both the new building and renovations, extensions and conversions markets. Demand for the division's products and services have been satisfactory through the year as a whole. The combined order backlog at the end of the year was NOK 68 million lower than the previous year. The order backlog for the part of the electrical installations business that was sold in the fourth quarter 2016 comprised NOK 85 million at the end of 2015. Market conditions saw different developments in Norway and Sweden as the year progressed. While the units with operations in Sweden enjoyed the high levels of activity in the Swedish economy, Norwegian units have had to adjust to reduced activity levels as a result of developments in the oil industry. 

Corporate governance

There have been no changes to the Board of Directors in 2016. Comprehensive information on the Group’s governing bodies is available in the information about The Board and in note 28.

Anders Lindh has been appointed new Division Manager of the Timber Division, succeeding Ole Helge Aalstad who chose to take up another position outside of the Group after 16 years with Moelven. Anders Lindh (45) comes from the position of Director at Moelven Våler AS. He is a graduate engineer and has formerly held several managerial positions in the timber processing industry, including outside of the Moelven Group.

Corporate structure

On 21 November 2016 Moelven acquired the business and assets of DLH Sverige AB. The acquisition includes inventory, warehouse and offices in Hässleholm. The acquisition provides Moelven with improved access to the market in southern Sweden, while at the same time strengthening logistics and facilitating further expansion through a cost-effective distribution scheme to both the building products trade and industrial customers.

In the second quarter 2016, Moelven Elektro AS acquired assets and project portfolio related to maintenance contracts, and small and medium-sized projects, from the other electrical installations business in the Group. The company, which belonged to the “Other businesses” reporting area, was sold to Bravida Norway AS 1 December 2016. At the time of the sale Moelven Elektro AS had a total of 162 employees.

In January 2017 a decision was made to transfer operations at Moelven Tom Heurlin AB from the Timber division to the Wood division as of year end. The company has failed to achieve satisfactory profitability through its strategic focus on exports, and will instead coordinate with the Wood division's focus on the Scandinavian home market. Coordination will entail a need to scale back capacity, and negotiations with trade unions have been initiated.

This is the Moelven Group

Ownership structure

The Moelven Group is owned by Glommen Skog SA (29.1 %), Eidsiva Vekst AS (23.8%), Felleskjøpet Agri SA (15.8%), Viken Skog SA (11.9%), Mjøsen Skog SA (11.8 %) and AT Skog SA (7.3%). Most of the remaining 0.4 per cent is owned by private individuals.

Vision

Moelven is a Scandinavian Group. All production units are located in Scandinavia, which is also the primary market. Moelven's vision is to be the natural choice for people who wish to build and live Scandinavian, and the Group shall take the lead in developing buildings that are based on Scandinavian building traditions. Within this framework, activities are based on a desire and an ability to contribute to creating good spaces – good environments to live and work in, and for all social functions. Good Scandinavian environments are often close to nature in their form and content. Wood and other natural materials are essential parts of what Moelven makes and are dominant in the greater part of the product range. Natural materials are environmentally friendly building materials and building solutions when it comes to houses, modules, bridges and interior products.

Location

The Group has its headquarters in Moelv in Norway and consists of 42 production companies in 48 production locations, and 33 offices for sales, service and fitting. Most of the production units are companies and workplaces with a strong local presence in rural communities in South East Norway and the western part of Central Sweden.

The offices for sales, service and fitting are located in larger population centres around Norway, Sweden, Denmark, the United Kingdom, Germany and the Netherlands. Production in Norway and Sweden is of approximately the same volume, but the Swedish units export a greater proportion of their production than the Norwegian. Out of a total of 3,492 (3,326) employees at the end of 2016, 1,625 (1,777) work in Norway, 1,839 (1,621) in Sweden, 19 (20) in Denmark and 9 (8) in other countries. The changes to the number of employees in Norway and Sweden in 2016 are primarily due to the sale of the electrical installations business in Norway, and permanent employment of hired personnel in the building modules business in Sweden.

The Divisions

Moelven offers a wide range of building products and building systems and associated services. The Scandinavian

market accounts for 85 per cent of sales revenues, and 85 per cent of the Group's products and services are used for new building or renovation of homes and commercial property. A large part of the remaining operation consists of sales of biomass for biofuel and for pulp, paper and particle board production. The Group also supplies wood products to the furniture, interior and packaging sectors. Customers are divided into three main segments: industry, trade and projects. This is based on the nature of their business. The Group is divided into three divisions: Timber, Wood and Building Systems, each of which focuses on one of the main segments. There is also an Other Businesses reporting area, which consists of the holding companies, supply businesses fibre products and bioenergy companies.

Timber

The Timber division consists of 14 production companies and 4 sales offices, supplying industrial timber, components and chip products made from local spruce and pine. 

The customers are mainly industrial companies that buy intermediate products for their own production of construction timber, glulam, panels, flooring, mouldings, windows, packaging, board and paper products, and for bioenergy. About 55 per cent of operating revenues come from Scandinavian customers. At the end of 2016, there were 674 (679) employees, 235 (237) of them in Norway, 430 (434) in Sweden and 9 (8) in other countries.

Wood

The Wood division comprises 18 production companies, 3 customer centres and one project sales company. The main products are white and impregnated building wood, external cladding, boards, length-adapted products and chip products, as well as interior products such as mouldings, flooring and interior panels. 

Wood also trades in purchased products. Almost 80 per cent of timber and board production is sold through the building products trade and wood processing industry. Wood is one of the leading suppliers to the Scandinavian market and about 90 per cent of its operating revenues come from Scandinavian customers. At the end of 2016, there were 1,039 (1,009) employees, 581 (564) of them in Norway, 439 (425) in Sweden and 19 (20) in Denmark.

Building systems

The Building Systems division consists of 8 production companies at 13 production locations and 20 sales, service and fitting offices. Building Systems is divided into the business areas Glulam, Building Modules and System Interiors, all three of which are market leaders in Norway and Sweden. 

The division's building and contracting customers buy customised building modules, flexible interior solutions systems and associated services and advanced glulam structures. In addition to bridges and load-bearing structures, the glulam unit also has considerable sales of standard laminated timber beams through the building products trade, as well as components for the prefabricated house industry. Operating revenues are primarily from Scandinavian customers. At the end of 2016, there were 1,644 (1,607) employees, 757 (927) of them in Norway and 887 (680) in Sweden. In order to ensure adequate flexibility in production capacity to meet seasonal and economic fluctuations in the market, the divisions use hired workers. Hired workers are not included in the employee figures. Hiring is from staffing companies who comply with the EU temporary agency work directive, and this entails that hired personnel are ensured the same terms as if they were employed by Moelven.

Other business

Other businesses include Moelven Industrier ASA, with sentralised services for finance, accounting, insurance, communications, HR and ICT. Timber supply and sales of wood chips and energy products are organised as a common function for the Group's timber processing industry and comprise the companies Moelven Skog AB, Moelven Virke AS, Vänerbränsle AB and Moelven Bioenergi AS. In addition there is the affiliate Weda Skog AB.

At the end of 2016, there were 142 (131) employees, 62 (49) of them in Norway and 80 (82) in Sweden.

Social responsibility

The Board has processed and approved the Groups general strategy and guidelines relating to HSE, social responsibility, the environment and competition law. The discussion of these areas are included in the Board's explanation of principles and practice concerning social responsibility pursuant to the Accounting Act Section 3-3c.

Operating revenues and results

årsberetning Driftsinntekter og resultater konsern NO

Operating revenues increased by 6.4 per cent compared to the previous year, including sales of businesses. The operating profit without corrections for restructuring increased by 37.3 per cent. EBITDA, which doesn't include impairment and loss through the sale of fixed assets, increased by 15.9 per cent compared to 2015. Overall, delivery volumes in 2016 have been higher than in the previous year, and at prices on a par with or somewhat higher than in 2015. Overall, raw material prices did not change significantly compared to 2015. The improvement in operating margin is thus mainly due to internal improvements.

The inventory estimates, which are prepared according to the FIFO principle, are reviewed regularly to correct for developments in raw material costs. Along with an update of real value assessments of inventory, this formed the basis for price adjustments totalling NOK 9 million in 2016 and NOK -45.6 million in 2015. The items do not have any impact on cash flow.

Following a review of the overall project portfolio in Building Systems, it has been revealed that the valuation of project revenues in the fourth quarter report was too high. Based on a careful assessment of the portfolio, an impairment totalling NOK 40 million has been implemented in the annual accounts.

The profits for 2015 were charged with write-downs and losses on sales of fixed assets totalling NOK 54.1 million related to the sale and liquidation of operations at Moelven Nössemark Trä AB, in addition to cost adjustments in the project portfolio of the Electrical Installations business of NOK 40.0 million. In the course of the autumn of 2015 the Group's remaining defined-benefit pension schemes in Norway were converted to defined-contribution pension schemes. The change resulted in a positive non-recurring effect on the operating result of NOK 26.5 million. In addition there is a positive effect of NOK 8.0 million from negative goodwill related to acquisitions.

Net financial expenses excluding changes in the value of financial instruments were NOK 57 million in 2016, compared to NOK 61.9 million the previous year. Overall borrowing costs increased slightly through the refinancing that was completed in June 2016, but lower net interest-bearing debt throughout the year meant that net financial costs nevertheless decreased.
The Group employs financial instruments to hedge foreign exchange rates, interest rates and power prices. Net non-cash items associated with this totalled NOK 14.5 million (NOK 5.6 million). The main reason is positive developments in the market value for the power hedges. Falling interest rates increased the already negative market value of the interest rate hedges slightly, while the currency hedges were almost unchanged compared to the previous year. 

Timber

årsberetning timber tabell 1 E

The activity levels in the Timber division's main markets were satisfactory in 2016, and followed the normal seasonal variations through the year. Demand for the division's products was good as well. Adjusted for Moelven Nössemark Trä AB as of 31 December 2015 no longer being a part of the Group, delivery volumes in 2016 were somewhat higher than for the previous year. Average prices for finished goods, without corrections for market mix, were slightly higher overall in 2016 than the year before.

Most of the exports take place from the division's Swedish units, and the bulk is settled in EUR. For 2016 as a whole, EUR has been marginally stronger against SEK than in 2015. At the same time the GBP, which is the Group's second largest export currency, weakened significantly following the BREXIT referendum. However, currency hedges and increased prices measured in GBP contributed to limit the negative effect on margins.

Access to raw material was good in the first half of 2016, while in the second half of the year, access to spruce in Norway varied. The situation improved towards the end of the year. At year end sawlog inventories were at levels that provide a satisfactory basis for the planned production levels for the winter. In 2016 price levels for sawlogs have overall been somewhat higher than in the previous year in Norway, and somewhat lower in Sweden. Sales of chip and fibre products were good throughout the year, at prices on a par with or somewhat over 2015.

Due to price developments, the profits for 2016 have been charged with a price adjustment to inventories totalling NOK 1.6 million The corresponding price adjustment in 2015 comprised NOK -23.0 million.

The profits for 2016 have been charged with an impairment loss of NOK 16.5 million as a consequence of the restructuring and change of concept at Moelven Tom Heurlin AB prior to transfer to the Wood division as of the first quarter of 2017.

The operating profit for 2015 has been charged with write-downs and losses on sales of fixed assets totalling NOK 54.1 million related to the sale of the operations at Moelven Nössemark Trä AB. Further, the conversion of the remaining defined-benefit pension schemes in Norway to defined-contribution pension schemes provided a positive non-recurring effect on the operating result of NOK 2.1 million in 2015.

In 2016 several units have improved efficiency as a result of the ongoing improvement work. There are nevertheless units remaining with unsatisfactory results, and improvement work will continue unabated in order to bring all units up to targeted profitability levels.

Wood

årsberetning wood tabell 2 E

The Wood division sells most of its products on the building materials market in Scandinavia. Demand in 2016 was, with the exception of south-west Norway, satisfactory. The increase in revenues compared to the previous year was mainly due to increased volumes in Norway and Sweden. Price levels for the division as a whole increased slightly compared to the previous year.
Sales of custom products such as surface-treated or cut-to-length products are on the increase. Commissioning and building of new homes is at a high level in both countries. In Sweden however, activity in the renovation, conversion and extension market has dropped slightly following changes to the tax rules concerning deductions.

The result for 2016 is to a certain extent characterized by lower than optimal production at some units after starting up following new investments. In addition there are still units that are not delivering satisfactory earnings. Improvement efforts to bring these to targeted profitability levels continue with high priority.
On 21 November 2016 Moelven acquired the business and assets of DLH Sverige AB. The takeover went according to plan, and yielded positive results in the board segment before the end of the year.

The planing mills in the Wood division use sawn timber as a raw material, and the raw material costs for these units thus follow the same trends as the finished product prices for the sawmills in the Timber division. Compared to the previous year, raw material costs for these units have increased slightly. Access to saw timber for the division's timber consuming operations was satisfactory in the first half of 2016, while in the second half of the year, access to spruce in Norway varied. The situation improved towards the end of the year. At year end sawlog inventories were at levels that provide a satisfactory basis for the planned production levels for the winter. In 2016 price levels for sawlogs have overall been somewhat higher than in the previous year in Norway, and somewhat lower in Sweden. Sales of chip and fibre products were good throughout the year, at prices on a par with or somewhat over 2015.

Due to price developments, the profits for 2016 have been credited with a price adjustment to inventories totalling NOK 10.6 million The corresponding price adjustment in 2015 comprised NOK -22.6 million.

The conversion of the remaining defined-benefit pension schemes in Norway to defined-contribution pension schemes provided a positive non-recurring effect on the operating result of NOK 4.6 million in 2015. 

Building Systems

årsberetning byggsytemer tabell 3 E

The increase in revenues compared to 2015 is due to greater activity in Building Modules in Sweden and the acquisition of Moelven Byggmodul Hjellum AS in the fourth quarter of 2015. The order backlog for the division as a whole is still good and diverse. At year end the combined order backlog was NOK 68 million lower than the previous year. The order backlog for the electrical installations business that was transferred to Other business in the second quarter of 2016 comprised NOK 85 million at the end of 2015.
Following a review of the overall project portfolio, it has been revealed that the valuation of project revenues in the fourth quarter report was too high. Based on a careful assessment of the portfolio, an impairment totalling NOK 40 million has been implemented in the annual accounts.
The conversion of the remaining defined-benefit pension schemes in Norway to defined-contribution pension schemes provided a positive non-recurring effect on the operating result of NOK 17.2 million in 2015. In 2015 there was also a disparagement of the project portfolio comprising individual projects with a contract value above NOK 30 million. The disparagement resulted in a charge to the result of NOK 40 million for the year as a whole.

Market activity and demand for glulam in Sweden was good in 2016. Overall, both the production and application of glulam in Sweden reached record levels. Prices were nevertheless under pressure as a result of several players directing their volumes at the home market rather than export markets. For Moelven Töreboda AB internal improvement work and increased volumes resulted in more efficient utilization of the factory, and the result improved significantly compared to 2015. The glulam activities in Norway also saw good demand for their products. However, increased costs for certain inputs led to a decline in earnings. Overall, glulam operations delivered a result in 2016 that was better than the year before.

The Interior System business saw a lower level of activity in Norway compared to the previous year, mainly due to market developments in south and western Norway. Reduced demand has also led to strong pressure on prices. Staffing on the Norwegian side has therefore been reduced and adjusted in accordance with the current market situation. For the Swedish part of the business the market situation was very good throughout 2016, particularly in and around the major cities of Stockholm, Gothenburg and Malmö, both within new building and renovation, conversion and extension. Overall, the Interior System business had a significant drop in earnings compared to the year before, but capacity adjustments contribute to maintain positive results and cash flow.

The Modular Buildings business in Sweden had excellent demand in all market segments throughout the year, and increased its level of activity significantly in 2016. As a result of this, 133 previously hired staff were given permanent positions in the course of the year. Price developments have been positive, but the economic boom has also led to increased costs. Efficiency-enhancing measures are therefore assigned high priority. During 2016 two significant investment projects have been implemented. At the plant in Kil, where building and construction modules are produced, conversion is taking place that will increase capacity by 15 per cent. At the plant in Säffle, where modules for residential and renting purposes are produced, a development project is ongoing with a cost framework of SEK 72 million that is to be completed in the course of the second quarter of 2017. The investment, which involves significant robotisation, will, in addition to increasing the overall capacity at the factory by 50 per cent, also provide more rational production solutions and improved HSE conditions.
In Norway there has also been good demand for modules in the housing segment. Towards the end of the year demand also improved in other market segments, but the situation at year end remains unsatisfactory for accommodation rigs. This market is to a certain extent characterized by a surplus of used rigs in the market. Due to the high demand in Sweden, available capacity at the plants in Norway has been used to produce modules for the Swedish market.

In the second quarter 2016, Moelven Elektro AS acquired assets and project portfolio related to maintenance contracts, and small and medium-sized projects, from the other electrical installations business in the Group. The company, which belonged to the “Other businesses” reporting area, was sold to Bravida Norway AS 1 December 2016. At the time of the sale Moelven Elektro AS had a total of 162 employees.

The remaining electrical installations operations in the Building Systems division, Moelven Elprosjekt AS, has focused on completing projects. At year end all projects were completed on site, but clarification on the final settlement for certain projects remains.

Other businesses

årsberetning øvrige tabell 4 E

Apart from this reorganization and subsequent sale of operations, fluctuations in operating revenues within the area of Other businesses are largely due to fluctuations in the level of activity within timber supply and sales of chips and energy products. The main activity is internal sales, which do not materially affect the results within the business area. In order to safeguard the supply of timber and market opportunities for wood chip and energy products in regions without local demand for pulp wood and wood chips, train solutions have been established for the transport of these. The business is based on fixed agreements on both the customer and supplier sides.

The result for 2015 includes a positive net result of NOK 8.0 million from negative goodwill related to acquisitions. In addition there is a positive non-recurring effect of NOK 3.5 million from converting the remaining defined-benefit pension schemes in Norway to defined contribution pension schemes. 

Investments, balance sheet and financing

During 2016, total investments were NOK 275.2 million (NOK 215.8 million). Investment projects of a strategic nature have been initiated to a greater degree than previously. In order to realize the improvement of the Group's profitability described in the strategy plan, the share of strategic investments will increase further in 2017. Depreciation in 2016 was NOK 290.1 million (291.2). In addition impairments of fixed assets of NOK 16.5 mill (47.9) were implemented. Impairment in 2016 is related to the restructuring of Moelven Tom Heurlin AB, while in 2015 it concerned Moelven Nössemark Trä AB. At the end of the year, the book value of the Group's total assets was NOK 4,766.8 million (NOK 4,778.1 million).

Cash flow from operating activities was NOK 421.5 million (584.6). Improved underlying profitability has in isolation resulted in improved cash flow, but variations in working capital entailed that total cash flow from operational activities was weakened. Cash flow from working capital items was NOK -179.1 mill (-100.7). The change is due to normal fluctuations in inventory, accounts receivable and other short-term debt. Net interest-bearing liabilities were NOK 1,026.9 million (NOK 1,110.4 million) at the end of the year. Financial leases are included in net interest-bearing liabilities, amounting to NOK 22.3 million (NOK 31.5 million). Cash reserves including short-term credit facilities was NOK 874.7 million (631.0). In mid-June an agreement was signed for a new short-term loan facility to replace the facilities with maturity in September 2016 and June 2017 respectively. The new agreement ensures that the Group has satisfactory financial flexibility up to June 2019. Current requirements to equity ratio were maintained in the new agreement, while the requirement towards maximum gearing has been increased somewhat. The levels for the default clauses are within both historic and targeted levels for the relevant key figures.

In the same manner as for the former financing, the available credit facility in accordance with the new agreement will be regulated in keeping with the natural fluctuations in the Group's tied-up capital through the year.

Equity at the end of the year amounted to NOK 1,813.4 million (NOK 1,756.9 million), equivalent to NOK 13.95 (NOK 13.48) per share.

The decision to disburse a dividend for 2015 totalling NOK 58.3 million was made, and was carried out in the third quarter of 2016. At the end of the year the equity ratio was 38.0 per cent (36.8 per cent). Parts of the Group's equity are linked to ownership interests in foreign subsidiaries, principally in Sweden, and are thereby exposed to exchange rate fluctuations. The extent and consequences of likely variations in exchange rates are within acceptable risk limits. For the full year currency fluctuations have resulted in a change in equity of NOK -67.4 million (61.3 million). Approximately half of the Group's assets are recognized in SEK. The total assets thus also change based on the exchange rate. The equity ratio in percent is therefore less impacted by exchange rate fluctuations than the nominal equity.

Risk

The Group's profits and balance sheet are affected by several external factors that can be influenced by Moelven to a greater or lesser extent.

For some of the risk areas that affect the Group, there are functioning financial markets where the risk of fluctuations can be reduced. This applies, for example, to interest rates, exchange rates and electricity. The Group's financial policy is that it is the industrial activities rather than financial transactions that shall create the conditions necessary for profitability. The main aim of the guidelines for the use of financial instruments is to reduce fluctuations and create more predictability. In other areas, such as raw materials, finished goods and projects, other methods of hedging risk must be used. As far as possible, fixed price contracts or index linking of contracts is used, for example. The Group's composition of units directed at different primary markets also has the effect of reducing risk. The primary markets are seldom affected by economic fluctuations at the same time, while the cost side can still benefit from economies of scale. 

Prices of finished goods

The units of the Moelven Group operate in markets with free competition and many players. The creation of prices therefore occurs freely in the marketplace, and assuming unchanged volumes a change in process will affect the group as shown on the sensitivity table.

Sawlog prices

The Moelven Group's units annually use around 4.3 million cubic metres sawn spruce and pine in production. The total value is approximately NOK 2,500 million, including transport costs. Spruce and pine account for approximately equal portions of the round timber. Moelven does not own any forest, but buys all its timber from external suppliers. These suppliers are in turn dependent on functioning markets within an acceptable transport distance, as well as satisfactory price levels for both sawlogs and pulpwood. The cost of sawlogs is by far the biggest single cost for the Group, and changes in timber prices have an immediate and substantial impact on margins. This involves both a price risk and a volume risk. The Group therefore focuses on entering into price agreements that as far as possible correlate timber prices with expected changes in the price of finished goods.

Prices of chips and biomass

The price of cellulose chips and biomass, which come from saw and planing production in Timber and Wood, is of great significance for the Group's revenues. Even though work is constantly going on to improve the utilisation of raw material, only about half of each log becomes industrial timber after passing through a sawmill. The remaining half is cellulose chipping and sawdust, in addition to various dry fractions. Part of these products are used for our own energy production, while the rest is sold to the particle board, bioenergy and paper industries. Since a change in the profit margin for these products has a direct influence on the Group's results, the distance to the customers and access to efficient logistics solutions for road and rail transport are of great importance. 

Electricity prices

The price of electric power is another important factor that affects the Group's profitability. Through the Group's electricity suppliers an annual 210 GWh of electricity is purchased on Nasdaq OMX Commodities.

According to the Group's finance policy, the need for electric power shall be secured against price fluctuations so as to ensure stability and predictability. The anticipated power requirement is hedged within stated maximum and minimum levels by trading futures on Nasdaq OMX with a 5 year maximum horizon. 

Interest rate risk

The Group's net interest-bearing debt is subject to interest rate risk. The main portion of the debt is in SEK, which is why interest rates in Sweden are most important for the development of the Group's interest expense. The Group companies will be financed with loans from the parent company. All external borrowing is done by the parent company, which also makes hedging in accordance with financial policy. The hedging instruments that can be used are ordinary interest rate swaps, FRAs and composite swaps of types that are normally used for such purposes. The extent of hedging is measured in terms of the combined duration of outstanding debt and hedging arrangements. The combined duration shall be between 12 and 60 months. No interest rate hedging agreements shall be entered into over more than 10 years.

Exchange rate risk

About 15 per cent of the Group's operating revenues come from markets outside Scandinavia and carry exchange rate risks.

Additionally, there is significant internal and external trade within the Group with both raw materials and finished products between Sweden and Norway. The most important currency crosses are EUR/SEK, GBP/SEK, SEK/NOK and EUR/NOK. Moelven uses forward contracts to counteract large cash flow fluctuations as a result of variations in exchange rates. Because of the hedging strategy that has been chosen, changes must be long-term so as to have the full effect on the Group's profitability, and during the hedging period operational adaptations may be made to compensate for the external changes. During the hedging period, operational adaptations may be made to compensate for the external changes. About half of the Group's total balance sheet is connected to activities in Sweden. The balance sheet figures will therefore be affected by the prevailing exchange rate between the Swedish and Norwegian kroner. The equity is partially hedged against this by financing the share investments in most of the Group's Swedish subsidiaries in Swedish krona. At the end of 2016, the total equity that is exposed to exchange rate risk amounted to SEK 804.9 million (SEK 701.0 million). 

Credit risk

It is the Group's policy that credit sales over a certain size shall be secured in the form of either guarantees or credit insurance. In practice, credit insurance is used most. There are internal guidelines and follow-up routines for unsecured sales, which only occur when no other security is possible.

Liquidity risk

The Group's foreign capital financing consists of the long-term credit facility with a total ceiling of NOK 850 million and SEK 750 million. Maturity is in June 2019, but with an option to extend by a year at a time up to 2021.

The loan agreement includes normal default clauses with regard to dividends, equity, net equity value and debt ratio. As at 31 December 2016, the Group's key figures were better than the levels at which the default clauses are triggered. In addition to the long-term credit facilities, the Group also has available credit in its banking systems, amounting altogether to about NOK 312 million, which is renewed annually.

Risk of damage and interruption to production

The Group has a policy for industrial insurance that is centrally managed and which is followed by all companies. This policy gives guidelines for insurance cover, preventive measures, risk review and preparation of continuity plans. The continuity plans become key plans if a fire/damage should occur. The plans cover immediate efforts, disaster management and the ability to continue deliveries to customers. Through its industrial insurance, the Group is covered for financial loss exceeding NOK 3 million per individual claim.

Risk of loss of reputation

Moelven places great emphasis on maintaining a good reputation. This is measured regularly using a brand survey that is conducted by external partners. There is financial risk linked to any loss of Moelven's reputation. The reputation risk is not quantified. Openness is what characterises the way the Group relates outwardly to society and the media and inwardly to employees of the Group. This applies whether it concerns positive or negative circumstances for Moelven, in line with Moelven's brand platform.

Risk of loss of environmental costs

The activities of the Moelven Group follow the prevailing legislation and regulations with regard to emissions and waste management. The Group has made provisions in the accounts for all known obligations in connection with environmental protection. The purpose of the Group's environmental policies is to minimize the risk of negative impact on the natural environment and thus the potential environmental cost as well.

årsberetning Risiko Sensitivitetstabell E

Human resources

For a detailed description of the HSE area, please refer to the Board's explanation of principles and practice concerning social responsibility pursuant to the Accounting Act Section 3-3c.

Effect on the external environment

For a detailed description of how the Group's activities impact the external environment, please refer to the Board's explanation of principles and practice concerning social responsibility pursuant to the Accounting Act Section 3-3c.

Innovation

Moelven's innovation focus is to engage in development and innovation linked to a specific application of a product or in a production process. Responsibility lies with corporate management.

The innovation processes take place mainly within each business area, where the greatest competence exists. Where there are larger parts of Moelven that drive and benefit from an area of innovation, this takes place in joint projects. The Group must facilitate innovation and provide resources, support and coordination. Research and development at Moelven takes place primarily at the project level, linked to commercial operations.

On 13 February key players in the forestry-industry-building value chain signed an agreement where the objective is to develop the In-land region into an international powerhouse for industrial construction with wood. The new cluster is called Norwegian Wood Cluster . The cluster comprises Hunton Fiber AS, Forestia AS, Boligpartner AS, Moelven Industrier ASA, Gausdal Bruvoll SA, Mjøsen Skog SA, Glommen Skog SA, Statskog SF and NTNU (Norwegian University of Science and Technology). The players have identified key focus areas for cooperation. The first is to increase the degree of industrialization in the entire value chain, the second is to increase capacity for innovation, and the third is to improve expertise. The cluster will also focus on building the reputation of an industry that is traditional – but which is undergoing rapid developments.

Product innovation

For the Modular Buildings companies, the development of cost-effective concepts adapted to the market for modular buildings of several storeys has been a prerequisite for the operations as they are today. The functional and aesthetic aspects change continuously in accordance with the technological developments and market trends. In order to maintain the market position in current markets and develop further in other segments, focus on innovation and developing new solutions in essential. The newly-developed housing concept in Norway with accompanying specialization of the processes is a good example of this.

The Interior System companies are aimed at a market where trends move rapidly. Product development and innovation are therefore a high priority and a continuous process. Glulam operations have for several years been at the forefront in the development of new products and technical solutions, and have completed several major innovation projects in recent years, both alone and in cooperation with customers.  The development of the hub technology forms the basis for glulam bridges and halls with large spans, as well as buildings with multiple storeys. Examples of the latter are the 14-storey “Treet” in Bergen and the planned “Mjøstårnet” in Brumunddal which will be 18 storeys.

«Mjøstårnet» - The world's tallest wood building, scheduled for completion in 2019. Moelven Limtre AS will supply and assemble all wood structures in the period from September 2017 to April 2018. Illustration: Voll Arkitekter

At Moelven Wood product development is of great importance in order for the choice of products to both follow the shifting market trends and satisfy requirements toward quality and functionality.

The goal is to offer customers the market's best, most diverse and most modern product range in wood. Innovation work is divided into two main directions. One aims to develop modern products that contribute towards inspiration and new trends at the end-user. The other main direction aims to simplify work with the products at the building site. Examples of such solutions are preprocessed internal panels with concealed nails, various floor solutions, sheet products with reduced widths to ease handling, ready cut lengths, etc.

Process innovation

For the project part of the glulam business, the use of new technology to process individual elements in the load-bearing structures is a precondition to provide complex, high-quality systems. For the part of glulam that is directed at the building products trade and for the processing units at Wood, the logistics systems are of great significance for reducing the cost and environmental effects of transport and for ensuring the customers' access to a wide range of products with short delivery times. Work on optimising the logistics systems is therefore continuous.

For the sawlog-consuming units in Timber and Wood, it is primarily the optimisation of the production processes that is of key importance. The objective is to safeguard the values inherent in the raw material. The use of X-ray photography, camera sorting and mechanical strength sorting are tools that contribute to this. The use of modern information technology also provides new opportunities in the timber processing industry. In 2016 an investment project was started at Moelven Valåsen AB, where digitization is a key area. On the IT side the main goal is to contribute to optimizing value added at the plant by linking information flows and establishing an IT infrastructure that is capable of handling “Big Data”. The project is one of eight innovation projects in Swedish industry that has been granted subsidies from state-owned Vinnova following “The smart digital factory” announcement.

For the Module and Interior operations, the development and refinement of technical solutions for production, connection of technical installations and assembly at the building site have been important to operate profitable industrial production of module-based building solutions, as well as to exploit the competitive advantage inherent in fast completion at the building site.

In connection with the conversion of Moelven Byggmodul AB's production facility in Säffle, new and improved production equipment was developed in cooperation with local suppliers. Besides capacity and efficiency improvements, the utilization of robot technology has enabled major improvements in HSE and logistics. The project will be completed in the second quarter of 2017. After completion, the facility will be used as a template for future similar investment projects at other facilities.

Automated production line for wall elements at Moelven Byggmodul AB i Säffle. The use of robots also yields safety improvements through a reduced risk of injuries and a better indoor climate through more powerful extraction and humidification. Photo: Lars Hartman

Corporate governance

Corporate governance at the Moelven Group is based on the current Norwegian recommendation for corporate governance of October 2014. The Board's report on the Group's policies and practice for corporate governance in accordance with section 3-3b of the Norwegian Accounting Act has been incorporated into the report on corporate governance. For further information about the Board and senior executives, refer to note 28.

Allocation of the net profit/loss for the year

The Board of Directors' dividend policy is based on Moelven's shareholders receiving a predictable and satisfactory cash return on their share investment. The policy provides guidelines for how much of the profit, or of distributable equity in years with a loss, shall be distributed as a dividend. The Group's net profit for 2016 was NOK 179.1 million (117.0). The equity ratio was 38.0 per cent (36.8 per cent). The Group has adequate equity to disburse a dividend in accordance with the applicable dividend policy. Based on the results for 2016 and taking into account the normal seasonal variations in the Group's employed capital and equity ratio, the Board proposes a dividend of NOK 0.48 per share to the annual general meeting. This totals NOK 62,179,816.

The parent company Moelven Industrier ASA, which distributes a dividend for the Group, had a net profit of NOK 35.5 million for the year in 2016 after the receipt of group contributions and share dividends from subsidiaries. It is proposed that provisions for dividends that are not covered by the annual profit are covered by a transfer from other equity. The company has sufficient distributable equity and liquidity for the distribution of the dividend at the adjusted time for the decision on dividends.

Events after the balance sheet date

No events have occurred after the balance sheet date that affects the accounts that have been presented.

Going concern assumption

In accordance with the requirements in the Norwegian accounting legislation, the Board of Directors confirms that the prerequisites have been met for preparation of the accounts under the assumption that the Company will continue as a going concern and that the annual accounts have been prepared under this assumption.

Outlook

In Norway the mainland economy is showing signs of growth, and the decline in activity in the petroleum sector has slowed. In Sweden expectations toward activity have been turned down a notch following a period with very high activity. The rest of Europe continues with a marginal positive growth rate. In USA the economy is still on the mend. Growth in China continues to slightly drop, while there are indications of higher activity in the rest of Asia. The Middle East and North Africa are still characterized by unrest and regulations from public authorities that complicate international trade. However, the underlying demand is good in the latter markets.

Positive and stable developments in the international market for industrial wood are expected.

The currency situation continues to contribute to maintain competitive ability in export markets, particularly for the Group's Swedish businesses where trading is in EUR or USD. Swedish units have also achieved a significantly stronger competitive position in the Norwegian market. Hedges in GBP that were made at exchange rate levels before the Brexit referendum have now been realized, but price in GBP have increased and thus compensate for parts of the margin shortfall as a result of currency fluctuations.

In Norway demand for processed products is expected to remain on a par with the previous year, albeit with regional differences. Building activity in and around the major cities, with the exception of south-west Norway, is expected to remain high. In Sweden the need for new homes remains high and activity in the new building market is strong. The renovation, conversion and extension market is also experiencing good levels of activity, although the changes in the renovation, conversion and extension deduction have slowed activities somewhat. No major changes are expected in the markets, and the Swedish market is expected to be at the same level as 2016 overall. Sawlog inventories and access to sawlogs at the start 2017 are satisfactory with regard to planned production.

For glulam it is expected that the positive trend of choosing wood for load bearing structures will continue.

In both Norway and Sweden demand is good for module-based buildings for housing purposes. Demands toward short construction times are increasing. This applies equally to homes, schools and care facilities.

The market for Interior Systems is strong in Sweden, primarily in the Stockholm, Gothenburg and Malmø areas. After a period of decline in the Norwegian new build market there are signs of improvement, but pressure on prices remains high. Good activity is expected to continue in Norway and Sweden in renovation, conversion and extension.

For the Group as a whole revenues are expected to increase somewhat. The programme for operational improvement and structuring of the group in line with the long-term strategy plan continues unabated and will contribute to improved profitability for the underlying operations.

The Group's composition, with divisions that experience different impacts from economic fluctuations and units that operate in different markets, provides the Group with a good starting point for further improvements. The result for 2017 is expected to be somewhat better than for 2016. The Group has a long-term goal of a return on capital employed of 13 per cent over an economic cycle. The Board is of the opinion that the Group has sufficient solidity and long-term access to liquidity to implement the restructuring and improvement projects required to achieve this goal.

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