Corporate governance

There have been no changes to the board of directors in 2018. The board has consisted of Olav Fjell (chairman), Trond Stangeby (deputy chairman), Elisabeth Krokeide, Aud Ingvild Storås, Asbjørn Bjørnstad, Martin Fauchald and Lars Håkan Karlsson.

Corporate governance at the Moelven Group is based on the current Norwegian recommendation for corporate governance of October 2018. 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 board’s account of corporate governance on page 37. Comprehensive information on the group’s governing bodies is published at www.moelven.no and in note 27.
 

Corporate structure

Moelven Pellets AS, which was established on 20 June 2018 to manage construction and operation of the new pellet factory and energy centre in connection with Moelven Soknabruket AS.

On 30 June 2018 Moelven acquired all of the shares in the company Broberg Skogs AB in Torsby in Sweden from SB Skog AS. The company, which had 5 employees, operates within timber purchases and forestry management in northern Värmland, which is an important area for Moelven.
 

In September 2018 it was decided to close operations at Moelven Are AS in Spydeberg. The closure is a necessary measure to strengthen the Wood division’s overall competitive ability, but does unfortunately mean that 21 employees lose their jobs. Moelven Are AS has acted as a distribution centre in the Wood division with the Oslo fjord region as its market. The company also has a planing mill and a painting and impregnating facility. Operations at Moelven Are AS will be transferred to other units in the Wood division, among them Moelven Langmoen AS and Moelven Edanesågen AB. Moelven Langmoen AS is the division’s main distribution centre, and has in recent years invested significantly in a new and modern distribution and logistics system.

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 (15.9%), 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. Moelven offers a broad range of natural and climate-smart products, systems and solutions with associated services related to homes and holiday homes, module-based buildings, building interiors and load bearing structures. 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, conversion and extension 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.

Location

The group has its headquarters in Moelv in Norway and consists of 36 production companies in 45 production locations, and a number of 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, the Netherlands and Poland. 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 3,524 (3,546) employees at the end of 2018, 1,696 (1,662) work in Norway, 1,797 (1,856) in Sweden, 21 (20) in Denmark and 10 (8) in other countries.
 

Divisions

The group is divided into three divisions: Timber, Wood and Building Systems, each of which focuses on one of the main segments of industry, trade and project. There is also an Other Businesses reporting area, which consists of the holding companies with group functions, supply businesses, fibre products and bioenergy companies.

Timber

The Timber division consists of 11 production companies and 5 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 2018, there were 620 (650) employees, 249 (242) of them in Norway, 361 (400) in Sweden and 10 (8) in other countries.

Wood

The Wood division comprises 17 production companies, 3 customer centres and one project sales company. The main products are white and impregnated building wood, external cladding, plywood, length-adapted products and chip products, as well as interior products such as mouldings, flooring and interior panels. Wood also trades in purchased products. Around 75 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 2018, there were 1,108 (1,079) employees, 601 (581) of them in Norway, 486 (439) in Sweden and 21 (19) in Denmark.

Building Systems

The Building Systems division consists of 7 production companies at 12 production locations and a number of sales, service and fitting offices. Building Systems is divided into the business areas Glulam, Modular Buildings and Interior System, 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 2018, there were 1,647 (1,687) employees, 788 (783) of them in Norway and 859 (904) 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 to some extent. 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 Businesses

Other businesses include Moelven Industrier ASA, with shared 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 are included with the companies Moelven Skog AB, Broberg Skogs AB, Moelven Virke AS, Vänerbränsle AB and Moelven Bioenergi AS. In addition there is the affiliate Weda Skog AB. Moelven Pellets AS, which was established in June to manage construction and operation of the new pellet factory and energy centre in connection with Moelven Soknabruket AS, is also included in the area, but as of yet with no result items of significance. At the end of 2018, there were 149 (130) employees, 58 (51) of them in Norway and 91 (79) 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. Refer to the sustainability report for 2018 for details.

Operating revenues and results

årsberetning Driftsinntekter og resultater konsern EN

Operating revenues in 2018 increased by 2.3 per cent compared to 2017. The backdrop is increased finished goods prices for both sawn timber and processed wood products. Sawn timber is the main product of the Timber division, and increased prices are an important cause of improved revenue for both the group and the division itself. Sawn timber is an important input for many of the companies in Wood and Building Systems, and price developments for sawn timber are thus also one of the causes for increased raw material costs in these divisions. Raw material costs also rose for the sawlog-consuming parts of the group compared to 2017. The prices for chip and fibre products also increased and reduced the cost effect from increased sawlog prices.

The operating result for 2018 increased by 39.4 per cent to NOK 586.2 million (420.4) and the operating margin improved to 5.3 per cent (3.9). The operating result for 2018 includes impairments totalling NOK 66.1 million as a result of restructuring, and that indications of reduction in value were revealed in connection with impairment testing of fixed assets, and the fact that the value of future cash flows is lower than the book value. The operating result for 2017 includes a charge from the third quarter of NOK 46.1million. The background for this is the decision to close Moelven Norsälven AB from the turn of the year, in addition to a resolved dispute related to a larger project in Building Systems.
 

The FIFO principle requires that inventory calculations are adjusted in line with developments in raw material costs. Along with an update of real value assessments of inventory, this has provided a positive effect totalling NOK 88.6 million (39.7) for the year. The items do not have any impact on cash flow.
 

The group employs financial instruments as a hedge against short-term fluctuations in foreign exchange rates, interest rates and power prices. Non-cash items connected to fair value adjustments on unrealised hedging instruments comprised NOK 51.5 million (-4.7) The amounts include basis swap effects of NOK -0.2 million (-8.5 million). Basis swaps are hedging instruments that when viewed for the entire term have a market value change equalling zero, and where the accounting effect therefore is reversed over time. The financial results for 2017 were positively impacted by NOK 9.6 million as a result of a reversal of previously allocated warranty costs. 

Timber

årsberetning timber tabell 1 E

Market activity and demand in the division’s main markets was good in 2018, with normal seasonal variations throughout the year. Internationally, demand is seeing a positive impact from activity levels in the global economy in general. In addition to being a good building material that is in more and more demand, wood is also widely used for packaging. The good demand for all qualities and assortments, in combination with low inventories in the production stage for most of the year, resulted in a further increase in prices for sawn timber. This is the main cause of the increase in operating revenues compared to 2017. Delivery volumes dropped somewhat in 2018, mainly due to there being one less production unit in the division in 2018 following the discontinuation of production at Moelven Norsälven AB in the fourth quarter of 2017.

The implementation of internal improvement measures resulted in an improvement of underlying operations at many units. Operating costs were nevertheless somewhat higher than in 2017, mainly due to extended maintenance budgets in a period of good earnings and cash flow. In addition there were some operational disruptions at certain units, including as a result of fire. On 30 March there was a fire in the bioenergy plant at Moelven Valåsen AB. No one was injured during the fire. At the time the plant was not owned by Moelven, but was taken over with effect from 1 December 2018. The heat energy from the plant is essential for the operation of the lumber dryers. In the beginning of April a backup solution with oil heating was in place, and production could proceed as normal. The fallback solution was used in April and May until the bioenergy plant was repaired and brought into use again in the beginning of June. On the night before 24 November a fire broke out at the dry sorting line at Moelven Notnäs Ransby AB, Ransby department. No-one was injured as a result of the fire here either. However, the dry sorting line sustained significant damage and will be out of service until the summer of 2019. The damage is covered by the group’s damage and consequential loss insurance, but the deductible was expensed in the quarter. The saw line was not damaged in the fire, and production has proceeded almost as normal by exploiting dry sorting and packing capacity at other units in the group. The reconstruction of the dry sorting line is expected to be completed in the summer of 2019.

Although developments in results for the division has been very good in recent years, there are still areas and units with a potential for operational improvements. Continuous improvement work is key to the division’s action and strategy plans. In all improvement work, much emphasis is on assessing how new technology may be adopted to ensure future-oriented development opportunities for the company with regard to capacity and value creation. Examples of projects where this has been carried out successfully are “The Dital Sawmill” at Moelven Valåsen AB and the investment in a new timber intake with an X-ray measuring frame at Moelven Våler AS. Both projects have been significant investments, but they have provided valuable experience and expertise that may also be utilised in smaller improvement projects.

Sawlog inventories at the start of the year were satisfactory with regard to planned production levels for the winter of 2018. Sawlog access during the winter months was normal for the season, although large snowfalls provided certain logistics challenges in some regions. The dry summer led to a great risk of forest fires and caused a challenging supply situation in some locations. With somewhat more precipitation as the autumn progressed, the risk of forest fires however decreased and led to a normalisation of the supply situation. At the end of the year, sawlog access was satisfactory and inventories were somewhat higher than at the beginning of the year. Both sawlog prices and prices for chip and fibre products have been higher in 2018 than the previous year.

Due to price developments, the profits have seen a positive effect of a value adjustment to inventories totalling NOK 12.3 million. The corresponding price adjustment in 2017 was NOK 15.1 million.
 

The result for 2017 includes impairment of fixed assets and cost provisions from the third quarter related to the closure of Moelven Norsälven AB totalling NOK 29.0 million.

Wood

årsberetning wood tabell 2 E

Around 80 per cent of the sawn timber and building products production of Wood is sold through the building products trade in Scandinavia. The remainder is mainly sold to industrial customers, both in the form of sawn timber, chip products and processed goods. Sales of custom products such as surface-treated or cut-to-length products is on the increase.

The 2018 winter season was cold with large amounts of snow, which somewhat reduced market activity in the first part of the year. However, activity and demand picked up towards normal levels towards the end of the first six months. Following a very dry and warm summer that reduced activity and demand for building products in July, demand developed positively as the second half of the year progressed. For sawn timber from the division’s sawlog-consuming units the external delivery volumes were somewhat lower than the previous year due to assigning priority to internal deliveries for processing.

The increase in operating revenues is attributed primarily to the development of the prices. Finished goods prices were higher in 2018 than in the previous year, after several price increases were implemented to follow international price developments in sawn timber, which is most important raw material for the planing mills in the division. The price increase for sawn timber internationally has however been greater and has taken place faster than has been possible to compensate through increased market prices for processed goods. Pressure on margins for the planing mills has therefore been greater than among the sawlog consuming units.

At the division’s sawlog consuming units, the combined plants, one of the main tasks of saw production is to ensure local access to high quality raw materials for the units’ own planing production. A part of the sawn timber produced is however sold externally. This has contributed to good results throughout 2018. Sawlog inventories at the start of the year were satisfactory with regard to planned production levels for the winter of 2018. Sawlog access during the winter months was normal for the season, although large snowfalls provided certain logistics challenges in some regions. The dry summer led to a great risk of forest fires and caused a challenging supply situation in some locations. With somewhat more precipitation as the autumn progressed, the risk of forest fires however decreased and led to a normalisation of the supply situation. At the end of the year, sawlog access was satisfactory and inventories were somewhat higher than at the beginning of the year. Both sawlog prices and prices for chip and fibre products have been higher in 2018 than the previous year.

Due to price developments, the profits for 2018 have been positively affected by a price adjustment to inventories totalling NOK 76.3 million. The corresponding price adjustment in 2017 amounted to NOK 24.6 million.

In September 2018 it was decided to close operations at Moelven Are AS in Spydeberg before year-end. Unfortunately the decision means that 21 employees will lose their jobs, but it is a necessary measure to ensure Moelven’s long-term competitiveness. Moelven Are AS has acted as a distribution centre in the Wood division with the Oslo fjord region as its market. The company also has a planing mill and a painting and impregnating facility. Operations at Moelven Are AS will be transferred to other units in the Wood division, among them Moelven Langmoen AS and Moelven Edanesågen AB. Moelven Langmoen AS is the division’s main distribution centre, and has made significant investments in the past year in a new and modern distribution and logistics system. In connection with the decision to close Moelven Are AS, operating income has been charged with a total of NOK 13.6 million.

In connection with the annual settlement, impairment tests have been carried out on the fixed assets. In connection with this, it has been concluded that there are indications that the value of future cash flows are lower than the book value. On the basis of the indications of reduction in value, impairments of NOK 52.5 million have been implemented.
Although underlying operations are improved compared to 2017, the impairments resulted in returns on capital employed for the division ending below the target level overall. All companies are subject to continued stringent requirements toward improvements and rationalisation. This work entails substantial investments at certain facilities, but also structural changes. In a period of good earnings and cash flow, some maintenance work has been moved forward. This has led to a higher level of costs than in the corresponding period the previous year, but also provides operational improvements in the time ahead.

Finansparken Bjergsted. Picture: 3D4D.no/SpareBank 1 SR-Bank

Building Systems

årsberetning byggsystemer tabell 3 E

Both activity levels and operating income dropped compared to 2017, mainly due to a lower activity level. For the division as a whole, the order backlog at the end of the quarter was NOK 510 million lower than at the same time the previous year. The main cause of the decline is somewhat lower market activity in certain segments. Work is ongoing to improve the order backlog.
 

For Glulam operations demand has been satisfactory in 2018, largely driven by increasing focus on climate-smart solutions. In Norway there is also significant activity in infrastructure, which in turn results in good demand for glulam bridges. Contracts have been signed for several larger bridges that ensures a good level of activity through the winter, which is a period ordinarily characterised by somewhat lower activity. In terms of results, business in both Norway and Sweden is characterised by increased raw material prices and cost overruns on individual projects. For business in Sweden the competition situation is more demanding than on the Norwegian side of the border, and market activity is declining somewhat. For the year as a whole, challenges related to raw material supplies have additionally led to unsatisfactory utilization of production capacity.

In the Modular Building  business, activity levels dropped during the year. The causes are primarily a slightly weaker economic situation in Sweden and some delays in several projects on the way to market. Some compensation may be attributed to an increasing interest in building with wood and modules, but overall the drop in activity has made it necessary to reduce capacity utilisation at the plants somewhat. Due to a reduced order intake and delays in certain projects, Moelven Byggmodul Hjellum AS laid employees for four weeks with 80% of the workforce for four weeks from the second week of 2019. The remaining 20 per cent will be used for training and other skill-enhancing measures in the layoff period.

The project organisations in the business area are strengthened to ensure execution and earnings in the projects that are carried out. For the Norwegian part of the business there have been some challenges related to groundworks at building sites. This is work that is mainly carried out by subcontractors. An important focus area in the time ahead is therefore to improve expertise in this area, and measures have been implemented to improve quality assurance of the entire process from planning to final inspection.

For the interior system business – Moelven Modus – demand remains good in the major cities in Norway and Sweden, as well as in southern Norway. Prices are however under pressure, particularly in Sweden where the market is characterised by a somewhat hesitant attitude. After several years of growth, the business is focusing on developing expertise and consolidation of the organisation that has been built.

The division’s results in HSE, and in particular the injury rate, has not been satisfactory. Efforts in HSE work will therefore intensify further, which is also expected to have a positive impact on profitability in general.

The operating result for 2017 has been charged with cost adjustments totalling NOK 17.2 million following the conclusion of a dispute.
 

Other businesses

årsberetning øvrige tabell 4 E

Fluctuations in operating revenues in the area of Other Businesses are largely fluctuations in the level of activity within timber supply and sales of wood 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 sawlogs 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

Investments, balance sheet and financing

During 2018, total investments were NOK 497.4 million (NOK 357.0 million). The increase in the investment rate is taking place in accordance with the investment programme in the group’s long-term strategy. The main proportion of the increase in investment activities compared to the previous year is the investments in new sawlog sorting with X-ray technology at Moelven Våler AS and a new pellets factory and energy centre in connection with Moelven Soknabruket AS. The projects are included with NOK 55.5 million and NOK 57.9 million respectively in the investment volume for 2018.

Depreciations and impairments for 2018 were NOK 346.5 million (295.7). For 2018 accumulated depreciations and impairments include a total of NOK 66.1 million in impairments. NOK 13.6 million is related to the closing down of Moelven Are AS that was decided in the third quarter, while NOK 52.5 million are impairments on fixed assets based on indications of reduction in value. Accumulated for 2017 this includes depreciation of fixed assets by NOK 17.4 million related to the liquidation of Moelven Norsälven AB which was decided in the third quarter of 2017.

At the end of the year, the book value of the group's total assets was NOK 5,302.3 million (NOK 5,044.6 million).

Cash flow from operating activities was NOK 653.1 million (676.2) in 2018, corresponding to NOK 5.04 per share (NOK 5.22). The change compared to last year is due to natural fluctuations in working capital items. Cash flow from working capital items was NOK -167.5 mill (48.7).

Net interest-bearing liabilities were NOK 721.4 million (NOK 761.7 million) at the end of the year. Financial leases are included in net interest-bearing liabilities in the amount of NOK 43.4 million (NOK 19.8 million). The increase is due to the fact that in connection with the work that was carried out as a preparation for the transition to a reporting standard for leasing from 2019, (IFRS 16 – Leasing), a reclassification has implemented for some leasing contracts for rolling stock from operational to financial leasing. The liquidity reserve was NOK 1,239.4 million (NOK 1,172.0 million). In the group's main financing the available loan facility varies in time with the natural fluctuations in the group's tied-up capital through the year.

Equity at the end of 2018 amounted to NOK 2,435.3 million (NOK 2,092.5 million), equivalent to NOK 18.70 (NOK 16.08) per share. The equity ratio was 45.9 per cent (41.5 per cent). The dividend for the previous year of NOK 0,68 (0.48) per share, totalling NOK 88.1 million (62.2), was paid and charged to equity in the second quarter of 2018. 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 scope and consequences of likely exchange rate fluctuations are within acceptable risk limits. In 2018, exchange rate fluctuations resulted in an unrealised change in equity of minus NOK 17.3 million (NOK 41.9 million). Approximately half of the group's assets are recognised in SEK. The total assets thus also change based on the exchange rate, and 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.

årsberetning Risiko Sensitivitetstabell E

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 4.5 million cubic metres spruce and pine sawlogs 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 sawlogs. Moelven does not own any forest, but buys all its sawlogs 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 sawn timber and pulpwood. The cost of sawlog 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 sawlog 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 this is used for our own energy production, while the

rest is sold to the particle board, bioenergy and fibre 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. About 210 GWh of electric power a year is bought via the group's electricity suppliers on the Nasdaq OMX Commodities exchange.

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 bulk of the debt 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 total duration should be minimum of 12 months and maximum 60 months. It shall not be entered hedging agreements with a maturity of 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. A large part of equity is secured against this in that share investment in most of the group's Swedish subsidiaries is financed in Swedish krona. At the end of 2018, the total equity that is exposed to exchange rate risk amounted to SEK 1,371.5 million (SEK 1,028.7 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. Once the loan agreement’s option to extend the term was used in the second quarter of 2017, maturity is in June 2020 with the possibility for a further extension of one year until June 2021.

The loan agreement includes normal default clauses with regard to dividends, equity, net equity value and debt ratio. As at 31 December 2018, the group's key figures were significantly better than the levels at which the default clauses are triggered. In addition to the long-term drawing facilities, the group also has short term credit facilities in its bank 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.
Two plants, Moelven Valåsen AB and Moelven Notnäs Ransby AB, Ransby department, suffered fires in 2018. These were fires that may be characterised as large, which is to say greater then NOK 10 million. At Valåsen the fire broke out in the heating installation on 30 March and caused operational disruptions before a mobile heating plant was in place. At Ransby a fire broke out at the dry sorting line on 24 November, with the result that the dry sorting line was out of service. Using established continuity plans, the operational disruptions in both cases were limited by using capacity at other plants.
 

IT
In an increasingly connected world with increasing digitization both in general in society but also in businesses like Moelven, an ongoing assessment of IT risk is important. Interconnected value chains increase efficiency, productivity and quality, but also increase vulnerability to digital service outages. With increasing threats both domestically and internationally and recent years media reported incidents following IT attacks against businesses and public institutions, Moelven devoted extra attention to IT security and risk last year. Moelven follows basic principles of IT security, and constantly works to identify and monitor risks, protect systems and data, maintain IT security and prepare and manage any incidents and recover from these.

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 related to environmental impact. One of the purposes of the group's sustainability policy is to minimize the risk of negative impact on the natural environment and thus the potential environmental cost as well.

Climate risk

Moelven has for more than 100 years operated an industry closely linked to the forest’s natural resources, and where climate and weather conditions play an important role both with regard to raw material access and operational conditions at the plants. Keeping track of how the climate impacts the business and provides both risks and opportunities, has therefore long been a natural component of both strategy work and operations. Historically the risks have been relatively stable and mainly related to raw material supplies in the short term and flooding. As climate changes have accelerated and become more pronounced, risks have changed. More risks have arisen, and long-term uncertainty has increased. In some areas ongoing risk-reducing measures are implemented, for example due to the flooding risk that has increased noticeably in recent years. Up until 2018 Moelven Trysil AS had been affected by flooding in 3 of the 4 last years, which is significantly more frequently than normal. In order to ensure continued operation and development of the plant, it was completely necessary to implement measures to prevent damage and operational disruptions as a result of spring flooding, and with the support of half of the investment from NVE a flood bank was built that was completed in the spring of 2018. The new flood bank prevented a stop in production when the spring flood in the Trysil river reached a level that previously would have led to flooding and up to several weeks halt in production. Flooding is an area where it is to a certain extent possible to implement risk-reducing measures, but there are other areas where this is more complex. The summary below shows examples of identified climate risks the group is following:

• Flooding of industrial plants
• Extreme weather conditions that affect raw material access. This can be both storms that damage the forest, precipitation that complicates felling and removal of timber, drought that increases risk of forest fire, etc.
• Changing weather conditions will change requirements to products that are used outdoors and product packaging for products that are stored or transported exposed to the elements.
• Extreme weather that damages plants and/or inventories outdoors.
• Changed raw material access as a result of regulatory changes related to e.g. felling volumes.
• Changed raw material quality as a result of climate changes.

Increased awareness of climate challenges also opens up opportunities for Moelven. The group’s products are based on a natural and renewable raw material, which also has important properties as a carbon repository. The increased use of wood from Sustainable forestry as a building material can contribute to reducing the CO2 content in the atmosphere, and thus act as a part of the solution to the climate challenges. Moelven wants to contribute to this through active focus on sustainability work and the continuous development of new products and services in the use of wood

Employees, health, safety and the environment

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 views innovation as the entire process from an idea arises until the customer has bought a new product that represents an added value, or a new production process is implemented. Moelven's innovation focus is mainly to engage in development and innovation linked to a specific application of a product or in a production process. The group does not engage in basic research by itself, but participates in projects where this is deemed appropriate. The R&D projects must contribute to strengthen the various business areas in the group and reduce business risk. This may also entail participation in innovation projects outside of our own value chain, but in projects that support Moelven’s operations and opportunities for growth. One example is the two ongoing projects at Moelven Töreboda AB to develop and improve building systems and acoustics in tall wooden buildings. This will contribute to improve Moelven Töreboda’s self-developed system Trä8 further. The two projects were started in October 2017, and will continue for five and three years respectively. The “Prowood” project is being carried out in cooperation with Företagsforskarskolen Prowood, where the purpose is to support and increase the competitive strength of the Swedish timber industry. The project is included in the European “Acoutect” project, which is a partnership between 12 European universities and businesses, including Chalmer’s Tekniska Högskola and Eindhoven’s Tekniska Högskola. Two doctoral fellows have been hired for the project, which ties activities to the remaining academic community.

Another research project where Moelven is a participant is “BioNext.” This is a research project under the auspices of the Research Council of Norway and the Norwegian University of Life Sciences (NMBU). The other participants in the project are Sintef Energi AS, Statkraft Varme AS, Handelshøyskolen BI, Avinor AS, Glommen Skog AS, University of Utrecht and Linneuniversitetet. The main objective of BioNext is to identify 0and assess commercial, regulatory and technical solutions towards a finacially viable forest bioenergy sector.

In order for the group’s mission statement to “give people good rooms” is to be upheld over time, it is essential that products and processes continuously develop in step with the outside world. Responsibility for innovation is with corporate management. The group must facilitate innovation and provide resources, support and coordination. The innovation processes are conducted in the individual business areas where expertise is greatest. Where there are larger parts of the Moelven group that will benefit from the innovation area, joint projects are carried out. Examples of this is the in the research centre FME ZEN (Zero Emission Neighbourhood), which shall develop zero emission solutions for urban areas. Over a period of 8 years, and with a budget of NOK 400 million, the centre shall find smart solutions for everything from production and distribution of heat and electricity within neighbourhoods, to find tools for planning zero emission areas. Moelven’s expertise in using wood in buildings contributes to build pilot areas with climate-smart materials and to document the CO₂ benefits.

Moelven is also co-owner of Norwegian Wood Cluster SA (NWC), which is an industrial cluster in the forestry and timber industry value chain. NWC is owned by Hunton Fiber AS, Forestia AS, Boligpartner AS, Moelven Industrier ASA, Gausdal Bruvoll SA, Mjøsen Skog SA, Glommen Skog SA, Statskog SF and NTNU.. NWC is registered as a cooperative enterprise with a non-financial object with offices at Mustad Næringspark in Gjøvik.

The cluster agreement was signed on 13 February 2017, the company was founded on 9 August 2017 and started operations on 1 September 2017.

NWC’s objective is to develop the cluster through close cooperation into an internationally leading industrial cluster for industrial, sustainable wooden buildings. The cluster partnership aims to give participants access to key production factors, ideas and impulses for innovation through interaction and cooperation, increase added value and profitability amongst the cluster partners and promote their common interests to public authorities. Moelven’s participation in Norwegian Wood Cluster will provide the group with a platform for development along with other players and be an important contribution to the group’s R&D work going forward.

Through its subsidiary Moelven Van Severen AS, Moelven is also a partner in ARENA SKOG, which is a complete forestry and wood-based industry cluster based in Trøndelag. The Arena project will give the cluster an extra boost and support the aggressive development already underway to increase the use of wood and wood fibre in existing and new product and market areas. The potential is considerable. This not only contributes to larger market areas for the forestry industry, but also to making other industries more sustainable , in keeping with the premises of the bioeconomy.

Procss development and innovation

The laminated timber area has been at the forefront of developing new products and technical solutions for many years. It would not have been possible to build the world’s tallest wooden building, the 85.4 metre tall Mjøstårnet in Brumunddal, as it stands today without technical solutions developed by both Moelven Limtre AS in Moelv and Moelven Töreboda AB in Töreboda. The Trä8 system, which is a key component of Mjøstårnet, has been under development at Moelven Töreboda AB for several years. Trä8 is a glulam-based building system for tall wooden buildings. In addition to the actual glulam structure, the system takes into account modern requirements with regard to fire safety, acoustics and engineering methods. The joint technology used in the joints of the large load bearing structures was developed at Moelven Limtre AS in connection with construction of the skating rinks for the Olympic Games in Lillehammer. Fire safety is very important, and is one of the advantages of glulam. Glulam is a compact material, and in the event of a fire, external charring of the glulam will act as insulation and cause the core temperature to rise very slowly. This means that a glulam load bearing structure retains its load bearing properties very well in the event of a fire. The structures in Mjøstårnet are scaled to withstand a full fire in a fire cell without causing the building to collapse.
 

In 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. Development may focus both on design, use of material, environmental properties and degree of processing. One example is surface-treated cladding where demand has increased rapidly. Because surface treatment takes place industrially and in a controlled environment, the production process becomes more environmentally sustainable while also providing more added value for 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.

Product development and innovation

The Moelven group continually works to rationalize and improve processes at all stages from purchasing to finished product. 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 in Wood, the logistics systems are of great importance. Efficient transport provides reduced costs and environmental impact, while the customer is ensured access to a broad product range with short delivery times.

An important focus area in the development of the group is to employ new technology and exploit the opportunities inherent in new digital solutions. In the project “The Smart Digital Sawmill,” Moelven has collaborated with a handful of technology partners in linking the entire value chain at Moelven Valåsen AB to a Big Data solution. Real-time data from all underlying systems and machinery are fed into one and the same system, where advanced analysis and machine learning technologies exploit the information in ways one has previously been unable to do. Identified patterns and achieved results were presented at the Trä & Teknik trade fair (Wood and technology) in Gothenburg at the end of August 2018. “The Smart Digital Sawmill” now comprises the template for deploying similar solutions at several of the group’s companies.

For the sawlog-consuming units in Timber and Wood, it is primarily the optimisation of the production processes that is of key importance. The goal of safeguarding the values inherent in the raw materials is key with regard to both environmental and financial sustainability. The use of X-ray photography, camera sorting and mechanical strength sorting are tools that contribute to optimizing raw material utilization. At Moelven Våler AS in Braskereidfoss, Norway’s first X-ray sorting of sawlogs arrived in 2018. Here every log is analysed, so that it may be used most efficiently. This means less waste and better utilisation of the natural resource.

In 2018 the use of the downtime system Axxos has been developed and new functionality and associated concepts are in use. The system will make it easier to identify causes of lost time or lost operational availability, so that measures for process or machine improvement can be implemented. To gain a better overview of machinery installations and thus more efficient maintenance, towards the end of 2017 a pilot project was started to assess maintenance systems. The results were evaluated in mid-2018, and it was decided to introduce the selected maintenance system at several units. At the end of 2018 implementation has been started for a further 5 units. The maintenance system is fully integrated with the downtime system, so that necessary maintenance may be implemented as quickly and smoothly as possible to remedy deviations identified in the downtime system.

For the module and interior businesses it is important to exploit the competitive advantage inherent in the module concept rather than traditional building concepts: Industrial production of the modules indoors and shorter overall building time because several processes can take place simultaneously, and the modules can be quickly assembled at the building site. Development and refinement of technical solutions for production, connection of technical installations and assembly at the building site is important to operate profitable industrial production of module-based building solutions, and to exploit the advantages the concept provides. 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 robot line, which was a significant part of the project, was then the first delivery of Randek AB’s ZeroLabor Robotic System. In November 2018 this system was nominated amongst the “Top five innovations” through the American organization Hive 50, and it is the first time an innovation outside of the USA has been nominated. The industrial mindset and experiences from the project in Säffle have been used as a template for investments in a robot line at the module factory in Moelv.
 

The project, which has been very successful, was completed in the spring of 2017 and was the reason Moelven Byggmodul AB was named “Lean builder of the year” at Byggegalan in Stockholm on 27 March. The award is presented by Lean Forum Bygg and the Byggindustrin journal.
 

Allocation of the net profit 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 2018 was NOK 451.2 million (293.0). The equity ratio was 45.9 per cent (41.5 per cent). The group has adequate equity to disburse a dividend in accordance with the applicable dividend policy. Based on the results for 2018 and taking into account the normal seasonal variations in the group's employed capital and equity ratio, the Board proposes a dividend of NOK 1.74 (0.68) per share to the annual general meeting. This totals NOK 225,401,834.

The parent company Moelven Industrier ASA, which distributes a dividend for the group, had a net profit of NOK 312.7 million for the year in 2018 after the receipt of group contributions and share dividends from subsidiaries. The company has sufficient distributable equity and liquidity for the distribution of the dividend.
 

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