Operating revenues dropped compared to the same period last year as a result of lower activity in Building Systems and Timber. Higher delivery volumes and higher market prices for processed goods resulted in increased operating revenues for Wood. With the exception of operational disruptions resulting from the fire in the lumber dryers at Moelven Trysil AS, the second quarter was good in terms of operations. Cost levels were nevertheless too high at certain units, and this imposes requirements towards further efficiency improvement measures.
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 impacted the operating profit with a total of NOK -9.5 million (30.3 million) in the quarter, and NOK 0.0 million (41.7 million) for the first six months. 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 related to fair value assessments on unrealized financial instruments totalled NOK -4.6 million (NOK 16.0 million) for the quarter and NOK -10.0 million (NOK 50.0 million) for the first six months. For the second quarter the amounts include basis swap effects of NOK -0.5 million (0.1), and for the first six months NOK 17.6 million (26.4). 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.
Investments totalling NOK 171.5 million (NOK 82.7 million) were made during the second quarter, and NOK 228.4 million (NOK 191.4 million) during the first half of the year. The increase in the investment rate is taking place in accordance with the investment programme in the group’s strategy plan. The depreciations were NOK 76.3 million (NOK 69.8 million) in the quarter and NOK 153.1 million (NOK 140.8 million) for the first six months. At mid-year, the group's total assets were reported as NOK 6,035.1 million (NOK 5,433.0 million). In addition to high investments in 2019/2018 and the accounting effects of the implementation of IFRS 16 – Leasing, increased inventories are the main reason of the increase in total assets.
Cash flow from operating activities in the second quarter was NOK 178.6 million (NOK 340.9 million), corresponding to NOK 1.38 per share (NOK 2.63). Corresponding figures for the first six months were NOK 20.9 million (NOK 117.6 million), which is equivalent to NOK 0.16 (NOK 0.91) per share. The change compared to last year is due to natural fluctuations in working capital items. Cash flow from working capital items was NOK -12.3 million in the second quarter (NOK 105.0 million) and NOK -313.9 million year to date (NOK -250.3 million). Net interest-bearing liabilities were NOK 1,335.9 million (NOK 924.2 million) at the end of the second quarter. Financial leases are included in net interest-bearing liabilities in the amount of NOK 214.8 million (NOK 14.1 million). The reason for the increase is because after the implementation of IFRS 16 – Leasing, all leases are recognised in the balance sheet as debt-financed assets. The liquidity reserve was NOK 747.6 million (NOK 936.9 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 the second quarter amounted to NOK 2,341.1 million (NOK 2,143.0 million), which is equivalent to NOK 18.07 (NOK 16.54) per share. The equity ratio was 38.8 per cent (39.4 per cent). The dividend for the previous year of NOK 1.74 (0.68) per share, totalling NOK 225.4 million (88.1), was paid and charged to equity in the second quarter. 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 the second quarter, exchange rate fluctuations resulted in an unrealised change in equity of NOK -6.2 million (NOK -34.4 million). Year to date the change was NOK -64.0 million (-100.5 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.
Activity in the world economy has declined somewhat. The trade conflict between the US and China and uncertainty concerning Brexit are contributing to fears of a further slowdown, and several central banks have already cut interest rates and implemented other measures to stimulate the economy. In Norway the mainland economy is at a normal level, while activity in Sweden has declined. The rest of Europe still has a marginal positive growth rate.
Uncertainty related to the UK has not diminished with the change of prime minister. The consequences of a hard Brexit may lead to significant changes in trade with the UK, with possible ripple effects in the rest of Europe. Moelven has implemented measures to reduce the risk related to this.
In the USA the economy is still improving, although the growth rate is lower and uncertainty greater than previously. Moelven has only occasional deliveries to the United States, but the group sees a positive effect from an improved global market balance. The growth rate in China and Japan is decreasing, and is to a certain extent affected by the ongoing trade war between China and the US. In other parts of Asia there are signs of increasing activity. The Middle East and North Africa are important export markets for Moelven, but remain characterised by conditions that complicate international trade. However, the underlying demand is good in the latter markets. Positive and stable developments in international demand for industrial wood are expected.
Both NOK and SEK are wakened against most currencies except the GBP. This improves competitiveness on the export markets.In Norway demand for processed products in 2019 is expected to remain on a par with 2018, albeit with regional differences. Construction activity in and surrounding the major cities is expected to remain high. In Sweden the need for new homes remains high, but activity in the new building market remains hesitant as in Norway. The order situation for building module operations remains weak, and it is taking a long time to finally clarify the projects that are on the market. Activity in the renovation, conversion and extension market remains good. Increased interest for wood as a building material contributes to maintain activity levels.
Sawlog inventories and access to sawlogs at the start of the third quarter 2019 are satisfactory. However, in Sweden increased harvesting of spruce to avoid powder-post beetle attacks has led to a certain reduction in the supply of pine. Some uncertainty remains in relation to further developments in the market as a result of the powder-post beetle attacks. In addition the situation is affected by major storm fellings in certain areas in Europe.
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 group has a long-term goal of a return on capital employed of 13 per cent over an economic cycle. Parts of the strategic programme for operational improvement and structure of the group are being pushed ahead to counter weaker economic developments than assumed by the strategy plan. This will contribute to continued strengthened profitability in the underlying operations. The Board is of the opinion that the group has adequate solvency and access to liquidity over the long term to introduce the necessary measures to develop the group in line with the strategy plan. For 2019 the Board expects a somewhat lower activity level than in 2018 in some of the market segments, and an overall weaker profit as a consequence of economic developments.