MANAGEMENT REPORT

SKANO GROUP AS UNAUDITED THIRD QUARTER 2018 RESULTS

Consolidated net sales for Q3 2018 were € 3.71 million, being a 9% decrease compared to the same period in 2017. The decline in sales of fibreboards was mainly caused by reduced demand for single family dwellings in Fibreboard’s largest market, Finland. Sales to customers in our other markets showed a slight increase. Furniture wholesale sales were negatively impacted due to weak performance by three of the four key furniture customers. We are working to secure more customers. Furniture retail sales also showed contraction, mainly due to the temporary closure of our best performing shop for total refurbishment caused by the introduction of Skano’s new retail concept.

Skano Group recorded EBITDA of positive € 46 thousand for Q3 2018 (vs € 292 thousand Q3 2017). Total furniture profitability was in line with Q3 2017 profitability, while Fibreboard profitability was substantially reduced due to the higher cost of its main raw material, woodchips. We are now in the process of passing on this cost increase to our customers. Net loss for Q3 2018 was € 211 thousand (Q3 2017: profit of € 14 thousand).

DIVISIONAL REVIEW OF THIRD QUARTER 2018

Fibreboard sales in Q3 2018 were € 2.92 million, which is 8% less than same period in 2017. We sold our products to customers in 29 countries. The sales decline in Finland outweighed the growth from the other countries, thus resulting in sales decline for Q3. Market statistics from AC Nielsen shows us having a steady market share of about 72% in the Finnish fibreboard market, thus the sales decline is due to a change in the housing industry in Finland with consumers moving into cities to live in apartments, instead of following the traditional way of building their own houses. Gross margin in Fibreboard were negatively impacted by the higher woodchip prices. Overhead costs were reduced, thus softening the negative impact on EBITDA, which ended up being € 141 thousand for Q3 2018 (Q3 2017 EBITDA was € 374 thousand).

Furniture wholesale sales in Q3 2018 were € 630 thousand, 12% down on same period last year. Total sales to our two main markets, Russia and Finland, were € 402 thousand (down € 91 thousand from Q3 2017). Sales to Skano’s own retail chain increased by 12% up to € 177 thousand compared to same period last year (Q3 2017: € 158 thousand). EBITDA for furniture wholesale for Q3 2018 was negative € 31 thousand (Q3 2017 EBITDA was negative € 74 thousand), reflecting the increased profitability achieved by ending our own kiln operations last Spring and instead now sourcing dried and cut material.

Furniture retail sales in Q3 2018 were € 333 thousand, down 11% (€ 41 thousand) from same period last year. Shops in all three Baltic markets experienced sales slowdown, and especially our best-selling shop in Tallinn which was temporarily closed due to extensive refurbishing as a result of introducing Skano’s new retail concept. EBITDA for furniture retail for Q3 2018 was negative € 50 thousand (Q3 2017 EBITDA was negative € 3 thousand), reflecting the weak sales in Q3.

Total Furniture operations of Skano (wholesale and retail) EBITDA for 2018 third quarter were negative € 81 thousand (Q3 2017 EBITDA was negative € 77 thousand).

BALANCE SHEET

As of 30.09.2018 the total assets of Skano Group AS were € 11.0 million (30.09.2017: € 11.9 million). The liabilities of the company as of 30.09.2018 were € 7.7 million (30.09.2017: € 7.9 million), of which Skano has borrowings of € 4.9 million as at 30.09.2018 (30.09.2017: € 5.3 million).

Receivables and prepayments amounted to € 1.6 million as at 30.09.2018 (30.09.2017: € 1.8 million). Inventories were € 2.4 million as of 30.09.2018 (30.09.2017: € 2.5 million). Property, plant and intangibles were € 7.0 million as of 30.09.2018 (€ 7.3 million as of 30.09.2017).

OUTLOOK

In Fibreboard, we are pushing for sales of our various applications which have more global reach than our traditional sales of windboards and insulation boards sold mainly in our traditional markets of Finland, Russia and Estonia. We are in process of implementing the annual price increases, thus aiming to alleviate the negative impact experienced from the higher cost of woodchips, our main raw material. Our marketing activities are focusing on the positive aspects of using our boards, made from fresh woodchips from spruce, compared to competing synthetic materials.

In Furniture, we expect improved retail performance with the introduction of the new shop concept. This has been rolled out in our best-selling shop in Tallinn as well as in our newly opened shop in the Decco centre in Riga and will next be rolled out in our Vilnius and Tartu shops. We are exiting our other Riga shop end of November, and also look to divest of our second shop in Tallinn due to its poor profitability. In wholesale we are in negotiations to take over certain European customers from our Finnish distributor, which should help expand our customer base and have potential to secure more sales of our furniture.

DIVISIONAL REVIEW
REVENUE BY BUSINESS SEGMENTS

PROFIT BY BUSINESS SEGMENTS

1. 
   SALES

The total sales of fibreboards for Q3 2018 were € 2.92 million, which are 8% down from Q3 2017 sales level (€ 3.17 million). We recorded solid sales increase in markets such as Portugal, Asia and Middle-East while sales were dropping in Finland and South Africa.

FIBREBOARD SALES BY GEOGRAPHICAL SEGMENTS

FURNITURE WHOLESALE SALES

Sales dropped to € 630 thousand in Q3 2018, down from € 715 thousand in Q3 2017. Russian consumer confidence is still negatively influenced by the sanctions imposed on Russia while in Finland our exclusive distributor is continuing with their restructuring. Skano’s retail shops in the Baltics recovered slightly from a very weak 1^st half of year, with more sales compared to Q3 2017.

FURNITURE WHOLESALE SALES BY COUNTRIES

FURNITURE RETAIL SALES

Skano Group retail business recorded sales of € 333 thousand in Q3 2018, which is 11% decline from Q3 2017. We started work in Q3 by introducing a more modern retail concept which provides furniture solutions for a family’s total living space, thus widening our furniture appeal from the historical more narrow focus on mainly bookshelves. The new retail concept was rolled out in our main Tallinn shop end of August, which meant closure of the shop for most of August due to the required refurbishment of the shop. The implementation of the new retail concept took place in our new shop in Decco centre in Riga, opened late October, and will be rolled out in our Vilnius and Tartu shops early next year. We will close our shop in the Spice centre in Riga end of November, and we are also seeking to exit our second Tallinn shop.  

RETAIL SALES BY COUNTRIES

*Ukraine retail operations divested in March 2017.

PEOPLE

On the 30th of September 2018, the Group employed 213 people (compared to 226 people as of 30.09.2017). The average number of personnel in Q3 2018 was 213 (Q3 2017: 231).

During first nine months of 2018, wages and salaries with taxes amounted to € 2.7 million (first nine months 2017: € 2.9 million). Payments made to management board members of all group companies including all subsidiaries with relevant taxes were € 136 thousand in nine months 2018 and € 152 thousand in nine months 2017.

FINANCIAL HIGHLIGHTS

EBITDA = Earnings before interest, taxes, depreciation and amortization
EBITDA margin = EBITDA / Revenue
Operating margin = Operating profit / Revenue
Net margin = Net profit / Revenue
Return on assets = Net profit / Total assets
Return on equity = Net profit / Equity 
Debt-to-equity ratio = Liabilities / Total assets
Earnings per share = Net profit / Total shares
Price-earnings ratio = Last price / Earnings per share 
Book value of a share = Equity / Total shares
Market to book ratio = Last price / Book value of a share
Market capitalization = Last price * Total shares
*http://www.nasdaqbaltic.com/

CONSOLIDATED STATEMENT OF FINANCIAL POSITIONS

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

Torfinn Losvik

Member of the Management Board

+372 569 90 988

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Attachments:
Skano 2018 3rd Quarter interim report.pdf