RusForest swings to Q4 net loss of 97.23M Swedish Kronor from earnings of 16.77M Kronor a year earlier; results affected by capacity utilization and start-up problems at Magistralny, Boguchany sawmills

STOCKHOLM , February 29, 2012 (press release) – Results for the twelve months ended 31 December 2011

  • Total turnover for the twelve month period ended 31 December 2011, amounted to SEK 431.8 million (2010: SEK 300.8 million);
  • The operating loss before financing costs for the period amounted to SEK 284.5 million (2010: SEK -165.9 million);
  • Net loss for the period was SEK 288.7 million (2010: SEK -130.2 million);
  • Earnings per share was SEK -3.32 (2010: SEK -4.35);
  • Cash and cash equivalents decreased during the reporting period by SEK 43.6 million, from SEK 67.2 million on 1 January 2011 to SEK 23.6 million on 31 December 2011.
Significant events during the fourth quarter 2011
  • Mr Strange was appointed Chief Operating Officer of RusForest as of 15 November 2011. Mr Strange has been working in Russia for more than 15 years, speaks fluent Russian and has worked in agriculture, and mainly forest industry, his entire career in Russia. His previous position was as CEO of Russia Baltic Pork Invest, based in Kaliningrad;
  • Harvesting operations showed a significant breakthrough after three new John Deere harvesting units were put into operation in Severny Les in Arkhangelsk. Four more units arrived a week before year end (two for each of Boguchany and Magistralny) and were put into use in January 2012;
  • RusForest acquired all shares in Clean Tech East’s wholly owned subsidiaries Eastern Bio Holdings AB (EBH) and B.E.N. Bio Energy Nord Ltd (BEN) – whose business is to manufacture and sell wood pellets;
  • RusForest registered a new subsidiary based in the Irkutsk region called Siberian Cellulose, intended as a platform for cooperation with global pulp producers looking for establishment in Russia;
  • The SEK 500 million bond raised by the Company in May 2011 was listed for trading on NASDAQ OMX Stockholm’s Corporate Bonds list, with the ticker RUSF001.
Significant events after the end of the period
  • RusForest appoints Kirill Pronin as interim CFO as of 2 March 2012, as current CFO, Vitaly Zhukov, will step down from his position. Mr Pronin has been employed as Project Director in Taiga Asset Management and later in RusForest Management in Moscow since 2008. Prior to joining RusForest he worked in Transaction Advisory at PricewaterhouseCoopers’ Moscow office;
  • RusForest intends to carry out a rights issue of approximately SEK 450 million. Notice has been given to convene an Extraordinary General Meeting on 1 March 2012 to resolve on the necessary amendments to the Articles of Association and on an authorisation for the Board of Directors to resolve on a rights issue;
  • On 15 February RusForest was granted a bridge loan in the amount of USD 10 million from Vostok Komi (Cyprus) Limited, a wholly owned subsidiary of Vostok Nafta Investment Ltd. The proceeds will be used for working capital purposes in order to maintain sustainable production volumes at all locations and keep up the speed in on-going investments in sawmilling and transportation;
  • On 16 February the East-Siberian Branch of Sberbank approved an investment loan in the amount of USD 10.5 million (SEK 70 million) for a period of seven years. The loan will be granted in two tranches: USD 5 million (SEK 32 million) was paid out in February 2012 and USD 5.5 million (SEK 38 million) is expected to be paid out in April 2012.
CEO’s Comments

Looking at the last 18 months, RusForest has taken important steps to secure its future development and a new industrial group in the Russian forest industry has been formed. The Company operates in three of the best forest regions of Russia and has managed to follow a path of well-planned forest lease consolidation, on-going completion of sawmills and has recruited professional managers for key positions over the last year.

The significant investments up to date have not been enough to reach breakeven, or turn into positive EBITDA. That is a disappointing fact. The main reason for the reported weaker result in the fourth quarter of 2011, especially compared to the third quarter, was a 10 per cent reduction in average prices between the quarters. The sawnwood volumes were at the same levels as Q3 as the Magistralny sawmill was still suffering from start-up problems and the Boguchany sawmill was still affected by the on-going construction work. This affected the capacity utilization at the sawmills. The total harvesting volume has increased during the fourth quarter, mainly building up stocks for sawmill production. During the quarter several harvesting groups were added, which generated high start-up costs but initially low utilization. Once all equipment is in place normal production costs will be reached. The effect from the newly added harvesting capacity and the gradual increase in production in our sawmills in Magistralny, Boguchany and Shenkursk will be visible during the first half of 2012 and support the journey towards normalized production costs. Operations, which are judged not being able to turn profitable, began to be phased out in parts of the operations during the fourth quarter of 2011 and the first quarter of 2012, and when renting out inefficient operations is not possible, they will be closed. This is true for parts of the Ust Ilimsk operations, which have been generating losses on the sawmill side, as well as for a smaller planing company in Arkhangelsk.

Following the forest lease acquisitions during 2011, combined with proper planning and extensive road development, the prerequisites are there to support the final development of the Group’s sawmills. The Company has finalized its current expansion phase and has come a long way towards creating the conditions for operational stability. During 2012 the remaining deficiencies will have been remedied. Needless to say, the way towards positive EBITDA would have been shorter if the conditions on the market for end-products had been stronger and the global economy had not been so weak.

From being just a harvesting company in Magistralny with limited forest leases (<350,000 m³ AAC), which was not sufficient to supply the sawmill, the area today represents a mill going into more normal production, which will be increasing, from the first quarter of 2012. This is supported by an additional 600,000 m³ of new quality leases secured during 2011.

Investments in complementary equipment for Boguchany, in both harvesting and sawmilling, were made in the first quarters of 2011 and delivered during the latter part of the year. In addition three local harvesting companies with associated forest leases were also consolidated into the Group during 2011. The new forest leases in Sibartles, Adar and Kansky have an expected payback period of no more than three years looking at the cost advantage compared to external purchases of raw material. This gives the mill stability, as the raw material situation was weak prior to these acquisitions. Combined with additional complementary mill equipment to Boguchany this will allow for more than doubled production capacity by the second quarter of 2012.

Harvesting and roads are still being developed in all locations. In 2011 the company constructed 55 km of permanent roads in Siberia and the Arkhangelsk region.

In addition to the strategic presence in the two Siberian regions, in December 2010 RusForest acquired a large port site and a sawmill in Arkhangelsk, LDK-3. The second phase of the development in the Arkhangelsk region was carried out in May 2011 through the merger with Nord Timber Group, a holder of quality spruce forest leases in that region. So far, the LDK-3 sawmill has had the most stable production.

During 2011, RusForest has focused the expansion on securing raw materials, rather than investments in processing only. This reflects the main assumption that the sawmills in Russia, as well as elsewhere, benefit from a stable raw material supply secured at the right price. Acquisitions, combined with additional road and harvesting machines and equipment, do not give an additional raw material output immediately, but will over time, reflecting that there always exists a lead time for delivery, installation and construction itself. Processes are less smooth than in Europe due to distances and other local conditions. Large financial, management and planning resources are needed in the regions where outsourcing of services is hard and local support for changes is small.

World Trade Organisation (“WTO”) accession in 2012. Naturally, this is important for us as a wood exporter. The WTO impact will reduce export duties related to pulp logs and quality export logs in particular. This increases the value of the forest resource at its root. The sawnwood market is not yet showing any significant signs of improvement, even if the summer of 2012 might offer some form of seasonal local demand peaks.

In fact we have moved forward in all our prime priorities in conjunction with the rights issue in 2010 and are confident that we will fulfil the remaining priorities over the next year. The money attracted in the new capital increase is however, absolutely necessary to fulfil the plans set in 2010, as since then, there has, due to weak markets, been a lower contribution to investments from running operations than initially expected. This, together with delays in the production ramp-up, expansion in Magistralny and Boguchany and the challenges with selling Russian Gravel Company have had a negative impact on cash flow but do not affect the strategy going forward.

As a shareholder, one can feel comfortable with the level of competence and experience within the forest industry that the Board of Directors of RusForest possesses, which easily matches that of any other listed forest company in Sweden.

It is important to note that, notwithstanding the losses during 2011, the average revenue of m3 sold is rising and the average cost per unit is falling in a predicted fashion. This will make it fully possible to reach positive EBITDA during 2012, all else being equal.

Martin Hermansson
CEO, RusForest AB

Industry Intelligence Editor’s Note: In an omitted table, the company reported a Q4 net loss of 97.23 million Swedish Kronor (SEK), sales of SEK117.72 million and losses per share of SEK1.02. For the same period a year ago, the company reported net earnings of SEK16.77M, sales of SEK47.08M and earnings per share of SEK0.34.

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