HONKARAKENNE OYJ’S FINANCIAL STATEMENT RELEASE 1

HONKARAKENNE OYJ    FINANCIAL STATEMENT RELEASE  16 February 2017 at 9:00 a.m.

HONKARAKENNE OYJ’S FINANCIAL STATEMENT RELEASE 1 JANUARY – 31 DECEMBER 2016

SUMMARY

Net sales for the last quarter of the year improved by 4 %. Net sales for the entire year decreased by 8 % on the previous year. The result before taxes for the last quarter was MEUR 0.4 (MEUR -0.3). The result before taxes for the entire year remained in the red, but, however, was MEUR 0.6 better than a year earlier. At the end of the year, the Group’s order book was 9 % higher than at the end of the previous year.

October - December 2016

• Honkarakenne Group's consolidated net sales for the last quarter of the year amounted to MEUR 10.3 (MEUR 9.9 in 2015), representing an increase over the same period the previous year of 4 %
• The operating result was MEUR 0.3 (MEUR -0.1). The adjusted operating result was MEUR 0.4 (MEUR 0.2)
• The result before taxes was MEUR 0.4 (MEUR -0.3). The adjusted result before taxes was MEUR 0.6 (MEUR -0.0)
• Earnings per share amounted to EUR 0.09 (EUR -0.02)

Year 2016

• Honkarakenne Group’s consolidated net sales for the entire year was MEUR 36.1 (39.1), representing a decrease over the same period the previous year of 8 %
• The Operating result was MEUR -0.8 (MEUR -1.1). The adjusted operating result was MEUR -0.4 (MEUR -0.2)
• The result before taxes was MEUR -1.2 (MEUR -1.7). The adjusted result before taxes was MEUR -0.8 (MEUR -0.9).
• Earnings per share amounted to EUR -0.30 (EUR -0.23).

The Board of Directors proposes to the Annual General Meeting that no dividend be paid for the financial year ended 31 December 2016.

In Honkarakenne’s view, net sales in 2017 will be higher and the result before taxes will be better than in the previous year.

At the end of December, the Group's order book stood at MEUR 16.3, up 9 % on the corresponding period of the previous year, when it stood at MEUR 15.0. The order book refers to orders whose delivery date falls within the next 24 months. Some orders may include terms and conditions relating to financing or building permits.

The company and its financiers negotiated new financing resolutions for year 2017. Some of the new financing resolutions include covenants relating to EBITDA. Some of those loans already carried a 30 per cent equity ratio covenant term. If the company's sales do not develop well enough, it is possible that the terms of the covenants will be broken during the next year.

Marko Saarelainen, President and CEO of Honkarakenne Oyj, in connection with the financial statement release:

“In the last quarter, sales in Finland declined, but sales in Russia saw a year-on-year increase. In addition, the sales trend was positive in Global Markets in the last months of the year. On the whole, net sales in the fourth quarter grew compared with the previous year, and at the end of the review period the order book was also at a higher level than in 2015.

In the last quarter, Honkarakenne continued to make outlays on renewal and training its dealer network: new dealers came on board and we organised product and marketing training for dealers in Europe and Russia.

For both the Finnish and export markets, Honkarakenne unveiled healthy care and school concepts which take the special requirements of public construction into consideration. Healthy House development continued. At the end of 2016, VTT granted Honkarakenne the right to give a Healthy House certificate to a larger delivery package that also includes construction partly done by the customer.

Compared to 2015, the full-year adjusted operating result was negatively impacted by decline in net sales while efficiency-boosting measures had a positive effect. The adjusted result before taxes was also positively impacted by lower financial expenses compared to the previous year.”

NET SALES

Honkarakenne Group’s net sales for the year 2016 decreased by 8 per cent to MEUR 36.1 (MEUR 39.1). The Group’s last-quarter net sales in 2016 increased by 4 per cent to MEUR 10.3 (MEUR 9.9).

Geographical distribution of net sales:

Finland & Baltics includes the following countries: Finland, Estonia, Latvia and Lithuania. It includes also Process waste sales for recycling.

Russia & CIS includes the following countries: Russia, Azerbaijan, Kazakhstan and other CIS countries excluding Ukraine.

Global Markets includes other countries than above-mentioned and CIS country Ukraine.

The Group’s order book stood at MEUR 16.3 at the end of December. In the previous year at the same time period it was MEUR 15.0. 

TRENDS IN PROFIT AND PROFITABILITY

The operating loss for the year 2016 was MEUR -0.8 (MEUR -1.1) and the result before taxes was MEUR -1.2 (MEUR -1,7). The adjusted operating profit for the year 2016 was MEUR -0.4 (MEUR -0.2) and the adjusted result before taxes was MEUR -0.8 (MEUR -0.9). The adjustment items were MEUR 0.4 and they included costs related to the efficiency-boosting programme kicked off in May and costs related to the Sistema Finance S.A.’s voluntary public tender offer (costs classified as adjustment items amounted to MEUR 0.8 in the previous year).

Compared to 2015, the full-year adjusted operating result was negatively impacted by decline in net sales while efficiency-boosting measures had a positive effect. The adjusted result before taxes was also positively impacted by lower financial expenses compared to the previous year.”

FINANCING AND INVESTMENTS

The financial position of the Group was satisfactory at the end of the report period. The equity ratio stood at 41 % (37 %) and net financial liabilities at MEUR 5.0 (MEUR 6.5). In December 2016 the company and its financiers negotiated new financing resolutions for year 2017. Some of the new financing resolutions include covenants relating to EBITDA. MEUR 2.5 of financial liabilities carries EBITDA covenant terms and MEUR 1.3 (MEUR 1.9) of them carried already before 30 per cent equity ratio covenant term.

As part of Honkarakenne’s financial arrangements Honkarakenne’s main owner Saarelainen Oy granted in November Honkarakenne an unsecured junior loan amounting MEUR 0.3. The junior loan is subordinated to bank loans.

Group liquid assets totalled MEUR 0.4 (MEUR 1.1). The Group also has a MEUR 5.4 (MEUR 7.8) bank overdraft facility, MEUR 1.2 of which had been drawn on at the end of the report period (MEUR 2.5). Gearing stood at 75 % (81 %).

The Group’s capital expenditure on fixed assets totalled MEUR 0.1 (MEUR 0.1) in year 2016.

PRODUCTS AND MARKETING

In Finland & Baltics, the company made outlays on regional marketing, with more house exhibitions and events at sales offices, and regional sales campaigns were carried out. During the last quarter, the company renewed brand strategy. In the last quarter of the year sales in Finland declined, but detached house sales figures remained good.

In Russia & CIS, the trend in sales was positive in the last months of the year. During the fourth quarter, the company organised product training for the staff of its Russian importer. Although sales in Russia improved towards the end of 2016, cumulative full-year net sales were down 15% on the previous year. It is expected that the Russian market situation will remain difficult.

In Global Markets, the company continued to develop its dealer network and the reorganisation of its sales. For instance, the European functions will be reorganised. Performance in German-speaking Europe and in international projects fell significantly short of the previous year in terms of both sales and net sales.

RESEARCH AND DEVELOPMENT

Research and development focused especially on solutions for healthy public construction and modern architecture. For both the Finnish and export markets, Honkarakenne unveiled healthy care and school concepts which take the special requirements of public construction into consideration. Healthy House development continued. At the end of 2016, VTT granted Honkarakenne the right to give a Healthy House certificate to a larger delivery package that also includes construction partly done by the customer.

In the January–December period, the Group's R&D expenditure totalled MEUR 0.3 (MEUR 0.4), representing 0.8 % of net sales (0.9 %). The Group did not capitalise any development expenditure during the financial year.

PERSONNEL

In terms of person years, the Group employed a total of 110 (115) people in average in 2016, representing a year-on-year decrease of 5. In 2016 the Group employed 136 (139) people on average. At the end of the year, the Group employed 132 (134) people.

In May-June, the Group conducted negotiations under the act on co-operation within undertakings and as a result Honkarakenne can lay-off clerical and managerial employees temporarily maximum 90 days and blue-collar workers will work under reduced working hours. The lay-off plan is effective until 31 March 2017 for white-collars and until 31 May 2017 for blue-collar workers.

CHANGE IN MANAGEMENT

In June Honkarakenne’s CFO Mikko Jaskari announced that he will transfer into another company’s employ. Mikko Jaskari’s employment relationship ended on 31 July 2016. Erja Heiskanen, Honkarakenne’s Vice President – Operations, left the company at the end of June due to the organisational reform carried out as part of the efficiency-boosting programme.

CHANGES IN GROUP STRUCTURE

Honka Management Oy, a company created in 2010 as an Executive Group bonus scheme is after the share acquisition carried out in December owned as whole by Honkarakenne Oyj. Honkarakenne Oyj’s earlier ownership of the shares in Honka Management Oy was 47 %. Based on the shareholder agreement, Honkarakenne Oyj already had control of Honka Management Oy before the share purchase, for which reason the latter was already included in the consolidated financial statements.

VOLUNTARY PUBLIC TENDER OFFER OF HONKARAKENNE OYJ’S SHARES

Sistema Finance S.A. announced on 3 November 2016 that it will make a voluntary public tender offer in cash to purchase all of the issued Series A shares and Series B shares in Honkarakenne Oyj (Series B shares on Nasdaq Helsinki Ltd. HONBS).

On 4 November 2016, Honkarakenne Oyj’s main shareholder Saarelainen Oy announced to the Board of Directors of Honkarakenne Oyj that it would not accept the proposed purchase offer. Sistema Finance S.A. started this voluntary public tender offer in cash on 11 November 2016. The offer period was scheduled to end at 16:00 on 16 December 2016. 

On 9 December 2016, Honkarakenne Oyj’s Board of Directors published a statement on the tender offer of Sistema Finance S.A. On 16 December 2016, Sistema Finance S.A. announced that it would extend the offer period of the voluntary public tender offer in cash for all shares in Honkarakenne Oyj (“Honka”) to 16:00 on 19 January 2017. In addition, Sistema Finance S.A. announced on that date that it had received clearance on 12 December 2016 from the antimonopoly authorities of the Russian Federation in respect of the transaction planned in the tender offer.

Sistema Finance S.A. announced the preliminary results of the voluntary public tender offer in cash for all shares in Honkarakenne Oyj on 20 January 2017 and the final results on 24 January 2017. According to Sistema Finance S.A.’s announcement, 192,866 Series B shares were tendered in the offer, representing 3.7 per cent of Honka shares. Sistema Finance S.A. announced that it would not complete the tender offer in accordance with its terms and conditions, as it was contingent on the acquisition of at least 67 per cent or more of the Series A and Shares B shares in Honka.

When calculating the adjusted operating result and the adjusted result before taxes costs related to the Sistema Finance S.A.’s voluntary public tender offer has been included in adjustment items due to their exceptional character.

LONG-TERM INCENTIVE PLAN

In the second quarter of 2013, the Board of Directors decided on a long-term share-based incentive plan for members of the Executive Group. The performance period of the new plan began on 1 January 2013 and will end on 31 December 2016. The potential reward for the performance period is based on the cumulative earnings per share (EPS) for 2013 - 2016 and on the average return on capital employed (ROCE) for 2013 - 2016. Any rewards for the performance period 2013 - 2016 will be paid partly as B shares and partly in cash in 2017. The rewards to be paid on the basis of the performance period will correspond to a total maximum of about 340,000 B shares, including the amount to be paid in cash.

The performance period of the share-based incentive plan concluded at the end of 2016 and no rewards will be paid under the plan; the payouts had already been assessed as zero a year ago.

On 31 May 2010, the Board of Directors of Honkarakenne Oyj decided on an Executive Group bonus scheme, with the aim of enabling significant long-term management shareholdings in the company. To this end Honka Management Oy acquired a total of 286,250 B shares in Honkarakenne Oyj in 2010-2011. In December 2016 Honka Management Oy’s shareholders agreed by consensus to dissolve the scheme, with Honkarakenne Oyj acquiring all Honka Management Oy’s shares by purchase from executives involved in the scheme at a unit price of €1. Honkarakenne Oyj’s earlier ownership of the shares in Honka Management Oy was 47 %.

HONKARAKENNE OYJ’S 2016 ANNUAL GENERAL MEETING, BOARD OF DIRECTORS, AND AUDITORS

The Annual General Meeting of Honkarakenne Oyj was held at the company’s headquarters in Tuusula on 15 April 2016. The AGM approved the parent company's and the consolidated Financial Statements, and discharged the members of the Board of Directors and the CEO from liability for 2015. The AGM decided not to pay a dividend for the 2015 financial year.

Kati Rauhaniemi, Anita Saarelainen, Jukka Saarelainen, Mauri Saarelainen and Arto Tiitinen were re-elected to the company's Board of Directors. Rainer Häggblom was elected as a new member. At the Board's constituent meeting, Arto Tiitinen was elected Chairman of the Board and Mauri Saarelainen was elected as Deputy Chairman. At the same meeting, the Board decided to establish a Nomination and Remuneration Committee. The following directors were elected as members of the committee: Arto Tiitinen (as Chairman of the Committee), Anita Saarelainen and Mauri Saarelainen.

PricewaterhouseCoopers Oy, member of the Finnish Institute of Authorised Public Accountants, was re-appointed as auditor of the company, with Maria Grönroos, APA, as chief auditor.

OWN SHARES AND AUTHORISATIONS OF THE BOARD OF DIRECTORS

Honkarakenne has not acquired its own shares during the report period. At the end of the report period, the Group held 364,385 of its Honkarakenne B shares with a total purchase price of EUR 1,381,750.23. These shares represent 6.99 % of the company's all shares and 3.34 % of all votes. The purchase cost has been deducted from shareholders' equity in the consolidated financial statements.

On 15 April 2016, the AGM decided that the Board of Directors will be authorised to acquire a maximum of 400,000 of the company’s own B shares with assets included in the company’s unrestricted equity. In addition, the AGM authorised the Board to decide on a rights issue or bonus issue and on granting special rights to shares referred to in Section 1 of Chapter 10 of the Limited Liability Companies Act in one or more instalments. By virtue of the authorisation, the Board may issue a maximum total of 1,500,000 new shares and/or relinquish old B shares held by the company, including those shares that can be issued by virtue of special rights. Both authorisations will remain in force until the next Annual General Meeting, however expiring at the latest on June 30, 2017.

CORPORATE GOVERNANCE

Honkarakenne Oyj follows the Limited Liability Companies Act and the Finnish Corporate Governance Code 2015 (effective from 1 Jan 2016) for listed companies issued by the Finnish Securities Market Association. The company’s website, www.honka.com, provides more information on the corporate governance systems.

FORTHCOMING RISKS AND UNCERTAINTIES

Russia is one of Honkarakenne’s major business territories. The sanctions connected to the Ukrainian crisis and strong exchange rate fluctuations currently cause instability in the Russian market. This might have major impacts on Honkarakenne’s operations.

In December 2016 the company and its financiers negotiated new financing resolutions for year 2017. Some of the new financing resolutions include covenants relating to EBITDA. MEUR 2.5 of financial liabilities carries EBITDA covenant terms and MEUR 1.3 (MEUR 1.9) of them carried already before 30 per cent equity ratio covenant term. If the company's sales do not develop well enough, it is possible that the terms of the covenants will be broken during the next year.

The assessment of amounts in the balance sheet is based on current assessment by the management. If these assessments are changed, this may result in changes to the Group's result.

In the financial statements, the deferred tax assets in the balance sheet include an item of MEUR 1.5 related to unused tax losses, of which MEUR 0.5 will expire in 2019 and MEUR 0.7 in 2021-2025. In Honkarakenne’s opinion, these deferred tax assets recognised in the balance sheet can be utilised by using the company’s estimated taxable income, which is based on Honkarakenne’s business plans, including the current efficiency-boosting programme. If earnings do not develop as expected in the long term, it is possible that the tax assets might not be utilised in time and must be impaired. The company did not recognise new deferred tax assets in the balance sheet in 2016.

REPORTING

This report contains statements that relate to the future, and these statements are based on hypotheses that the company's management hold currently as well as on the decisions and plans that are currently in place. Although the management believes that the hypotheses relating to the future are well-founded, there is no guarantee that the said hypotheses will prove to be correct.

This financial statement release has been drafted in accordance with IAS 34. The principles adhered to in preparing the annual financial statements 2015 also apply to this financial statement release but new and amended IFRS standards and interpretations effective in 2016 have been applied. Amended standards and interpretations effective from the beginning of year 2016 have no bearing on the figures presented for the report period.

As from half year financial report, Honkarakenne complies with the Guidelines on Alternative Performance Measures (APM) issued by the European Securities and Markets Authority (ESMA).  An APM is a financial measure of performance other than a financial measure defined or specified in IFRS. For this reason, the term “adjusted” is used instead of previous term “without non-recurring items”. As adjustment items, the company classifies significant business transactions that are considered to affect comparisons between different reporting periods. Such transactions include significant reorganisation expenses, impairment losses or reversals thereof, and capital gains and losses on assets or other significant income or costs of unusual business operations. When calculating the adjusted operating result and the adjusted result before taxes costs related to the Sistema Finance S.A.’s voluntary public tender offer has been included in adjustment items due to their exceptional character.

The figures have not been examined by the auditor.

EVENTS AFTER THE REVIEW PERIOD

Sistema Finance S.A. announced the preliminary results of the voluntary public tender offer in cash for all shares in Honkarakenne Oyj on 20 January 2017 and the final results on 24 January 2017. According to Sistema Finance S.A.’s announcement, 192,866 Series B shares were tendered in the offer, representing 3.7 per cent of Honka shares. Sistema Finance S.A. announced that it would not complete the tender offer in accordance with its terms and conditions, as it was contingent on the acquisition of at least 67 per cent or more of the Series A and Shares B shares in Honka.

PROPOSAL OF THE BOARD OF DIRECTORS ON THE USE OF PROFIT FUNDS

The parent company has no distributable funds and no funds can be allocated as profits. The parent company posted a MEUR -0.1 loss for the financial year.

The Board of Directors proposes to the Annual General Meeting that no dividend be paid for the financial year ended 31 December 2016.

THE OUTLOOK FOR 2017

In Honkarakenne’s view, net sales in 2017 will be higher and the result before taxes will be better than in the previous year.

GENERAL MEETING

Honkarakenne Oyj’s Annual General Meeting will be held on Friday, 7 April 2017 from 14:00 onwards in Järvenpää.

HONKARAKENNE OYJ

Board of Directors

Further information:

Marko Saarelainen, President and CEO, tel. +358 40 542 0254, marko.saarelainen@honka.com

This and previous releases are available for viewing on the company’s website at www.honka.com.

During week 11, Honkarakenne will publish the Board of Directors’ Report and the Financial Statements for 2016, as well as a separate Corporate Governance Statement on the company’s website at www.honka.com. The half year financial report for 2017 will be published on 10 August 2017.

DISTRIBUTION

NASDAQ OMX Helsinki

Key media

Financial Supervisory Authority

www.honka.com

Honkarakenne Oyj has two series of shares: A shares and B shares, which have different right to dividend. Profit distribution of 0.20 EUR per share will be paid first for B shares, then 0.20 EUR per share for A shares, followed by equal distribution of remaining profit distribution between all shares.

a) Share capital

b) Share premium account

c) Fund for invested unrestricted equity

d) Translation difference

e) Own shares

f) Retained earnings

g) Non-controlling interests

NOTES TO THE REPORT                                                

Accounting policies

This financial statement release has been drafted in accordance with IAS 34. The principles adhered to in preparing the annual financial statements 2015 also apply to this financial statement release but new and amended IFRS standards and interpretations effective in 2016 have been applied. Amended standards and interpretations effective from the beginning of year 2016 have no bearing on the figures presented for the report period.

As from half year financial report, Honkarakenne complies with the Guidelines on Alternative Performance Measures (APM) issued by the European Securities and Markets Authority (ESMA).  An APM is a financial measure of performance other than a financial measure defined or specified in IFRS. For this reason, the term “adjusted” is used instead of previous term “without non-recurring items”. As adjustment items, the company classifies significant business transactions that are considered to affect comparisons between different reporting periods. Such transactions include significant reorganisation expenses, impairment losses or reversals thereof, and capital gains and losses on assets or other significant income or costs of unusual business operations.

The figures have not been examined by the auditor.

Honkarakenne has three geographical operating segments that have been combined into one segment for reporting purposes. Geographically, sales are divided as follows: Finland & Baltics, Russia & CIS and Global Markets. The internal reporting of the management is in line with IFRS reporting. For this reason, separate reconciliations are not presented.

Adjustment items

The result for the financial year 2016 includes MEUR 0.4 costs related to the efficiency-boosting programme kicked off in May and costs related to the Sistema Finance S.A.’s voluntary public tender offer (costs classified as adjustment items amounted to MEUR 0.8 in the previous year).

Own shares

Honkarakenne has not acquired its own shares during the report period. At the end of the report period, the Group held 364,385 of its Honkarakenne B shares with a total purchase price of EUR 1,381,750.23. These shares represent 6.99 % of the company's all shares and 3.34 % of all votes. The purchase cost has been deducted from shareholders' equity in the consolidated financial statements.

Events with related parties

The Group’s related parties consist of subsidiaries and associated companies; the company's management and any companies in which they exert influence; and those involved in the Saarelainen shareholder agreement and any companies controlled by them. The management personnel considered to be related parties comprise the Board of Directors, President & CEO, and the company's Executive Group. The pricing of goods and services in transactions with related parties conforms to market-based pricing.

During the report period, ordinary business transactions with related parties were made as follows: sales of goods and services to related parties amounted to EUR 258 thousand and trade receivables from related party amounting EUR 69 thousand and purchases from related parties amounted to EUR 410 thousand and trade payables to related party amounting EUR 61 thousand.

As part of Honkarakenne’s financial arrangements Honkarakenne’s main owner Saarelainen Oy has granted Honkarakenne an unsecured junior loan amounting MEUR 0.3. The junior loan is subordinated to bank loans.

In 2010 and 2011, Honkarakenne Oyj granted long-term loans totalling MEUR 0.9 to Honka Management Oy, which was earlier owned by the company’s senior management. An impairment was recognised in 2014 and in 2015 for this loan in the parent company, the total amount of these impairments is MEUR 0.4.