Key financial ratios

Third-quarter export demand for Tulikivi’s products was similar to that of last year while domestic demand was lower.

Performance in the principal market areas of France, Germany and Russia was positive but correspondingly slower in other areas. In early October, Tulikivi opened its first consumer shop in Central Europe in Leipzig. Importers in France and Germany will also open new shops during the autumn. The Hiisi fireplace collection, launched last year, has become the best-selling product family in Central Europe.

In Finland low-rise housing construction and renovation has declined, and this has had an impact on the demand for fireplaces and interior stone products in the third quarter. However, compared to the year before, the decline was smaller than it was in the early part of this year.

Tulikivi’s production and fixed costs were adjusted to meet the lower net sales, which improved profitability in the third quarter. Working capital reduced as a result and net cash flow from operating activities improved.

On 8 August 2013 Tulikivi announced its performance improvement programme which aims at increasing operating profit by EUR 7 million by the end of 2015. Plans to rationalise production, reduce costs and boost sales have proceeded as previously reported. The codetermination negotiations launched in September on the reduction of a maximum of 90 persons will be completed in early November. The performance improvement programme is anticipated to cause non-recurring expenses of EUR 2.5 million in the fourth quarter of 2013. The measures taken under the programme will have a positive impact on productivity from the beginning of 2014.

The low level of low-rise housing construction and renovation projects has weakened demand for fireplaces in Finland. Demand has also been affected by a reduction in lending by banks and deteriorating consumer confidence.

The protracted European recession has reduced export sales during this year. In the second half of the year, demand for fireplaces has been satisfactory in Germany and France but weak in the Nordic countries. New construction and energy efficiency regulations based on EU regulation have given rise to uncertainty in the market and had an impact consumers’ decisions.

Order books at the end of the reporting period amounted to EUR 5.3 million (EUR 5.9 million on 30 September 2012).

The Group´s third-quarter net sales totalled EUR 12.1 million (EUR 13.1 7–9/2012), the operating profit was EUR 0.0 (0.4) million and the result before taxes EUR -0.3 (0.2) million. Changes were made in Tulikivi’s management in the third quarter, resulting in a non-recurring cost of approximately EUR 0.6 million during the third quarter. The operating result before non-recurring expenses was EUR 0.6 million (0.4) in the third quarter. As a result of adjustments to production and a reduction of costs, relative profitability improved in the third quarter.

The Group’s net sales were EUR 31.9 million (37.0, 1–9/2012) during the 1–9/2013 review period. The operating result before non-recurring expenses was EUR -1.9 (-0.4) million during the period. The consolidated operating result was EUR -2.5 (-0.4) million for the period, and result before taxes was EUR -3.3 million (-1.1) million. Earnings per share amounted to EUR -0.07 (-0.02).

In the segment reporting, the corresponding operating result for the Fireplaces Business was EUR 29.1 (33.8) million, and for the Interior Stone Business EUR 2.8 (3.2) million. Net sales in Finland accounted for EUR 15.8 (18.7) million, or 49.5 (50.4) per cent, of total net sales. Exports amounted to EUR 16.1 (18.3) million in net sales. The principal export countries were France, Russia, Germany, Sweden and Belgium.

In the segment reporting, the corresponding operating result for the Fireplaces Business was EUR -2.4 (-0.3) million, and for the Interior Stone Business EUR -0.1 (-0.1) million.

On 8 August 2013 Tulikivi issued a stock exchange release announcing a performance improvement programme which aims at increasing operating profit by EUR 7 million by the end of 2015. The programme includes measures to rationalise production, reduce costs and boost sales. The performance improvement programme also included changes to the company’s management, which have been carried out as announced in stock exchange releases issued on 23 August 2013 and 26 August 2013. Codetermination negotiations were also initiated in September, including talks to reduce a maximum of 90 employees and temporary layoffs affecting the entire personnel. The aim is to complete the codetermination negotiations in early November; the negotiations were announced in a separate stock exchange release was issued on 17 September 2013. The performance improvement programme is anticipated to cause non-recurring expenses of EUR 2.5 million in the fourth quarter of 2013. The performance improvement programme will have a positive impact on the company’s profitability from the beginning of 2014. In order to support the commitment of management and key personnel to the implementation of the performance improvement programme, the Board of Directors of Tulikivi Corporation decided on a new stock option programme, details of which are included in the stock exchange release issued on 17 September 2013.

Cash flow from operating activities before investments was EUR 0.2 (-3.7) million. Working capital decreased by EUR 0.6 (-5.5) million during the review period. Working capital was EUR 8.7 (12.0) million at the end of the review period. Interest-bearing debt was EUR 26.0 (26.0) million. Financial income was EUR 0.0 (0.1) million and financial expenses were EUR 0.8 (0.7) million. The equity ratio was 30.1 per cent (33.2 per cent on 30 September 2012). The ratio of interest-bearing net debt to equity, or gearing, was 137.3 (130.3) per cent. The current ratio was 1.4 (1.6). Equity per share was EUR 0.42 (0.49).

At the end of the reporting period, the Group’s cash and other liquid assets were EUR 4.6 (2.6) million. The total of undrawn credit facilities and unused credit limits amounted to EUR 0.0 (1.0) million.

The company has several financers with which it has separate credit agreements. The company’s credit agreements include financial covenants that concern the equity ratio and the ratio between the interest-bearing debt and EBITDA. The credit agreements also include repayment terms under which the breach of the terms of one credit agreement may result in the repayment of outstanding loans under other credit agreements. The company meets the covenants associated with the equity ratio as of 30 September 2013 and the management have assessed that the company will also meet the equity ratio covenants as of 31 December 2013.  The management estimates that the company will not meet the covenant regarding the ratio between Group interest bearing net debt and EBITDA on 31 December 2013. In addition, the company’s performance improvement programme will result in non-recurring expenses in the remaining part of 2013, and the management estimates that the company will not meet the covenant regarding the ratio between net debt and EBITDA as of 31 December 2013. Consequently, the company has negotiated a waiver from the covenant on the ratio of interest-bearing debt and EBITDA as of 31 December 2013. The company has also negotiated a waiver from the covenant on net debt and EBITDA as of 31 December 2013 under which a maximum of EUR 3 million in non-recurring expenses will not be included in covenant assessment. Negotiations with financers regarding the 2014 credit terms have been launched.

On 8 October 2013, the Board of Directors of Tulikivi Corporation decided on a share issue under the authorisation issued by the Annual General Meeting, in which the company will offer a maximum of 22,727,273 Series A shares in a directed rights issue to the public in Finland.

 The subscription price of the offered shares was EUR 0.33 per share. The subscription price includes the usual discount on the market price of the company’s Series A share. The subscription period of the shares offered started at 9.30 a.m. on 11 October 2013 and ended at 4.30 p.m. on 17 October 2013. The maximum number of the offered shares corresponded to approximately 61.2 per cent of the company’s stock and approximately 18.5 per cent of the votes attached to them before the share issue, and to approximately 38.0 per cent of the company’s total stock and approximately 15.6 per cent of the votes attached to them after the share issue, provided that the issue is subscribed in full. A number of Finnish institutional and other investors had committed to subscribe issued shares to a total maximum sum of EUR 6.1 million. The subscription commitments represented a maximum of approximately 81.74 per cent of the maximum number of the shares offered.

Tulikivi Corporation’s directed rights issue of approximately EUR 7.5 million was completed successfully on 17 October 2013. According to the final result, a total of 22,920,917 of the company’s Series A shares were subscribed, corresponding to some 101 per cent of the offered22,727,273 shares. On 21 October 2013 the company’s Board of Directors approved the subscriptions of 22,727,273 Series A shares under the terms of the share issue. All shares subscribed in the share issue have been paid in full. Shares subscribed in the share issue were registered in the Trade Register on 22 October 2013 and are traded on the NASDAQ OMX Helsinki Ltd exchange together with the company’s existing Series A shares as of 23 October 2013. As a result of registering the new shares in the Trade Register, the number of the company’s Series A shares will be 50,331,243. The number of the company’s Series K shares will remain at 9,540,000. The lead manager of the share issue is Pohjola Corporation Finance Ltd.

The Group’s investments in production, quarrying and development were EUR 1.1 (1.9) million in the reporting period. Research and development expenditure was EUR 1.2 (1.2) million, i.e. 3.8 (3.3) per cent of net sales. EUR 0.2 (0.4) million of this was capitalised in the balance sheet.

Product development focused on launching new models in the Hiisi product family. New woodburning and electric sauna heaters were also introduced to market in Russia and Finland.

The Group employed an average of 295 (364) people during the reporting period. Salaries and bonuses during the period totalled EUR 9.4 (10.3) million.

The Tulikivi Group has an incentive pay scheme for all personnel. As the incentive pay scheme is based on a positive consolidated result, no incentive pay will be paid out on 2013.

A substantial decline in euro zone consumer confidence is the Group’s most significant risk.  The decrease in new construction and renovation projects is affecting the demand for fireplaces.

The purpose of the share issue was to strengthen the company’s capital structure and to gain a more solid financial position.The funds from the share issue will be used to fund the company’s working capital and to rationalise production, renew and develop the product range and extend distribution in, for example,Russia and Germany under the company’s performance improvement programme.The funds from the share issue will also enable the company to make its normal credit instalments in accordance with the original schedule.

Even with the completion of the share issue, maintaining the company’s financing position at the present level and securing the continuation of financing will depend on an improvement in profitability in the future.The repayment of debt may cause a higher-than-anticipated burden on the company’s cash flow if the company’s business operations and result do not develop as well as expected.The company’s management will continuously evaluate and monitor the volume of financing available to operations to ensure that the company will have sufficient liquid funds to finance its operations and repay its maturing debt.Delays in the planned schedule of the performance improvement programme will cause a significant risk to the company’s profit performance.

Construction legislation is currently being revised in the EU.New country-specific energy efficiency provisions that meet the EU’s energy efficiency policies will come into force during 2013 and could influence the competition between different forms of heating and thus the demand for fireplaces in different markets.

A more comprehensive explanation of the Tulikivi Group’s other risks can be found under note 38: “Major risks and their management” in the Consolidated Financial Statements of the Annual Report for 2012.

The demand for Tulikivi products is dependent on consumer confidence. Although new products will allow us to increase our market share, net sales will decline from the 2012 figure. The operating result for 2013 is expected to show a loss. In addition, measures taken under the performance improvement programme are anticipated to cause non-recurring expenses of EUR 2.5 million in the fourth quarter.

TULIKIVI CORPORATION

Board of Directors

Distribution: NASDAQ OMX Helsinki

Key media

www.tulikivi.com

Additional information: Tulikivi Corporation, FIN-83900 Juuka, Finland, tel. +358 207 636 000, www.tulikivi.com

– Harri Suutari, Chairman of the Board, tel. +358 400 384 937

– Heikki Vauhkonen, Managing Director, tel. +358 207 636 555