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Annual Report 2019
Annual Report 2019
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Annual Report 2019
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Table of contents for the Annual Report 2019 report

Operational review
Key FiguresTo our shareholdersAbout Precious Woods / Sustainability
VisionProducts and marketsGoal of sustainable growthManagement organization with strong market orientationSustainable forestry in all dimensionsMarket opportunities thanks to sustainability certificates for tropical woodContribution to the UN Sustainable Development GoalsPrecious Woods Amazon: Close ties with the local populationPrecious Woods in Gabon – Projects for the protection of flora, fauna, and biodiversitySounding BoardInstitutional framework as opportunity and challengeIllegal logging threatens certified timber trade and sustainable developmentCarbon FootprintThe role of forestry in the current climate change debateMilestones Precious Woods
Group results
Income statementBalance sheet
Brazil
Higher harvest volume, increased production volumes, higher yieldContinued high resources for legacies and special factorsSocial and environmental sustainabilityOutlook for 2020
Gabon
Negative development of productivity and profitabilityMore difficulties than usualProgress in social and environmental sustainabilityOutlook for 2020
TradingCarbon & Energy
Emission certificates thanks to residual wood in BrazilianEmission trading together with myclimatePrecious Woods Carbon & Energy
Corporate Governance
1. Group structure and shareholders2. Capital structure3. Board of Directors4. Group Management5. Compensation, shareholdings, loans6. Shareholders’ rights of participation7. Changes of control and defense measures8. Auditor9. Information policy
Shareholder information
Share capitalEquivalent to 100 sharesStock market listingShare register informationCompany headquartersStock price development
Financial Report
Precious Woods Group financial statements
Consolidated statement of profit or lossConsolidated statement of comprehensive incomeConsolidated statement of financial positionConsolidated statement of changes in equityConsolidated statement of cash flowsNotes to the consolidated financial statements
1. Basis of presentation and general accounting policies2. Financial risk management3. Financial information by segment4. Revenue from contracts with customers5. Consumables used and other production costs6. Labour costs7. Other operating income and expenses8. Depreciation, amortization and impairment9. Financial income and expenses10. Property, plant and equipment11. Land12. Biological assets13. Intangible assets14. Investment in associates15. Inventories16. Prepayments17. Trade and other receivables18. Non current financial assets19. Trade and other payables20. Financial liabilities21. Financial instruments by category and Fair value hierarchy22. Leasing23. Share capital24. Major shareholders25. Earnings per share26. Related party balances and transactions27. Provisions28. Contingencies29. Income taxes30. Employee benefits31. Currency translation rates32. Basis of consolidation33. Subsequent events34. Approval of financial statements and dividends
Report of the statutory auditor on the consolidated financial statements
Precious Woods Holding Ltd financial statements
Balance sheets as of 31 December 2019 and 2018Statements of income 2019 and 2018Notes to the financial statements of Precious Woods Holding Ltd
Essential accounting and valuation principles1. General2. Authorized share capital3. Conditional share capital4. Investments in subsidiaries5. Other short term interest bearing liabilities6. Long term interest bearing liabilities7. Board and Executive compensation8. Depreciation, amortization and impairment9. Major shareholders10. Pledged assets / other securities11. Other note / Full time employment12. Other note / Lease liabilities13. Other note / Significant events after the reporting date
Report of the statutory auditor on the financial statements
Additional information
Contact addresses
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12. Biological assets

in thousand EUR   2019
At 1 January   –
Initial recognition of fair value   13 455
Currency effects   –297
At 31 December   13 158

The forests of Precious Woods in Brazil are organized as one single forest management and are managed in a sustainable manner, which means that no more than the incremental growth will be harvested and the substance of the forest will be preserved. The forests were not recorded at fair value in the past since fair value measurement was not possible due to a not adapted management system in place. In 2019, independent experts BDO Brazil did the first appraisal of the Group’s naturally grown forests according to IAS 41 Agriculture and IFRS 13 Fair Value Measurement. The implementation of the new management system allowed to collect sufficient data to measure the fair value of the forests reliably. The fair value of forests was measured as of 31 December 2019.

Accounting policies

Biological assets are measured at their fair value less costs to sell, with any resultant gain or loss recognized in the consolidated statement of profit or loss. The fair value of biological assets was estimated by applying the income approach, considering the discounted cash flow method. The income approach reflects current market expectations in relation to future values. The costs to sell are made up of harvesting, transporting and processing costs.

Valuation process

The Group has a team within the Internal Reporting department that performs the valuation of biological assets. The valuations will be updated internally at the end of each reporting period. If indicators of major changes are noted, a new external independent appraiser is engaged to recalculate the fair value of the assets. When considering the appropriate input data, the team reviews available information such as quantity of tree harvest: expected yield, current market prices, expected harvest costs through to harvest and the expected timing of harvest.

The valuation policies and procedures, as well as changes in the fair value measurements are reviewed by the chief financial officer (CFO) annually. The CFO is responsible for the Group’s internal valuation team. The Group’s internal valuation team comprises two employees, both of whom hold relevant internationally recognized professional qualifications and are experienced in valuations in the forest industry.

Methodology and assumptions used in determining fair value

Since management was able to provide reliable cash flow estimates, the group utilized the Income Approach, specifically the Discounted Cash Flow (DCF) Method for determine the fair value of the biological assets. The DCF Method is a commonly used method for valuing biological assets based on its expected future cash flows.

The following significant assumption were adopted by the group to determine the fair value of the forest:

Volumes: The biological assets consist of a variety of naturally grown trees native to the region, which are cut from 50 cm in diameter and have a natural renewal cycle of 35 years. For value estimation and still considering the characteristics of the evaluated assets and the sustainable management, an annual exploration area of 11 000 to 13 000 hectares was considered. The exploration area of effective forest management area is calculated from the total area of forests owned by Precious Woods (in order to obtain the exploration approval) excluding 20 % of the permanent preservation area.

For the estimation of the fair value of the forest, a certain volume of exploration area was considered, according to the evolution through years and the Group’s management expectation of exploration for the coming years. Based on historical data, a weighted average productivity was applied to get an average projected volume per year. The harvesting volume is calculated on effective quantities achieved in the last 20 years of activity in this area with 16 m3/ha/year. The total harvesting volume is expected to be 180 000 m3/year.

Volume adjustment factor: The logs will be transformed to sawn timber in various dimensions. An average yield factor was applied.

Prices: The average price applied on the volume to generate revenues were derived from the segregation between export or domestic market, type of product (commercial / non-commercial) and the corresponding prices. Generally, the costs contain cutting, transportation and processing as well as the depreciation expenses of the related fixed assets. For the export market, additional costs for drying and packaging are added. The majority of timber is for the export market and related to market prices.

Operating costs: The costs include all cost related to the sustainable forest management and the production cost in the industry.

Cost to sell: On top of operating cost there are cost for packaging, administration, sales activities and transportation respected. All cost excluding financial costs and income taxes.

Level 3 fair value

The valuation model considers the present value of the net cash flows expected to be generated from the natural forest management activities in the next 4 years. The forest for the 31 years remaining part of the cycle is regarded as non-productive forest, even if a harvesting will follow, as the forest is naturally re-generated during the cycle of 35 years. Therefore, the values remain +/- the same if there are no major market price differences than the ones applied.

Key assumption used in the determination of the discount rate

In determining the after tax weighted average cost of capital (WACC) a group rate of 7.1% used in Brazil has been applied considering the following inputs:

    2019
Unlevered beta factor   1.19
Risk free rate   2.4%
Equity risk premium   5.2%
Debt/Equity ratio   39.4%
Tax rate   34.0%
Sensitivity analysis

Assuming all other unobservable inputs are held constant, the following changes in these above assumptions will cause a change in the fair value of the forest:

in thousand EUR   FV   Effect
Assumption 31 December 2019   13 158    
Sales prices -5.0%   9 855   –25%
Costs +5.0%   10 585   –20%
Volumes -10.0%   7 505   –43%
Discount rate +50.0%   12 368   –6%

The above sensitivity analysis shows how the present value of the discounted cash flows would be affected if the key valuation parameters were attributed other values than those that form the basis of the current valuation of the discounted cash flows. An increase by the same percentage would have the opposite effect on the valuation.

The Group is exposed to a number of risks relevant to its natural forest management activities, namely:

Regulatory and environmental risk: The Group has established environmental policies and procedures aimed at compliance with environmental legislation. Management performs regular reviews to identify environmental risks and to ensure that the management systems in place are adequate. The Group manages its natural forest in compliance with FSC and PEFC standards since 1994 or 2017 respectively.

Supply and demand risk: The Group is exposed to risks arising from fluctuations in the price and demand for log products. When possible, the Group manages these risks by aligning its harvest volumes to market demand. Management performs regular industry trend analyses to ensure that the Group’s pricing structure is in line with the market and to ensure that projected harvest volumes are consistent with expected demand on a sustainable basis.

Climate and other risk: The Group’s forests are exposed to the risk of damage from climatic changes, diseases and other natural forces.