Risk management

Risk management seeks to predict future risks, ensure that strategic and operational targets are reached, and safeguard operations amid changing conditions.

Our risk management is based on the risk management policy approved by the Board of Directors of Lemminkäinen Corporation. We define a risk as an external or internal uncertainty factor that, if realised, would either positively or negatively affect our potential to achieve our strategic and financial targets in a sustainable and ethical manner. We evaluate a risk’s significance on the basis of its probability and financial impact.

We seek to forecast, identify, analyse, evaluate and control significant strategic, operative, financial and accident risks. The Board of Directors defines the Group’s risk appetite and risk tolerance in conjunction with its strategic and annual planning processes and through its decisions. The Board’s Audit Committee monitors the adequacy and effectiveness of the Group’s risk management in accordance with the annual Action Plan.

Risk management responsibilities

The President and CEO is responsible for risk management. The CFO holds primary responsibility for managing financial and funding risks with support from business management. Operative risks fall under the responsibility of business management, which reports them to the President and CEO.

The heads of the business segments, units and areas are responsible for executing the risk management policy in their own organisations. Every employee is responsible for identifying any risks relating to their own work and bringing them to the attention of their supervisor.

Lemminkäinen’s major risks

Strategic risks

Business risks

Fluctuations in global economic trends and changes in our operating environment affect the demand for our products and services and their cost levels. We continually monitor economic trends and changes in the economy. We aim to forecast them through, for example, scenario exercises during strategic and operational planning. Our goal is to minimise any associated risks.

Risks associated with the price of oil

We use great amounts of oil-based products in asphalt production, which accounts for more than a third of our net sales. The price of bitumen is tied to the global price of oil. Lemminkäinen manages the bitumen price risk with oil derivatives and contractual terms. We use over 300,000 tonnes of bitumen annually, more than half of which is hedged using the above-mentioned methods.

The economic situation in Russia and the development of the rouble exchange rate

The prices of oil and gas also influence the development of the Russian economy. The development of the rouble exchange rate and the rising interest rate have a direct impact on consumers' purchasing power and housing demand.

We manage this risk by aquiring plots in central locations, where demand of  apartments is more stable. We also control the share of our Russian operations' net sales in the Group’s net sales. Our target is that during the strategy period 2014–2018, its share will not exceed 20 per cent of the Group net sales.

Legislative and compliance risks

Legislative changes can affect market development and, consequently, the profitability of our business operations. We continuously monitor and analyse our operating environment.

Legislative and compliance risks become increasingly important when we are expanding our operations into new markets and strengthening our foothold in our current markets. We invest in the implementation of our Code of Conduct and competition law training. In this way, we manage the risk of malpractice and corruption.

Operative risks

Project-specific risks

The significant risks associated with projects involve cost and implementation management. In particular, the large, demanding projects require good project management. We manage this risk by developing our personnel’s project management expertise. We continuously develop our contractual expertise and project management practices during the tender and implementation stage. In 2014, we will revise our management models and decision-making powers, increase the number of risk reviews and intensify the projects’ margin follow-up.

Mistakes and defects in production also pose a risk for us. Our management systems support project management and help us to ensure the quality of products.

Unusual or harsh weather can weaken the profitability of our operations by interrupting or delaying projects.

Plot and sales risks

In our residential and commercial development projects, we are responsible for the entire implementation of the project, starting with plot acquisition. We buy plots in Finland and Russia from both the private and public sectors. We manage risks associated with plot acquisition by determining plot ownership rights and any planning restrictions.

The company’s residential development and construction involves both sales and price risks. As unsold residential units tie up capital, the company only starts new housing construction if a sufficient number of units have been reserved in advance. Reservation and sales rates are being constantly monitored. We also manage the risk by selling entire properties or parts thereof to investors, which enables us to apply the percentage-of-completion method in project revenue recognition. When undertaking commercial development, business premises are usually sold to property investors in the early stages of construction at the latest, thereby reducing sales risks.

Market changes and, for example, a rapid rise in interest rates increase the sales risk.

Personnel risks

The success of our projects is greatly affected by the availability and commitment of competent personnel. With a consistent HR policy, we aim to safeguard our personnel’s expertise and performance and maintain an appropriate age structure. We encourage employee commitment through fair and motivational remuneration, interesting tasks and career development opportunities.

Along with our new strategy, we need new kinds of experts in order to increase the share of insightful infrastructure solutions in our net sales. We manage personnel risks by developing our current personnel’s expertise and employer image.

The new strategy period also increases the need for successful change management. This risk is managed by supporting supervisory work and providing training.

Financial risks

In our business operations, we are exposed to financial risks, the major ones being interest rate, foreign exchange rate, liquidity, credit and funding risks.

Our management of financial risks is based on the treasury policy approved by the Board of Directors, which defines the operating principles and division of responsibility in financial risk management and funding activities.

More detailed information on financial risks is presented in the notes to the 2013 financial statements.

Accident risks

Risks associated with occupational safety and the environment pose an accident risk for us. The majority of our environmental impact stems from our production facilities, construction, and transportation. We regularly monitor our environmental impact. We constantly seek to reduce our environmental impact by, for example, enhancing our production methods and optimising transportation more efficiently. Our Group-level environmental policy, compliance with our management systems and training of our personnel help us to manage our environmental risks.

Risks associated with occupational safety are managed by providing regular training for our personnel and by reporting any safety observations. Our Group Executive Team monitors the development of occupational safety on a monthly basis. We have a Group-level safety policy.

Accidents and damage involving IT systems, personnel security and information security may also pose accident risks for us. We manage these risks by making plans for exceptional circumstances. The implementation of new IT systems also involves risks, which we manage through careful planning and training.

Legal proceedings

An isolated risk is posed by the legal proceedings concerning damages related to the asphalt cartel, about which the District Court of Helsinki gave its decisions on 28 November 2013. For Lemminkäinen, the decisions given concerned the claims of 38 municipalities and the Finnish state. According to the District Court, Lemminkäinen’s share of the damages is approximately EUR 48 million (damages of approximately EUR 26 million as well as interest and legal expenses of approximately EUR 22 million). Lemminkäinen paid damages to 35 municipalities, but not to the Finnish state.

In addition to the claims that the District Court decided on, 14 claims against Lemminkäinen and other asphalt companies for damages are pending. Lemminkäinen has made a provision worth EUR 6 million for these. The amount also includes interest and legal expenses related to the damages.

Lemminkäinen has deemed the claims for damages to be without foundation. Lemminkäinen and other parties have until 31 March 2014 to submit possible appeals to the Court of Appeals.

More information on the asphalt cartel and the related damages can be found in the Board of Directors’ report on 2013 as well as on the company’s website at www.lemminkainen.com/investors.

Major risks in 2014

Risk type Examples of risk management measures
Project-specific risks Complying with the business management system, continual monitoring of production and financing, contractual expertise
The economic situation in Russia and the development of rouble rate Central location of plots, securing sales by, for example, investor sales
Financial risks The efficiency programme, diverse funding sources, implementing the working capital optimisation project to all operating countries
Reputation risks and ethical malpractices A reporting channel for malpractices, review of management modes, continuous communication of the Code of Conduct