Risk management is an essential part of Lemminkäinen’s business operations; it ensures that the most significant strategic, operative, financial and accident risks are identified, analysed, assessed and managed proactively. Risk management aims to ensure the achievement of the Group’s strategic and operational targets with the best possible result as well as to secure the continuity of the operations under changing conditions, too.
Our risk management is based on the risk management policy approved by the Board of Directors. 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 planning.
The Group’s President and CEO is responsible for the implementation of risk management. Members of the Group Executive Team are responsible for the execution of risk management in their respective areas of responsibility. The Group Executive Team monitors the implementation of risk management regularly. Every Lemminkäinen employee is responsible for identifying any risks related to their own work and for bringing them to the attention of their supervisor.
We train our personnel to implement risk management systematically and effectively. We provide our personnel with training in legal and contractual matters. The Group also has detailed guidelines for different areas, such as competition law and insider issues. We monitor compliance with these guidelines as part of line operations and management.
Lemminkäinen’s major risks
Uncertainty in the global economy and financial markets may have a negative effect on Lemminkäinen’s operations, performance, financial position and sources of capital. Lemminkäinen’s business operations are sensitive to new construction cycles in Finland in particular. We manage the risk structurally by distributing our business operations throughout Scandinavia, the Baltic countries and Russia. However, ongoing changes in the organisation and management may affect our ability to implement our strategy in the changing operating environment.
In Russia, the weakened economic situation, the prolonged political uncertainty or the significant escalation in the sanctions between the EU and Russia could, in the worst case scenario, lead to a standstill in housing sales, changes in the infrastructure market that are unfavourable to us, and/or the interruption of or withdrawal from our ongoing projects. Furthermore, the political culture, legislation, its interpretation and regulatory practices in Russia compared to Finland as well as the uncertainty of the legal system, administrative procedures and interpretation of law enforcement mechanisms as well as changes in them may result in significant risks for us. In order to manage the risks, we have increased the efficiency of our housing sales.
Legislative changes can affect market development and customer behaviour and, consequently, the profitability of our business operations. We continuously monitor and analyse our operating environment, invest in the maintenance and implementation of our Code of Conduct and Corporate Governance, and provide guidelines and training to our employees.
Lemminkäinen’s financial performance depends largely on successful contract and project management, which, among other things, includes the correct pricing of the project, reasonable use of resources, careful planning and scheduling, ability to procure raw materials at competitive prices, cost control, appropriate change management as well as efficient and timely handling of claims for damages. We are continually developing our contractual expertise and project management practices during the tender and execution stage. We are renewing project tracking systems and steering models, and we are paying more attention to the personnel’s competence development.
Residential and commercial development and construction projects involve sales and price risks, as we have full responsibility over the entire project, starting with plot acquisition. Our target is to actively manage and monitor the risk related to the capital tied up in unsold completed apartments and other assets. We take market changes and risks into account when assessing the profitability of new development and construction projects. We only start new residential projects if a sufficient number of units have been reserved in advance, taking into consideration the area in question, and we keep the number of unsold completed apartments at a minimum. When undertaking commercial development, we usually sell the business premises to property investors in the early stages of construction, thereby reducing sales risks.
Fluctuations in the price of raw materials may have an impact on financial performance. Lemminkäinen’s biggest individual outsourced raw material is bitumen, and its price is based on the world market price of oil. We manage the bitumen price risk with contractual terms and oil derivatives. Unexpected changes in the weather may also cause fluctuations in our income from road construction and paving.
As our business operations and operating environment develop, we also need new kinds of expertise. The success of our development and business projects is greatly affected by the availability and commitment of competent personnel. In addition, Lemminkäinen’s turnaround requires change management expertise. We manage these risks by supporting supervisory work and providing training as well as by investing in the competence development of current employees and in increasing their work motivation, whenever possible.
In its business operations, Lemminkäinen is exposed to financial risks, such as liquidity, foreign exchange rate and interest rate risks, and impairment of tangible and intangible assets. Management of financial risks is based on the treasury policy, which defines the operating principles, and division of responsibility in financial risk management and funding activities as well as the company's risk appetite. Lemminkäinen protects itself from currency exchange risks primarily through operative means. If necessary, transaction risks are hedged with the aid of foreign currency loans and currency derivatives. The company does not hedge translation risk. In 2014, approximately 40% of Lemminkäinen’s net sales were generated in functional currencies other than the euro, the major currencies being the Russian rouble and the Norwegian, Swedish and Danish kronas.
The majority of our environmental impact stems from our production facilities, construction, and transportation. We regularly monitor our environmental impact and constantly seek to reduce it by, for example, enhancing our production methods and optimising transportation. Our guidelines, compliance with our management systems and personnel training help us to manage our environmental risks.
We manage risks associated with occupational safety by providing regular training for our personnel and by investing in the reporting of safety observations. Lemminkäinen’s Board of Directors, the Group Executive Team and the business segment management teams regularly monitor the development of occupational safety.
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 involves risks, which we manage through careful planning and training.
One-off risks are posed by the legal proceedings concerning damages related to the asphalt cartel as well as charges for an alleged environmental offence related to the amounts of recycled asphalt used in asphalt mass production. More information about the legal proceedings and related claims can be found in the Board of Directors' report and on the company’s website.
More information about risks and risk management
Lemminkäinen also publishes its assessment of the most essential risks in its interim reports that can be found on the company’s website at www.lemminkainen.com/Lemminkainen/Investors/Releases-and-publications/Interim-Reports-and-Financial-Statements-Bulletins/.
More information on the asphalt cartel and the related damages can be found on the company’s website at www.lemminkainen.com/Lemminkainen/Investors/Lemminkainen-as-an-investment/Asphalt-cartel-issue/.
More information about Lemminkäinen’s financial risks and management can be found on the company’s website at www.lemminkainen.com/Lemminkainen/Investors/Credit-facilities/Financial-risks/.