Changes in the reporting structure in 2014 and 2015
Lemminkäinen changed its reporting structure on 1 August 2014 into three reporting segments: Infrastructure construction; Building construction, Finland; and Russian operations. The former Scandinavia business segment was integrated into the Infrastructure construction business segment. Russian operations include both building construction and infrastructure construction businesses.
At the beginning of 2015, the Infrastructure construction business segment was divided into two: Paving, mineral aggregates and earthworks businesses were transferred to the new Paving business segment. Foundation engineering, civil engineering and rock engineering constitute the new Infra projects business segment. As of 1 January 2015, the reporting business segments are: Paving; Infra projects; Building construction, Finland; and Russian operations. Building construction in Sweden is reported as part of the Group’s other operations.
In Finland, infrastructure construction decreased due to weak development in building construction and cuts in road maintenance appropriations in the state budget. Underground infrastructure construction remained brisk, especially in urban growth centres. In Sweden, Norway and Denmark, road construction, including the renovation projects, maintained the demand for paving in particular. In addition, the governments of these countries are investing in the infrastructure network development and in road maintenance. In the Baltic countries, the market situation in infrastructure construction was mainly stable. The mild weather prolonged the paving season in all Lemminkäinen’s operating countries.
Net sales by country were 41% from Finland, 49% from Scandinavia and 10% from the Baltic countries. Net sales by business type were 68% from paving (including road maintenance, mineral aggregates and earthworks), 21% from projects and 11% from building construction in Sweden.
In Finland, the profitability was improved by major infra projects as well as paving and mineral aggregates businesses. In Norway, the result turned clearly positive through overhead reductions and by closing down unprofitable sites and business operations, among other measures. The efficiency of paving project management and tendering process has also been improved. The segments’ operating profit includes an approximately EUR 3 million loss related to unreceived payments from the company’s customer Lappland Gold Miners that declared bankruptcy.
At the end of the year, the order book for infrastructure construction was lower than in 2013: EUR 682.6 million (866.7), of which 67% attributable to 2015. The most significant decline in the order book took place in rock engineering in Finland and Sweden.
Building construction, Finland
The market situation in building construction remained weak in 2014. Construction was supported by renovation, which remained stable. Only some 25,000 (28,000) new residential units were started, and the number is not expected to increase in 2015. Housing sales slowed down especially during the second half of the year as consumer demand was decreased by economic uncertainty and longer sales times of old private houses. Commercial construction was minimal, particularly outside the Helsinki metropolitan area. In 2015, the market situation in building construction is estimated to remain similar to 2014.
In January–December, net sales were EUR 539.0 million (592.9) and operating profit was EUR 9.3 million (5.0). The operating profit includes asset write-downs worth EUR 4.1 million (14.1). The operating profit, excluding non-recurring items, was EUR 13.4 million (19.1). The segment’s result was improved by residential and commercial projects in the Helsinki metropolitan area. The profitability was impaired by slowdown of housing sales and failures in individual projects such as a declined margin of approximately EUR 4 million related to an old consortium.
Housing sales slowed down during the second half of 2014 and the number of reservations cancelled was higher than before. Due to the declining markets in 2014, the number of residential development start-ups targeted at consumers was slightly lower than in the previous year. The decrease in consumer demand was compensated by growing sales to investors. The number of unsold completed residential units doubled, and was 336 (164) at the end of the year.
The order book of Building construction, Finland stood at EUR 687.1 million (544.3), of which 58% attributable to 2015. The order book was increased by major contracting projects such as the renovation of the Parliament Building and the Sibelius Academy in Helsinki as well as the school campus of timber to be built in Pudasjärvi with the PPP model.
The economic uncertainty in Russia and the radical weakening of the rouble in 2014 increased mortgage interest rates and banks applied stricter loan terms in many locations. However, the economic and political uncertainty did not decrease consumer demand for housing in the so-called comfort class, where a large proportion of housing transactions are financed by the consumers themselves. Housing sales were brisk especially during the fourth quarter of the year. In infrastructure construction, several state-funded road renovation projects were started, especially on roads departing from Moscow. The outlook for 2015 continues to be uncertain. The declining oil price is slowing down the country’s economic growth and, together with the limited scope of the Russian financial markets, is impairing the general construction market situation. The increase in mortgage interest rates and the decreasing purchasing power of the middle class may reduce the demand for housing this year.
The net sales were EUR 196.1 million (164.5) and the operating profit was EUR 19.7 million (-0.3). The result includes a EUR 4.3 million write-down related to a residential development project completed in 2010. The operating profit, excluding non-recurring items, was EUR 24.0 million (-0.3). The impact of currency exchange rate changes on the euro-denominated net sales was EUR -40.0 million and on the operating profit EUR -4.3 million compared to 2013. Of the net sales, 48% came from residential development projects, 25% from infrastructure construction and 27% from building construction contracting.
Profitability for 2014 was improved by residential development projects, better margins in ongoing contracts and profitable road and bridge special paving projects. Housing sales picked up towards the end of the year and the apartment price level in roubles rose. During the second half of the year, Lemminkäinen completed two residential development and construction projects in St Petersburg, comprising altogether 545 residential units as well as some individual commercial properties and parking spaces. Of the completed projects, a total of 446 residential units had been sold and recognised as revenue at the end of the year. At the end of the financial year, Lemminkäinen had one residential development project (418 residential units) under construction, with estimated completion at the end of 2015. The results for building construction contracting and infrastructure construction developed favourably in 2014, but the company recorded approximately EUR 1 million loss related to the termination of technical building services. The capital tied up in Russian operations at the end of period was EUR 61.9 million (85.6).
The segment’s order book decreased clearly and stood at EUR 86.4 million (322.2) at the end of the year. The order book was decreased by the completion of two residential development projects and fewer contracting projects.