Risks and uncertainties
Risk management is an essential part of Lemminkäinen’s business operations. Its main target is to ensure achievement of strategic and operational targets with best possible results including continuity of the operations under changing conditions. Lemminkäinen’s risk management is based on the risk management policy approved by the Board of Directors.
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. The company manages the risk structurally by distributing its business operations throughout Scandinavia, the Baltic countries and Russia. However, ongoing changes in management and organisational structure may affect Lemminkäinen's ability to implement its strategy in changing operating environment.
In Russia, the negative economic trends and prolonged political uncertainties including major escalation of sanctions between EU and Russia could, in the worst case scenario, culminate in a standstill of housing sales, changes in the infrastructure markets unfavourable to Lemminkäinen and/or the interruption or exits of ongoing projects. On top of this, the differing political culture, legislation, its interpretation and procedures of the authorities compared to Finland and 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 to Lemminkäinen. In order to manage the risk, Lemminkäinen has increased the efficiency of its housing sales.
Lemminkäinen’s financial performance depends largely on successful contracting 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, management of change requests as well as efficient and timely handling of claims for damages. Lemminkäinen is continually developing its contractual expertise and project management practices during the tender and implementation stage. Project monitoring systems and steering models are being renewed and more attention has been paid to the personnel’s competence development.
In the residential and commercial development and construction projects, Lemminkäinen is exposed to price and sales risks due to the full responsibility over the entire project, starting with plot acquisition. The aim is to actively manage and monitor the valuation risk related to the capital tied up in unsold completed apartments and other assets. Lemminkäinen evaluate new residential development projects by taking the market changes and risks into account. The company starts new housing construction only if a sufficient number of units have been reserved in advance. The requisite number of reserved units varies regionally. When undertaking commercial development, business premises are usually sold to property investors in the early stage of a construction, thereby reducing sales risks.
The price fluctuation of raw materials may have an impact on financial performance. Lemminkäinen’s biggest individual outsourced raw material is bitumen, and its price depends on the world market price of oil. Lemminkäinen manages the bitumen price risk with contractual terms and oil derivatives. On top of this, unexpected changes in the weather conditions and business cycles can cause volatility in income generation.
Lemminkäinen’s business operations are exposed to financial risks, such as liquidity, interest rates, foreign exchange rates, as well as impairment of tangible and intangible goods. Management of financial risks is based on Lemminkäinen treasury policy defining the operating principles and division of responsibility in financial risk management and funding activities. Lemminkäinen seeks to protect itself from currency exchange risks primarily through operative means and, 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 as well as Norwegian krone, Swedish krona and Danish krone.
More information about Lemminkäinen’s risks, including a more detailed description of the company’s risk management, is presented on the company website. A more detailed account of the financial risks is also provided in the notes to the annual financial statements.