Favourable business development, positive outlook for 2008
The 2007 accounting period overall was a positive one for Lemminkäinen. The good result was strongly influenced by brisk activity in office and commercial construction and profitable property developments. The growth of infrastructure construction was sustained by major on-going projects. Demand for technical building services, refurbishment contracting and building materials was also good.
Lemminkäinen’s net sales rose by 21% to EUR 2,174.1 million (1,795.9). Net sales in Finland grew by as much as 26%, whereas the growth rate of the construction market as a whole was 6%. International operations accounted for a full quarter of the Company’s total net sales.
The operating profit was EUR 126.3 million (108.1). The result in Q4 was significantly impacted by a EUR 14 million infringement fine imposed by the Market Court, which found that Lemminkäinen had participated in activities contravening competition legislation on the Finnish asphalt paving market. Excluding this non-recurring item, the comparable operating profit was EUR 140.3 million, representing 6.5% (6.0) of net sales.
Lemminkäinen does not, under any circumstances, approve of the use of illegal procedures in its operations. For several years now, the Group has paid particular attention to training and guidance in the area of competition law.
Outlook for 2008
Commercial, office and logistics construction in Finland will continue to be active, but may slow down towards the end of the year. The selling times of housing units have grown longer and the number of own-development housing starts will decline. The construction projects started by Lemminkäinen in 2007 and already planned for 2008 will keep the company’s construction volume at a good level this year.
In Russia, demand for industrial, residential and commercial construction is still good and the outlook for Lemminkäinen in the country over the next few years is promising.
A 530-unit apartment building is under construction in St. Petersburg. The total value of the project is approx. EUR 50 million. Another significant new project in Russia is the development of a 135-hectare industrial park concept. The idea is to offer companies investing in Russia a fast and low-risk way to establish themselves in the growing Russian market. The industrial park is located about 200 kilometres south-west of Moscow in the province of Kaluga. Twenty or so production plants and logistics centres will set up in the park in the next few years.
In infrastructure construction in Finland, 2008 is not expected to be as busy as last year due mainly to reduced activity in the rock engineering segment. The postponement of some major projects will weaken the market situation. Lemminkäinen’s ongoing, long-term transport infrastructure projects will ensure that the Company has a reasonable stock of work for 2008 and 2009.
The volume of asphalt paving work is expected to remain at the same level as in 2007. Demand for crushing contracting and ready-mix concrete is expected to remain good due to ongoing infrastructure projects and the sustained level of relatively active building construction. The infrastructure construction markets in the Baltic states are expected to grow.
Demand for the servicing, maintenance and repair of technical building and facility systems is expected to remain brisk in Finland. Demand for industrial maintenance services is expected to increase both in Finland and abroad.
The market situation for building materials will remain good on the whole in the near future, although the slowdown in housing production will contribute towards weaker demand for products and services. Urban environment construction will grow steadily.
The outlook for other international operations, e.g. in Poland, India and China, is expected to remain good. Major forest-industry projects that are of interest to Lemminkäinen are being planned in various parts of the world. Demand for 3G-network construction will continue to grow.
Lemminkäinen’s new structure
Lemminkäinen Group was reorganised on 1 January 2008 into four business sectors. The business sectors are building construction, infrastructure construction, technical building services and building products. The new structure supports the revised strategy approved for Lemminkäinen in February 2007 and clarifies the Group’s position in the infrastructure and building construction markets. The new structure’s business model meets the needs of the Group’s customers and will improve Lemminkäinen’s competitiveness.
Challenges in human resources
It has been estimated that by 2020 the construction sector will need 25,000 new workers in addition to replacements for natural wastage. The industry’s training does not correspond to its needs, and competition for skilled human resources is fierce. In spite of rapid growth, Lemminkäinen has been very successful in its recruiting efforts. The Company is well known as a good and reliable employer.
Near-term risks and uncertainty factors
Market risk poses the most significant threat to Lemminkäinen in the near future. Disturbances on international financial markets could spread to Finland and may be reflected in housing demand and other investments.
Operating in a number of business sectors with differing cyclical behaviours is a cornerstone of Lemminkäinen’s strategy. Fluctuating demand for new construction in Finland is counterbalanced by international operations, maintenance and refurbishment contracting. Business abroad accounts for a full quarter of the Group’s net sales and it is expected to grow in the long run. Maintenance and refurbishment contracting make up about 40% of Lemminkäinen’s business. Infrastructure construction, which exhibits little sensitivity to fluctuations in economic activity, generates about 40% of the Group’s net sales. Lemminkäinen’s own housing developments account for only about 10%, which is a much lower percentage than in other large construction companies.
Finally
On the whole, the Group’s order book is good and the prerequisites for favourable business development in 2008 are in place.
I would like to thank the employees of Lemminkäinen Group for a job well done and also our other stakeholder groups for their good collaboration.
Juhani Sormaala
Managing director
Source: Annual report 2007, p. 6-7