Lemminkäinen Group

We define risks as either internal or external factors that, if they were realised, would hamper our ability to achieve our strategic and financial objectives. We evaluate the significance of a risk using a combination of the likelihood of the event occurring and its effect.

At Lemminkäinen, risk management is a continual and comprehensive process. It’s part of our everyday work and management processes.

RESPONSIBILITY

Our risk management is based on the risk management policies approved by the Board of Directors in 2011. The Board also supervises the implementation of our risk management. The Board defines the Group’s risk-taking capacity and willingness to take risks, both as part of its strategy and annual planning processes and through its decisions. The Board’s Audit Committee monitors the sufficiency and effectiveness of the Group’s risk management in accordance with the annual Action Plan.

The President & CEO is responsible for the implementation of risk management. The CFO holds primary responsibility for managing financial risks with support from our business sectors’ management. The executive responsible for risk management coordinates policies and processes, and reports risks to the President & CEO , the Executive Board and the Board of Directors. He also works with units and functions to develop risk management guidelines and procedures. The heads of our business sectors, units and functions are responsible for executing risk management 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
Operating environment risks

Fluctuations in the world economy, megatrends in our operating environment, and changes in political and technological factors affect demand for Lemminkäinen’s products and services and the company’s cost level. When planning our operations, we actively monitor – and attempt to forecast – changes in our operating environment, thereby minimising any associated risks. 

Market risks

Operations in Finland generate 66 per cent of Lemminkäinen’s net sales, and about half of our business functions are dependent on building construction in Finland. Although construction in Finland grew in 2011, growth is expected to halt or even decline in 2012. The cyclical sensitivity of new construction poses the most significant market risk to our operations. We manage this risk by structural and operational means.

The more stable demand for infrastructure construction in the Nordic countries balances out fluctuating volumes in new domestic construction, as do maintenance and upkeep,

In our own development of residential and business locations, we manage the sales and price risks stemming from unstable demand by only beginning construction once a sufficient number of advance reservations have been made. In addition, we seek to sell business premises to property investors in the initial phase of construction at the latest. Changes in the market and, for example, a rapid rise in interest rates can quickly increase market risks.

We use bitumen in our asphalt production and, as the price of bitumen is tied to the global price of oil, we use oil derivatives and contracts to manage this price risk.

Operative risks
Project risks

Project risks may be associated with, for example, costs and implementation management. These are controlled through systematic project management at both the tender and implementation stage. The occasional unsuccessful project does not, however, significantly affect our financial position.

Climate change, and unusual or harsh weather can weaken the profitability of our operations by interrupting or delaying projects. Mild winters on the other hand extend our working season.

Organisational risks

We manage the risks associated with the growth and internationalisation of our organisation by maintaining awareness of political, cultural and legislative factors in our business countries, and by standardising our operating methods and reporting systems.

As our operations are labour-intensive, the availability of skilled personnel is essential for our growth. We seek to safeguard our organisation’s expertise and effectiveness by avoiding uneven age structures and minimising personnel turnover. In 2011, we invested in developing the recruitment process, orientation, training, good managerial work, key performers, and fair and motivating remuneration.

Change management risks

In line with its strategy Lemminkäinen is overhauling itself by becoming an even more unified construction company. As part of this change, the structure of the Group and the operating model of the business functions were changed. At the beginning of 2011, support services, HR, legal affairs, finance, IT as well as communications and marketing changed over to a more centralised operating model. Procurements are also being centralised. In autumn 2011, we started up an efficiency programme to accelerate our profitability trend, and the programme involved personnel reductions. HR management and personnel’s commitment pose challenges during the implementation of changes. Managers who are well-versed in change management and successful internal communications that support change play key roles in risk management. Accordingly, managerial training and communications were developed in 2011.

Financial risks

In the course of its operations, Lemminkäinen is exposed to financial risks, the major ones being interest rate, exchange rate, liquidity and credit and availability of funding. By managing financial risks, we seek to reduce the uncertainty that changes in financial markets may cause to our value, result and cash flow. 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 risk management and funding activities.

Interest rate risk

Fluctuations in interest rates have an impact on Lemminkäinen’s result and cash flows. We seek to minimise our interest rate sensitivity by setting the average interest rate fixing period of our liabilities to the same level as the predicted interest rate sensitivity ofoperations. We can take out both variable and fixed rate long term loans. In order to optimise our interest rate risk, the ratio of fixed to variable rate loans can also be changed using interest rate derivatives.

Foreign exchange rate risk

Exchange rate risks mainly arise in the form of translation and transaction risks. Translation risks occur through differences in currency exchange rates when the income statements and balance sheets of our foreign companies are translated into the Group’s home currency. In accordance with our treasury policy, we primarily protect ourselves from translation risks by ensuring that all equity funds in foreign companies are kept sufficiently small.

Transaction risks arise in foreign currency denominated transactions from operating and financing activities. We seek to hedge our transaction risks of business operations primarily by operative means. The remaining transaction risk is hedged by using instruments such as foreign currency derivatives or foreign currency loans.

Funding and liquidity risks

In order to guarantee uninterrupted operations, we must ensure access to sufficient funding under all circumstances. We must cover the running of our day-to-day operations whilst ensuring adequate liquidity and the risk premium required to implement strategic projects. We seek to optimise the use of our liquid assets in funding business operations and to minimise interest and other financial costs.

Our Group Treasury is responsible for overall liquidity management and ensuring that we have adequate credit lines and a sufficient number of financing sources. The Treasury also ensures that our loans mature evenly over several years. Our liquidity risk management is based on monthly forecasts and daily cash flow planning.

Credit risk

We are exposed to credit risks through all of the Group’s receivables – both trade receivables and those associated with financial intermediaries (cash, deposits, derivatives and equivalents). We manage our credit risk by retaining possession of buildings until we have received payment for their construction, and by minimising and spreading out our receivables.

Capital structure risks

Capital structure, capital invested in operations, and interest-bearing liabilities pose a risk to profitability. We employ effective capital management to ensure that our company remains operational and competitive whatever the economic climate. We also continually monitor our liabilities, equity ratio, and net debt to EBITDA ratio. This enables us to maintain a sufficient risk-taking capacity and effective loan-servicing ability, whilst also paying good dividends.

Accident risks

Our accident risks are mainly associated with the environment, working capacity, and occupational health, safety and wellbeing. The majority of our environmental effects stem from our production facilities, construction, and transportation. For more detailed information about environmental issues, see the Material and energy efficiency section of the Annual Report 2011 on page 40. You can read more about occupational safety in the Occupational health, safety and wellbeing section starting on page 54.

Litigations

Writs of summons filed at district court level by the Finnish state and a number of municipalities pose a risk. In 2009, the Supreme Administrative Court (SAC) ordered Finnish asphalt industry companies to pay an infringement fine for violations of the Act on Competition Restrictions.

At the end of 2011, 40 claims for damages brought by municipalities and the Finnish state (Finnish Transport Agency) were pending against Lemminkäinen and other asphalt industry companies in the District Court. The claimants contend that restrictions of competition have caused them damages. The total amount of damages sought from Lemminkäinen totals about EUR 117 million. After the Finnish Transport Agency changed its claim, the total amount of claims rose in January 2011 by approximately EUR 15 million. The claims presented in the statements of claim differ from each other as regards their amounts and grounds.

The ruling rendered by the SAC in 2009 as it stands does not mean that Lemminkäinen or the other asphalt industry companies actually caused any damages to the asphalt work clients. The ruling does not concern the individual contracts that the claimants cited in support of their claims. Nor does the ruling concern the pricing of individual contracts. The SAC has not investigated the contention that inflated prices have been charged for the contracts.

Lemminkäinen’s initial position is that the claims for damages are without foundation. The claims will be processed in the order and schedule set by the District Court. Preparatory hearings started in January 2012. A more detailed schedule of the process and the dates of the rulings is not available at the present time.

No provisions have been made for the actions filed at the district court by the Finnish Road Administration and the said municipalities.

Lemminkäinen will provide information on the proceedings in its interim reports or in separate releases, as necessary.

4.4.2012