SRV’s financial statement release January–December 2018: The order backlog rose to EUR 1.8 billion, cash flow positive despite the loss-making result

SRV GROUP PLC       FINANCIAL STATEMENT RELEASE       6 FEBRUARY 2019       8:30 EET

SRV’s financial statement release January–December 2018: The order backlog rose to EUR 1.8 billion, cash flow positive despite the loss-making result

January-December 2018 in brief:

• Revenue declined by 14 per cent to EUR 959.7 (1,116.1 1−12/2017) million. Revenue was down in all operations, particularly the housing business. 
• Operative operating profit amounted to EUR -10.0 (27.0) million. Operative operating profit was weakened by longer delivery periods and a rise in material and labour costs due to the market situation, and especially by the higher-than-expected costs of the REDI shopping centre, which was implemented as a fixed-price construction contract and opened in September. The costs of REDI rose by a further EUR 11.1 million in the fourth quarter. Excluding the negative impact of REDI on earnings, EUR 40.8 million, SRV’s operative operating profit for January-December would have been EUR 30.8 million. Operative operating profit was also weakened by impairment of EUR 4 million in International Operations. Capital gains of EUR 14 million from sales of SRV Kalusto Oy in turn reduced the loss.
• Operating profit decreased to EUR -19.8 (15.3) million. Operating profit was influenced by the change in the exchange rate of the rouble, which had a net impact of EUR -9.8 (-11.7) million. The exchange rate impact was caused by the conversion of euro-denominated loans to roubles and hedging expenses.
• The result before taxes was EUR -37.3 (4.6) million.
• Earnings per share were EUR -0.56 (0.05).
• At period-end, the order backlog stood at EUR 1,832.0 (1,547.9) million. During the review year, the order backlog strengthened by 18 per cent, with the recognition of new agreements to the value of EUR 1,133 (771) million. 89 per cent of the order backlog has been sold.
• Equity ratio was 28.5 (35.5) per cent and net gearing was 121.1 (105.0) per cent. The change in the equity ratio and net gearing were impacted by the weaker rouble exchange rate and loss-making result. Similarly, the key figures improved in 2018 thanks to steps taken to lighten the balance sheet and positive cash flow.
• Due to the rise in net gearing caused by the REDI project, SRV agreed on the temporary raising of the covenant of the EUR 100 million credit facility with the bank syndicate in the second and third quarters, but this was not required in the fourth quarter.
• The Board of Directors proposes that no dividend will be paid for the year now ended (EUR 0.06 in 2017).

October–December 2018 in brief:

• Revenue declined to EUR 299.8 (339.0 10-12/2017) million. The primary reason behind the lower revenue was the decrease in revenue from housing construction in Finland.
• Operative operating profit declined to EUR 1.5 (14.0) million. Operating profit was weakened by a rise in costs due to the market situation, longer delivery periods and particularly the higher-than-expected costs of the REDI shopping centre. The costs of REDI rose by a further EUR 11.1 million in the fourth quarter. Operative operating profit was also weakened by impairment of EUR 4 million in International Operations. Capital gains of EUR 14 million from sales of SRV Kalusto Oy had a positive impact on the result for the quarter.
• Operating profit was EUR 0.1 (11.2) million. The rouble exchange rate in International Operations had an impact of EUR -1.4 (-2.8) million on operating profit.
• The result before taxes was EUR -6.2 (9.3) million.
• Earnings per share were EUR -0.08 (0.18).
• The company announced a new segment structure effective as from 1 January 2019. In Construction, we’ll be focusing on efficient project management and implementation, as well as high-quality construction and an excellent customer experience. We have gathered all of our property investment expertise together under Investments.

This interim report has been prepared in accordance with IAS 34, and the disclosed information is unaudited.

Measures taken to improve financial performance

• SRV has continued to take steps to improve its profitability towards its strategic earnings level. The company has boosted its operational efficiency, such as by selecting its future projects even more prudently with regard to profitability and capital commitment. SRV has also focused on higher efficiency in design and savings in procurements.
• Work to improve the balance sheet structure and liquidity is progressing. During the entire year, the company released over EUR 90 million in capital employed in the balance sheet. This was achieved by reducing working capital, selling plots that have been included in the balance sheet for a long time, and accelerating sales of existing smaller-scale investments and unsold residential units. We also manage the capital employed in our balance sheet by acquiring new plots for external plot funds. The equipment business was sold in December for EUR 21 million. In addition, the process of selling the Pearl Plaza shopping centre in St Petersburg, Russia is continuing. 

Outlook for 2019

• More developer-contracted housing units will be completed in 2019 than in the comparison period. It is estimated that a total of 809 developer-contracted housing units will be completed in 2019 (526 in 2018).
• SRV makes long-term procurement agreements, due to which the expected reduction in construction costs will not have a significant effect on the company’s earnings performance in 2019. The trend in rental income from shopping centres is positive, but slower than anticipated.
• Full-year consolidated revenue for 2019 is expected to grow compared with 2018 (revenue in 2018: EUR 959.7 million). Operative operating profit is expected to improve compared with 2018 and to be positive (operative operating profit EUR -10.0 million).

CEO's review

2018 was our weakest year in terms of our result. Even though operative operating profit was slightly positive in the last quarter, we posted a loss for the full year. Although we rigorously screen new projects and are continually gaining experience in implementing complex projects, the sector’s rapid growth rate has been reflected in cost pressures and poor earnings trends in some projects. In particular, the higher-than-expected costs of the REDI shopping centre and continued geopolitical uncertainty in Russia pushed SRV’s full-year result for 2018 into the red.

In spite of the sector’s strong growth and cost pressures, many of our projects progressed well. For instance, Helsinki’s New Children’s Hospital was opened in September 2018. In the Tampere Deck project, work has begun on the deck’s support structures and shell tile, and the parking facility and population shelter are also under construction. We also have many major projects under construction in the field of school and hospital construction, such as the Jokirinne Learning Centre in Kirkkonummi, a new building at Tampere University Hospital, Central Finland Hospital Nova in Jyväskylä, and HUS’s Siltasairaala Hospital in Helsinki.

In the last quarter, we booked a total of EUR 438 million in new orders into our order backlog. The most significant of these was the startup of the Terminal 2 extension project at Helsinki Airport. Our order backlog is strong, EUR 1.8 billion, 18 per cent larger than a year earlier. 89 per cent of the order backlog has been sold.

SRV operates shopping centres in Russia and Finland, and our shopping centre business accounts for 17 per cent of our revenue. The REDI shopping centre opened in September in the Kalasatama, Helsinki, and during the early months our investments have focused on creating awareness and increasing visitor numbers. Visitor numbers fell somewhat short of targets in the first few months, but we believe that 2019 will bring the desired results. Visitor numbers at Pearl Plaza in St Petersburg, Russia, rose by 5 per cent to 9.6 million in 2018. Strong sales growth was also seen. The Pearl Plaza shopping centre is ready for sale, and we are currently looking into this.

Work to improve the balance sheet structure and liquidity is progressing. During 2018, we released over EUR 90 million in capital employed in the balance sheet, mainly by boosting working capital and divesting plots.  In December, we divested the entire share capital of SRV Kalusto Oy to Ramirent Finland for EUR 21 million. This transaction has enabled us to create an even better foundation on which to further develop equipment rental and construction processes on our construction sites.

Our new organisation, which is divided into the Construction and Investments segments, came into force at the beginning of the year. We believe that the new segments will result in sharper leadership, enhance capital management, and increase transparency. In Construction, we’ll be focusing on efficient project management and implementation, as well as high-quality construction and an excellent customer experience. We have gathered all of our property investment expertise together under Investments. This leaves us better equipped to succeed in the increasing competition and changing market conditions.

We have clear goals for 2019: efficient construction in our projects, improving profitability, and further developing our balance sheet structure. We believe that 2019 will yield a better result, and that both our operating result and cash flow will be in the black. Rental income from our shopping centres is also expected to rise in both Finland and Russia.

I’d like to extend a big thank you for the past year to our dedicated personnel and all of our partners!

Juha Pekka Ojala, President and CEO

Overall review

¹⁾ Operative operating profit is determined by deducting the calculated currency exchange differences included in financial items in Russian operations and their potential hedging impacts from operating profit. Exchange rate differences during the review period amounted to EUR -9.8 (-11.7) million, of which the effect of hedging was EUR 0.6 (-2.5) million.

January-December 2018

The Group’s revenue declined by 14 per cent to EUR 959.7 (1,114.4 1-12/2017) million. Revenue contracted in all business areas, particularly in the housing business.  Fewer developer-contracted housing units were recognised as income than in the comparison period, a total of 523 (825).

The Group’s operative operating profit amounted to EUR -10.0 (27.0) million. Operative operating profit was weakened by longer delivery periods and a rise in material and labour costs due to the market situation. The major reason for the loss-making result was that the costs of the REDI shopping centre, which was implemented as a fixed-price construction contract and completed in September, were higher than expected.

The costs of REDI rose by a further EUR 11.1 million in the fourth quarter. Excluding the negative impact of REDI on earnings, EUR 40.8 million, SRV’s operative operating profit for January-December would have been EUR 30.8 million. Operative operating profit was weakened by an impairment of EUR 4 million in International Operations.  Capital gains of EUR 14 million from equipment sales reduced the loss.

The Group’s operating profit was EUR -19.8 (15.3) million in the red due to high costs in Operations in Finland and the REDI shopping centre and International Operations. The operating profit of International Operations, EUR -17.8 million, was impacted above all by the change in the rouble exchange rate, which had a net effect of EUR -9.8 (-11.7) million. The exchange rate impact was caused by the conversion of euro-denominated loans to roubles and hedging expenses. Exchange rate differences with no impact on cash flow vary in each interim report in line with fluctuations in the exchange rate of the rouble. As part of the euro-denominated loans were redenominated to roubles in the Russian associated companies in the early part of the year, the original rouble risk has decreased to about a half.

At period-end, the Group’s order backlog stood at EUR 1,832.0 (1,547.9) million. The order backlog has grown by 18 per cent since the end of 2017. The sold share of the order backlog was 89 (82) per cent.

New agreements valued at EUR 1,133 (771) million were signed in January-December, of which the most significant were the HUS Siltasairaala Hospital in Helsinki, Tampere Deck, and the expansion of the Helsinki Airport and renovation of its Terminal 2.

The Group’s profit before taxes was EUR -37.3 (4.6) million.

The Group's earnings per share were EUR -0.56 (EUR 0.05).

The Group’s equity ratio stood at 28.5 (35.5) per cent and net gearing at 121.1 (105.0) per cent. In addition to the loss-making result, an increase in net debt due to seasonal growth in invested capital and the weaker exchange rate of the rouble contributed to the change in the equity ratio and net gearing.

Segment reporting revised

As of 1 January 2019, SRV will report on two business areas: Construction and Investments (previously referred to as Property development). The Construction segment covers all of SRV’s construction activities including the capital and plots required for developer-contracted housing production. Construction encompasses housing construction, business construction, technical units, procurement, and internal services. The Investments segment in turn encompasses both complete and incomplete sites in which the company is a long-term investor. Plots that SRV will develop itself, and whose expected profits will be generated through development, will also be reported on under Investments. Investments focuses on the management and realisation of the Group’s real estate investments, and on the creation and ownership of new joint investment structures.

SRV started providing additional information on the capital invested in the Construction and Investments (previously referred to as Property development) businesses and the return on investment in its interim reports for 2018. SRV’s first-quarter interim report for 2019 will use the new segments, and comparison figures are scheduled for publication in March 2019.

Financial objectives

SRV’s strategy and all of its operations are guided by the 2018–2022 strategic financial objectives that were approved in February 2018: 

• After a phase of rapid revenue growth, SRV primarily seeks to increase annual operative operating profit.
• The objective for operative operating profit margin is 8 per cent. Of this objective, 6 percentage points will be generated by construction and 2 percentage points by shopping centre rental income as part of associated company holdings.
• The objective for return on equity is at least 15 per cent by the end of the strategy period.
• The objective for return on investment is at least 12 per cent by the end of the strategy period.
• The company seeks to maintain the equity ratio above 35 per cent.
• The longer-term objective is to distribute dividend of 30-50 per cent of the annual result, taking into account the capital needs of business operations.

The achievement of these strategic objectives will be based on moderate but steady economic growth in Finland, and Russia’s economy stabilising at a slightly stronger level. Growth in SRV’s developer-contracted projects is also required. SRV seeks to divest shopping centres that are in the management phase when the market situation allows. SRV will continue to develop projects in Russia that can be launched when the Group’s capital structure allows and the financial criteria of the properties are fulfilled.

Reaching the profitability targets requires not only boosting the efficiency of the company’s own operations, but also the more prudent selection of new projects with regard to profitability and capital commitment. The company anticipates that it will achieve its strategic earnings level by the end of 2022.

Proposal for the distribution of profits

The parent company’s distributable funds on 31 December 2018 are EUR 170,668,647.19, of which net profit for the financial year is EUR 3,368,158.40. The Board of Directors proposes to the General Meeting that no dividend be paid for the 2018 financial year.

Annual General Meeting

SRV Group Plc’s Annual General Meeting is planned to be held on Tuesday, 19 March 2019 at 4.00 pm. The Annual General Meeting will deal with the matters specified in Article 11 of the Articles of Association and any other Board proposals. The Board of Directors will convene the meeting separately in due course.

Espoo, 5 February 2019

Board of Directors

All forward-looking statements in this review are based on management’s current expectations and beliefs about future events, and actual results may differ materially from the expectations and beliefs such statements contain.

Financial results briefing

A conference for analysts, fund managers, investors and representatives of the media will be held on 6 February 2019 at 12.00 EET at the Living Lab, address Kaasutehtaankatu 1, 00540 Helsinki. The event will be held in Finnish.
A live webcast of the conference will begin at 12.00 EET, available through the company’s website www.srv.fi/en/investors. The presentation will be available on the company's website.

For further information, please contact:
Juha Pekka Ojala, CEO, tel. +358 (0)40 733 4173, jp.ojala@srv.fi 
Ilkka Pitkänen, CFO, tel. +358 (0)40 667 0906, ilkka.pitkanen@srv.fi 
Maija Karhusaari, SVP, Communications and Marketing, tel. +358 (0)45 218 3772, maija.karhusaari@srv.fi   

www.srv.fi

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SRV in brief
SRV is a bold developer and innovator in the construction industry. We want to offer the best customer experience as a constructor of urban city centres, while also being the most attractive employer in the industry. Our genuine cooperation and enthusiasm for our work comes across in every encounter. Sustainability is reflected in all our activities.

Established in 1987, we are a publicly listed company since 2007 in Helsinki Nasdaq stock exchange that operates in selected growth centres in Finland and Russia. Our revenue in 2018 was EUR 960 million. Over 1,000 people work for us and we employ a network of almost 4,000 subcontractors in our projects.

SRV - Building for life