Following new assessments of the project portfolio, Veidekke has decided to perform a write-down of NOK 550 million in the Norwegian civil engineering business. The write-down is primarily related to infrastructure projects where there is great uncertainty pertaining to the revenue base. The company is taking immediate action to improve profitability and risk management in large civil engineering projects and is making changes in corporate management to further focus the Norwegian civil engineering business.
During 2017 Veidekke implemented a major reorganisation and realignment of the strategy for the Norwegian civil engineering business. The background for the changes was that the business had demonstrated unsatisfactory project profitability, particularly in infrastructure projects. In 2017 the civil engineering business accounted for 13% of Veidekke's overall turnover and reported a profit margin of -1.6%. The reorganisation entailed new management, a streamlined project organisation, and greater focus on turnkey and other projects where Veidekke is best equipped to succeed.
A new assessment has been made of the project portfolio, which comprises approx. 50 civil engineering projects in Norway shared between infrastructure, industry and energy/other. A need to reduce portfolio risk was uncovered, and the company has decided to carry out a write-down in the total amount of NOK 550 million, which will be charged to the accounts for the second quarter 2018.
The write-down is mainly attributed to two ongoing and one completed infrastructure project, in addition to a project in the energy sector. Additional write-downs have been carried out on certain other projects in the portfolio where the projects' final forecasts have been revised downwards. As a result, the financial risk in the portfolio is reduced. These projects all precede the reorganisation of the civil engineering business and the new strategy that was drawn up in 2017.
"Our profitability challenges in the Norwegian civil engineering business have not been resolved. Although we are finding that the measures we implemented last year appear to be yielding the desired effects, it is very disappointing that we are required to write down our project portfolio in Norway. A key challenge has been construction contracts on infrastructure projects with major change requirements, where it has proven difficult to receive full compensation for the changes. We acknowledge that, as an organisation, our assessments of the uncertainty and complexity in these projects have been inadequate," comments Arne Giske, President and CEO.
Veidekke is therefore implementing several measures to improve profitability in the civil engineering business.
Changes to corporate management are being made to emphasise focus on the Norwegian civil engineering business, and the Norwegian construction operations will be divided into two parts: Øivind Larsen will become new EVP for the civil engineering business, and Hans Olav Sørlie will become EVP for the building construction business. Dag Andresen will withdraw from the corporate management group, to take on a special responsibility for improvement work related to the civil engineering business. Andresen will continue to report directly to the President and CEO Arne Giske.
The group is expanding its risk management programme at project and portfolio level in all of Veidekke's units. The programme comprises new tools, processes and methods for early risk detection in projects and for making the appropriate assessments and decisions. In addition to the corporate management's ongoing follow-up of projects that entail great uncertainty, a newly-established internal board for the civil engineering business will closely follow up on bids and major ongoing projects.
In the short term, Veidekke will ensure sufficient management capacity on ongoing infrastructure projects and focus on their safe and profitable execution. Going forward, the company will exhibit extreme care when prioritising projects where risk, geography, client and contract type are significant parameters.
"For the civil engineering business, the measures we are implementing now will ensure better control of the project portfolio. We will also conduct a thorough assessment of the business's strategy, in addition to reviewing the cost structure throughout the group with the aim of reducing costs and creating shareholder value», concludes Arne Giske, President and CEO.
Including the write-down of NOK 550 million, the Norwegian construction operations will report a pre-tax profit of approximately NOK -440 to -470 million for Q2 2018. Further details related to Veidekke's second quarter will be published along with the quarterly report on 16 August 2018.
As of Q3 2018, Veidekke's segment reporting will split Construction Norway into Building Construction Norway and Civil Engineering Norway.
A telephone conference for analysts and investors will be held today at 09:00 CET. President and CEO Arne Giske and other members of Veidekke's management team will provide a brief status account for the Norwegian civil engineering business and answer questions.
Conference call details:
Norway: +47 2350 0296
Sweden: +46 8 5065 3942
International: +44 330 336 9411
Meeting code: 1175677
For more information, please contact:
Arne Giske, President and CEO, (+47) 905 89 526, arne.giske@veidekke.no
Lars Erik Lund, EVP Communications and Public Affairs +47 413 31 369, lars.lund@veidekke.no
Jørgen Michelet, Finance director, +47 91 74 38 56, jorgen.michelet@veidekke.no
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Veidekke is one of Scandinavia's largest construction and property development companies. The company undertakes all types of building construction and civil engineering contracts, develops residential projects, maintains roads, and produces asphalt and aggregates. The company is known for its involvement and local knowledge. Revenue is almost NOK 32 billion, and half of the 8,000 employees own shares in the company. Veidekke is listed on the Oslo Stock Exchange and has always posted a profit since it was founded in 1936.
This information is subject to the disclosure requirements pursuant to section 5 -12 of the Norwegian Securities Trading Act.