Revenue grew 40 per cent, weakening of the rouble significantly decreases earnings

SRV GROUP PLC     HALF YEAR FINANCIAL REPORT     20.7.2017, AT 8.30

Revenue grew  40 per cent, weakening of the rouble significantly decreases earnings

SRV Group Plc changes its outlook for operating profit and introduces the concept of operative operating profit in order to improve comparability

January-June 2017 in brief:

• Revenue increased to EUR 508.5 (362.4 1−6/2016) million (up 40%). Revenue growth was seen particularly in business and housing construction in Operations in Finland.
   
• Operative operating profit* amounted to EUR 5.5 (4.2) million (up 33%). Revenue growth in Operations in Finland and the recognition of more developer-contracted housing than in the comparison period had a favourable impact on the operating profit. Operative operating profit was weakened by a rise in the costs of certain projects that are under construction and the cost impact of one project that has already been completed.
   
• The rouble exchange rate has fluctuated significantly. The most significant item affecting the result is euro-denominated project loans of associated companies in Russia. At the end of the reporting period the loans are converted into euros, which creates a calculated currency exchange differences to the line Percentage of associated companies' profits. The difference has no impact on cash flow.
   
• Operating profit decreased to EUR -2.0 (4.1) million. Operating profit was weakened by the decline in the result of International Operations to EUR -10.8 (-2.5) million. The result of International Operations was impacted above all by the change in the rouble exchange rate (effect: EUR -7.6 million).
   
• The result before taxes was EUR -8.0 (-7.0) million. The result for the comparison period was weakened by a EUR -6.6 million fair value revaluation of a ten-year interest rate hedge.
   
• Earnings per share were EUR -0.17 (-0.15).
   
• At period-end, the order backlog stood at EUR 1,594.6 (2,021.6) million. During the comparison period, the Nova Hospital in Central Finland was recorded in the order backlog. In addition, agreements for several new larger-scale projects valued at a total of over half a billion euros were signed in January-June this year, and these will be included in the order backlog towards next year.
   
• SRV’s equity ratio was 33.5 (36.9) and gearing was 114.4 (103.1) per cent. The weaker exchange rate of the rouble contributed to the change in the equity ratio.

April-June 2017 in brief:

• Revenue increased to EUR 284.8 (218.5) million. Revenue growth was seen in Operations in Finland, while the revenue of International Operations declined, as expected.
   
• Operative operating profit decreased to EUR 2.8 (4.1) million. Operative operating profit was weakened by a rise in the costs of certain projects that are under construction and the cost impact of one project that has already been completed.
   
• The rouble exchange rate has fluctuated significantly. The most significant item affecting the result is euro-denominated project loans of associated companies in Russia. At the end of the reporting period the loans are converted into euros, which creates a calculated currency exchange differences to the line Percentage of associated companies' profits. The difference has no impact on cash flow.
   
• Operating profit decreased to EUR -9.3 (4.1) million. Earnings were impacted by the result of International Operations, which weakened to EUR -14.0 million due to the rouble exchange rate.
   

• The result before taxes was EUR -15.3 (-1.5) million. The result for the comparison period was burdened by a EUR -2.3 million fair value revaluation of interest rate derivatives.
   
• Earnings per share were EUR -0.26 (-0.04).

*In  order to improve comparability in the case of actual earnings, as from 20th of July SRV has adopted the new concept of “operative operating profit”. It differs from the IFRS definition of operating profit in that it eliminates the calculated currency exchange differences included in financial items in Russian operations and their potential hedging impacts.
     

Events after the period

• On 4 July 2017, SRV signed a contractor agreement with the property management centre of the City of Helsinki for the construction of the Jätkäsaari elementary school. The project is valued at around EUR 23 million. SRV is serving as the project management contractor. Construction will begin in autumn 2017 and the school will be completed in autumn 2019.

Outlook for 2017

• The Group’s full-year consolidated revenue for 2017 is expected to grow compared with 2016 (revenue EUR 884 million). If the rouble exchange rate remains at the level prevailing the end of the second quarter 2017, operating profit is expected to weaken, but operative operating profit to improve, compared with 2016 (operating profit EUR 27.7 million and operative operating profit EUR 26.3 million). A profitability level in accordance with strategy will not be attained, however, until the end of the strategy period 2019–2020.

• Although developer-contracted housing will be completed on a steadier schedule than in 2016, a significant part of operating profit will still be made in the second half of the year. Based on current schedules, SRV estimates that a total of 816 developer-contracted housing units will be completed during 2017.
  
   
• The operating currency of all of SRV’s subsidiaries and associated companies in Russia was changed to the rouble during 2016. This accounting change will make SRV more susceptible to fluctuations in the rouble exchange rate, which may impact full-year operating profit.

CEO's review

Early 2017 has been in line with expectations in many ways. We’re currently working on more than eighty construction sites in growth centres around Finland, both on large projects that will take many years to complete and smaller projects. Our good speed is also reflected in our revenue, which is continuing to grow in accordance with our plans, above all thanks to Operations in Finland.

With respect to operating profit, we are far from our objectives. The changes in the rouble exchange rate alone, which have no cash flow impact, knocked almost EUR 8 million off our earnings for the first part of the year. Due to the uncertainty of the ruble exchange rate, we decided to change our outlook for operating profit in 2017. However, the operative operating profit is expected to improve. In this interim report, we are for the first time introducing the concept of operative operating profit, which describes our actual business situation exclusive of currency exchange rate impacts. This is intended to better highlight our performance in actual business operations. The operative operating profit for the first part of the year was EUR 5.5 million, which is not at the desired level, either.

A year ago, the order backlog rose to over two billion euros for the first time in our history. In the comparison period, for example the Nova Hospital in Central Finland was recorded in the order backlog. We will not quite reach that level this year, but the current level is still excellent. Our order backlog grew with many new projects and we also signed new agreements valued at over half a billion euros, which will be included in our order backlog next year. These include Siltasairaala Hospital in Helsinki and the extension of Terminal 2 of Helsinki Airport, to name but two. Siltasairaala is another demonstration of our success in establishing ourselves as a leading expert in demanding hospital construction, and our expertise will continue to be in demand.

In the second quarter, we handed over several projects, such as the Niitty shopping centre in Espoo and HKScan’s new chicken processing facility in Rauma. The trend in our housing construction is also delightful. We predict that we will recognise more than 800 housing units as revenue this year, and currently have over 3,000 homes under construction. At the same time, the housing sales figures look excellent. We had sold over 800 residential units by June, more than three times as many as in June last year. The number of housing start-ups in January-June was also high, close to 600 units, much more than in 2016 as a whole. This serves to safeguard our operations in 2018 and keeps us in the top ranks of the largest housing constructors in the Helsinki metropolitan area.

Work will continue in line with our plans during the rest of the year. For instance, work at REDI has progressed to the point that there is a little bit over a year left until the opening of the shopping centre. Construction of the tallest residential tower in Espoo is now in the finishing phase in Niittykumpu, and tunnelling works on Ring Road 1 in Keilaniemi are progressing at a rapid clip. In the case of project development, the company has the greatest expectations for the Tampere Central Deck and Arena project, for which a final decision is expected to be made in the latter part of the year. SRV also faces challenges, especially with respect to profitability and fluctuations in currency exchange rates. Furthermore, the general cost level has shown signs of increasing for a while now, and the overheating of the construction industry is evident above all in the scarcity of salaried employee resources. We are well aware of these issues and in the latter part of the year will make a concerted effort to steer the company towards our targets.

Juha Pekka Ojala, President and CEO

Overall review

*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 -6.9 (0.0) million and hedging expenses to EUR -0.7 (0.0) million.

January-June 2017

The Group’s revenue rose by 40.3 per cent to EUR 508.5 (362.4) million. Particularly good growth was seen in business and housing construction in Operations in Finland. Major business premises projects agreed on and started in 2016 have entered the construction phase and are now generating revenue. The recognition of income from significantly more developer-contracted housing units in the first half of the year than in the comparison period, a total of 250 (84), also contributed to revenue growth.

Operative operating profit amounted to EUR 5.5 (4.2) million. Growth in revenue from Operations in Finland had a positive impact on the operative operating profit. More developer-contracted housing was recognised as income than during the comparison period, and this also improved operative operating profit. Significantly more developer-contracted housing was also recognised as income than during the comparison period, 250 (84). Operative operating profit was weakened by a rise in the costs of certain projects that are under construction and the cost impact of another project that has already been completed.

The Group’s operating profit declined to EUR -2.0 (4.1) million. Operating profit from International Operations totalled EUR -10.8 (-2.5) million. Operating profit from International Operations was weakened particularly by the weaker rouble exchange rate, which had an impact of EUR -7.6 million on operating profit. The exchange rate impact is primarily caused by the conversion of euro-denominated loans to roubles. Exchange rate differences vary in each financial statement in line with fluctuations in the exchange rate of the rouble. The difference has no impact on cash flow.

The consolidated order backlog stood at EUR 1,594.6 (2,021.6) million. In the comparison period, the Nova Hospital in Central Finland was recorded in the order backlog. Several new agreements valued at a total of almost EUR 300 million were signed during the January-June this year. In addition, many other new projects valued at a total of more than half a billion euros will be included in the backlog. These include the Siltasairaala hospital in Helsinki, the expansion of Helsinki Airport and the renovation of its Terminal 2. Siltasairaala will be included in the order back at the beginning of 2018 and the renovation of Terminal 2 in the second half of the year.

The Group’s profit before taxes totalled EUR -8.0 (-7.0) million.

The Group's earnings per share were EUR -0.17 (EUR -0.15). The earnings per share for the comparison period were impacted by the non-recurring cost of repaying the hybrid bond.

Variation in SRV's operating profit and operating profit margin is affected by several factors. SRV’s developer-contracted projects are recognised as income upon delivery; projects recognised as income based on the level of completion mainly consist of lower-margin contracting; and the nature of the company's operations (project development).

The Group’s equity ratio stood at 33.5 (36.9) per cent and gearing at 114.4 (103.1) per cent. The weaker exchange rate of the rouble contributed to the change in the equity ratio.

Espoo, 19 July 2017
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.

More information

This is a summary of SRV’s interim report and the complete report is attached as a pdf-file to this release and is also available on the company website.

SRV’s management will present the result in a combined audio webcast and conference call, which will be held on 20 July at 10.00 a.m. President & CEO Juha Pekka Ojala’s and Chief Financial Officer Ilkka Pitkänen’s Finnish-language presentation can be followed in real time at the address: http://qsb.webcast.fi/s/srv/srv_2017_0720_q2/

After the presentation, time has been allocated for questions. If you have any questions, you can participate in the conference call by calling 10 minutes before it starts to one of the following numbers:

From Finland: +358 (0)9 7479 0404

From Sweden: +46 (0)8 5065 3942

From outside Finland: +44 (0)330 336 9412

Confirmation code: 5274272

For further information, please contact:

Juha Pekka Ojala, CEO, +358 (0)40 733 4173, jp.ojala@srv.fi
Ilkka Pitkänen, CFO, +358 (0)40 667 0906, ilkka.pitkanen@srv.fi
Päivi Kauhanen, SVP, Communications, +358 (0)50 598 9560, paivi.kauhanen@srv.fi

www.srv.fi

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