SRV to strengthen its balance sheet substantially, major impairments led to a significant operating loss, strong cash flow during the last quarter

SRV GROUP PLC FINANCIAL STATEMENT RELEASE 6 FEBRUARY 2020 8:30 EET

SRV’s financial statement release January–December 2019: SRV to strengthen its balance sheet substantially, major impairments led to a significant operating loss, strong cash flow during the last quarter

January-December 2019 in brief:

Revenue rose by 10.6 per cent to EUR 1,060.9 million (959.7 1–12/2018). Revenue was up in both business construction and housing construction. Revenue from housing construction grew because more developer-contracted housing units were recognised as income than in the comparison period, a total of 833 (537).
Operative operating profit amounted to EUR -96.8 (-10.0) million. Operative operating profit was weakened especially by the classification of the REDI shopping centre as an asset held for sale and its consequent measurement at impairment in the fourth quarter as well as other impairments and expense entries made for holdings. Impairments with an impact on operative operating profit during the entire year totalled EUR 96.5 million. Operative operating profit was also impacted by the weakening of the margins of two projects – by a total of EUR 11.0 million – completed in 2019, expense entries of EUR 6.0 million for the water damage at Majakka and the loss of EUR 1.9 million from the sale of a plot in Estonia. Operative operating profit was improved by slight growth in the revenue of Construction and a year-on-year increase in housing units recognised as income. Operative operating profit for the comparison period is burdened particularly by the losses on the construction of the REDI shopping centre.
Operating profit was EUR -93.0 (-19.8) million. The change in the rouble exchange rate had an impact on the operating profit of the Investments segment, which totalled EUR -92.5 (-17.5) million. The net effect of the exchange rate change was EUR 3.8 (-9.8) million. The exchange rate impact, which had mainly no effect on cash flow, was caused by the valuation of the euro-denominated loans of associated companies in roubles and hedging expenses. Operating profit exclusive of the above impairments amounted to EUR 3.5 (-15.8) million.
Operating profit from Construction rose to EUR 7.0 (-13.4) million. Operating profit was positively impacted by the completion of the REDI shopping centre contract, but was reduced particularly by the weakening of the margins of two projects – by a total of EUR 11.0 million. The result also includes EUR 6.0 million in expense entries due to water damage at REDI Majakka and a EUR 1.9 million loss on the sale of a plot in Estonia.
The result before taxes amounted to EUR -122.4 (-37.3) million, including the EUR -2.1 (-0.6) million impairment revaluation of interest rate derivatives. Profit before taxes included impairments and extraordinary expense items of EUR 107.4 million in total, of which impairments and extraordinary expense items of loan receivables of associated companies and joint ventures recognised in financial expenses accounted for EUR 10.8 million.
Cash flow from operating and investing activities was EUR -16.7 (22.4) million. Cash flow was weakened primarily by a decrease in non-interest-bearing debt.
Earnings per share were EUR -1.85 (-0.56).
At period-end, the order backlog stood at EUR 1,344.2 (1,816.0) million. In January-December, the order backlog saw a year-on-year decline of 26.0 per cent. The sold share of the order backlog was 81.4 (88.7) per cent. New agreements valued at EUR 487.6 (1,133.0) million were signed in January–December.
In May, SRV issued a EUR 58.4 million hybrid bond. EUR 20.5 million of the proceeds were used for early repayment of the existing hybrid bond and EUR 37.9 million for early repayment of current notes.
Equity ratio was 21.2 (28.5) per cent and gearing was 240.3 (121.1) per cent. Impairments and the effect of the adoption of IFRS 16 at the beginning of the year weakened the equity ratio and gearing, while the loan arrangement carried out in May improved them. The comparable figures (without the impact of IFRS 16) were 26.4 (28.5) per cent for the equity ratio and 151.2 (121.1) for gearing. The company sought the necessary approvals from the financing banks in advance and the loan covenants were not broken.

October–December 2019 in brief:

Revenue in October-December amounted to EUR 403.8 (299.8) million. Revenue was increased particularly by growth in revenue from housing construction.
Operative operating profit amounted to EUR -87.2 (1.5) million. Operative operating profit was weakened especially by the classification of the REDI shopping centre as an asset held for sale and its consequent impairment in the fourth quarter as well as other impairments made for holdings, totalling EUR 92.9 million. Operative operating profit exclusive of impairments was EUR 5.7 million.
Operating profit was EUR -86.8 (0.1) million.
The result before taxes amounted to EUR -97.2 (-6.2) million, including the EUR 1.8 (-1.4) million impairment revaluation of interest rate derivatives. Profit before taxes included impairments of EUR 101.2 million in total, of which impairments of loan receivables of Russian associated companies recognised in financial expenses accounted for EUR 8.3 million.
Cash flow from operating and investing activities was EUR 70.2 (63.6) million. Cash flow was improved primarily by a decrease in inventories influenced by completion of developer-contracted projects.
Fewer new agreements were recorded in the order backlog than last year, EUR 142.9 (438.0) million.

Events after the period

Today, the company issued a separate release about significant transactions, preliminary financing agreements and its intention to ask the Annual General Meeting for the authorisation to implement two separate share issues during spring 2020. Due to the planned transactions, the company already designated several asset items as assets held for sale and in the 2019 financial statements. If the transactions are carried out as planned, the company’s balance sheet and financial position will improve significantly by the end of the second quarter. The company’s equity ratio (excluding the impact of IFRS 16) would then improve to about 35–38 per cent from its current level and gearing to about 75–85 per cent (excluding the impact of IFRS 16), and the measures are expected to have a positive cash flow impact of around EUR 95 million.
On 29 January, SRV signed an agreement with Sagax on the sale of the Lumijälki 2 project. Work on the logistics centre will commence immediately and the new premises in Ylästö, Vantaa will be ready for use in early 2021. The total value of the project is EUR 23 million. The project was recognised in SRV’s order backlog in January.

Recovery programme measures Q4:

In connection with the publication of the Q3 interim report, SRV announced that it will kick off a recovery programme. The short-term target is to ensure that operative operating profit and cash flow in 2020 are in the black and to return operative operating profit in 2021 to the 2017 level. The recovery programme focuses on renewing the organisation and operating culture, lightening the balance sheet, strengthening cash flow and achieving cost-savings.
As part of the programme, the company carried out cooperation negotiations with personnel in Finland. As a result of the negotiations, the number of personnel will decrease by no more than 48 people. In addition, layoffs and part-time assignments will be implemented, with an effect amounting to around 12 person-years. The combined effect of the adjustment measures and other attrition is about 80 person-years. The estimated cost impact amounts to annual savings of EUR 6.0 million.
Completed housing units have been sold at an accelerated pace, mainly to investors. Negotiations on several plots are currently under way and one plot has been sold in Estonia.

Outlook for 2020

During 2020, SRV's revenue and result will be affected by several factors in addition to general economic trends, such as: the timing and amount of income recognition for SRV's own projects, which are recognised as income upon delivery; the part of the order backlog that is continuously recognised as income mainly consists of contracting; trends in the order backlog's profit margins; the start-up of new contracts and development projects; and the rouble exchange rate.

The largest ongoing projects are Tampere Central Deck and Arena, the extension of Helsinki Airport, and several hospital projects.

The company's main focus in 2020 will be on major business premises contracts, hospital projects, and housing development projects for investors. Fewer developer-contracted housing units will be completed in 2020 than in the comparison period. It is estimated that a total of 586 developer-contracted housing units will be completed in 2020 (808 in 2019).
Measures to boost operational efficiency and achieve savings in procurement are expected to improve the company’s earnings performance. In addition, the recovery programme measures that were carried out in late 2019 are expected to improve the company’ cost structure.
Full-year consolidated revenue for 2020 is expected to fall in comparison with 2019 (revenue in 2019: EUR 1,060.9 million). Operative operating profit is expected to improve on 2019 and to be positive (operative operating profit EUR -96.8 million).

CEO's review

In connection with the financial statements, we published a comprehensive solution thanks to which SRV will be even better able to meet its customers’ needs and wishes as well as the challenges of urbanisation. This solution is expected to significantly strengthen the company’s financial position, give SRV a fresh start and lay a strong foundation for the development of the company.

2019 was a great disappointment to us in terms of both earnings and profitability. In the fourth quarter, we had to recognise several impairments, the most significant of which was the EUR 71.5 million impairment of the REDI shopping centre due to its forthcoming sale. Construction remained largely healthy and the failures in operational performance were limited to a few individual projects.

Towards the end of the year, we kicked off a recovery programme that focuses on renewing the organisation and operating culture, bolstering financial position and performance level, and improving profitability. As part of this programme, we announced that we intend to reduce our holdings in various cooperation projects. The recovery programme is proceeding at a rapid clip and most of the measures have been implemented. The new comprehensive solution that we have now announced will give the company more financial muscle to reorient its operations.

In the last quarter, we overhauled our organisation and clarified responsibilities. The new Corporate Executive Team came into effect at the beginning of this year.

Construction continued to be strong and more housing units were completed and recognised as income than in the comparison period. Demand also remained good in the Greater Helsinki Area, Tampere and Turku. Residents moved into Finland’s first residential skyscraper, Majakka, in November-December. In the fourth quarter, 532 housing units were recognised as income, 275 of them in Majakka alone, and we recorded new projects valued at EUR 121.0 million in our order backlog.

As I mentioned above, today we have announced a wide-ranging comprehensive solution that includes many measures: new financing solutions, sales of assets and new capital. This new solution and our existing strengths will build up an evolving, high-performance company that is an appealing partner and investment.

I would like to thank all our customers, partners and personnel for the year now ended. We head into this year from a new, strengthened position.

Saku Sipola, President & CEO

Overall review

Group key figures (IFRS, EUR million)	1−12/ 2019	1−12/ 2018	change	change, %	10−12/ 2019	10−12/ 2018
Revenue	1,060.9.	959.7	101.3	10.6	403.8	299.8
Operative operating profit¹⁾	-96.8	-10.0	-86.8		-87.2	1.5
Operative operating profit, %	-9.1	-1.0			-21.6	0.5
Operating profit^*)	-93.0	-19.8	-73.3		-86.8	0.1
Operating profit, %	-8.8	-2.1			-21.5	0.0
Operating profit, excl. IFRS 16^{2) *)}	-94.3	-19.8	-74.6		-84.6	0.1
Operating profit, %, excl. IFRS 16²⁾	-8.9	-2.1			-21.0	0.0
Financial income and expenses, total^**)	-29.3	-17.5	-11.8		-10.4	-6.3
Profit before taxes	-122.4	-37.3	-85.1		-97.2	-6.2
Net profit for the period	-103.6	-31.2	-72.4		-83.4	-4.0
Net profit for the period, %	-9.8	-3.3			-20.6	-1.3
Order backlog (unrecognised)³⁾	1,344.2	1,816.0	-471.8	-26.0
New agreements	487.6	1,133.0	-645.3	-57.0	142.9	438.0

^*) net effect of currency exchange fluctuations	3.8	-9.8	13.5		0.4	-1.4
^**) derivatives included in financial income and expenses	-3.7	-2.2	-1.6		1.6	-1.6

Operative operating profit is determined by deducting the calculated rouble exchange differences included in financial items and their potential hedging impacts from operating profit. Net exchange rate differences during the review period amounted to EUR 3.8 (-9.8) million, of which the effect of currency hedging was EUR -3.8 (0.6) million.
The impacts of IFRS 16 in 2019 have been adjusted out of the figure. Due to this adjustment, the figure is comparable with the figures for 2018.
The Group’s order backlog consists of the Construction business. The unrecognised margin corresponding to the holding is not included in the order backlog comparison figures.

Construction January-December 2019

Revenue from Construction rose to EUR 1,057.7 million (955.4 1–12/2018) in the January–December period. Revenue was up in both business construction and housing construction. Revenue from housing construction was up 30.7 per cent because more housing units were recognised as income than in the comparison period. Revenue from business construction was up 2.0 per cent.

Construction’s operating profit rose to EUR 7.0 (-13.4) million. Operating profit was positively impacted by the completion of the REDI shopping centre contract, but was reduced particularly by the weakening of the margins of two projects by a total of EUR 11.0 million. The result also includes EUR 6.0 million in expense entries due to water damage at REDI Majakka and a EUR 1.9 million loss on the sale of a plot in Estonia.

Operating profit was also burdened by impairments of the following plots:

EUR 6.7 million impairment of the Papula plot in Vyborg, Russia (Q4/2019)
EUR 0.8 million impairment of two already sold plots in Estonia (Q1/2019)
Total impairments of EUR 7.5 million in operative operating profit

Construction’s order backlog stood at EUR 1,344.2 (1,816.0) million. Although the order backlog has declined, it remains at a good level, and 81 per cent of the order backlog has been sold. New agreements valued at EUR 487.6 (1,133.0) million were recognised in January–December. The most significant agreements were for REDI Loisto in the first quarter, the Finnish-Russian School in the second quarter, Wallesmanni and Opaali in Tampere and the Raisio production facility in the third quarter, and Siltasaari 10 and the Kirkkonummi wellbeing centre in the fourth quarter.

Construction’s capital employed totalled EUR 372.9 (212.8) million. IFRS 16 had an accounting effect of EUR 133.3 million on this growth in capital employed.

Investments January-December 2019

Investments’ revenue totalled EUR 5.9 million in the January–December period (4.6 1–12/2018). It mainly consists of revenue from shopping centre management. The startup of shopping centre management at REDI increased revenue. In accordance with SRV’s operating model, revenue from associated companies’ projects and joint ventures is reported under the Construction segment; one example is the Tampere Central Deck and Arena project.

The operative operating profit totalled EUR -96.3 (-7.8) million. The shares of associated companies’ results included in SRV’s result include not only the projects’ EBITDA, but also depreciation, financial expenses and taxes. The occupancy rates and rental income of the shopping centres owned by associated companies improved, but earnings were burdened by the fact that the management and financing expenses of recently opened shopping centres were higher than income. In the fourth quarter, the company concluded that it does not have the financial prerequisites to develop all its assets. Due to the planned sale of the REDI shopping centre, the asset was designated as an asset held for sale and measured at impairment. Measurement at impairment weakened operative operating profit substantially.

In addition, the company noted that the financial figures of some of its projects had weakened, particularly due to the poor situation in Russia.

The following impairments were allocated to assets in the Investments segment:

EUR 71.5 million impairment of the investment in the REDI joint venture (Q4/2019)
EUR 6.9 million impairment of the investment in the associated company Pearl Plaza (Q4/2019)
EUR 5.9 million impairment of the Eurograd plot in Russia (Q4/2019)
EUR 1.0 million impairment of the Mytishchi plot in Russia (Q4/2019)
EUR 1.0 million impairment of the Kuninkaanportti commercial property in Finland (Q4/2019)
EUR 2.3 million impairment of the Etmia office property (Q3/2019)
EUR 0.6 million impairment related to the dissolution of the VTBC fund (Q1/2019)
Impairments totalling EUR 89.2 million in operative operating profit. The impairments of investments in Pearl Plaza and REDI relate to their assumed or known selling price.

Investments’ operating profit was EUR -92.5 (-17.5) million. The net effect of currency exchange fluctuations was EUR 3.8 (-9.8) million, which arose from valuation of the euro-denominated loans of associated companies in roubles. 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.

Capital employed totalled EUR 245.7 (337.8) million. Capital employed was reduced by the EUR 89.2 million in impairments listed above and EUR 10.8 million in impairments and extraordinary expense items of financial receivables recognised in financial expenses. Capital employed was impacted by additional capital invested in the Tampere Central Deck and Arena project and the Okhta Mall car park during the financial year. The strengthening of the rouble exchange rate also affected capital employed. Total capital employed decreased by about EUR 92.1 million. The majority of SRV’s capital employed consists of investments in associated companies.

The return on investment was -32.6 (–5.2) per cent. When calculating the return on investment, the income from interest on loans granted to associated companies and changes in the value of loans are also taken into consideration.

SRV is a co-investor in four shopping centre projects through its associated companies. SRV is also responsible for leasing, marketing and managing premises in completed shopping centres. SRV intends to sell its holdings once stable rental income has been achieved or the market situation allows. Stable rental income is usually reached 3–4 years after opening. For instance, the rental income of Pearl Plaza in St Petersburg, which was opened in 2013, is now stable.

Group key figures (IFRS, EUR million)	1−12/ 2019	1−12/ 2018	change	change, %
Equity ratio, %¹⁾	21.2	28.5
Equity ratio, %, excl. IFRS 16 ²⁾	26.4	28.5
Net interest-bearing debt¹⁾	422.0	282.8	139.2	49.2
Net interest-bearing debt, excl. IFRS 16²⁾	271.9	282.8	-10.9	-3.9
Net gearing ratio, %¹⁾	240.3	121.1
Net gearing ratio, %, excl. IFRS 16²⁾	151.2	121.1
Return on investment, % ³⁾	-15.2	-2.9
Return on investment, %, excl. IFRS 16²⁾³⁾	-17.5	-2.9
Capital employed^{1) 3)}	625.3	611.0	14.4	2.4
Capital employed, excl. IFRS 16^{2) 3)}	479.4	611.0	-131.6	-21.5
Return on equity, %	-50.6	-12.1
Earnings per share, EUR	-1.85	-0.56	-1.29	230.7
Equity per share (without hybrid bond), EUR	1.59	3.21	-1.62	-50.5
Share price at end of period, EUR	1.36	1.70	-0.34	-20.0
Weighted average number of shares outstanding, millions	59.6	59.6

Financial objectives

The company will update its strategy in 2020 and will publish its longer-term financial objectives by the end of the year.

Proposal for the distribution of profits

The parent company’s distributable funds on 31 December 2019 are EUR 149,250,195.52, of which net profit for the financial year is EUR -21,418,550.34. The Board of Directors proposes to the General Meeting that no dividend be paid for the 2019 financial year.

Annual General Meeting

SRV Group Plc’s Annual General Meeting is planned to be held on Thursday, 26 March 2020 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, 6 February 2020

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 2020 at 8.45 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 8.45 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:

Saku Sipola, President & CEO, tel. +358 (0)40 551 5953, saku.sipola@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

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SRV in brief

SRV is 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 growth centres in Finland and Russia. Our revenue in 2019 was EUR 1,061 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

Liitteet

SRV Financial Statement Release 2019 EN