CONSTRUCTION DENMARK HOFFMANN

Hoffmann A/S achieved a satisfactory result in 2009. Total sales were MNOK 1 635 (MNOK 2 073 in 2008), profit before tax was MNOK 45.9 (MNOK 13.2) and profit margin was 2.8% (0.6%). With this we strengthened our position as the "solution-oriented partner." We also confirmed our position as the HSE leader among Denmark construction companies.

A challenging market

The building and construction industry in Denmark was marked in 2009 by the continuing economic crisis, which led to a virtual full stop in the building of dwellings and non-residential buildings. Simultaneously, planned public building and heavy construction projects are postponed or cancelled due to lack of public funding stemming from reduced tax revenues and income from property sales and non-residential developments.

Government implemented economic stimulus measures with aid packages for the banking and business sectors in the form of increased credit on value added tax and tax breaks to private individuals, did not produce the intended effects: The result was negative growth with a decline in real growth in house-building and other building and construction activities by 9 and 16% respectively in 2009. This led to a sharp reduction in the commissioning of new projects in the construction industry. Real economic outlook continues to points towards economic downturn, especially in building and heavy construction.

The level of activity in the building and heavy construction sector is expected to remain unchanged for the next 2-3 years, especially where the market for housing and non-residential buildings will continue to stagnate, with a further reduction in the number of newly built square meters.

The market for renovation of both private and public buildings has stagnated as a result of halted public investment, which in turn, has lead to the postponement of necessary renovation contracts. Competition for smaller and medium-sized contracts is keener.

The heavy construction market is perceived as relatively stable with variations among the different types of projects. Within a two-year period an increase in heavy construction activities is expected due to large public investments in road and railway networks.

The market situation has led to major price pressure on projects out for tender, and the industry is experiencing considerable variations in the tenders submitted. Several competitors' bids appear to be calculated to a negative gross margin.

This also appears to be the case in the subcontractor and supplier markets where, in 2009, we saw a sharp drop in prices on all technical contracts and materials, with wage declines up to 35% and a fall of up to 40% on some material deliveries.

The stronger competition in the subcontractor and supplier market has caused a marked rise in the number of bankruptcies among smaller suppliers. The trend is expected to continue in 2010 with increased bankruptcy risks for medium-sized companies.

Satisfactory results

Despite the difficult market Hoffmann A/S achieved a very satisfactory result in 2009. Turnover was MNOK 1 635 (MNOK 2 073 in 2008), profit before tax was MNOK 45.9 (MNOK 13.2), and profit margin was 2.8% (0.6%).

The positive trend in earnings, in relation to previous years' results and the difficult market situation, can be attributed to the following actions taken:

• We continued the necessary organisational adjustments begun in the last half of 2008, with an ongoing assessment of resources versus the market and order situation, and a volume decrease of 25%. This required a 13% workforce reduction during the year. In this process, there was a strong focus on maintaining the necessary and best expertise.
• Work on "Hoffmanns Rygrad" was continued with considerable effort. This process was initiated in 2007 and is based on a thorough analysis of all projects in Hoffmann. It revealed that there is a clear relationship between the profitability of a project and the behavior and the values that characterise the development of the project. The analysis culminated in the preparation of a set of maxims and values, "Hoffmanns Rygrad", which has since been fully implemented at all levels of Hoffmann's organisation.

The positive effects "Hoffmanns Rygrad" yielded in 2008 were continued and strengthened in 2009. In particular, there was improvement in project risk management and in the selection of customers and tenders. Hoffmann had, as a result, no loss-making projects in 2009, and no tender was submitted on any project without calculations showing a positive gross margin.

Focused efforts in 2010

Hoffmann will, in 2010 and beyond, maintain its goal-oriented focus on projects for which price alone is not crucial, but where we can make effective, advantageous use of our processes and employees' competence in an open, early-in-the-process cooperation with our customers.

In 2010, we will work to continuously improve operations, including implementing improved procedures and processes involving both employees and subcontractors. Not at least, we will further develop our client relationships positioning Hoffmann as the solution-oriented partner.

Reduced activity level in all regions

In 2009 Hoffmann was affected by a general reduction in activity levels in all regions and market areas:

• Region West experienced the full effect of the financial and economic crisis that occurred in eastern Denmark in 2008. This led to a significant reduction in order backlog and increased competition in the Jutland market. Despite changing market conditions, Region West maintained good earnings, which are expected to continue in 2010, albeit at a level lower than in 2009
  
  
• Region East Renovation had an unchanged level of activity in 2009 in relation to 2008, but improved its earnings. The renovation market was stable with increased competition. Here Hoffmann experienced that the company was selected on merits other than price (skills, values, quality and economic implementation capacity) for major renovation contracts. The region expects an unchanged level of activity in 2010, provided that the projects it has been awarded are not postponed.
  
  
• The market for residential and non-residential buildings continued with zero growth from 2008, which resulted in a marked reduction in the level of activity in Region New Building. Moreover, several public building projects, which the region had in its orders-on-hand, were postponed and did not come into production as a result of the financial situation. The market for residential construction is weak and is not expected to rise over the next few years. The market for non-residential buildings has stagnated, and the region's focus in 2009 was to acquire profitable contracts, in parallel with good management and conclusion of dispute cases from previous years. As a result of implemented improvement processes and successful conclusion of the dispute cases, the region expects a positive result for 2010.
  
  
• Region Technical Operations held, the same level of activity in 2009 as in 2008, and maintained solid earnings. As internal subcontractor to the other regions, the region also noted the difficult market, but has managed to build a strong and profitable service function. They have focused on the engineering of technology packages on major projects to other regions of Hoffmann, which has yielded a significant contribution to earnings in 2009. The region expects an unchanged level of activity in 2010 with a focus on developing new business areas within environment and energy.
  
  
• Region Heavy Construction continued its positive trend in 2009 from 2008, and is now one of the best earning regions. This is the result of a successful turnaround during the last three years. The heavy construction market is also characterised by fierce competition and price pressure. The region expects, however, continued positive earnings on an unchanged level of turnover in 2010.

Our focus on profitability and deliberate choice of projects in a difficult market, led to a reduction in order backlog to MNOK 978 from MNOK 1 298 in 2008. Over 75% of order backlog of projects are awarded on merits other than price.

Among the new, profitable contracts are:

Vojens Ice Arena, MNOK 96 (skating rink)
Thors Bakke, MNOK 156 (new wellness center)
Skovengen, MNOK 50 (renovation of dwellings)
Karberghus, MNOK 41 (construction of office buildings)

Good HSE results continue

Hoffmann maintained their leading HSE position in 2009 scoring the industry's lowest injury rate and sickness absence leave. The injury rate was 7 (9%) and sickness absence was2.4% (2.3%).

As part of the Veidekke Group, Hoffman has focused great attention on its working environment, and will continue to have as its goal and core value to be the best in the industry. One of the key priorities in 2010 will be the reduction of work injuries among subcontractors.

Expecting a stable level of activity

The sustained real economic crisis in Denmark is expected to affect the building and heavy construction markets in 2010 and onwards. Quality, collaborative design and financial implementation capacity will be important keywords for our customers when selecting a contractor for future building and heavy construction projects.

The continuous improvement processes in Hoffmann in competence development, risk management, selection and cooperation with customers, all deeply rooted in Hoffmann's Rygrad, will furnish us a good foundation on which to get well through the recession.

As a result of the continuous improvement efforts, we expect that the activities of Hoffman in 2010 will be on par with 2009.

In 2010, we will have a particular focus on selection of customers, structured sales and risk management in relation to an increased bankruptcy risk of among suppliers and subcontractors.