CONSTRUCTION - NORWAY

Order backlog developed positively totalling 8.6 billion NOK at the end of the year, compared to 6.6 billion NOK a year earlier.

The market was considerably weaker in 2009 than the year before. Veidekke Entreprenør focused throughout the year on handling the changing market situation in a way which will yield both good short-term results and that will form a basis for increased strength in the long-term. We avoided workforce reductions in 2009, while we worked systematically on recruitment and skills development. The continuous improvement work through the project, "We at Veidekke" continued. At the end of 2009, the business had 3207 employees, compared to 3 270 a year earlier.

Weak market in recovery

Although the housing market began to slow already in 2007, the financial crisis hit the construction industry with full force in the autumn of 2008. In Norway the construction of approximately 18 000 dwellings was initiated in 2009, as against about 23 000 the year before. The market for non-residential buildings also fell throughout 2009, but from a historically high level. In the construction market, there was a sharp increase in public transport projects, while activity in private industrial projects dropped significantly.

When the financial crisis struck the Norwegian economy, the Government, through a package of stimulus measures, chose to provide substantial funds for public building and construction works. In combination with sharply lower interest rates, effects of the crisis on our market were curbed.

Developments in 2010 will largely depend on the general economic framework conditions. The central question is how long the stimulus measures will continue and how fast interest rates will rise. Norwegian and international economies will likely be characterised by frequent fluctuations, which will also characterise the construction industry. In this situation it is possible we may see greater disparities in orders won between market players than we have traditionally seen. This, in turn, could reinforce the "nervousness" in the market resulting in price pressure.

Low interest rates along with continued revenue growth contributed to the resulting rise in the housing market during 2009. The decline in residential construction is likely to come to a halt and we can in 2010 experience new growth in the number of housing starts. At the same time, we will still see large regional differences in the start-up of projects, and the proportion of blocks of flats will continue to decline in favour of row housing.

The downward trend in non-residential buildings will, with high probability, continue. The arrows continue to point downwards within the private non-residential buildings especially, while the level of public buildings will be maintained.

Investment in new road and rail infrastructure is currently on a high level. The political climate suggests that this high level is likely to persist. Construction activity related to the oil and gas industry has fallen in recent years, and investment research by SSB (Statistics Norway) does not indicate any improvement in the coming years. Activity within municipal technical facilities (water, sewage, municipal roads, etc.) will probably increase slightly in the coming years.

Good earnings trend continues

For years, Veidekke Entreprenør has seen a stable and solid development. With a profit margin of 6.4% (6.6% in 2008), this trend continued also in 2009. The total turnover was MNOK 8 121 (MNOK 10 660 in 2008) and earnings MNOK 523.7 (MNOK 707.9).

Business in 2009

Nation-wide and local in building and construction

Construction activities in Norway are managed by Veidekke Entreprenør AS, and its subsidiaries. The division undertakes all types of building and heavy construction works. On the building side are primarily housing, commercial buildings, schools and other public buildings projects. On the heavy construction side are roads, bridges, railway construction and industrial projects. Approximately 60% are building activities and 40% heavy construction activities. Approximately 80% of turnover in 2009 was building projects, while the remaining 20% were projects related to existing buildings or facilities (additions, extensions or modifications).

Veidekke Entreprenør is organised in five regions: East, South, North/West, Heavy Construction and Special Projects. East, South and North/West are engaged mainly in building - the other two mainly in heavy construction. Construction operations are largely local operations and the five regions consist of 26 districts/subsidiaries.

These constitute the business units in Veidekke construction, with full responsibility for marketing, customers, projects, resources and results. As of 1.1.2009 a minor adjustment was made to the business boundary between Veidekke Industry and Veidekke Construction in which the activities Dokken AS and UFO Construction AS were transferred from Veidekke Industry to Veidekke Entreprenør.

Veidekke Entreprenør operates primarily in Norway, but also participates on a few projects, mainly construction, in Sweden and Denmark in cooperation with Veidekke Entreprenad and Hoffmann respectively. Housing construction for Veidekke's own account takes place in close cooperation with Veidekke Eiendom AS. The latter company is responsible for purchasing development sites and for sales of housing, while Veidekke Entreprenør looks after planning and production.

Stable workforce

At the end of 2009, Veidekke Entreprenør had 3 207 employees. Of these, 1 191 were salaried staff and 2 016 were skilled workers. (3 270 employees at the end of 2008, of which 1 167 were salaried and 2 103 skilled workers.) In 2009 the company had 152 apprentices, and about 60 newly qualified engineers and civil engineers were members of our trainee scheme. We focus both on recruiting young people for the engineering and skilled jobs that are important to Veidekke, and on making the company attractive to newly qualified people. We work with several universities and colleges.

Low proportion of women

In 2009, 19% of salaried staff in Veidekke Entreprenør were women. The number of female skilled workers is low. Increasing the proportion of women is a major challenge for the entire construction industry. It is therefore gratifying to see that more women are looking to an engineering education relevant to the industry. Veidekke Entreprenør is actively seeking to recruit women. Through an increased proportion of female employees we will also benefit from more female management candidates. The goal for 2010 is at least 30% of salaried staff recruits to the trainee scheme should be women.

High ambitions

Veidekke Entreprenør's primary goal is to be Norway's best construction company. This means that we should have:

• The most satisfied customers
• The most competent and motivated employees
• The best profitability

Our strategy is to achieve these overall objectives through:

• Understanding and meeting customer expectations and needs
• Being skilled producers
• Involving all staff in planning, monitoring and improvement
• Pursuing active competence and system development
• Developing ourselves along with selected suppliers
• Prioritising profitability before of volume
• Ensuring health, safety and the external environment permeates everything we do
• Being guided by our shared basic values
  
  

Continued improvement efforts

The improvement and development process, "We at Veidekke", is an important part of our development. The main aim of the improvement work is better planning and execution of each project. Through the involvement of all employees we exploit the overall competence of the organisation and achieve commitment and the desire to contribute. The planning methodology, Participative Planning is an increasingly important part of "We at Veidekke". The goal of Participative Planning is to create the best possible production flow.

Interaction with customers and suppliers

Repeat customers represent approximately 80% of Veidekke Entreprenør's turnover. Most of our customers are professional, that is to say they are engaged in business themselves or they are responsible for providing public services. The largest customers account for a significant share of turnover. Barely 2% of sales in 2009 were derived from building of housing for Veidekke's property division, Veidekke Property.

Veidekke has a high and growing percentage of turnkey contracts (contracts where we are responsible for design and execution). In 2009, turnkey contracts stood for just under 80% of our building project portfolio, while the corresponding share on the heavy construction side was just over 10%.

For us, deliveries consist both of a process - in same way as for example the service industry - and of an end product - in the same way as any other production industry. The products represent substantial investments for our customers, who are naturally interested in achieving the best possible cost-benefit ratio. Our customers also make a considerable contribution to the building process, for example through knowledge of the end product, the planning process and decisions. Our high percentage of returning customers shows that competitive prices and good performance on earlier projects for these customers are the two most important criteria for new contracts. Many of our repeat customers emphasise experience from previous projects when selecting a construction company for new projects.

We're constantly working to improve our customer interaction on each individual project. This means that we, together with the customer, identify and follow up the most important project challenges, we evaluate the project together, and that we agree on how to bring key learnings forward to the next project.

Veidekke's suppliers (consultants, subcontractors and material suppliers) account for a significant portion of the product we sell to our customers. In order to be able to offer our customers the best building processes and thus the best and most cost-effective products, we also need to cooperate closely and constructively with capable suppliers. Within our strategic delivery area our main strategy is to develop ourselves along with selected suppliers.

A construction operation is the production of projects. On a construction site all of the contributions involved in an integrated process are gathered. This means that our improvement cannot only focus on our own internal processes. Although we must of course start with ourselves, improvement efforts must be directed towards improving the overall process, meaning a process in which customers', suppliers' and Veidekke's contributions are critical to succeeding in the best possible way.

Unsatisfactory HSE performance

The construction industry has a tradition of measuring safety performance in terms of the number of lost-time injuries per million hours worked (injury rate). Veidekke's long-term safety objective is to operate injury-free. We are therefore working to increase our attention on all injuries, i.e. injuries to employees and sub-contractors, and injuries resulting both in and without absences.

In 2009, we saw that what absolutely should not happen happened; on two of our construction sites a total of three lives were lost. We are currently considering what we can do to prevent similar accidents from happening in future. At the time of this writing, the Police and Labour Inspections investigation of the accidents was incomplete, and it is yet to be concluded what went wrong and what we can do to ensure that similar events do not happen again.

Increased injuries

We registered in 2009 a total of 127 injuries on our construction sites (89 in 2008). This figure includes all injuries from the most serious to least significant, and applies to all who have worked on our building sites (both our own employees and employees of sub-contractors). 27 injuries applied to own employees, compared with 12 in 2008. This corresponds to an injury rate of 5.0 (2.2 in 2008). Under-reporting of injuries by sub-constructions has historically been a problem and we are constantly working to improve reporting practices. Some of the increase in the total number of injuries may be due to reduced under-reporting of injuries among sub-contractors.

Reporting and monitoring of all undesirable incidents, not just those that result in an actual injury, is essential if we are to learn from the mistakes we make and reach our goal of zero injuries. We therefore worked in 2009 on the development of a new system for registration and monitoring of undesirable incidents. The system is expected to be completed during the winter of 2010 and will then be gradually implemented.

Increased absenteeism

Absence represents direct and indirect costs, but is also an indicator of job satisfaction and commitment in the organisation. Veidekke Entreprenør aims to achieve an overall sickness absence for salaried staff and technicians of under 4%. In 2009, total sickness absence was 5.9%, which is the same as the previous year. Among skilled workers sickness absence in 2009 was 8.2%, against 7.8% in 2008.

Conditional optimism for 2010

Veidekke Entreprenør increased its order-on-hand in 2009. At the end of the year, orders-on-hand totalled MNOK 8 581, compared with MNOK 6 579 a year earlier. The order backlog was built-up in a very demanding market, but quality is assessed as good.

We believe that the effects of the financial crisis will result in considerable market development uncertainty for a long period ahead. Given that the State has led a very active counter-cyclical policy for a period, this may mean that we may be facing a period of more restrictive public spending. In this situation, how quickly the private market returns is important. We have seen signs of improvement in the housing market. Underlying demographic factors indicate a significant need for new housing.

From Veidekke's side, we follow market developments closely and make independent assessments. We make these assessments available to our customers and partners through a periodic economic report on the Scandinavian countries.

Veidekke Entreprenør has avoided significant staff reductions in 2009. So far developments in 2010 indicate that we will be able to avoid this, this year as well. Turnover is low, but with about 3000 employees it is still subject to significant recruitment to maintain staffing.

Market developments will bring us significant challenges, but will also present us new opportunities. Our challenges can be summarised as dealing with the market situation in short-term, while establishing a foundation to benefit long-term from the changes taking place in today's market.