BUSINESS AREAS

Construction activity

Construction activities in Norway and Denmark are nation-wide, while activity in Sweden is concentrated in the regions around Stockholm and Gothenburg and Skåne.

Total construction operations had a turnover of MNOK 12 095 in 2009 compared with MNOK 15 534 in 2008. Earnings for the year were MNOK 605.7 as against MNOK 773.8 in 2008, corresponding to a profit margin of 5.0 percent – the same as in 2008.

Norway

Veidekke Entreprenør has had a very strong and stable development for years. With a profit margin of 6.4 percent (6.6 percent in 2008), this trend continued in 2009 also. Turnover in 2009 was MNOK 8 121 (MNOK 10 660 in 2008) with earnings of MNOK 523.7 (MNOK 707.9).

Given the very demanding market, this result reflects very good work by the entire organisation. As of 1 January 2009 a minor adjustment to the business boundary between Veidekke Industry and Veidekke Entreprenør was carried out in which business involving construct-ion was transferred to Veidekke Entreprenør. Adjusted for this, the volume decrease from 2008 to 2009 was nearly 30 percent.

The market in 2009 was consider-ably weaker than the year before. Veidekke Entreprenør focused on managing the changing market situation in a way that will be both successful in the short-term and which will form the basis for increased strength in the long-term. The operations avoided cutbacks in 2009, and worked systematically with recruitment and skills development. The improvement and development process, We in Veidekke, continued. This is an important part of ongoing efforts to achieve better planning and performance on each construction project through the involvement of all employees in the project.

Developments in 2010 will largely depend on the general economic conditions. The Norwegian and international economies will likely be characterised by frequent fluctuations, which will also characterise the building and construction industry.

Veidekke Entreprenør signed a number of major contracts with private and public customers in 2009. Among the major contracts were concrete works in the construction of Hardanger Bridge with a contract sum of approximately MNOK 330, and expansion of a shopping centre for Olav Thon Eiendomsselskap AS and Vital Forsikring ASA, with a contract sum of approximately MNOK 570. In addition, there are four road projects for the Public Roads Administration with a total contract sum of approximately MNOK 1 800. Towards the end of the year, we won a contract on an apartment project in Kolbotn outside Oslo, with a contract sum of approximately MNOK 194. The developer is Strandli Road AS, a company in which Malthe Winje Eiendom AS and Veidekke Eiendom AS each own 50 percent.

At year’s end, Veidekke Entreprenør had orders-on-hand of NOK 8.6 billion, against NOK 6.6 billion a year earlier.

Sweden

Veidekke Entreprenad had a turnover of MNOK 2 355 (MNOK 2 801). Profit before tax was MNOK 36.4 (MNOK 52.7). This corresponds to a profit margin of 1.5 percent (1.9 percent). All of the decline can be ascribed to the Region West, which has been very hard hit by an investment halt in the industry sector. The other regions achieved increased profitability in 2009, which is very positive. This shows that overall the Veidekke Entreprenad organisation has tackled the recession well.

The market and the general economic picture remained very pessimistic in Sweden in the first half of the year. Financial turbulence and a lack of capital meant that several new projects were postponed. During the autumn, however, we saw some signs of stabilisation and an increased willingness to invest in housing. We therefore expect some increase in residential construction in 2010. Building activities were adversely affected by the fact that there were no new housing project starts. This, combined with the need for new non-residential buildings and the short supply of capital, had a very negative impact on the prices of projects that were started. The heavy construction market is, however, very good, especially when it comes to infrastructure projects in the Stockholm area and in western Sweden.

In 2009, Veidekke Entreprenad began activities in the industry sector related to crushed stone and gravel, and recycling in the Stockholm area. We see growth opportunities in Stockholm, Malmo and Gothenburg. Activities will be developed in close interaction with Industry operations in Norway.

Veidekke Entreprenad won several large contracts in 2009 including the housing projects Pelarbacken for AMF Pension at MNOK 230, and Kulla Gulla for Svenska Bostäder at MNOK 190, both in Stockholm. Other contracts include development of Agnes Berg-Marie Holm on E13 for Swedish Rail Administration at MNOK 210, SU Låghus Stage 3 for Västfastigheter at MNOK 117 and Iron Ellerhusen old town in Stockholm for Iron Ellerhusen AB at MNOK 75, and housing in Kv Sockertoppen in Lund for HSB at MNOK 59.

At year-end, orders-on-hand totalled NOK 2.8 billion compared with 2.5 billion million a year earlier. All regions look very positive. Large-scale infrastructure projects account for a large part of the orders-on-hand with housing construction also accounting for a significant share.

Denmark

Despite the difficult market in Denmark, Hoffmann achieved a good result in 2009. Turnover was MNOK 1 619 (MNOK 2 073). Profit before tax was MNOK 45.6 compared with MNOK 13.2 in 2008. This equates to a profit margin of 2.8 percent (0.6 percent).

This positive development is the result of, among other things, organisational adjustments with an ongoing assessment of resources in relation to orders-on-hand. This has led to a 13 percent reduction in the number of employees over the past two years. Throughout this entire phase emphasis has been on preserving the best expertise and highest level of proficiency in the organisation. In 2008, improvement processes were implemented with sharp focus on increased project profitability through thorough analyses of behaviours and values on projects. The positive effects of this work spilled into 2009 resulting in better risk management and better selection of customers and project bids. In 2010, we will continue working with continuous improvement activities through the involvement of both employees and subcontractors. Not at least, we will further develop our customer relationships positioning Hoffmann as the solutions-oriented partner.

Hoffmann maintained its position as a leader among Danish contractors in health, safety and environment. One of the key priorities in 2010 will be to bring down the number of injuries among our subcontractors.

In 2009, Hoffmann was characterised by a general reduction in the level of activity in all regions and markets. There is very low activity in the housing market, and the market for non-residential buildings has stagnated. Several previously won tenders have postponed as a result of the financial situation. The heavy construction market was relatively good, but marked by fierce competition and price pressure. The renovation market was stable, but with stiffer competition for tenders. On over 75 percent of the contracts signed in 2009, however, we were chosen based on the criteria of competence, implementation capability and quality.

Among new contracts won are an ice skating hall, Vojens Ice Arena at MNOK 113, a new Wellness Centre, Thors Bakke at MNOK 183, and an office building, Karberghus at MNOK 48. We have also received a contract for housing renovation, Skovengen, at MNOK 70.

As a result of the focus on profit-ability and the conscious selection of projects, orders-on-hand declined in 2009. At the end of the year, orders-on-hand were MNOK 978 compared with MNOK 1 298 at the beginning of the year.

Property development

This entity develops housing for Veidekke’s own account, and non-residential buildings for private and public customers. Activities are centred in the largest cities in Norway and Sweden, while activities in Denmark are limited as a result of the market decline.

In 2009, Property Scandinavia had a turnover of MNOK 711 (MNOK 1 402 in 2008). Earnings before taxes were MNOK -73.9 as against MNOK 19.4 the year before. The weak results reflect both the difficult housing market in 2009, with low sales and few initiated projects, and to some extent write-downs on sites, non-residential buildings and our shareholding in Hansa Property Group. Total write-downs in 2009 amounted to MNOK 60. Conversely, office buildings were sold with gains of MNOK 20. The market was most difficult in Norway and Denmark, while the Swedish operations delivered positive results in 2009.

As a result of low interest rates and decreased future uncertainty, the market showed a gradual improvement over the last nine months of the year. Sales picked up in the used homes markets in the Oslo and Stockholm areas, as well as on new projects put on the market. Improvement is most visible on small dwellings projects, as well as for smaller blocks of flats on the city outskirts. The market for large blocks of flats is still somewhat hesitant.

Due to low housing starts in recent years, Property’s total operations had only 311 homes under production at the end of the year, compared with 638 homes for the same period the year before. In all, 430 homes were sold in 2009, compared with 130 in 2008.

At the end of the year, a total of MNOK 2 219 (MNOK 2 635) was tied up in property operations. The Group had a land bank equivalent to 7 800 housing units, of which about half are options.

Norway

Property operations in Norway had a turnover of 349 MNOK (632 MNOK) in 2009. Earnings before taxes were MNOK -47.9 MNOK (-49.9). As a result of the weak housing market no new projects of significance have been started in the past two years, providing little contribution from ongoing projects in 2009. As a result of the weak market, some non-residential projects have been written-down, as well as some shares, totalling MNOK 27. In addition, shares in Hansa Property Group were written-down by a further MNOK 13. In 2009, non-residential buildings were sold with total gains of MNOK 20.

Aided by low interest rates and an improved financial market, housing sales increased considerably during the last three quarters, particularly in the Oslo region. 215 homes were sold, compared with 41 throughout 2008. Several projects including small blocks of flats and small house-building projects are ready for start up in 2010.

123 (vs. 542) homes were completed in 2009, and 50 (28) homes were initiated in 3 (2) projects. At the end of 2009, activities in Norway included 64 (185) properties under production, divided over 4 (6) projects. Of the housing units under production, there were 4 units (72) which did not sell. In addition, at year-end there were 90 (110) completed, unsold homes spread over 12 projects. Of these, 78 properties were rented out until further notice. Exposure is still regarded as low, and housing sales from this portfolio are ongoing. All sites in the portfolio were valued at year-end, which found no basis for devaluing the portfolio.

In the non-residential market, the Skien and Porsgrunn projects (total 13 000 m²) were nearing completion at year’s end. Rental rate was 70 percent by the end of the year, and the buildings are leased to the public sector. Moreover, the non-residential part of the Victoriagården project in Sandvika outside Oslo (4 400 m²), was sold during the year. The sale amount was in excess of MNOK 100, and a smaller gain was recognised. Capital of MNOK 1 463 (MNOK 1 929) was tied up in Property in Norway at year’s end, and the land bank consisted of 3 400 housing units.

Sweden

Property operations (Veidekke Bostad) had a turnover in 2009 of MNOK 359 (MNOK 720). Earnings before tax were MNOK 21.2 (MNOK 101.8). The low volume and the decline in earnings are related to the weak market in recent years and the start up of few new projects.

In 2009, Veidekke Bostad completed 391 (501) homes, and initiated 185 (32) homes in 5 (2) projects. At the end of 2009, it had operations in Sweden with 247 (453) properties under production in 9 (11) projects. 15 (29) of the housing units under production were not sold. There were 0 (3) completed, unsold homes at year-end.

The housing market showed a clear positive trend through 2009 with 215 properties already sold compared with 86 in 2008. The improvement may be linked primarily to areas in and around Stockholm, but sales also picked up in Skåne and Gothenburg.

At the end of the year the land bank totalled 3 900 residential units, of which 70 percent were purchase options. Rights to build 640 homes were acquired in 2009, of which a large portion is options based, reducing the need for capital in the development period. A valuation of all sites in the portfolio was undertaken at year’s end. No basis for devaluing the portfolio was found.

A new entity, Veidekke Fastighetsutveckling AB, was established in 2008, which will engage in the development of non-residential properties. As a result of the financial crisis the entity had a difficult start, and is still a small operation.

At the end of the year MNOK 498 (415 MNOK) capital was tied up in Sweden.

Denmark

Veidekke's property development activities in Denmark, Hoffmann Ejendomme A/S, had no projects under production in 2009. The company has a land bank equivalent to 600 units, and 17 homes for sale. The market is still very difficult, and in 2009 land and housing was written-down by MNOK 20. Including this, earnings before tax was
MNOK - 47.2 (MNOK -32.5).

Industry

Industry’s activities are organised into four business areas: Asphalt, Aggregates (crushed stone and gravel), Operation and maintenance of roads, and Recycling of industrial waste. All these operations are managed by Kolo Veidekke AS and its subsidiaries. Kolo Veidekke is Norway's largest asphalt contractor with a market share of about 30 percent, and is the second largest producer of crushed stone and gravel.

Turnover in 2009 was MNOK 2 968 (MNOK 3 293) and earnings before tax were MNOK 7.1 (MNOK 68.1). The weak result in 2009 is mainly due to lower volumes in crushed stone and gravel, and recycling, as well as provisions for future losses in operation and maintenance.

The operations focused very sharply on measures to free-up capital in 2009. Cash flow in 2009 showed good progress and was positive for the year. We are continuing this work in 2010, and will implement further measures in this area.

Asphalt activities in 2009 amounted to approximately 70 percent of the total revenue in Veidekke Industry. Turnover was MNOK 2 215 (MNOK 2 138). There was high activity in the asphalt industry for much of 2009, which had a good end to the year showing a 5 percent increase in total volume over 2008. The Government's fiscal stimulus measures directed to road maintenance contributed to an increase in total demand, which was also fuelled by high demand from private customers.

Veidekke is a joint owner of two smaller asphalt companies in Sweden, which developed as expected. Investments in these companies are a part of our strategy to develop asphalt and gravel operations in Sweden.

Turnover within crushed stone and gravel was MNOK 449 (MNOK 445) on a volume for the year which was approximately 5 percent lower than in 2008. In addition, the operations experienced price pressures and increased costs resulting in margins which were somewhat lower in 2009 than the year before.

Turnover within road operation and maintenance was MNOK 318 (MNOK 302). The operations showed negative results, and further provisions for expected future losses on individual contracts have been made. On a portfolio of 15 contracts, seven delivered very negative results, and with a view to future losses on these contracts, a further MNOK 35 was allocated in 2009. As of 31 December 2009, a total of MNOK 54 has been allocated. In order to better results in this area, extensive measures have been initiated to strengthen the organisation, improve calculations, and increase operational and contractual expertise.

Recycling includes customised solutions for the collection, transport and sorting of different waste fractions as well as the production of waste and bio-based fuels. Turnover was MNOK 495 (MNOK 493). The market is closely tied to developments in the construction sector, retail/property, and the continued privatisation of waste management. Through internal improvement programs and organic growth, recycling operations developed positively in 2009.

Other Activities

“Other activities” is comprised of our operations outside Scandinavia: Veidekke’s long-established involvement in East Africa through Noremco. In addition, the project company Allfarveg AS, the operation of the Group's central management and financial administration are also added to this area.