MARKET CONDITIONS, RISK AND UNCERTAINTY

Market Prospects

In the autumn of 2009, stock market prices increased significant-ly and with them optimism both in the household sector and the business sector began to return. The sharp downturn in the housing market in several countries appears to have stalled and prices are again on the rise. GDP growth the world over is expected to be above 3 percent in 2010, driven by increased optimism, low interest rates and the continued positive effect of stimulus measures. The Scandinavian countries will largely be positively affected by international growth. There is, however, some uncertainty around the effects of pending reductions in stimulus measures and gradually increasing interest rates from the end of 2010.

The building and construction market is expected to show a slightly positive development in all three countries. A positive development in the housing market will continue with increasing residential construction from a low level. Continued weak growth in used homes prices is expected. Additionally, a high level of activity within infrastructure projects will also contribute to sustaining the market.

Investments in building and construction in Norway will increase by around 2 percent in 2010, and continue at just over 2 percent in 2011. A continued decline in private non-residential buildings investment is expected, while investments in public buildings and facilities will remain unchanged. Activity within the road maintenance is likely to decrease slightly in 2010, although the 2009 level was very high as a result of government stimulus measures.

In Sweden, a rise of around 1 percent is also expected in building and construction investment in 2010. Housing investment and public buildings investment is expected to push up activity here, while private non-residential buildings will have the opposite effect.

The market in Denmark will be weak in 2010 due to continued low housing investment. Residential construction is expected to edge up by the end of the year and contribute to increased activity in 2011.

For Veidekke, 2010 will be a year with a flat trend in the overall market, but with large variations between individual regions. Competition for contracts will remain hard, with many players in the market. Prospects for new growth at the end of 2010 and into 2011 will contribute to an increasing cost level in future, which will affect new contracts.

Risk and uncertainty factors

Veidekke’s activities relate to the execution of individual projects. There is a great variation in the complexity, size and risk between projects. Systematic and professional handling of projects is absolutely crucial for Veidekke’s results. Veidekke’s order-on-hand increased during 2009. The increase related primarily to the public builders, although the private market also improved somewhat. New projects have been won under far tighter market conditions than before.

Prices from our suppliers in terms of both materials and services were reduced in 2009. The risks relate to market developments and our assessment of when we should enter into binding agreements – both signed contracts and submitted tenders. This risk is partly offset by entering into long-term cooperation agreements with strategic suppliers.

There are still many companies in the building and heavy construction industry struggling financially. We will therefore continue to follow-up our sub-contractors’ ability to deliver, on both already initiated and new projects. A possible bankruptcy of a subcontractor may incur the risk of overuse and delay progress.

Future earnings in the property segment depend on the start-up of new projects. The number of new projects in 2010 is expected to increase.

Credit risk associated with custom-ers' ability to pay is important. This risk primarily relates to Industry operations, but also somewhat to Property.

Veidekke closely follows developments in order to manage risk and take appropriate action.

Challenges ahead

Because of the recession, Veidekke will continue to focus on maintaining the best possible financial position and freedom of action. This freedom of action is to be used to further develop operations, and to exploit business opportunities, which previous recessions have shown to emerge at this stage of the business cycle.

The Board of Directors wishes to underline the importance of maintaining focus on margins rather than volume. This requires thorough prioritisation in the selection of projects, and places even higher demands on assessing risks associated with each project.

Veidekke maintains its long-term ambitions of continuing to be a leading Scandinavian player, and to be among the most profitable contractors and property developers in its markets.