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CEO’s review

CEO’s review

Interim report 1-9/2022, 27 October 2022

Our most significant achievement during the past year was the extensive financing arrangement we carried out in the second quarter, thanks to which our balance sheet is healthy and we are virtually net debt-free. Now that our balance sheet is healthy again, we are in a stronger position to face the more challenging market and have been able to fully focus on the development of our operational business. In spite of the challenges in our operating environment, our operative operating profit developed positively. Our result is based on successfully keeping inflation under control, ensuring the availability of materials, and longer-term improvement in the controllability of
projects.

Following the financing arrangement carried out in the spring, our balance sheet is strong, we are net debt-free and we no longer have Russia-related balance sheet risks. In addition, the number of unsold residential units that have been completed and are under construction remains low. At the end of September, 26 completed residential units were unsold. Our efforts to pursue growth in developer-contracted housing construction have stopped, as we have postponed the startup of certain developer-contracted housing projects due to inflation and weaker demand. In this business environment, our clear advantage is that our order backlog is on a healthy footing with relatively low risks.

Our order backlog still fell short of the comparison period and amounted to EUR 717.1 million. Projects won earlier valued at about EUR 131.2 million were recorded in the order backlog during the review period, comprising the Oulu Central Police Station and Prison as well as Kokardi, a developer-contracted housing project to be built in Pasila, Helsinki. The development phases of the projects we have won earlier and which have not as yet been entered in the order backlog have progressed well in the early autumn. We expect these projects to generate a growing inflow of orders in the fourth quarter and partly in early 2023. At the end of the review period such projects still amounted to about EUR 1.3 billion and they largely comprise relatively low-risk cooperative business premises contracts.

One of our successes in the review period was the completion of Lumo One in August. It is the third residential tower in Kalasatama, Helsinki. The project was handed over to the customer in phases during the summer and the last residents moved into the tower building in August. Phased handover was important to our customer. Our good and proactive cooperation with the Helsinki City Building Control Department contributed significantly to our success in this. Construction of the fourth Kalasatama tower building, Visio, is progressing on schedule; it reached its full height in September and will be completed at the end of 2023. In line with the original plans, Kalasatama is developing into an urban and appealing environment where services and smooth public transport comprise a natural and important part of working and living. We believe that the construction of the Kalasatama towers will continue, with all eight being completed by the end of 2027. We aim to start up the next buildings in the months ahead.

Our lifecycle-wise strategy has been evident in many of our operations during the past review period. Our most significant outlays in lifecycle-wise focus on the lifecycle wisdom of the projects we build. In addition, we have also developed our own construction operations, with our sites reaching net zero emissions as from the beginning of the year. Based on the feedback we received, this has succeeded in creating value for our customers as well. We cannot yet eliminate all emissions – we have achieved net zero emissions by compensating for the remaining emissions by planting trees to serve as carbon sinks. Thanks to our development efforts, SRV’s emissions have decreased 85 percent year-on-year. We have responded to the ongoing energy crisis by seeking to reduce our energy consumption, harnessing strongly renewable sources of energy like geothermal heat during construction, and scheduling electricity consumption for off-peak times, which impact both on our energy costs and the security of supply of society as a whole.

We expect that market conditions will become more difficult.We anticipate that inflation, growing interest rates and weakening consumer confidence will cut into demand at least during the winter ahead. However, we predict that contracts and projects under preliminary contracts that we have won earlier will be recorded in our order backlog during the next six months. In housing construction, our volume will decline going forward into the next year. Today we announced initiating change negotiations in accordance with the co-operation act. Our aim is to adjust our cost structure and number of personnel to meet the demand of the current market situation.

At a later date, we will reassess our long-term financial objectives and will consider restructuring our segments after our exit from Russia. We are actively continuing negotiations aimed at exiting.

I am satisfied and pleased that we have taken great strides forward in matters under our control and are heading in the right direction. I would like to thank our shareholders, customers and other partners and our personnel for the quarter now ended!

Saku Sipola
President and CEO
SRV Group Plc