YIT’s Interim Report January 1 – March 31, 2018: Integration progressing, result was modest

YIT Corporation Stock Exchange Release April 26, 2018 at 1:00 p.m.

Unless otherwise noted, the figures in brackets refer to the corresponding period in the previous year and are of the same unit. YIT reports in accordance with IFRS principles. 

 YIT and Lemminkäinen merged on February 1, 2018. In this interim report for January–March 2018, comparison figures are pro forma figures. To illustrate the impacts of the merger on the result of YIT’s operations and its financial position and to improve the comparability of the combined company’s financial information, YIT has prepared unaudited pro forma financial disclosures. These unaudited pro forma financial disclosures reflect the new segment reporting structure and reporting practices adopted by YIT on the date of completing the merger. The unaudited pro forma financial disclosures are based on YIT’s and Lemminkäinen’s IFRS-compliant historical financial data, adjusted for the effects of the merger. YIT’s actual results may deviate materially from the assumptions used in preparing these audited pro forma disclosures.

Additional information about the historical financial figures of YIT or Lemminkäinen are available in YIT’s and Lemminkäinen’s audited consolidated financial statements and unaudited interim reports, available on YIT’s website at www.yitgroup.com/en.

In this interim report, the figures for the first quarter 2018, the comparison figures and the figures for year 2017 are presented as pro forma figures. The pro forma balance sheet is presented as if the merger had occurred on December 31, 2017 and as if YIT as the accounting acquirer had consolidated the acquisition balance sheet of Lemminkäinen in its group financial accounts at said time. The pro forma income statements for the accounting period ending December 31, 2017 are presented as if the merger had occurred on January 1, 2017. Pro forma adjustments that do not have a continuing impact on YIT’s result are presented in the income statement for the accounting period that ended December 31, 2017. Additional information is available in the stock exchange release published on April 4, 2018 and its appendices.

Due to the merger, YIT’s financial information is also reported in the explanatory statement of the interim report so that the financial statements of merged Lemminkäinen for the financial period January 1‒January 31, 2018 are included in the pro forma figures for 2018, and the figures are presented in the tables in the column ”Pro forma 1-3/18”. Figures including Lemminkäinen’s financial statements for the financial period January 1–January 31, 2018 are used in the discussion in the explanatory statement and compared to the pro forma figures January 1 – December 31, 2017. In the interim report tables, the column ”Reported 1-3/18” does not include Lemminkäinen’s figures for the financial period January 1–January 31, 2018.

Group reporting, IFRS

Residential projects for consumers recognised as income upon completion

January–March

• Revenue decreased by 13% to EUR 602.2 million (696.0).
  
• Operating profit amounted to EUR -51.1 million (-52.4) and operating profit margin was -8.5%  (-7.5).
  
• Adjusted operating profit1 amounted to EUR -43.2 million (-27.1) and adjusted operating profit margin was -7.2% (-3.9). Adjusting items of EUR -7.8 million during the reporting period are mainly related to merger related fair value cost effects, integration costs and reorganisation of paving operations in Scandinavia.
  
• Earnings per share were EUR -0.25 (-0.23).
  
• Operating cash flow after investments, excluding discontinued operations, amounted to EUR -152.7 million.
  
• Order backlog grew from the level of end of December 2017 and was EUR 4,640.8 million  (12/2017: 4,218.3).
  
• The merger of YIT Corporation and Lemminkäinen Corporation was completed on February 1, 2018.
•  The company estimates the total annual synergies related to the merger to have an impact of EUR 40-50 million by the end of 2020. Of this, EUR 40 million is expected to be achieved starting from the first quarter 2020.

Kari Kauniskangas, President and CEO:

The most significant event this year so far has been the merger of YIT and Lemminkäinen completed at the beginning of February. The integration of the companies has proceeded as planned. Business operations have continued normally and all vital operations have continued uninterrupted during the integration phase. The main objective for the first three months spent together is to create an operating model for the new company and to form a functioning organisation, including unit levels. We are satisfied with the progress of the integration.

The pro forma revenue for January–March, including Lemminkäinen’s figures in January, was EUR 602.2 million (EUR 696.0 million). Adjusted pro forma operating profit was modest, EUR -43.2 million (EUR -27.1 million). The result was especially affected by the usual seasonality in the Paving and Infrastructure projects segments as well as the relatively low number of housing completions in Russia. In connection with preparing our new segment structure we evaluated our project portfolio thoroughly. Based on the evaluation, we had to lower the margins in a significant number of projects in the Russian contracting business, Infrastructure projects and Business premises. The adjustments include mainly merger related fair value cost effects, integration costs and items related to the reorganisation of Scandinavian paving operations.

In the Housing Finland and CEE segment, residential demand remained good during the period, and the segment’s development was positive due to strong consumer housing sales. Using the POC accounting method, the segment’s profitability improved year-on-year. The outlook for the segment is positive: we started several projects targeted at consumers in both Finland and in the CEE countries. In Russia, residential demand has remained stable compared to the second half of last year. In addition to the weaker margins in the contracting business, profitability has been negatively affected by measures taken to ensure meeting the cash flow objective and the increased residential sales in the Moscow area.

In the Business premises segment, we signed significant long-term lease agreements during the reporting period, which we expect to help us sell several large development projects to final investors during the remainder of the year. The segment’s result was lower than expected due to aforementioned weakened margins in certain projects. The Tripla project is progressing as planned. At the beginning of the year, we set up the Partnership properties segment in order to increase visibility into the ownership and financing of co-owned development projects. Projects partially owned by YIT, such as the Mall of Tripla, Tietotie 6 and the Hamina–Vaalimaa E18 motorway project, are reported under this segment. The current amount of investments for projects reported under this segment is approximately EUR 147 million. The E18 Hamina–Vaalimaa motorway was taken into operation in its entirety during the period.

I am satisfied with the approximately EUR 206 million contract signed in March with the Helsinki Region Environmental Services Authority HSY for constructing a new underground wastewater treatment plant in Blominmäki, Espoo, Finland. The Infrastructure projects segment’s operating profit was weak due to both seasonal fluctuation in the business and weakened margins in certain projects. Overall, the Paving segment’s winter planning has worked better than in the previous year. Regarding the Paving segment, we have made sizeable reforms in Scandinavia during the beginning of the year in order to improve the competitiveness of the business in the market area. We have also succeeded well in the paving contract tenders in our area of operation, and the starting position to the actual paving season seems favourable.

In spite of the expectedly modest first quarter, the market environment seems promising, assuming that tensions in the Finnish labour market do not needlessly culminate. We estimate that, in 2018, a total of approximately 5,000–5,500 new apartments will be completed in Finland and in the CEE countries, and approximately 3,000 apartments in Russia, the majority of them during the fourth quarter. After the successful lease agreements made during the first months of the year, we expect to sell several business premises properties to final investors during the remainder of the year. In our annual cash flow planning, our target is to have a positive cash flow after dividend payout. The same principle also applies to cash flow planning for year 2018. The company estimates the total annual synergies related to the merger to have an impact of EUR 40-50 million by the end of 2020. Of this, EUR 40 million is expected to be achieved starting from the first quarter 2020.

Key figures

Group reporting, IFRS

1 Comparisons include pro forma figures with Lemminkäinen’s financial statements for the accounting period of January 1‒January 31, 2018. 2 Attributable to the equity holders of the parent company.

Outlook for 2018

Due to the merger of YIT and Lemminkäinen, YIT does not issue numerical guidance for the Group but is issuing a general outlook that describes future development instead. YIT’s outlook is based on assumptions and the management’s estimates of the development of demand in the Group’s operating environment and segments. The Board of Directors will assess, and later announce, whether it is appropriate to issue numerical guidance for the merged company.

Outlook by segment

Housing Finland and CEE: Consumer demand for apartments is expected to remain at a good level. Activity among large residential investors is expected to be lower than in the previous years.

Housing Russia: Demand for apartments is expected to remain at the same level as seen on average in the second half of 2017. Residential prices are expected to remain low.

Business premises: Rental demand for business premises is expected to remain at the previous year’s level in growth centres. The contracting market is expected to remain active, but contract sizes are expected to decrease on average.

Infrastructure projects: Infrastructure construction market is expected to continue to grow slightly from the level of the year 2017.

Paving: The total volume of the paving market is expected to grow slightly in YIT’s area of operation.

Partnership properties: Activity among property investors is expected to remain at a good level, particularly for centrally located projects in the Helsinki metropolitan area and in major growth centres.

The adjusted operating profit is expected to fluctuate significantly between the quarters.

In its annual cash flow planning, YIT targets to a positive cash flow after the dividend payout. The same principle applies to planning the 2018 cash flow.

YIT has adjusted its estimate on the total amount and timing of the synergy benefits of the merger. YIT estimates that the total synergies are larger and they will be achieved sooner than earlier announced. The company estimates the total annual synergies related to the merger to have an impact of EUR 40-50 million million by the end of 2020. Of this, EUR 40 million is expected to be achieved starting from the first quarter 2020. Previously the company estimated the annual total synergies to be EUR 40 million, and they were estimated to be reached in full by the end of 2020.

YIT estimates that in 2018 approximately 5,000 – 5,500 apartments in Finland and CEE, and approximately 3,000 apartments in Russia will be completed, most of them during the last quarter of 2018. In the beginning of the year, YIT has signed several significant long-term lease agreements and estimates to sell several large business premises to final investors in the Helsinki metropolitan area during the remainder of the year.

Outlook by region

Finland

Consumer demand for apartments is expected to remain at a good level. Activity among large residential investors is expected to be lower than in the previous years. Location and the price level will continue to play a key role.

The divergent development of apartment prices and demand between growth centres and the rest of Finland is expected to continue. The availability of mortgages is expected to remain good. The increased supply of apartments is anticipated to prevent the overheating of the market and therefore the rise of housing prices.

The rental demand for business premises is expected to remain at the previous year’s level in growth centres. Activity among property investors is expected to remain at a good level, particularly for centrally located projects in the Helsinki metropolitan area and in major growth centres. The contracting market is expected to remain active, but contract sizes are expected to decrease on average.

Renovation is expected to grow moderately due to increasing urbanisation and aging of building stock.

High construction activity has led to increased competition for skilled professionals and the situation is expected to continue. Construction costs are estimated to increase slightly. Construction volume is expected to remain at a high level.

The increased regulation and higher capital requirements imposed on financial institutions may affect construction and property development.

Infrastructure construction market is expected to continue to grow slightly from the level of the year 2017. The Government's decisions regarding transport projects in the General Government Fiscal Plan as well as major cities’ investments in infrastructure improve the outlook for both paving and infra projects. The state's planned investments in basic road maintenance are expected to keep demand relatively stable for paving in 2018. Demand for infra projects is maintained by complex infrastructure projects in urban growth centres as well as transport projects and industrial investments.

Russia

The demand for apartments is expected to remain at the same level as seen on average in the second half of 2017. In Russia, the low point of the economic cycle is now in the past, but residential demand is anticipated to only improve slowly and price levels are expected to remain low. The improved economic situation is anticipated to have a cautiously favourable impact on the residential market. Expectations of interest rate cuts are expected to influence consumer behaviour.

Expectations for lower interest rates are estimated to affect consumer behaviour. Changes in regulation concerning residential transactions are expected to lead to increased volatility in supply and demand for apartments as well as changes in sales practices. Demand is expected to focus primarily on affordable apartments also in Russia. Inflation in construction costs is expected to remain moderate.

Construction and repair projects on major roads are expected to maintain demand for paving.

The Baltic countries and CEE countries

Residential demand is expected to remain at a good level. Residential prices are estimated to increase further. The prices of plots have increased and competition for plots is expected to remain intense. The availability of financing and low interest rates are expected to continue to support residential demand. The shortage of resources is expected to increase inflation in construction costs. The contracting market for business premises is expected to remain at the current level or decrease slightly in the Baltic countries.

In the Baltic countries, the volume of infrastructure construction is expected to continue to grow due to the states’ investments in improving urban and transport infrastructure.

Scandinavia

In Norway and Sweden, infrastructure construction is boosted by multi-year, state-funded traffic infrastructure development programmes. In both countries, infrastructure construction is expected to grow in 2018. Large-scale road and railway projects are ongoing or planned in Sweden and Norway, which will increase demand for infra projects and paving. In addition, especially Norway is investing in the development and renewal of energy production.

In Denmark, demand for paving is expected to decline as public investments in road infrastructure are decreasing.

Factors affecting the guidance

The most significant factors with which YIT can answer the market demand are sales and pricing, project and project risk management, product development and the product offering, measures to reduce production costs, cost management and measures affecting the capital efficiency.

Factors outside of YIT’s sphere of influence are mainly related to global economic development, the functionality of financing markets and the interest rate, the political environment, economic development in areas of operation, changes in demand for apartments and business premises, the availability of resources such as key persons, the functionality of the labour markets, changes in public and private sector investments and changes in legislation, permit and authorisation processes and the duration thereof, as well as the development of foreign exchange rates.

Due to the long-term nature of construction and urban development projects, the changes in demand may be quicker than the company's ability to adapt its offering.

Events after the review period

In January, before the merger, Lemminkäinen announced that it would redeem the outstanding share of EUR 35.2 million of its hybrid bond in accordance with the terms and conditions of the hybrid bond on March 30, 2018, and as a result thereof the payment took place on April 3, 2018.

YIT is taking part in establishing a fund investing in residential plots in Finland. The plot fund is part of the Partnership properties segment. YIT’s partners in the fund are Ålandsbanken and Varma Mutual Pension Insurance Company. The investment capacity of the established plot fund is EUR 100 million, of which equity accounts for EUR 50 million. The fund’s equity investors are YIT (20%), Varma (40%) and Ålandsbanken (40%); Ålandsbanken manages the fund. 

YIT concluded the cooperation negotiations on the reorganisation of the combined company in Finland. The number of redundancies based on eliminating double work in the organisation and streamlining the operations is at the maximum 120 employees in Finland. In addition, the same amount of personnel reduction will be carried out as natural exits, retirements and terminations of fixed-term employment contracts.

In April, residential sales to consumers are estimated to be around 190 units in Finland (4/17: around 170), around 80 units in the CEE countries (4/17: around 80) and over 250 units in Russia (4/17: below 200). Additionally, YIT estimates to sell further to consumers approximately 40 apartments of projects previously sold to the YCE Housing I fund (4/17: 6).

News conference for investors and media

YIT will arrange a news conference on Thursday, April 26, 2018 at 2:00 p.m. Finnish time (EEST, at 12:00 noon BST) at YIT's head office, Panuntie 11, 00620 Helsinki, Finland. The event is in English and targeted for analysts, portfolio managers and the media. Welcome!

Webcast

The news conference and presentation by the President and CEO of YIT Corporation Kari Kauniskangas can also be followed through a live webcast at www.yitgroup.com/webcast. The live webcast starts at 2:00 p.m. (EEST) and a recording of the webcast will be available at approximately 4:00 p.m. (EEST) at the same address.

Conference call

The news conference can be participated also through a conference call. Conference call participants are requested to dial in at least five minutes prior to the start of the conference, at 1:55 p.m. (EEST). Conference call numbers are:

Participants from UK and outside of Nordic countries +44 (0)330 336 9105
Participants from Sweden +46 (0)8 5033 6574
Participants from Norway +47 2100 2610

The participants will be asked to provide the following confirmation code: 2892309.

During the webcast and conference call, all questions should be presented in English. At the end of the event, the media has the opportunity to ask questions also in Finnish.

For further information, please contact:

Hanna Jaakkola, Vice President, Investor Relations, YIT Corporation, tel. +358 40 5666 070, hanna.jaakkola@yit.fi 

Ilkka Salonen, Chief Financial Officer, YIT Corporation, tel. +358 45 359 4434, ilkka.salonen@yit.fi

YIT CORPORATION

Hanna Jaakkola

Vice President, Investor Relations

Distribution: Nasdaq Helsinki, major media, www.yitgroup.com

YIT is the largest Finnish and significant North European construction company. We develop and build apartments, business premises and entire areas. We are also specialised in demanding infrastructure construction and paving. Together with our customers our 10,000 professionals are creating more functional, more attractive and more sustainable cities and environments. We work in 11 countries: Finland, Russia, Scandinavia, the Baltic States, the Czech Republic, Slovakia and Poland. The new YIT was born when over 100-year-old YIT Corporation and Lemminkäinen Corporation merged on February 1, 2018. Our pro forma revenue for 2017 was over EUR 3.8 billion. YIT Corporation's share is listed on Nasdaq Helsinki Oy. www.yitgroup.com