Risk Management
YIT’s risk management policy aims to identify the major risk factors, taking the special characteristics of YIT’s business operations and environment into consideration, and optimally manage the total risk exposure so that the company achieves its strategic and financial objectives. Optimal risk management seeks to increase the company’s value.
Strategic risks
Growing organically and through acquisitions
YIT’s annual growth target is 10 per cent on average. Growth is sought both organically and through acquisitions. The majority of YIT's business is labour-intensive, thus the availability and retention of skilled employees is a prerequisite for organic growth. Risks associated with acquisitions and outsourcing are managed with strict criteria and process supervision. The criteria defined by YIT are suitability for the strategic objective, price and valuation, operative synergy and development opportunities, competent personnel and the corporate culture. As for the process, management particularly involves an effectively completed integration programme following the closure of a deal. A good example of a successful integration process and improvement in profitability in a large-scale business acquisition is the acquisition of Building Systems in 2003.
Rapid growth in Russia
Residential construction is by its nature dispersed into several separate sites and cities. Expansion of residential construction into new cities aims to expand the business as well as disperse geographical and partner risks. Risk management particularly focuses on finding the right local partners. Partners are expected to be well-versed in the local markets. Business premise projects, on the other hand, are individual large-scale projects by nature, and project management is their central issue.
Other key factors in risk management in Russia include finding competent and sufficient personnel, management of operative growth and optimisation and management of capital and cash flow. The need for capital will increase, particularly given land acquisition and ongoing production. At the end of 2007, YIT had 9,870 residential units under construction in Russia. There were 11 completed but unsold residential units.
Capital management
In business where investments are small, effective turnover of net working capital is the objective. In the more capital-intensive business operations, residential development projects and property development projects, capital is tied to the land reserves and ongoing production. Capital increases at the highest rate in Russia, and at the end of 2007, Russia accounted for 33 per cent of the YIT Group’s invested capital.
Combining the growth strategy and active dividend policy in the strategic objectives requires that the capital structure is managed and actively guided in the right direction. YIT systematically monitors the trend in net working capital and cash flow in its risk management. When other operations generate stable cash flow, growth in property development can be financed not only with the company’s own cash, but also with debt. Cash flow generation has been set as one of YIT’s strategic focus areas.
Tender-based contracts and cost management
Tender-based contracting is a major part of the Group’s core business. YIT does not set out to increase the relative share of revenue accounted for by contracting. Rather, the Group is selective with regards to its risks and profitability. Effective contract management requires comprehensive project management expertise at all operative levels in order to keep costs under control and reach the desired profitability. Expertise is upgraded by investing in training, contractual expertise and the development of offer and risk analyses.
All business segments focus on cost management and improving cost efficiency through cost control, identification and prevention of risks, and by making operations more efficient and developing procurement activities.
Ensuring the availability and competence of skilled employees
The majority of YIT’s business operations are labour intensive and domestic by nature. Moreover, YIT is growing organically, increasingly complex technical equipment is being used more widely, and the company’s business has become highly service oriented, which further highlights the importance of competent personnel. The availability of labour is a challenge given the changing age structure of the population.
Challenges are answered by investing in the commitment of current employees, developing the employer image, cooperation with local educational institutions, expanding the recruitment and training programmes for young professionals and integrating foreign workers. YIT's appeal as an employer is increased by the desire to work in a large, international growing company with a strong corporate culture and management system, good working conditions and opportunities for development.
Financial development
Management of strategy-related risks is based on predicting changes in the business environment and markets as well as on the company’s own ability to react. Continuous monitoring and analysis of financial, demographic and technological phenomena make it possible to react quickly to change and to utilise the new business opportunities provided by them.
Administrative risks
Management system
A strong corporate culture and a clear management system comprise an integral part of YIT’s success factors. The regular monitoring of profitability extends throughout the entire line organisation, from the project level to the Group level with the help of an active management approach. As the organisation expands to new areas and countries, the management systems are upgraded by standardising and firmly establishing operating and reporting procedures in different countries and business segments. YIT has large-scale projects underway, e.g. with the new ERP system.
Damage risks
In the management of damage risks, it is YIT's key objective to minimise the losses caused by identified risks to YIT and thus ensure the company's financial results and continuity of operation. YIT's projects are insured with project-specific insurance policies covering any sudden and unforeseen material damage to the project site, such as fire, collapse and theft. Other assets, such as properties, machinery and equipment are insured through continuous property insurance policies in case of material damage. There are few projects that are large considering the overall extent of operations and whose insurance should be separately surveyed.
Financial risks
Financial risks include liquidity, interest rate, currency and credit risk, and their management is a part of the Group's financing policy. An account of the financing risk can be found in the notes to the financial statements for 2007.
Updated May 15, 2008
InvestorRelations@yit.fi
