Outlook for 2018
YIT’s Board of Directors confirms outlook and the most significant short-term business risks
The Boards of Directors of YIT Corporation and Lemminkäinen Corporation decided yesterday, on January 31, 2018, to complete the merger of Lemminkäinen and YIT in accordance with the merger plan signed on June 19, 2017. The merger has been entered into the Trade Register and takes effect today, February 1, 2018. The organisational meeting YIT Corporation’s Board of Directors was held February 1, 2018. The company’s outlook for 2018 and the most significant short-term risks were confirmed in the meeting.
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 segments
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: The 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: The 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 operating area.
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. The adjusted operating profit for the first quarter of 2018 is expected to be low due to normal seasonal variation of the combined company.
*Adjusted operating profit reflects the result of ordinary course of business and it does not include material reorganisation costs, impairment charges or other items affecting comparability. Adjusted operating profit is disclosed to improve comparability between reporting periods. Adjusting items are defined more precisely in the tables in the Financial Statements Bulletin 2017.
Outlook by regions
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.
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. Changes in regulations concerning residential transactions are expected to lead to increased volatility in supply and demand for apartments as well as changes in sales practices.Demand in Russia is also expected to focus primarily on affordable apartments. 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 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.
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 on which YIT can answer the market demand are sales and pricing, project management and project risk management, product development and the product offering, measures aiming to reduce production costs, cost management and measures affecting the capital efficiency.
Factors outside of YIT’s sphere of influence are connected mainly 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, 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 the demand may be quicker than the company's ability to adapt its offering.
The combination and synergies
The combination of YIT and Lemminkäinen is expected to create significant value for the shareholders of the combined company. The total synergies are expected to be approximately EUR 40 million annually, and they are expected to materialise in full by the end of 2020. As the companies have now merged, the sources of synergies and the synergy plans can be specified and verified. The company aims to report the cumulative synergies and specify the synergy timetable in connection with the interim report for the first quarter of 2018, and continue to report the development regularly going forward.
Integration costs of approximately EUR 40 million are expected to have a nonrecurring cash flow impact mainly for the years 2017–2019. In 2017, the adjusting items related to the merger totaled approximately EUR 9.5 million divided into transaction costs of EUR 7.6 million and integration costs of EUR 1.9 million. The company estimates that the majority of integration costs will be booked in 2018. The transaction and integration costs reduce the operating profit, but they do not have an impact on the adjusted operating profit.