Review by the President and CEO
Kari Kauniskangas in connection with the Interim Report January-March 2018
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.