Risks and risk management
Most significant short-term business risks
As published in the Financial statements bulletin 2019
YIT’s Board of Directors approves the company’s risk management policy and its objectives, including the risk tolerance and risk appetite. Risk management planning and the evaluation of the overall risk position are part of the annual strategy process. Risk management is included in all of the Group’s significant operating, reporting and management processes. Significant changes in risks are followed on monthly basis and reported according to the Group’s governance and reporting practices.
The general economic development, functioning of the financial markets and the political environment in YIT’s operating countries have a significant impact on the company’s business. Negative development in consumers’ purchasing power, consumer or business confidence, availability of financing for consumers or businesses, or general interest rate level would likely weaken the demand for YIT’s products and services. They also impact parametres used for fair valuation of certain balance sheet items, such as the Mall of Tripla. A drop in residential prices or an increase in investors’ yield requirements would pose a risk for the profitability of the company, should these factors materialise.
There is still uncertainty related to the economic development of Russia. The volatility of the oil price and the rouble, changes in legislation, geopolitical tensions and inflation may have an influence on the demand for apartments due to a weakening in purchasing power and consumer confidence. Declining purchasing power and oversupply of apartments would also impact the development of residential prices.
At the end of 2019, Finland accounted for the majority of the company’s revenue, which highlights the significance of Finland’s economic development for YIT’s business. The slowing growth of the Finnish economy and the indebtedness of the public sector may weaken consumers’ purchasing power and general confidence, which would have a negative impact on the demand for apartments and business premises. An increase of public sector debt could also make it more difficult to finance infrastructure investments. Investors have played a central role in YIT’s Finnish business in recent years. An increase in price or interest levels, increased rental accommodation supply and/or weakening in tenant demand on the business premises or residential market and better yields of alternative investments could lead to a significant decrease in investor demand. Increased supply and slowdown of population growth or depopulation can pose a local risk for residential demand.
Ensuring competitive products and services corresponding to customer demand is critical for YIT’s business. Changes in customer preferences and in the competitors’ offerings pose risks related to the demand for the company’s products and services. New competitors, business models and products on the housing market may pose risks related to the demand for the company’s products and services.
Especially in Finland and the CEE countries, the availability of the resources needed for the increased production volume might prevent increasing the production as planned. Competitors’ need for resources also poses a risk of losing key personnel and expertise. The overheating of market, should it materialise, would have an impact on price levels and availability of resources. To support the identification of potential personnel risks, YIT annually creates a proactive personnel and training plan that outlines, in accordance with the Group’s strategy, YIT’s competence needs, personnel needs and potential attrition due to retirement, for example.
Completing the integration, the planned sale of Nordic paving and mineral aggregates businesses as well as arrangements in Russia take time from key personnel, cause uncertainty among employees, activate competitors to recruitment attempts and may have an impact on the company’s financial performance. The company has taken measures as planned to mitigate these risks.
The company expects the annual total synergies to have an impact of EUR 47 million by the end of 2020. Of this, EUR 41 million was achieved by the end of 2019. The assumptions related to the synergy benefits and integration costs are by nature uncertain and liable to numerous significant risks and uncertainties related to business, economy and competition. More detailed information on the risks related to the merger is published in the merger prospectus. The merger prospectus is available on YIT’s website.
Most of the company’s business is project business, meaning that successful project management plays an integral role in ensuring the company’s profit. The most significant project management risks are related to factors such as pricing, planning, scheduling, procurement, cost management and customer behaviour as well as in the company’s self-developed business, also the management of sales risk. YIT’s major business premises and infrastructure projects in Finland, make up a significant share of the company’s expected operating profit in the coming years, meaning that successful project management in the projects is integral.
Among other measures, the company has continued to manage risks related to its business and to capital employed by utilising associated companies and joint ventures in its business operations. Being a party to associated companies and joint ventures is nevertheless subject to risks typical to them related to, among other things, potential disagreements regarding decision making, financing and business operations, as well as distribution of obligations among parties.
Generally increased activity in cyber criminality may cause risks for the company’s operations and information security. Malpractices of personnel may cause losses, financial or other, or risks to other employees.
Epidemies or pandemics can disturb the company’s supply chains or at worst weaken the company’s operational prerequisites.
Changes in legislation and authorities’ processes may slow down the progress of projects, have a negative effect on net debt, increase the need for equity or debt funding or prevent additional funding from being realised. There are uncertainty factors related to authorities’ actions, permit processes and their efficiency particularly in Russia and the CEE countries. Political tensions between e.g. EU, USA, Russia and China are materialised as sanctions, among others, that may have a significant impact on the company’s business. Changes in the federal law regulating housing market in Russia may cause disturbance in companies’ monetary transactions, current contract models and increase capital employed. The housing act came into force in summer 2019, which increases uncertainty. The role of banks in monitoring the law has been expanded and the incompleteness of the monitoring process may cause uncertainty.
In recent years, the company has decreased capital employed in Russia according to its strategy, and the improvement of the capital turnover will continue as a part of normal business. The company’s target is to further release capital employed in Russia.
The most significant financial risks are the risks related to foreign exchange rate development and the availability of financing. Availability of financing may be affected by negative development in the Nordic residential construction market. The Group’s most significant currency risk is related to rouble-denominated investments. Additional information on financial risks and their management is provided in Note 29 to the Financial statements 2018.
Operational risks related to environmental issues may be locally significant in YIT’s operations; for example, in the event of a fuel leak or soil contamination. Activities related to environmental risks are focused on proactive measures. The most significant acute environmental risks are related to the handling of hazardous materials. The Group’s construction sites have operating instructions in place for risk identification, prevention and management. An environmental risk assessment is conducted in the planning phase for the largest projects.
Also climate change poses challenges for the operations of YIT and the construction industry. For example, significantly increased annual precipitation or extreme weather may result in increased costs or delayed production processes. Significant changes in legislation, investor demand or customer demand related to climate change or climate action may impair the company’s operational prerequisites. YIT aims to prepare for such risks through proactive measures and ambitious goals intended to promote the sustainability and eco-friendliness of the operations.
Risks related to occupational safety are individual, such as various accidents and injuries. Most of the occupational accidents occurring at YIT are related to tripping or slipping when moving around on-site. The Group’s current occupational safety activities are increasingly focused on proactive measures such as safety planning, safety observations, on-site safety briefing practices and orientation training. Accidents and near misses are investigated and information on them is communicated internally.
The risks identified by YIT with regard to respecting human rights are related to working conditions, harassment, racism, discrimination and unethical operating methods. These risks are taken into consideration in YIT’s Code II online training, orientation training, selection processes, regular development discussions, intervention practices and the annual Voice personnel survey. The Group has also introduced the YIT Ethics Channel for reporting suspected non-compliance.
As regards the subcontractor network, YIT strives to eliminate risks related to foreign workforce in the realisation of respecting human rights by monitoring and auditing subcontractors. YIT manages risks related to labour human rights in the supplier and subcontractor network by enforcing supplier requirements. Respect for labour and human rights in the supply chain is monitored by means of various reviews and audits.
The high level of subcontracting and the use of contracting chains are challenges in the construction industry. The use of contracting chains is always subject to permission at YIT. In spite of active monitoring efforts, internal audits and communication, there is always the risk that there are illegal operators in the subcontracting chain.
Risks related to the prevention of corruption and bribery include the operations being geographically dispersed, the large number of agreements and the fixed-term nature of projects. Increasing transparency throughout the Group’s operating countries, defining common operating methods and targets and increasing awareness and the use of internal audits are part of YIT’s risk management. Risks related to unethical activities are also managed by conducting background checks for partners to the extent allowed by local legislation. Other methods include approval procedures, the selection and auditing of partners and internal audit practices.
YIT Ethics Channel, an ethical reporting channel, is in use in the company. Its goal is to prevent risks and promote the observance of ethical operating principles throughout the organisation. YIT Ethics Channel is used in situations where non-compliance with legislation, YIT’s values, policies, procedures or instructions is suspected. All reported information is handled confidentially and in accordance with the legislation governing the processing of confidential information.