YIT Corporation publishes outlook and guidance for the second half of 2013, strategy, financial targets as well as certain financial information regarding Caverion Corporation, a company to be formed in the partial demerger of YIT

 

YIT CORPORATION PUBLISHES OUTLOOK AND GUIDANCE FOR THE SECOND HALF OF 2013, STRATEGY, FINANCIAL TARGETS AS WELL AS CERTAIN FINANCIAL INFORMATION REGARDING CAVERION CORPORATION, A COMPANY TO BE FORMED IN THE PARTIAL DEMERGER OF YIT

 

The Board of Directors of YIT Corporation (”YIT”) confirmed in its meeting on 3 June, 2013 the outlook and guidance for the second half of 2013 as well as the strategy and financial targets until 2016 for Caverion Group to be formed in the partial demerger of YIT (“Demerger”). This release contains also certain other previously unpublished information that will be described in the prospectus regarding Caverion Corporation, a company to be formed in the Demerger, to be published on or about 5 June, 2013 (the “Prospectus”). This information includes the key competitive strengths of Caverion Group, carve-out and pro-forma historical financial information of Caverion Group, events after the three-month period ended 31 March 2013, dividends and dividend policy as well as treasury policy.

 

The Board of Directors of YIT approved and published the demerger plan regarding the Demerger on 21 February, 2013. According to the demerger plan YIT is demerged so that all assets and liabilities related to YIT’s Building Services business are transferred to a new company, named Caverion Corporation (“Caverion”), to be formed in the Demerger. YIT’s Construction Services business will form YIT’s continuing operations.

 

The Demerger will become effective when YIT’s Extraordinary General Meeting to be held on 17 June, 2013 has approved the Demerger and its implementation is recorded with the Finnish Trade Register. The planned registration date is 30 June, 2013. YIT will apply, on behalf of Caverion, for the listing of all Caverion shares for public trading on NASDAQ IMX Helsinki Ltd with the trading code “CAV1V”, so that the Caverion shares are estimated to be entered into public trading on 1 July, 2013.

 

GUIDANCE FOR THE SECOND HALF OF 2013

• Caverion estimates that the Group’s revenue for the second half of 2013 is more than EUR 1.3 billion and EBITDA more than EUR 50 million.
• The guidance does not take into account the non-recurring expenses related to the Demerger, nor the expenses related to any potential mergers or acquisitions.

 

SUMMARY OF THE STRATEGY AND LONG-TERM FINANCIAL TARGETS FOR CAVERION GROUP

 

Caverion's strategic objective is to achieve a leading position in the European building systems market. The strategy has three main objectives:

 

• In Northern Europe, the key aim is to improve profitability.
• In Central Europe, Caverion will pursue strong growth, especially in Germany and German-speaking countries. The aim is to grow both organically and through acquisitions.
• Extensive new and advanced projects and services. The company will pursue growth and profitability by putting an emphasis on long-term service agreements in the service and maintenance business, Design & Build projects and deliveries related to energy savings.

 

YIT’s Board of Directors set the following financial targets for Caverion until 2016 on June 3, 2013.

 

	TARGET UNTIL 2016	ACTUAL 2012 (Carve-out)
Revenue growth (%)	Average annual growth in revenue of more than 10 per cent	-2.5
Profitability (%)	EBITDA over six per cent of revenue	3.0
Operating cash flow after investments (EUR million)	Strong operating cash flow to enable organic growth, repayment of loans and distribution of dividend	40.5

 

 Market outlook for Caverion’s services

Caverion’s operating environment varies by business and country. Caverion operates in Sweden, Finland, Norway, Germany, Austria, Denmark, Russia, Estonia, Latvia, Lithuania, Poland, the Czech Republic and Romania. The extensive geographical area of operations and comprehensive portfolio balance the effect of economic fluctuations, with the changes impacting business operations at different times and force.

The market situation for building systems is expected to vary by country also in 2013, especially in the project business. In 2013, the service and maintenance market is estimated to remain stable or even grow slightly in all major countries where Caverion operates. The raise in technology in buildings increases the need for new services, and the demand for energy efficiency services is expected to remain stable. The opportunities for growth in service and maintenance are still quite favorable, particularly in Norway, Germany and Austria. In Poland, the building systems market will continue to grow but suffer from oversupply, which has a negative impact on prices. The building services market in the rest of Central Eastern Europe (the Czech Republic and Romania) is developing slowly with a low level of activity.

Decision-making on new investments is still slow, but positive signs can be seen. After the stagnation in 2012, new investments in building systems are expected to increase slightly in Norway, Germany and Austria. Increasing public investments and an increasing need for renovation and repair work are expected to the growth. Demand in the project market is expected to weaken further in 2013 in Finland, Sweden and Denmark and decrease slightly or remain unchanged in Central Eastern Europe. The size of the Swedish project market as a whole is expected to decrease by approximately 5 per cent during 2013, mainly due to weakening demand. The Norwegian project market has developed well during the first quarter of the year, and the favourable development is expected to continue during 2013. In the Baltic countries and Russia, both the project and service market demand is estimated to remain low.

There is potential for energy-efficient services over the next few years with the tightening of environmental legislation. Environmental certifications and energy efficiency will be increasingly significant factors in the future, allowing property owners to increase the value of their properties, which will continue to support growth opportunities. Services and projects related to the maintenance of traffic infrastructure are also estimated to develop favorably.

 

Outlook for the second half of 2013

Caverion estimates that the Group’s revenue for the second half of 2013 is more than EUR 1.3 billion and EBITDA more than EUR 50 million. The guidance does not take into account the non-recurring expenses related to the Demerger, nor the expenses related to any potential mergers or acquisitions.

Company’s management may with its actions affect the controllability of operations and the improvement of profitability by streamlining the segment organization and by lowering the organizational structures as well as with business restructurings. The profitability of the project business is sought to be improved by choosing the projects more carefully, by a more systematic risk management and by improving the acquisition process. In addition to these improvement measures commenced earlier the aim is to improve the tender process and to focus the project business in knowledge centers. The criteria for the tendering process have been made clearly stricter with regard to the profitability and risks of the project, among other factors, and the number of offers made will be decreased. The systems and software used in offer calculations will be harmonised, and authorisations for approving projects have been made more stringent. The company also aims further in the value chain and it aims to strengthen its position particularly in Design & Build projects. The restructuring of operations proceeded during the first quarter of 2013 in all countries where Building Services Northern Europe operates. The aim is to decrease the number of personnel by 600 employees in 2013; of these, personnel cuts amounting to approximately 200 employees were carried out during the first quarter. The effects of the executed cost savings and measures are estimated to be seen as an improvement of the profitability during 2013.

Company’s management cannot affect the general market development with its actions. According to the company management’s estimate, the effects of the implemented cost-savings are expected to be shown as improved profitability during the rest of 2013. The additional service and maintenance work postponed by customers starting from the fourth quarter of 2012 is expected to result in increasing demand, which is also estimated to contribute to the favorable development of revenue and profitability during the rest of the year. The clear strengthening of the order backlog of Building Services Central Europe and picking up of demand in Germany in the first quarter of 2013 will contribute, according to the management’s estimates, to the development during the rest of the year. The increased insecurity of the general macroeconomic development has nonetheless an effect on Caverion’s business and customers.

 

Strategy and financial targets for Caverion Group

 

As Caverion will be established only in connection to the implementation of the Demerger, YIT has defined the strategy and financial objectives for Caverion. After its establishment Caverion will independently make the decisions regarding its strategy and financial objectives.

 

Caverion's strategic objective is to achieve a leading position in the European building systems market. The strategy has three main objectives:

 

• In Northern Europe, the key aim is to improve profitability
• In Central Europe, Caverion will pursue strong growth, especially in Germany and German-speaking countries. The aim is to grow both organically and through acquisitions.
• Extensive new and advanced projects and services. The company will pursue growth and profitability by putting an emphasis on long-term service agreements in the service and maintenance business, Design & Build projects and deliveries related to energy savings.

 

Improving the profitability of Building Services Northern Europe

 

Caverion aims to improve the profitability of Building Services Northern Europe. The previously announced measures to carry out cost savings of EUR 40 million have been executed and personnel cuts of 800 employees were carried out by the end of the 2012. The cost savings measures related to personnel have been executed and the pursued cost savings have been reached. Nonetheless the cost saving measures have turned out to be inadequate due to market development and decrease in revenue. Hence, the adjustment of costs will continue in Building Services Northern Europe during 2013. The aim is to decrease the number of personnel by further 600 employees in 2013; of these, personnel cuts amounting to approximately 200 employees were carried out during the first quarter. The aim is to improve the profitability of project business through more careful project selection, increasingly systematic risk management and more efficient procurement. In addition to these efficiency measures that have already been launched earlier, the aim is to make the tendering process more efficient and centralise the project business in centres of excellence. The criteria for the tendering process have been made clearly stricter with regard to the profitability and risks of the project, among other factors, and the number of offers made will be decreased. The systems and software used in offer calculations will be harmonised, and authorisations for approving projects have been made more stringent.

 

Strong growth in Central Europe

 

Caverion will pursue strong growth in Central Europe both through acquisitions and organically. Caverion's market shares in Central European countries are smaller than in Northern Europe, which offers good opportunities for growth in these diversified Central European markets. According to the Company’s management, Caverion is the second largest player in terms of market position in Germany with a market share of approximately two per cent and the third largest player in Austria with a market share of approximately three per cent.

Caverion aims to further expand in service and maintenance business in the German-speaking region with selected acquisitions. YIT has expanded into the Central European market with two significant acquisitions (MCE in 2008, caverion GmbH in 2010) and the Company estimates that Caverion also has resources for continuing its growth through acquisitions.

Caverion aims to increase its service and maintenance operations significantly in Central Europe, where service and maintenance account for a lower share of revenue than in Northern Europe. The outlook for services and maintenance of building services is good over the long term in all countries in which the Company operates. Economic trends have less effect on the demand for maintenance than the project business, and the profitability of maintenance is also typically better. In 2012, service and maintenance operations accounted for 64 per cent of all Building Services and Industrial Services volume in Northern Europe and 31 per cent in Central Europe.

 

Growth and profitability will be pursued with extensive, new and advanced projects and services

In the project business, the aim is to grow as a supplier of so called Design & Build projects and total deliveries of building systems, as large projects that require significant resources and extensive competence are where Caverion excels, being involved throughout the project from designing the solution to delivering the technology. Higher profitability than in individual tendered projects are typical of such project development. Major projects often last for several years and generate cash flows positively.

 

The Company also aims to increase long-term service agreements, strengthen its technical expertise and become even more of a forerunner as a provider of energy-efficient building systems and energy efficiency services. Caverion has been a forerunner in energy-efficient building systems for a long time, and it aims to continue to invest in the development of its products and services.

 

Long-term financial targets

 

YIT’s Board of Directors set the following financial targets for Caverion until 2016 on June 3, 2013.

 

	TARGET UNTIL 2016	ACTUAL 2012 (Carve-out)
Revenue growth (%)	Average annual growth in revenue of more than 10 per cent	-2.5
Profitability (%)	EBITDA over six per cent of revenue	3.0
Operating cash flow after investments (EUR million)	Strong operating cash flow to enable organic growth, repayment of loans and distribution of dividend	40.5

 

There is no certainty of the Company achieving the above financial targets or being able to maintain them if it reaches them. The Company uses the above-mentioned and other financial targets and performance indicators at selected intervals in its business.

 

Key competitive strengths of Caverion Group

Comprehensive services and strong market position in selected geographical regions.

 

The building systems market is fragmented in all of Caverion’s geographical areas: no individual players hold a market share of over 10 per cent in any of Caverion’s significant operating countries. There are lots of small companies in the market, focusing on only a few technical solutions in a limited geographical area. Caverion’s strength is its extensive service portfolio, covering all building systems throughout the life cycle of the property from design and installation to service and maintenance. With its extensive expertise, Caverion can offer total deliveries of building systems also in large-scale Design & Build projects that typically offer better profitability and have less competition compared to conventional tender-based projects.

 

The increasing amount of technology in buildings increases the demand for new services, and outsourcing of service and maintenance of building systems is expected to increase. The comprehensive expertise in building systems is expected to provide Caverion with a competitive advantage as customers often prefer a single supplier instead of several small suppliers.

 

Caverion has a strong market position in all key countries in which it operates: the Company’s management estimates, that measured by revenue, Caverion is the market leader in Finland and Norway, the second largest in Sweden and in the relevant markets in Germany and among the three largest also in Denmark and Austria (source for market size: Euroconstruct December 2012, VTT Technical Research Centre of Finland and the management’s estimate based on public information from third parties). Caverion also has special expertise in industrial services, particularly in Finland and Sweden.

 

Solid experience in acquisitions supports growth opportunities in a fragmented market

 

Caverion’s management and business areas have solid experience in mergers, acquisitions, reorganization of operations and integration of companies in all key countries relevant to its business. The fragmented markets continue to offer plenty of opportunities for acquisitions. Caverion’s strategic objective is to grow also through acquisitions, especially in Central Europe.

 

The profitability of the most significant acquired companies has been successfully improved in a relatively short time after the acquisition. The significant growth in YIT's Building Services, and also the foundation for Caverion’s international operations, was facilitated at the beginning of the 2000s when YIT acquired Calor AB in Sweden and the building services business of ABB. These acquisitions almost tripled the volume of YIT Building Services. At the same time, YIT succeeded in improving the profitability of the acquired businesses: for example, the operating profit margin of the business operations acquired from ABB grew from zero in 2003 to more than seven per cent by 2007. Correspondingly, the business volume, revenue and operating profit margin of Building Services Central Europe increased significantly between 2008 and 2010 with the acquisition of MCE AG and caverion GmbH. The average annual growth in YIT Building Services revenue in 2000–2012 was approximately 15 per cent, with acquisitions playing a key role. 

 

Low capital employed, extensive customer base and significant share of service business provide the preconditions for strong and stable cash flow.

 

The building systems business ties relatively little capital and requires only low level of investments, apart from possible acquisitions. Caverion’s cash-based investments in tangible and intangible assets according to the carve-out financial statements totaled EUR 14.2 million in 2010–2012, or only approximately 4 per cent of the combined EBITDA for the years in question.

 

Long-term customer relationships and an extensive customer base support the stability of cash flow. Caverion does not depend on individual customers: its ten largest customers accounted for only approximately 14 per cent of the Groups revenue in 2012. In addition, different customer groups in the private and public sector and extensive geographical area of operations decrease the business operations’ dependence on economic fluctuation.

 

In 2012, the service and maintenance business, which is less cyclical than the project business,  accounted for 55 per cent of Caverion’s business. The share of service and maintenance operations of revenue has remained stable in recent years. Their demand is expected to develop at a stable rate in the future as well, as the increasing amount of technology in buildings, among other factors, maintains the continuous need for service and maintenance.

 

Building systems operations have generated a strong cash flow for YIT in the long term. After the Demerger, the cash flow will be available exclusively for developing Caverion's building systems business. Naturally, changes in working capital also influence the total cash flow of individual years, and therefore the management of trade receivables and advance payments plays a key role in terms of the generation of cash flow to be used for acquisitions, for example.

 

Caverion is a forerunner in technology with own innovative solutions

 

Caverion’s technological expertise covers all building systems, which makes it stand out from smaller competitors. Furthermore, Caverion has special technological expertise in, for example, energy efficiency, cooling, technology for cleanrooms and other demanding sites, such as hospitals and laboratories, traffic and tunnel telematics, as well as high-pressure industrial piping. Caverion offers its own products and brands in building automation and ventilation systems, among other fields, and invests heavily in research and development at its own R&D centre.

 

Caverion offers advanced building automation, remote control and control room services, which requires special expertise that is quite rare in the market. The demand for control room services is estimated to be growing as they decrease the need for service visits and reduce customers’ costs significantly. In the future service and maintenance is expected to focus increasingly on foreseeing measures and actual need, which will support the demand for Caverion’s services.

 

Caverion’s business is labour-intensive and based on the high professional skill of the personnel. Own personnel play a significant role in the service business in particular, which guarantees the uniform high quality of service. Subcontractors are used as necessary, mainly in the project business, to add flexibility to overall capacity.

 

Energy efficiency as part of all services

 

Energy efficiency is currently an essential criterion for customers in choosing a service provider. Its importance is estimated to grow further in the future with tightening environmental regulations and increasing energy costs. This is a competitive advantage for Caverion, as energy efficiency is part of all Caverion services. The aim is to incorporate energy savings into all project deliveries and service agreements. Energy efficiency has been a key factor with which Caverion has won projects, especially in large-scale Design & Build projects.

 

Caverion Group’s historical carve-out financial information

 

The Prospectus contains the following Caverion Group’s historical carve-out financial information:

 

- Caverion Group’s audited carve-out financial statements for the years ended December 31, 2012, 2011 and 2010

- Caverion Group’s unaudited interim financial information for the three month period ended March 31, 2013, with comparative information.

 

The above mentioned Caverion Group’s historical carve-out financial information have been attached in full to this release as annex 1 and 2.

 

Caverion has not formed a separate legal group in the past. The carve-out financial statements presented in this Registration Document reflect the financial information of the entities that have historically formed the Building Services business within YIT Group, which consists of YIT’s reportable segments Building Services Northern Europe and Building Services Central Europe.

 

The carve-out financial statements of Caverion Group for the years ended December 31, 2012, 2011 and 2010 and the carve-out financial information for the three-month period ended March 31, 2013, have been prepared by combining (“carve-out”) from YIT’s consolidated financial statements using the historical income and expenses, assets and liabilities and cash flows attributable to Building Services business. The carve-out financial statements and interim financial information also include allocations of income, expenses, assets, liabilities and cash-flows from YIT Corporation and Perusyhtymä Oy.

 

The carve-out financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the European Union, under consideration of the principles for determining which assets and liabilities, income and expenses as well as cash flows are to be assigned to Caverion Group as described in the notes to the carve-out financial statements.

 

The carve-out financial statements may not be indicative of the future performance of Caverion Group and they do not necessarily reflect what its combined results of operations, financial position and cash flows would have been had Caverion with its subsidiaries operated as an independent group and had it presented stand-alone financial statements during the periods presented.

 

Pro forma information for Caverion Group

 

The unaudited pro forma financial information included in the Prospectus has been compiled to illustrate those impacts of the Demerger, which are not included in the historical carve-out financial information. The unaudited pro forma information has been presented to illustrate the estimated effects of the financing agreement negotiated in February 2013 to be transferred to Caverion, the vcapital structure of Caverion Corporation, the company to be incorporated in the Demerger, and the direct costs related to the Demerger on Caverion’s result of operations and financial position at the dates presented in the pro forma information.

 

 

The unaudited pro forma financial information has been compiled for the purpose to illustrate what Caverion’s results of operations and financial position would be, had the Demerger taken place at an earlier date. Pro forma information had been presented for illustrative purposes only. Therefore, it does not represent what Caverion’s result of operations and financial position would be had the Demerger taken place at the dates presented in the pro forma information. The pro forma information is not intended to project the results of operations or financial position of Caverion as of any future date and does not represent the results of operations or financial position of Caverion had Caverion been an independent publicly traded company for the periods presented.

 

The pro forma adjustments are based upon available information and assumptions. There can be no assurance that the assumptions used in the preparations of the unaudited pro forma combined financial information will prove to be correct.

The pro forma income statement and pro forma statement of comprehensive income for the year ended December 31, 2012 and for the three month period ended March 31, 2013, have been compiled assuming that the Demerger had been completed on January 1, 2012 and the pro forma balance sheet as at March 31, 2013 has been compiled assuming that the Demerger had been completed on March 31, 2013.

The above mentioned Caverion Group’s pro forma financial information have been attached in full to this release as annex 3.

 

Events after the three-month period ended March 31, 2013

 

YIT has, on May 23, 2013, announced that it has made an initial, non-binding offer to acquire HOCHTIEF Service Solutions. On the basis of YIT's initial offer, the seller has informed that YIT's proposal qualifies the start-up of due diligence process and SPA negotiations.

 

YIT is not expected to be the sole bidder qualified to the next phase in the potential acquisition. As the tendering process and the sales negotiations are about to be initiated, the terms and conditions of the possible acquisition, including the purchase price, remain yet to be agreed. Due to this, YIT cannot at this stage estimate the possibility of the realization of the acquisition, the detailed timetable, its effects on the company's operations or the risks involved with the possible acquisition.

 

The business of HOCHTIEF Service Solutions relates to the Building Systems operations of YIT. The business potentially to be acquired would thus be transferred to Caverion Demerger.

 

Dividends and dividend policy

 

Caverion’s aim is to distribute at least 50 per cent of the result for the year after taxes, excluding changes in fair value, as dividend and capital redemption to the Company’s shareholders. Even though there are no plans to amend this dividend policy, there is no guarantee that a dividend or capital redemption will actually be paid in the future, and also there is no guarantee of the amount of the dividend or return of capital to be paid for any given year.

 

Caverion’s treasury policy

 

The Board of Directors of YIT has, on 3 June, 2013 ratified a treasury policy to be applied by Caverion, which mainly complies with the same principles as the treasury policy applied by YIT. The most significant changes to Caverion’s treasury policy concern the maturity distribution of Caverion's liabilities and interest rate risk and counterparty risk management. Caverion Group’s aim is that a maximum of one half of interest-bearing liabilities may fall due during a single calendar year and the target for the average interest rate fixing term of Caverion’s net debt is 18 months.

 

For further information, please contact:

 

Juhani Pitkäkoski, President and CEO, juhani.pitkakoski@yit.fi, +358 400 451 644

Sakari Toikkanen, SVP Business Development, sakari.toikkanen@yit.fi, +358 40 532 2174

 

 

YIT CORPORATION

 

Milena Hæggström

Investor Relations Manager

 

Distribution: NASDAQ OMX, principal media, www.yitgroup.com

 

YIT is a leading European service company in building systems, construction services and services for industry. Our 25,000 professionals serve customers in 14 countries in the Nordic and Baltic countries, Russia and Central Europe. For over one hundred years we have grown together with our customers and developed our services in line with the changes taking place in different societies. We intend to continue on that track. Our vision is to lead the way in creating and maintaining good living environments. In 2012, YIT’s revenue was approximately EUR 4.7 billion. YIT’s shares are listed on the NASDAQ OMX Helsinki. www.yitgroup.com

 

DISCLAIMER

 

The information contained herein shall not constitute an offer to sell or the solicitation of an offer to buy the securities referred to herein in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration, exemption from registration or qualification under the securities laws of any such jurisdiction.

This document is not an offer for sale of securities in the United States. Securities may not be offered or sold in the United States absent registration or an exemption from registration under the U.S. Securities Act of 1933, as amended. YIT Corporation and Caverion Oyj have not registered, and do not intend to register, any offering of the Caverion shares in the United States. There will be no public offering of the Caverion shares in the United States.

This release includes forward-looking statements. These forward-looking statements include, but are not limited to, all statements other than statements of historical facts contained in this communication, including, without limitation, those regarding the demerger plan and its execution. By their nature, forward looking statements involve known and unknown risks, uncertainties and other factors because they relate to events and depend on circumstances that may or may not occur in the future. Such statements are based on numerous assumptions and may differ materially from (and be significantly more negative than) those made in, or suggested by, the forward-looking statements contained in this release.