ANNUAL REPORT 2017 A living city is built together. Year 2017 | Business operations | A living city is built together | Sustainability | Corporate governance | Financial statements | Investors Annual Report 2017 Table of contents #LIVINGCITY YEAR 2017 BUSINESS OPERATIONS CORPORATE GOVERNANCE 5 Key figures 26 Urban development trends as the starting point 65 Corporate Governance 6 Indicators of our operations 72 Operating principles and control systems 7 Financial targets in 2017 27 Value creation model 74 Board of Directors 8 President and CEO’s review 28 Self-developed business 75 Management Board 29 Contracting 10 STRATEGY 30 Financing solutions FINANCIAL STATEMENTS 11 Creating better living environments 77 Report of the Board of Directors 12 The new Partnership Properties segment 31 DEVELOPMENT PROGRAMMES 103 Consolidated financial statements 14 Merger of YIT and Lemminkäinen 32 Performance Leap 159 Parent company financial statements 34 Living Services 175 Board of Directors’ proposal for the distribution 17 SEGMENT REVIEWS 36 Renovation Services of distributable equity 17 Operating environment 177 Auditor’s report 18 Housing Finland and CEE A LIVING CITY IS BUILT TOGETHER 182 Key financial figures 20 Housing Russia 39 Personnel 22 Business Premises and Infrastructure 42 Customers INVESTORS 45 Partners 189 YIT aims to create added value for its shareholders 24 Point of view: Urbanising Finland needs urban design 193 Information for shareholders SUSTAINABILITY 48 Sustainability creates added value 49 Highlights of sustainable cities 50 Sustainable development at YIT 56 Risks and risk management “We will also remember 2017 for the merger of YIT and 59 GRI Index Lemminkäinen, which was announced in the summer. The merger is a strategically important step for YIT on its path to becoming one of the leading urban develop- ers in the Northern European construction market.” ON THE COVER: WEST TERMINAL 2, HELSINKI KARI KAUNISKANGAS, PRESIDENT AND CEO 2 Year 2017 | Business operations | A living city is built together | Sustainability | Corporate governance | Financial statements | Investors Annual Report 2017 YIT in 2017 IT creates better living environments by developing and constructing housing, business premises, infrastructure and FINLAND Y RUSSIA entire areas. Our vision is to bring more life in ST. PETERSBURG ESTONIA sustainable cities. TYUMEN LATVIA YEKATERINBURG LITHUANIA MOSCOW AND THE MOSCOW KAZAN We want to focus on caring for our customers, REGION POLAND visionary urban development, passionate CZECH execution and inspiring leadership. REPUBLIC SLOVAKIA ROSTOV- ON-DON Our growth engine is urban development involving partners. Our operating area covered Finland, Russia, the Baltic countries, the Czech Republic, Slovakia and Poland. In 2017, we operated in eight countries: Finland, Russia, the Baltic countries, the Czech Republic, Slovakia and Poland. 3 Year 2017 | Business operations | A living city is built together | Sustainability | Corporate governance | Financial statements | Investors Annual Report 2017 Year 2017 Key figures 5 Indicators 6 Financial targets in 2017 7 President and CEO’s review 8 Strategy 10 Merger of YIT and Lemminkäinen 14 Operating environment 17 Segment reviews 18 Housing Finland and CEE 18 Housing Russia 20 Business Premises and Infrastructure 22 Point of view: Urbanising Finland needs urban design 24 BRATISLAVA, SLOVAKIA 4 Year 2017 | Business operations | A living city is built together | Sustainability | Corporate governance | Financial statements | Investors Annual Report 2017 Key figures POC 1–12/17 1–12/16 Change DIVIDEND PROPOSAL (PER SHARE) REVENUE BY SEGMENT, POC 1 Revenue, EUR million 1,908.6 1,783.6 7% 42% 44% Operating profit, EUR million 102.3 52.9 93% Operating profit margin, % 5.4 3.0 Housing Finland and CEE, EUR 835.2 million Adjusted profit, EUR million 122.3 79.9 53% € 0.25 Housing Russia, Adjusted profit margin, % 6.4 4.5 EUR 268.3 million Business Premises and Infrastructure, Profit before taxes, EUR million 81.2 13.8 489% EUR 814.7 million 14% Profit for the review period (attributable to equity 1 62.8 7.4 748% REVENUE, POC %-shares excluding other items holders of the parent company), EUR million Earnings per share, EUR 0.50 0.06 747% ADJUSTED OPERATING PROFIT BY SEGMENT, POC Dividend/share1, EUR 0.25 0.22 14% 39% 57% Operating cash flow after investments, EUR million 164.5 -43.1 Return on investment (last 12 months), % 8.8 4.7 1,909 Housing Finland and CEE, EUR 81.7 million EUR MILLION Equity ratio at end of period, % 35.1 35.1 Housing Russia, EUR 6.3 million Order backlog at end of period, EUR million 2,568.5 2,613.1 -2% Business Premises and Infrastructure, EUR 56.3 million Personnel at end of period 5,427 5,261 3% 4% 1 The figure for 2017 is the Board of Directors’ proposal to the AGM REVENUE BY GEOGRAPHICAL AREA, POC 13% IFRS 12/17 12/16 Change Gearing, % 88.7 112.3 14% Finland EUR 1,399.2 million Equity ratio, % 33.2 31.2 Russia EUR 270.3 million Net interest-bearing debt, EUR million 455.0 598.6 -24% CEE EUR 239.1 million Balance sheet total, EUR million 2,193.3 2,284.0 -4% Invested capital, EUR million 1,155.4 1,263.4 -9% 73% 5 Year 2017 | Business operations | A living city is built together | Sustainability | Corporate governance | Financial statements | Investors Annual Report 2017 Indicators YIT’S SUSTAINABLE URBAN YIT’S QUALITY INDICATORS ENVIRONMENTS INDICATORS LOST TIME INJURY FREQUENCY (LTIF) WEIGHTED NPS ACCESSIBILITY OF SERVICES FROM OUR APARTMENTS 13 12 62% 11 60% >60% DISTANCE FROM A GROCERY SHOP 10 51% 58% 2016 47% 2017 38% 35% 2015 2016 2017 Goal 15% 2014 2015 2016 2017 7% NPS, or Net Promoter Score (scale -100% – 100%), less than less than over No. of reportable accidents at work per million working hours, reflects the degree to which customers are prepared to last 12 months. Our goal is 0 accidents. recommend the company in question. The score is affected 500 m 1,200 m 1,200 m by the proportion of Promoters and Detractors among all respondents. Weighted NPS has been calculated from segment spesific results weighted by revenue volumes. DISTANCE FROM PUBLIC TRANSPORTATION NUMBER OF EMPLOYEES AT THE END OF THE YEAR 65% Q-FACTOR 53% 100% 2016 92% 41% 87% 90% 2017 5,427 25% 10% 6% less than less than over NUMBER OF TRAINEES AND THESIS 300 m 750 m 750 m WORKERS DURING 2017 OVER Our biggest impact on the society comes from our products, 2015 2016 2017 Goal or apartments, business premises and infrastructure creating urban environment. We follow Sustainable Urban Environ- ments indicators in self-developed residential production. Q-factor reflects the proportion of consumer customers who The figures include all the self-developed apartment bulding have no complaints when the apartment is handed over. projects in all of our operative countries that has received a Flawless handovers are a strategic objective for us. start-up decision during the year. 800 6 Year 2017 | Business operations | A living city is built together | Sustainability | Corporate governance | Financial statements | Investors Annual Report 2017 Financial targets in 2017 n conjunction with revising the strategy in autumn 2016, YIT’s Board of Directors decided on the Group’s financial targets. The Long-term target Target level Outcome 2017 cash flow target was specified as having sufficient operating cash flow after investments to pay dividends. The aim is to not increase net debt, and the investment reserve will be used to accelerate Igrowth. It has been estimated that key indicators will be improved Revenue growth 5–10% annually on average 7% primarily by improving the company’s profitability and operative results. Other long-term targets have remained unchanged. New preliminary financial targets were set for the merged company Return on investment 15% 8.8% along with the merger. Read more. Operating cash flow after Sufficient for dividend payout EUR 164.5 million investments¹ Equity ratio 40% 35.1% REVENUE GROWTH IN THE CEE COUNTRIES 40–60% of the net profit Dividend payout 50.0%2 In accordance with our strategy, we are pursuing growth in the CEE for the period countries, which are seeing strong growth in demand. We have increased our revenue in the CEE countries for several consecutive All figures are based on the percentage of years and, in 2017, they already accounted for 22% of the Hous- completion segment reporting method (POC). ing Finland and CEE segment’s revenue. Profitability in the CEE 1 Excluding discontinued operations countries has also been higher than the industry average. We have 2 The Board of Directors’ proposal to the Annual General Meeting also been involved in establishing YCE Housing I fund, that invests in housing projects in the CEE countries. To date, we have sold 10 projects to the fund. 7 Year 2017 | Business operations | A living city is built together | Sustainability | Corporate governance | Financial statements | Investors Annual Report 2017 President and CEO’s review he year 2017 was a success for YIT in many ways. All of the Group’s business T segments achieved positive develop- ment, and earnings per share more than tripled compared to the previous year. The year 2017 will also be remembered for the merger of YIT and Lemminkäinen, which was announced in the summer and completed at the beginning of February. The year as a whole was excellent, and we improved our performance further towards the end of the year. In terms of the Group’s profitability, the final quarter was one of the best in YIT’s entire history. With respect to our strategic objectives,