Most significant business risks and risk management

Financial Statements bulletin January 1 - December, 2017

(published 7 February, 2017)

Caverion’s business involves a number of strategic, operational, financial and event risks. Risk management is an integral part of the Group’s management, monitoring and reporting systems.

From a strategic point of view Caverion has developed its business mix to be more stable and balanced, in order to handle changing economic cycles. Regular monitoring and analysis make it possible to react quickly to changes in the operating environment and to capitalise on new business opportunities. The company has an extensive customer base, comprised of customers of various sizes from the public as well as private sector.

The Group's target is to grow both organically and through acquisitions. Risks associated with acquisitions and outsourcing are managed by selecting projects according to strict criteria and effective integration processes which familiarise new employees with Caverion's values, operating methods and strategy. The Group has a uniform process and guidelines for the implementation of acquisitions.

Caverion's typical operational risks include risks related to tenders, service agreements, project management and personnel. With regard to various projects, it is important to act selectively, taking into account the risks and profitability of the projects, and to review the content, risks and terms and conditions of all contracts and agreements in accordance with specified processes. Inefficient and unsuccessful project management may have a material effect on Caverion’s ability to offer high-quality and profitable services, which may have an unfavourable effect on Caverion’s business, business performance and financial position. As the business mix is changing in line with strategy the share of long-term contracts is expected to increase proportionally. This may increase the contractual risks in long-term contracts.

Group companies are engaged in legal proceedings which are connected to ordinary business operations. The outcomes of the proceedings are difficult to predict, but if a case is deemed to require a provision that has been made on the basis of a best estimate.

The investigation of violations of competition law related regulations in the technical services industry in Germany continues. As part of the investigation German authorities have searched information from various technical services providers, including Caverion. Caverion co-operates with the local authorities. Based on the currently available information, it is still not possible to evaluate the magnitude of the potential risk for Caverion related to these issues. The timing of the closing of the investigations is also unknown. It is possible that the costs, sanctions and indemnities can be material.

As part of this co-operation Caverion has identified activities during 2009-2011 that are likely to fulfil the criteria of corruption or other criminal commitment in one of its client project executed in that time. Caverion has brought its findings to the attention of the authorities and supports them to further investigate the case. It is possible that these infringements will cause considerable damage to Caverion in terms of fines, civil claims as well as legal expenses. However, the magnitude of the potential damage cannot be assessed at the moment. Caverion is monitoring the situation and will disclose any relevant information as applicable under regulations.

Caverion has continued the roll-out of an annual, group-wide compliance e-learning programme during 2016 which all employees must complete as well as trained the division management on anti-bribery and other compliance matters. Also certain compliance-related policies have been reviewed and updated.

Caverion’s business does not include significant environmental risks. Cooperation with its clients provides Caverion an important opportunity to influence the level of global carbon footprint. Caverion continuously develops its products and services to make it possible for its clients to decrease their environmental impacts. Caverion offers its customers a variety of energy efficiency services: for example, property energy inspections and analyses as well as energy-efficient building systems and modernisation adjustments. The carbon dioxide emissions of Caverion’s own operations are mainly caused by the fuel consumption of its service vehicles. Caverion utilises logistics solutions which help to decrease greenhouse gas emissions in the transport of both goods and personnel.

The success of any company materially depends on the professional skills of the company’s management and personnel, as well as on the ability of the company to retain its current management and personnel and, when necessary, to recruit new and skilled personnel. The majority of Caverion's business is labour-intensive, meaning that the availability and commitment of skilled employees is a prerequisite for organic growth and business success. The loss of executives or employees and the inability to attract qualified new personnel may have a material unfavourable effect on the company’s business, result of operations and financial position.

The Group books write-offs or provisions on receivables when it is evident that no payment can be expected. Caverion Group follows a policy in valuing trade receivables and the bookings include estimates and critical judgements. The estimates are based on experience on realised write-offs in previous years, empirical knowledge of debt collection, customer-specific collaterals and analyses as well as the general economic situation of the review period. Caverion completed several risk assessments related to POC and trade receivables in its project portfolio during 2016. These assessments led to project write-downs during 2016. Most of the write-downs related to POC receivables. A further review and risk assessment will be continued during 2017.

Goodwill recognized on Caverion’s balance sheet is not amortised, but it is tested annually for any impairment. The amount by which the carrying amount of goodwill exceeds the recoverable amount is recognised as an impairment loss through profit and loss. If negative changes take place in Caverion’s result and growth development, this may lead to an impairment of goodwill, which may have an unfavourable effect on Caverion’s result of operations and shareholders’ equity.

Caverion’s external loans are subject to a financial covenant based on the ratio of the Group’s net debt to EBITDA. Breaching this covenant would give the lending parties the right to declare the loans to be immediately due and payable. Caverion and its lending parties confirmed the EBITDA calculation principles related to the Group’s financial covenant (net debt to EBITDA) in December. The level of the financial covenant ratio is continuously monitored and evaluated against actual and forecasted EBITDA and net debt figures.

Financial risks are described in more detail in the Financial Statements note 30 and in the financial tables to this Financial Statement Release under note 6.

Possible event risks include accidents related to personal or information security as well as sudden and unforeseen material damage to premises, project sites or other property resulting, for example, from fire, collapse or theft. Event risks are mitigated by insurances.