1 July – 30 September 2022
1 January – 30 September 2022
Unless otherwise noted, the figures in brackets refer to the corresponding period in the previous year.
Review by the President & CEO Jacob Götzsche
“I am pleased that we continued our positive development in the third quarter of 2022. We delivered a double-digit organic revenue growth both in Services and Projects. Partially the growth was driven by the increased costs of materials and external services, that we were able to successfully factor in our sales prices. We estimate this inflation impact to account for roughly one third of the organic growth. In addition, our profitability and cash flow improved. We expect our solid order backlog to support revenue growth also going forward.
The high cost inflation continued to impact the building technology market in the third quarter. We have proactively taken various measures to manage pricing, including price increase clauses in tenders and agreements. The market instability is expected to decrease new construction volumes going forward. However, our Services business accounts for around two thirds of the Group revenue and is overall more resilient throughout business cycles.
The effects of the corona pandemic stabilised during the third quarter, however the sick leave levels were still above normal. We remain somewhat cautious with the pandemic as unpredictable virus variants and new waves of the pandemic may continue to emerge.
Despite all the challenges posed by the operating environment, our order backlog continued to increase during the third quarter, and amounted to EUR 1,971.0 (1,889.7) million at the end of September, 4.3 percent higher compared to same time previous year. Our third quarter revenue increased by 14.3 percent to EUR 564.1 (493.7) million. The revenue increased in all divisions as a result of increased underlying activity and partly indirectly due to inflation impact.
We have been able to show resilience despite the cost inflation and higher sick leave levels and improved our adjusted EBITA by 25.0 percent to EUR 26.9 (21.5) million, or 4.8 (4.4) percent of revenue during the third quarter of 2022. Profitability improved in both Services and Projects. I am also pleased that in the current operating environment, we could improve our operating cash flow before financial and tax items significantly to EUR 7.7 (-10.1) million in the third quarter.
As part of the implementation of our Sustainable Growth strategy, we have made targeted acquisitions. In the first nine months of 2022, we closed nine acquisitions with total annual revenue of EUR 92.3 million and welcomed already more than 700 new colleagues from the acquired companies. The acquisition of PORREAL Group strengthens our position in the Austrian facility services market. The acquisition of CS electric expands our footprint in marine, energy and industrial segments in Denmark. After the review period, we also signed an agreement to acquire TM Voima group’s substation and transmission line business in Finland and Estonia. The acquisition strengthens our presence in the energy sector. Our third quarter revenue increased by 2.9 percent as a result of acquisitions and divestments. We continue to look for high quality companies that complement our existing capabilities or geographical footprint.
A consortium of investors led by Bain Capital has today on 3 November 2022 announced a public tender offer to the shareholders of Caverion. The Board of Directors of Caverion, represented by a quorum comprising the non-conflicted members of the Board of Directors, has unanimously decided to recommend that the shareholders of Caverion accept the tender offer. The offer provides clear evidence that our goal to achieve Sustainable Growth by delivering to our customers along the building’s lifecycle and assisting in their Smart Building and green transitions is an attractive strategy for the future. I believe that with the support and resources of the consortium we will be able to further accelerate our business and deliver for all our stakeholders. We at Caverion continue our daily work as usual, focusing on serving our customers and working together across the company.
Despite the lowered economic growth prospects, we are on a good track to improve profitability in line with our strategy. We have already before the ongoing energy crisis proactively strengthened our capabilities in energy efficiency enhancing services. We enable our customers to reduce their energy consumption, be more sustainable and reduce their carbon footprint. We strongly believe in our purpose to enable building performance and people’s wellbeing in smart and sustainable built environments.”
The economic uncertainty has increased during the first nine months of 2022 due to the geopolitical tensions related to the Ukraine conflict, resulting in subsequent energy crisis, mounting inflation, rising interest rates and lowered economic growth prospects. Inflation has accelerated towards the end of the third quarter and the cost inflation related to material prices, including fuel costs, continued to impact also the building technology market. There have also been supply shortages and delays in some areas. Caverion has proactively taken various measures to optimise the supply chain and to manage pricing.
Economic sentiment weakened in the EU during the first nine months of 2022 along with lower economic growth prospects. Also the corona pandemic still continued to have some impact on the operating environment through sick leaves, while the restrictions have been lifted in Caverion’s operating countries.
In Services, the market demand and general investment activity remained positive. Caverion has
continued to see a general increasing interest for services supporting sustainability, such as energy management and advisory services, driven by regulation and the expected governmental and EU stimulus packages supporting investments in green growth. There has also been increasing interest towards long-term and large-scale service agreements. Growth has been limited by the availability of competent workforce and delays in the supply chain.
In Projects, the market demand remained mostly stable during the first nine months of 2022. The interest for energy improvement projects has picked up, driven by the focus on energy consumption due to the energy crisis.
The market was impacted by increases in material prices, delays in decision-making and supply chain as well as uncertainty in the business environment, especially related to new construction.
Impacts of the Ukraine crisis
Russia’s invasion of Ukraine at the end of February 2022 increased geopolitical tensions especially in Europe overnight. The war has created uncertainties weakening the growth prospects in several countries where Caverion operates. The duration of the Ukrainian conflict and its future effects on the industry, and Caverion in particular, remain uncertain, and the overall situation remains highly volatile.
Caverion has divested its Russian subsidiary at the end of 2021 and has no operations in Ukraine or Belarus. Therefore, the impact of the conflict on Caverion is currently indirect. Caverion has experienced increases in material prices and delays in the supply chain and in decision-making, however Caverion continued to manage them on a daily basis without having a significant impact on the performance during the first nine months of 2022.
Caverion expects the underlying demand to be overall positive in Services during the rest of 2022. In Projects, Caverion expects the underlying business activity to remain stable for the last months of 2022. In Projects, however, the economic uncertainty may start to impact the demand environment negatively. This scenario assumes a sufficient control of the corona pandemic impacts with no significant unforeseen setbacks during the last months of 2022 and no further escalation of the conflict in Ukraine.
The conflict has resulted in geopolitical tensions, mounting inflation, rising interest rates and lowered economic growth prospects and the situation is estimated to persist. Also the probability of recession has increased. In order to control the mounting inflation, the European Central Bank (ECB) has continued to raise the key interest rates and indicated further increases in its upcoming meetings.
The business volume and the amount of new order intake are important determinants of Caverion’s performance in 2022. A negative scenario whereby the ongoing geopolitical conflict or the corona pandemic start to negatively impact market demand cannot be ruled out. However, a large part of Caverion’s services is vital in keeping also critical services and infrastructure up-and-running at all times. Furthermore, the continued focus on energy efficiency and CO2 reduction activities and projects continues to support the activity and business volume. The energy crisis is expected to increase the need for energy efficient solutions for the built environment.
Increased material prices, including fuel costs, and longer delivery times may continue to affect also Caverion’s business going forward. Potential risks may still emerge from the supply side, not only from cost inflation but also from labour shortage, potentially further fuelled by increased sick leave levels or quarantines caused by the corona pandemic. Any further delays in the supply chain and potential cost increases may have a negative impact on business execution and order intake going forward.
The digitalisation and sustainability megatrends are in many ways favourable to Caverion and believed to increase demand for Caverion’s offerings going forward. The increased energy efficiency requirements, increasing digitalisation, automation and technology in built environment as well as urbanisation remain strong and are expected to promote demand for Caverion’s services and solutions over the coming years. Especially the sustainability trend is expected to continue strong.
The economic stimulus packages provided by national governments and the EU are expected to increase infrastructure, health care and different types of sustainable investments in Caverion’s operating area over the next few years. The main themes in the EU stimulus packages are green growth and digitalisation. Caverion expects the national and EU programmes to increase demand also in Caverion’s areas of operation in 2022. The EU aims to accelerate the green transition due to the current geopolitical situation that has led into energy crisis in many countries that have been largely dependent on imported gas from Russia.
Increasing awareness of sustainability is supported by both EU-driven regulations and national legislation setting higher targets and actions for energy efficiency and carbon-neutrality. This is furthermore supported by the society’s end-users’ general request for an environmentally friendly built environment. Examples of current initiatives include e.g. the proposed revision of EU’s Energy Performance of Buildings Directive (EPBD) and Minimum Energy Performance Standards (MEPS) it aims to establish as well as the “Fit for 55” climate package and the Renovation Wave Strategy. The “Fit for 55” climate package proposes to make EU's climate, energy, transport and taxation policies fit for reducing net greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. The objective of the European Commission’s Renovation Wave Strategy is to at least double the annual energy renovation rate of residential and non-residential buildings by 2030. Mobilising forces at all levels towards these goals is expected to result in 35 million building units renovated by 2030.
Caverion expects the underlying demand to be overall positive during the rest of 2022. Caverion’s Services business is overall by nature stable and resilient through business cycles. Stimulus packages are also expected to positively impact general demand in the Services business.
There is an increased interest for services supporting sustainability, such as energy management. Caverion has had a special focus for several years both in so-called Smart Technologies as well as in digital solutions development. These are believed to grow faster than more basic services on average and enable data-driven operations with recurring maintenance. The sustainability trend is also increasing the demand for building automation upgrades.
As technology in buildings increases, the need for new services and digital solutions is expected to increase. Customer focus on core operations also continues to open opportunities for Caverion through outsourcing of industrial operation and maintenance, property maintenance as well as facility management.
The market instability resulting from the war in Ukraine and the high inflation are expected to dampen the willingness to invest in new construction. Uncertainty is caused by the availability of building materials and the significant cost increases. However, the demand for energy improvement projects is expected to increase going forward, driven by the focus on energy consumption due to the energy crisis. The stimulus packages are expected to positively impact the general demand also in the Projects business. Caverion expects the underlying business activity to remain stable for the last months of 2022. In Projects, however, the economic uncertainty may start to impact the demand environment negatively.
From the trends perspective, the digitalisation and sustainability megatrends are supporting demand also in Projects, as Caverion’s target is to offer long-term solutions binding both Projects and Services together. The requirements for increased energy efficiency, better indoor climate and tightening environmental legislation continue to drive demand over the coming years.
Guidance for 2022
In 2022, Caverion Group’s revenue (2021: EUR 2,139.5 million) and adjusted EBITA (2021: EUR 87.7 million) will grow compared to 2021.
Despite the challenges posed by the operating environment, order backlog at the end of September increased by 4.3 percent to EUR 1,971.0 million from the end of September in the previous year (EUR 1,889.7 million).
At comparable exchange rates the order backlog increased by 5.8 percent from the end of September in the previous year.
Order backlog increased by 9.0 (15.2) percent in Services and decreased by 1.3 (+17.2) percent in Projects from the end of September in the previous year.
In July–September, the Group’s operating cash flow before financial and tax items improved to EUR 7.7
(-10.1) million. The Group’s free cash flow amounted to EUR -42.2 (-19.2) million. Cash flow after investments was EUR -42.6 (-20.1) million.
The amount of trade and POC receivables increased to EUR 588.6 (530.0) million and other current receivables decreased to EUR 29.9 (30.2) million. On the liabilities side, advances received increased to EUR 264.0 (242.1) million, other current liabilities decreased to EUR 251.5 (253.4) million and trade and POC payables increased to EUR 201.7 (183.1) million.
Caverion’s cash and cash equivalents amounted to EUR 46.8 (81.5) million at the end of September. In addition, Caverion had undrawn revolving credit facilities amounting to EUR 100.0 million and undrawn overdraft facilities amounting to EUR 19.0 million.
The Group’s gross interest-bearing loans and borrowings excluding lease liabilities amounted to EUR 181.9 (137.6) million at the end of September, and the average effective interest rate was 2.4 (2.6) percent. Approximately 32 percent of the loans have been raised from banks and other financial institutions and approximately 68 percent from capital markets. Caverion has issued commercial papers to support sufficient liquidity. At the end of September, the outstanding commercial papers amounted to EUR 44.9 million. Lease liabilities amounted to EUR 138.9 (129.0) million at the end of September 2022, resulting to total gross interest-bearing liabilities of EUR 320.8 (266.5) million.
Caverion has a balanced debt maturity profile, where most of the long-term debt matures in 2025 and in 2027.
In February Caverion issued a senior unsecured bond of EUR 75 million with an issue price of 99.425 percent. The 5-year bond matures on 25 February 2027 and carries a fixed annual interest of 2.75 percent. Also, Caverion carried out a tender offer for the EUR 75 million bond maturing in March 2023 resulting to a EUR 71.5 million acceptance level. The new bond extends the maturity profile, lowers the interest expenses and supports Caverion’s strategy for sustainable profitable growth.
On 15 May 2020 Caverion issued a EUR 35 million hybrid bond, an instrument subordinated to the company's other debt obligations and treated as equity in the IFRS financial statements. The hybrid bond does not confer to its holders the rights of a shareholder and does not dilute the holdings of the current shareholders. The coupon of the hybrid bond is 6.75 percent per annum until 15 May 2023. The hybrid bond does not have a maturity date but the issuer is entitled to redeem the hybrid for the first time on 15 May 2023, and subsequently, on each coupon interest payment date. If the hybrid bond is not redeemed on 15 May 2023, the coupon will be changed to 3-month EURIBOR added with a Re-offer Spread (706.8 bps) and a step-up of 500bps.
Caverion’s external loans are subject to a financial covenant based on the ratio of the Group’s net debt to EBITDA according to the calculation principles confirmed with the lending parties. The financial covenant shall not exceed 3.5:1. Caverion is in compliance with the quarterly monitored financial covenant.
There have been no material changes in Caverion’s significant short-term risks and uncertainties reported in the Board of Director’s Report presented in the Annual Review of 2021. Those risks and uncertainties are still valid. Since then, the most significant factor creating uncertainty is the invasion of Ukraine by Russia. The impacts of the crisis on Caverion’s business during the first nine months of 2022 have been described earlier in the report in “Impacts of the Ukraine crisis on Caverion’s business during the first nine months of 2022”. Any further escalation or prolongation of the conflict or regional unrest in neighbouring areas could negatively affect Caverion's operating environment.
The lack of availability of materials and supply as well as the increase in material prices were presented as short-term risks in the Board of Director’s Report presented in the Annual Review of 2021. These risks are still valid and even more significant due to the Ukraine crisis. The same applies to the risk of rising energy and fuel prices. Possible problems with the availability and cost of materials, labour, energy and fuel may impact the operating environment in the near future. These risks have already partly materialised. The key measures how Caverion is managing the situation include price increase clauses in tenders and agreements covering these costs.
The soaring inflation in the EU countries poses several risks and may lead to a recession within the EU and also wider. The situation may have an impact on the market demand going forward due to a weakening economic sentiment. The potential risk is balanced by the growing need for energy efficiency in the built environment where Caverion is able to support its customers.
Cyber risks have increased due to the Ukraine crisis. There have been concrete cases of cyber-attacks on business enterprises and government authorities. Government authorities have warned of an increasing amount of cyber-attacks. Caverion has improved the company’s cyber security operations and technologies continuously and is well prepared against cyber security threats. However, it cannot be excluded that also Caverion could face cyber-attacks with potential impact on operations.
The corona pandemic continued to negatively impact Caverion’s business in the first nine months of 2022. While there was less impact on the demand, the level of sick leaves was particularly high in the Nordics and also higher than normally in Central Europe especially during the first half of the year 2022. In the third quarter, the effects of the pandemic started to normalise but it still had an impact on business.
The business volume and the amount of new order intake are important determinants of Caverion’s performance. Despite the somewhat more optimistic outlook of the corona pandemic, a negative scenario whereby new waves of the corona pandemic or new pandemics would emerge cannot be ruled out. However, a large part of Caverion’s services is vital in keeping critical services for buildings, industries and infrastructure up-and-running at all times.
Should the new waves of the corona pandemic or new pandemics emerge, Caverion’s business would be exposed to various risks. These include, for example, suspension or cancellation of existing contracts by customers, lack of demand for new services, absenteeism of employees and subcontractor staff, closures of work sites and other work premises by customers or authorities and defaults in customer payments.