Yit Oyj Unsp/Adr

and welcome to YIT's second quarter 2021 earnings webcast. My name is Tommi Järventä. I'm the head of YIT's investor relations. With me here today are also our CEO Markku Moivanen and CFO Ilkka Salonen. We will first go through the presentation, followed by Q&A. At this point, I would like to hand over to our CEO. Markku, please go ahead.

Thank you, Tommi. and welcome on my behalf as well to this webcast. So let's start from health and safety. And that's our focus in everything that we are doing. And during the last quarter, our focus has been on preventive actions on safety. fighting against the COVID-19 pandemic. And we are satisfied with the successful actions that we have had. Our sites have been opened and the infections have been low. However, we have clearly now the fourth wave coming in several countries, in Finland, in Russia, to mention a few. So, we are continuing our vigorous actions in that area. If we are looking at our safety development, the number of accidents and the injury frequency of the LTIF, it's been stagnant for a while. And for that reason, we had our safety week, our annual safety week in May, where we really had a focus on proactive and preventive actions. actions on safety observation and management safety walks and talks as well. So, we'll continue the focus, because this is highly important for us. Looking at our results during the second quarter, as we have reported, that was a satisfactory quarter. I would say that this is another solid quarter, driven by good results in housing. Our adjusted operating profit ended up to be 30 million euros, compared to 5 million during the same period last year as well. And the good result is driven by good results in housing segments in all of the geographies that we are working. However, we had a loss in infrastructure due to margin reduction in some projects. On the other hand, our business premises segment continued to stabilize, like it did during the last quarter as well. As a result of strong sales, our operating cash flow was solid during the quarter as well. And after investment, our operating cash flow was 109 million compared to 247 during the same period last year. We have to bear in mind that last year during this period, we had cash flow from the sale of our Nordic paving and mineral aggregates businesses. So, operationally clear improvement compared to last year. As a result, our balance sheet strengthened further, and our gearing improved further. We are using our strong balance sheet to answer our customer needs, especially in the housing market. And we have actually accelerated our housing startups significantly during this year compared to last year. So the annual growth is around 40% compared to last year. And with this, we are not only answering our customer needs, but ensuring for the company a solid market for next year. Like we reported during or after last quarter, we have three management priorities. The first one is project management, where the work started already during autumn 2020. And that's progressing on a fast pace and very well. We are implementing common practices and processes and reports in our project management. For example, new project portfolio forecasting and reporting tools, new criteria for suppliers, new production reporting practices, to mention a few. So this is really the backbone of our business and backbone of being able to deliver predictable results in the quarters to come as well. Secondly, our work on our operating model is progressing well, and we will give you more info during the coming months. Thirdly, we started our strategy work from our infra strategy. We were not satisfied with the performance of our infra segment, and therefore we started the strategy work from there. The most notable finding that we already have now before doing the full group strategy is that We see that infrastructure business will continue to have a strategic role in the YIT group also in the future. We already see that in large urban development projects, having our own infrastructure business enables us to achieve clear synergies and synergy benefits and financial opportunities. In the future, we will be focusing on our core capabilities in infrastructure, such as rock tunneling, foundation engineering, rail and tram, and urban bridges, and marine to mention a few. However, we will also trim our offering to become more competitive and efficient, so we will be more selective in projects. So therefore, as a conclusion, our future infrastructure business will be somewhat smaller than today, but clearly more predictable and profitable. We have, during the second quarter, done the analysis of our project portfolio that led to these write-offs, and we will have a new director for the segment to start late August, so this is a good basis for Pasi Tolppanen to continue to draw infrastructure business further. So, let's go to the Q2 results and the numbers through a bit more in detail. So, I have Ilkka Salonen, our CFO here. Please, Ilkka, the floor is yours.

Thank you, Markku. Good morning, everyone. If we look at Q2, starting from the revenue side, we had growth over there, driven by the housing business, and slight decrease in business premises, going more for the annual volatility, but then also slight decline in infrastructure, net sales partly driven by the fact that we are exiting from Norway, as well as from Estonia. In order book, there we see a clear drop, about 200 million, but it's good to divide it into a couple of items that requires a little bit of explanation. First of all, in the housing side, housing Finland and CEE, roughly about 100 million lower than we had last year after Q2. And it's just from the fact that we had roughly about 330 apartments less under construction. That will be fixed as we are speeding up our startups later this year. In Russia, it will be the same story, and on the other hand, as we are closing down operations in some cities over there. That has an impact for that one as well. In business premises, a clear increase, about 130 million. There are several projects. One of the biggest ones is Tammisaaraala, or the hospital in Helsinki area, which we won this year. And then the major drop in infrastructure, 200 million. And actually, that's coming from different sources. One is that, yes, we are exiting from Estonia as well as from Norway, that is having impact for the order book. We have in Finland big projects in the end of their life cycle, meaning that the amount in the order book is lower than last year. And when it comes to the new big projects, just like Tram Alliance in Helsinki area. It is still in the design mode, so there is not too much in the order book. The third one is that, yes, we have been more selective for the new orders, new deals, and that has had an impact to the order book as well. In the profit side, Our adjusted operating profit was 30 million compared to last year, 5 million. So, clear improvement over there. And of course, in the absolute levels, what we see on the right-hand side, housing, Finland and CE, as well as housing in Rasto, made a good result for the Q2. Business premises stabilized, infrastructure, Minus 12, and there we are stabilising that one at the moment. And then partnership properties three months, like last year. And then the deviations segment by segment compared to the last year. There you can see the very good performance in the housing side. 22 million in Finland and CEE, and 4 million in housing, RAS. And then business premises, even the absolute result is not satisfactory level yet. But it is clear, and so the stabilisation over there has performed quite nicely during the last one year. And infrastructure is in the stabilising mode at the moment. And the negative deviation compared to last year, it is driven by the margin reductions in some projects. Cash flow, 109 million. That is, once again, a good performance from the businesses. Last year, we had 247 million. It's good to remind that 283 million was driven by the divestment of the Nordic paving and mineral aggregates business, so the improvement and performance in the businesses themselves has been clearly from the negative side up to 109 million. And then, yes, we have continued to invest for the plots. And we are eager to buy plots in the future as well. And especially when we are increasing our startups, it also requires new plots. And net interest bearing debt, 350 million. If we take... Comparing the Q2 last year, that's about 350 million. And in that 750 million, the paving deal is already in. So, in the beginning of the second quarter of 2020, where the net debt was 950 million. So the gas generation has been quite nice. And of course, there is also impacting the 100 million euro hybrid, which we took in Q2, in Q1. We have made major refinancing programs during the first half year this year, actually on the big items have been refinanced, two bonds, one hybrid, and also the revolving credit facility has been renewed, so the finance portfolio, if we look at the maturity and the diversity, it's very good and will be solid for a number of quarters forward. That was And then, yes, of course, equity ratio and gearing ratio. We are at the moment in 35 over there, but already at this stage, it's good to highlight that we are increasing our startups, which will tide capital more than we have had in East Petroleum Housing Finland and CEE. And then, of course, when the gas flow is working and the profit is improving, the other metrics are also getting to the better level. That was shortly, and now I pass that to Mark, please. Thank you, Ilkka.

And let's have a look at the market outlook. The market is quite stable in housing, real estate and infrastructure. However, there are minor changes. in real estate and infrastructure, housing remains to be good, as we see during Q3 in all of our geographies. The minor changes are that in real estate market, the Baltic real estate market has turned, as we see, or will turn from yellow to green, as the investor demand is seemingly strong over there. On the other hand, in the Baltics, the infra market has turned, will turn to red, is weakening as the government's budgets have already been running over. So we see less opportunities over there. Let's have a look at a couple of other items that impact the outlook for the next quarter. The first one is the material cost inflation. So all the building material as well as subcontracting costs are clearly inflating in all of the geographies and in all of the markets that we are active. However, we have taken and will take mitigation action and I want to open you a couple of these. The first one is procurement practices. It is like indexing materials on our purchasing. Then as we have a majority of our businesses housing, so we can do, we can buy the materials in advance when we know when we are going to do the startups. So there's a bit more tools to mitigate against the cost inflation in housing, whereas in traditional contracting in business premises and infrastructure, we don't have these mitigation tools available. Then we have pricing and contractual practices, like dynamic pricing in Russia and housing. So that enables us to mitigate. against the material cost of inflation. We continue to follow the development closely, and we don't see a major impact for YIT Group during this year, but if the inflation continues for long, it will have more impact to us and for the entire construction industry. Another item that will have an impact for Q3 is our housing completions. And as you can see from this chart, our completions are reaching a bottom during Q3. So we'll have around 300 units completing compared to 874 units during the third quarter in 2020. On the other hand, we expect the fourth quarter to be back on a high level again. So, there's a volatility in the completions between the quarters. And this will, of course, have an impact on our... Q2 results, so this less completions than last year is expected to have an approximately 15 million euros impact to the segments adjusted operating profit year on year. We expect that otherwise housing business, housing Russia continue in a solid way. We expect business premises performance continue to stabilise as well. However, we expect that our infrastructure business will have a low level of profitability due to certain low performing projects. Then I want to remind of the Lestiarvi windmill park sale, which will have a swing effect. We are still expecting to get the sale around 40 million during this year, but there's a probability, a low probability that that will fall to next year as well. In partnership properties, our portfolio development is expected to continue. The good news is that so far, in Mall of Tripla, which has a major weight on partnership properties. The number of visitors has been increasing, and that will, of course, have a positive impact on partnership properties, but we need to remember the impact of the fourth wave of the pandemic as well, so there could be volatility in that area as well. Finally, we have communicated a new member to our management team. So we are going to continue to strengthen our management team. We have announced earlier two new segment heads. So Ilkka Tomperi now starting actually next week in partnership properties. Pasi Tolppanen, as announced earlier, will start later in August heading the infrastructure segment. And today we have announced that Tuomas Mäkipeska will be our new chief financial officer. And as communicated Ilkka Salonen, who is here together with me, this is his own request. So Ilkka wants to continue on board memberships and advisor roles. So I want to give here big thanks to Ilkka. He has had a long career both in Lemminkäinen and YIT, and a major role, important role in the integration and the businesses, and not least strengthening our financing and balancing this year. So, I expect that with these three members and the existing members in our management team, we have a good team to go forward in our management agenda. So our focus during the second half of this year is to continue the actions to stabilize our performance, do the actions, continue the actions in our project improvement, have a really, really close look at our projects, and we will implement our new operating model, which we'll communicate later during this quarter, the third quarter. Secondly, we will develop our sharpening strategy. As communicated today, we have started the work from the infrastructure segment, and now we'll do similar work in other segments, and then finally look at the whole group strategy as well. And last, but definitely not least, we will have a close eye on the preventive and proactive actions in health and safety. And as part of our strategy work, we will develop our sustainability roadmap as well. So, thank you very much. That was our presentation. So, I guess, Tomi, now it's time for questions.

Yes, indeed. Thank you, Markku. Operator, we are now ready for the questions.

Okay, Anssi, if you try to ask your question again.

Okay, I will definitely do that. Hi guys, it's Anssi from SCB. Thanks for finally taking my questions. I have a couple of them. I will take them one by one. So kicking off with the infrastructure, I mean margin reductions and one-offs once again in Q2. Could you indicate the scale of margin reductions? I mean, without the one-offs, would the infra business be in positive figures, or what's the situation there? Thanks.

Yeah, thank you, Antti. Yes, there are one-offs in certain projects, and without that, the underlying business is profitable. as you are asking it, so there is a number of actually old projects that we are finalising, but still continuing, so the margins are reduced, and that's the reason for the loss.

Okay, and can you indicate what projects are those?

Unfortunately, we are not sharing that information publicly.

Okay, then looking at the second half, you indicate that the margins will be diluted also in the coming quarters. So what's the scale? I mean, should we expect similar impacts than in Q2, in Q3 and Q4? What's the situation?

Yeah, and now talking about the infrastructure segments, yes, We see similar level of reductions in projects in the coming quarters that we had. On the other hand, we have the underlying business, as mentioned earlier, running pretty well. So, we have overall in a similar scale that we are talking during the coming quarters that we had now during Q2.

Okay, thanks. Then your comment on focusing your infra business. There is still quite a lot of business disciplines that you have and you are focusing, but did you elaborate what are the projects, what kind of business in what sectors, what is the business you are not keen staying in?

Yeah, we are We are sharing all the details as part of the group strategy. but open to you that a bit, is that firstly, it is certain project types, where we see that collaborative projects like alliances are the ones that we will be focusing also in the future, whereas traditional project management consulting are the ones that we have not been successful and profitable, so we are not keen on those in the future. Then we are focusing on the core capabilities that has clear synergies, like rock tunnelling and foundations, so synergies with the other segments as well. Opening a bit more about the ones that we are not doing is very traditional road constructions, which is not urban related, and many other kind of non-urban related projects, and we are very careful on non-urban projects as well. And as an example, we have been already very selective, which has had an impact to our audiobook on some mining projects in Sweden, where we were not tendering at all due to the risk and the probability of low profitability.

Okay, and if we think about energy and that kind of industrial projects, is this also a business you don't want to take part in?

I would say that we have sustainability high on our agenda, and many of these energy projects are really urban sustainability, like the one that we just won for Vantaa Energia, Vantaa Energy, the big heat battery beyond the Ring 3 road. So, we see that when we can use our core competencies, we are competitive, and they are high on our agenda, like in sustainability, then energy is okay for us as well.

Okay, thanks. Then the last question is on input cost pressure. Assuming that the input costs remain at current levels in wood products and steel and what have you, did you indicate any margin dilution impact for 2022 as you highlighted that there won't be any impacts in 2021?

Well, we are closely looking at the markets, and there's some indications that this inflation would turn down at the end of Q4. So we are, of course, looking at that, and it's premature at this stage to say what the impact would be for 2022. And as I said, not only for YRT, but for the whole industry. So we are looking at the... the trends and the development, and of course, we'll closely report that as well during the coming quarters.

Okay, that's all from me. Thank you very much.

And the next question comes from the line of Svante Kockfors from Nordea. Please go ahead.

Yes, good morning, Svante from Nordea. Thanks for taking my questions. If we continue on infraside and the margin reductions, just to make it clear, so it's not kind of, you haven't made a write-down, you have reduced the margins and you expect that this kind of events could occur still in H2. So it's not that you have made a kind of a one-off write-down. Could you elaborate on that?

Yeah, it's about this... an old project where we have done the thorough project reviews, and we have some disagreements or complaints with the clients, which has resulted that the rest of the project margin will be lower than initially anticipated, and that's the reason for this Q2 result turn into loss and similar impact will continue during the coming quarters three and four as well.

Okay thanks for clarifying that and then on business premises there was some old completions that burden still should we assume that that is now cleaned out for H2?

We still have some old tales of projects that we are closing during this year. Not really a major impact that we are doing, and we are really hoping that we could close them during this year. That's our timing, so we could have a fresh start for business premises for next year.

Again, could you give some indication of the financial impact on this old project in Q2?

No, that's, as I said, that's really not material impact in the whole group results as it is from infra.

Thank you. And then more of Tripla, obviously performance dependent on the pandemic, but can you say something about the shopping center market situation, any changes in yields?

Yeah, that's of course driven by the number of visitors in the shopping center and the parking hall as well. And as I mentioned, the number of visitors is increasing, not really to the pre-pandemic level, but month after month increasing. And of course, if that would continue, that would have an impact to the yield and financially, finally to our result as well. But as I said, the fourth wave is a kind of question mark. So therefore, we are a bit closely following that situation. But so far, the trend is positive.

Okay, thanks. And then on housing Finland, Has there been any change to your apartment mix lately? What you want to start up? Any increase in average square meter or something like that, going to the pandemic?

Yeah, we actually see that the pandemic has resulted that the average size has increased. So, people working from home clearly would like to have another room for for that purpose, and therefore we see an increase of square meters and number of rooms. And of course, we will take that into account when having the new startups of our project.

And what kind of impact do you think that has on your margins?

Not really margin impact. This is more kind of answering the market need.

Okay, thank you. And then perhaps do you have some comments on investor demand for apartments, both private and institutional?

That continues on a high level. So there's a high interest on that, which is from one side driving the good housing. Pausimaa.

Thanks, and then just to... I'm not sure I heard it all, but did you say that regarding the wind park, it's more likely that it will close this year than next year?

Yes, that's our understanding and expectation based on the information that we have so far.

Okay, that's all from me. Thank you very much.

Okay, thank you very much.

And the next question comes from the line of Olli Koponen from Indorus. Please go ahead.

Yeah, hello. It's Olli from Indorus. Thank you for taking my question. I have one question left after this. After these questions, it's about your outlook and just that I understand it correctly what you say there. You said that in housing in Finland and CEE, you expect the adjusted operating profit to be 50 million euros lower than in Q3 2020. Is that correct?

Yeah, that's the volatility between the quarters. So, we're talking about just the Q3 results will be compared to last year, around 50 million low.

Yeah, and if I read that correctly, that would mean almost zero result for the segment in Q3. Is that right?

If you look at the deviation that 50 million is driven by the fact that we get so much lower level in the commissions, but of course then there are other items just what comes to the completed sold apartments, which means that they have been already completed but not sold. Those have an impact. And also, of course, we have the investor sales, which is going on all the time, but that gives just about the magnitude that what's the impact on the difference between the completions this year Q3 and last year.

Okay, is there any other explanations, or do you have any kind of margin pressures there on certain projects, or is this just because of their completions?

No, and that's why we wanted to leave this and highlight this, because this is a kind of quarterly volatility regarding the completions in housing. and we want to lift it up. There's nothing else expected in Q3.

Okay, that clarifies. That's all from me. Thank you. Thank you. Thanks, Olli.

And we have one more question from the line of Mattias Reitema from Fenske Bank. Please go ahead.

Good morning. I have still a couple of questions left and I'm trying to understand the very high revenue in Housing Finland and CEE. So you obviously had the higher completions and the ready inventory came down. How about the investor sales and the investor business? Is the revenue higher this year compared to last year?

Yes, it is. So the investor sales is higher this year compared to last year.

So that contributes positively to the revenue level. Okay. And how about the average selling prices? You noted that, and we have seen that the apartment prices have increased, but can you elaborate What is your average selling price level in Finnish consumer houses and in CEE? Could you elaborate that?

We are not sharing that information publicly. I'm sorry.

Okay. Could you comment something about the year-on-year change in prices?

Well, I can comment the overall price levels in the markets, and especially in the metropolitan areas, the prices are in the market increasing. So that is what is happening in the market. And of course, we are a major player in the market, so you can draw some conclusions from there.

Okay. Is there other factors like geographical mix or in the apartment mix that is driving prices that are you overperforming the overage market level or how would you describe that?

I would say that we are still very competitive in all of our geographies when it comes to housing, and that's driven by high quality and consequently high customer satisfaction that we are measuring very, very closely. And of course, that brings us a competitive advantage in that market.

Okay, thanks. Then question on March in this housing in Finland and CEE segment. Do you expect to improve your margins also next year, or do you see this year's margin as an extraordinary high, as the new start will obviously have significantly higher costs? How do you see this?

Well, if we talk the margin, of course, the absolute margin is driven by the volumes. And we are this year increasing our volumes, and that's one part. But I would say that then on the other hand, we have the material inflation, which has an impact to the pricing. So, I would say that the overall margin level, when it comes to kind of margin percentage, we are in a very good level or good level at the moment. We are not expecting next year any material changes on that. So, it's more driven by the volume.

Okay, very good. Thanks. And then question relating to the consumer startups in Finland. So, they have been quite low level before this quarter, given that the demand has been very strong. Why it was so?

We actually increased already during Q2 the startups, and we'll further do it now during Q3. So the annual growth is 40%, 21 compared to 22. So it's really, really now peaking. Already we started to increase during Q2 and continue that. We'll have the peak of startups in Q3. So we are really, really listening to the markets and listening to the customer demand.

Okay. And are you happy with your land bank and building rights? Do you have enough building rights that allows you to respond to demand quickly enough? Are you happy with the situation?

We are so far happy with the situation. However, the competition on plots is tightening, especially on the major cities, and the price level is increasing. which puts a pressure for us to acquire the plot and to our margins as well. So we are having a really, really close look at that moving forward. So that is something that is impacting on our plot reserve, which we of course need and will have for the future.

Okay, very well. That was all from my side. Thank you very much. Thank you.

Thanks.

And as there are no further questions, I'll hand it back to the speakers.

Thank you very much, operator. And thank you everyone for the questions. YIT's third quarter results will be published on October 29th. Until then, thank you and have a great day.