Yit Oyj Unsp/Adr

Good morning and welcome to YIT's Q1 2022 results webcast. My name is Tommi Järvenpää. I'm the head of YIT's investor relations. We had a good start for the year. Q1 was solid, driven, especially by strong performance in housing. Today, we will be discussing how our profitability developed and how our businesses are performing. The results will be presented by our CEO Markku Moilanen and CFO Tuomas Mäkipeska. After the presentation, we will be taking questions from the conference call line. And at this point, I would like to hand over to Markku. Please go ahead.

Thank you, Tommi. And good morning and welcome to the webcast on my behalf as well. So let's have a look at our Q1 and Overall, we had a solid quarter. I have to say that I'm very satisfied on our performance and our progress according to our strategy as well. We have our new focus strategy. We were able to utilize our capabilities in all business segments successfully, which led to very good results in terms of profitability as well. Secondly, during Q1, As we have announced earlier, we accelerated the strategic review of our businesses in Russia that we initiated already in November last year. And as a result, we were happy to find a solution to sell our business in Russia. The closing process is ongoing. It will take a bit longer than originally anticipated, but we expect the closing to happen during Q2 this year. And the third thing really related to Q1 is that we have a strong balance sheet, and despite of our sale of the businesses in Russia, our balance sheet remains strong. Our CFO Tuomas Mäkipeska will open the balance sheet a bit more, a bit late. Starting from the numbers, so revenue wise, our revenues was a bit lower than during Q1 last year, and that was a result of a lower number of apartment completions as planned. all in all revenue was as expected. The adjusted EBIT was very good. So that grew from 15 million euros to 22 million. And even more importantly, we are on way to improve our overall profitability. So our adjusted EBIT margin grew from 2.7 to 4.2. We had solid quarters in all segments. And this is, of course, very important for us as well. Housing was really the locomotive. Again, continued their strong performance. And we had very good sales in housing. Even a bit stronger than we initially expected. Still, if we look at the first half of this year, We expect that to be along our original expectations. So, there are very high sales to normalize during Q2. A very good thing in business premises and infrastructure, where we have already started our actions to transform the business, they are clearly showing results. Behind the scenes, it's important to understand that we had no surprises in our project in those two segments. So that is notable and showing in black numbers as well. Our new property development segment resulted positive numbers as well. And again, it's good to remember the business model of the property development where we'll have a kind of relatively low level of revenue and margin in a normal situation. But then when the big items, when the development items, either in a property or in wind power happen, like we had the Lestiärvi sale during Q4 last year, then we'll of course see big numbers in terms of revenue and profit as well. But all in all, all segments in black, which brings strong confidence for us moving forward. We continue to execute our strategy, and we have the three focus areas in our strategy, focus, productivity, and ESG. Starting from focus, we continue to invest in attractive urban plots in the growing areas. Secondly, we continued our new way of selecting projects, the selectiveness of projects in tendering. And it's notable to look at our order book still, even if we are more selective, we are doing rigorous risk management and we are selecting those where we have our core competencies, where we can win and we can deliver in a profitable way. We were able to keep a good order book in all segments as well. And in the big picture, our business portfolio was streamlined by the sale of the Russian operations as well. Going to productivity, we implemented 1 January our new operating model, and we expect to have annual savings between 15 to 20 million euros by 2023 compared to the baseline of 2020. We took steps forward on ESG as well, so on the environmental area, we had our actions and development related to achieving the science-based targets initiative that we have committed and to reach good result in EU taxonomy as well. And again to open that a bit what we have been doing. So if you think the life cycle uh of built environment uh and and where where we can have action and will have actions in term of uh reducing our carbon footprint firstly it's about materials so so we we continued development and taking into use as low carbon materials like such as low carbon concrete and steel Secondly, on our construction sites, we develop and take into use fossil-free fuels whenever possible, reducing our carbon footprint over there as well. And the third part of the life cycle is, of course, the energy usage, and especially in our own housing, we move towards our direction to reduce in a carbon footprint of the energy used in our self-developed housing and real estate as well. So we are well underway on that. I'm particularly happy with our results in work safety. So our combined lost time injury frequency, the 12 months average decreased from last year's 12.2 to 10.5 yeah that is still too high as I see but we are moving to the right direction and the key reason for that is that in our housing segments capital division where we have done already for a longer time decisive actions to improve our safety culture and develop our safety related procedures. This means that we have taken regular and more and more safety walks by the managers. We have increased the level of safety observations from all level of the organization. we are faster to respond on deviations and giving feedback and sharing good practices. Those experiences we are rolling out the same kind of actions to the other divisions as well. The next one that we did we launched our update and training on code of conduct and finally we made an internal audit to inspect the non-EU workers on our sites as well. And the result was that we found only two non-compliant work permits out of the 444 inspected. Of course, we took the actions on those two as well. Moving forward and opening a bit of the situation of our land bank, because we invested on our land bank as well. So, in Kaladno, close to Prague, we invested on a plot, enabling us to build 430 housing units. We invested a few plots, the most notable in Tapiola in Espoo and as well as in Järvenpää. So all in all our land bank enables construction of 32 000 new homes and we are really growing the land bank in the growth areas in this picture shown on green. At the same time we continue to structure our land bank so that divesting plots in the non-strategic region as well. All in all, if we are looking where we are in our trajectory, so we are well now positioned to achieve our financial targets for 2025. If we start from the EBIT, the profitability, our last 12 months bigger is 3.5% compared to 2.8% in 2020 and 3.2% in 2021. So we are well on our way on that. Our gearing is still below our goal, which is below 50. It's increased from 30 to 40 due to the Russian sale as well. And again, we are well on our way to stable growth. on dividends. So, let's have a look at the final numbers a bit more closer. So, I'll hand over to our CFO Tuomas Mäkipeska. So, please, Tuomas.

Yes, thank you, Markku, and good morning on my behalf as well. I would like to echo what Markku mentioned. So, we had very solid financial performance during the Q1. If we look at the most important financial KPIs, describing, of course, our strategy execution and the impacts of the execution. First of all, the order book was strengthened significantly. Also, as already mentioned, just the debit, both in absolute and relative terms, was increased significantly. And at the same time, we were able to decrease our net debt position. But before going more into the details with the numbers, so two important topics to handle before. First of all, We published earlier this week the financial information from 2021. So we restated the financial information because of the two components. First of all, the operating model change that took place starting this year. Basically, now going forward, we have four reportable segments and also some intra-segment changes were made according to the new operating model. Second topic was the sale of the Russian operations. So now going forward, it is classified as assets held for sale, and reported as discontinued operations. And this is actually the second important topic I would like to raise here, is the financial impacts. of the sale of the Russian businesses. First of all, as published earlier, we made an impairment of 150 million euros. And this is now reported as part of the discontinued operations. And of course, this had a negative impact on the group result for the period, which including the discontinued operations amounted to minus 130 million euros. We have the accumulated translation difference in our balance sheet, which amounted to 300 million, a bit above or below 300 million euros at the end of year one. And this will then be booked to the income statement when the sale of the operations is closed. And that is also reported as part of the discontinued operations. But now going forward with the figures and the key figures. So first of all, on the left-hand side here, you can see the order book development. So we are on a positive trend with our order book. We were able to increase our order book compared to the last year. And this is a clear demonstration of our competitiveness in the market. As Mark already mentioned, we are practicing rigorous selectiveness of the projects and tendering what we are participating. And in this part of that, we are able to increase the order book. So it's a clear demonstration of competitiveness in the market. Also, from revenue perspective, you can clearly see here the seasonality of our business, and there is a small decline compared to the last year in our revenues, and one kind of a reason behind that is also a positive one in last year's Q1 sales, sorry, in revenue, and also a bit lower revenues in housing in Q1, as Mark already mentioned. So, those were the main reasons behind the revenue development. Now, maybe the most important KPI to follow. We were able to increase the adjusted EBIT both in relative and absolute terms. From group level, there were two main levers that we pulled. The first one being related to our strategy and the operating model. we were able to increase our cost efficiency due to the new operating model. And the second one is the project management excellence, which resulted in a lot lower net deviations in our projects than before. So those are the two main drivers on a group level for the improved EBIT. If we look at it from the segment perspective, the biggest contributor is, of course, housing. We had very good sales and sales mix with the improved margins also, which resulted in very good operational performance in housing. And it was also supported by a couple of smaller positive one-off items. Then if we have a look at the business premises and infrastructure development, so the transformation is progressing well, even though the absolute development in EBIT is not significant, but still it is a step to the right direction. Transformation is progressing well, and one key indicator there is also the net deviations in the project. As mentioned, they are a lot smaller than before. In property development, basically just a small decrease in EBIT, but basically the performance is flat there. Then, going back to the investments for growth, Markku just presented the land bank developments there. So, you can see on the left-hand side the cash flow development, and the negative cash flow from Q1 is related to the investments for growth, and especially the plot investments that we made during the Q1. Also, the same thing is reflected on the right-hand side on the Q1 capital employed, So, the capital employed increased a bit from the year end, but still decreased from last year's figures. This is related to the growth investments according to our strategy. An important topic is our debt structure here. On the left-hand side, you can see the gross debt structure. At the bottom of the stack, we have the IFRS 16 lease liabilities and the housing company loans related to the unsold apartments, which are then passed further to the consumers when the apartments are sold. So those are basically not conventional net interest bearing debt in a sense. And if with those exclude the gross debt from the gross debt, we would have minus one net debt. So that is very important structure to understand. We are basically debt free. Also, if we look at the portfolio, the debt portfolio on the right hand side, the majority profile of our debt is extremely healthy and we have no needs for financial restructuring in the near future. This all is of course then reflected on the balance sheet side and I also already commented on the net debt side, but if we look at then the gearing as a result of the net debt development gearing, we are on a positive track of decreasing the gearing. The small increase now from the year end is of course related to the sale of our Russian operations and the impairment what I just mentioned earlier made. Interest cover ratio developing nicely to the right direction. To conclude the financial performance from Q1, we just had a good start of the year. The profitability improved both in relative and absolute terms. Our balance sheet remained strong, and we have very good and healthy order book going forward. Thank you. And now back to you, Markku.

Thank you, Tuomas. And then let's have a look at the outlook of the rest of 2022. Starting from the market, so Q1 was still very strong overall in our key markets, either normal or very strong. And of course, then what happened was the eruption of the Ukrainian crisis during Q1 as well, and since then, we have seen issues in availability of certain construction materials, and some material prices have continued to increase as well. In addition, the general consumer confidence is weakening, which we expect that will be reflected in the housing demand as well. Looking forward, going forward, We expect the challenges in the market in terms of material cost inflation, and availability to continue, and the consumer demand to be a lower level than during Q1. But we see that that will continue at least during the next couple of quarters. On the other hand, we see that in mid and long term, demand will come back, because the need for built environment, the need for housing is there for a longer term. But let's elaborate a bit the material cost increases. And I would like to start by showing this picture of the material cost indices development, and this is something that started already in 2021. And then, of course, we started our actions and started to be organized in several task forces to mitigate the actions as well. On the other hand, if you see in this picture, which is from Statistics Finland, you can see that steel structures have continued to increase, whereas wood structures actually came down as expected at the end of 2021. And again, these are results in March this year, and they're coming a bit late, so we expect the inflation to continue moving forward. However, what we have done, and again, I want to emphasise that we started the work already last year when we saw the inflation to start, So what we have done, we have gone through all of our projects, looked at what contract types we have, how much materials, which materials. We have a strong procurement organization actively contacting our supply chain, our people in the customer and client front. actively contacting the clients as well. So all in all, if we think this is a case of an apartment building, and we have of course done a similar analysis in all of our different projects, but in a typical average apartment building, the materials are about one third of the building price. And out of those, then those those materials where both the earlier inflation is hitting, as well as the Ukrainian crisis, represents 20% out of the 30% as well. So that's where we have been, of course, been focusing on. And again, the mitigation actions that we reported already during last year are, first, the active customer relations management, so very proactive dialogue with the customers, pricing adjustments whenever possible, dynamic pricing as we have especially in the CEE countries in housing. Secondly, the contract management negotiations, using the force majeure whenever possible, finding together with our clients the joint measures for the benefit of the project. And again, definitely for new projects to use indexing, use cost plus fee models and others like that. And then finally, our strong procurement, where we have a task force, where we have a total look at the whole company's procurement, and they have been able to find alternative materials, new supply chains and sources as well. So, as said, during Q1, we have been successful in this, and we continue our actions with a goal to mitigate as much as possible moving forward during the coming quarters. Again, in the outlook, it's good to remind that the completions in this year, we are estimated to have on a lower level than last year. And the reason is that we had a lower level of startups in the beginning of the COVID-19 pandemic as well. So looking at the estimated completions in Q1 this year, they're relatively low level, actually zero in the C and then a bit more in Finland. And again, like I was alluding earlier, we had a very good level, very high level of sales in Q1. expect that to normalize during Q2. So overall, we see that the Q1, Q2 together in terms of revenue and profits in housing is along our expectations. And again, to explain a bit more our housing completions and then the consequent revenue as well. So in this picture, you can see the blue line is our startup levels where we had some cautious nets in the beginning of the COVID-19 pandemic. And you can see that the average building is about, takes about 18 months, and you can see a low level of completions then in the white line as well. But moving forward to 2023, the high level of startups will mean that the revenue, firstly the completions and the revenue will pick up in 2023. All in all, we will keep our guidance, so that we expect that this year's YIT Group's adjusted operating profit is expected to be higher than in 2021 in the continuing operations. And quickly looking at that, and in housing, like I expected, We explained we expect the completions in consumer apartments to decrease a bit. We expect our business performance in business premises and in infrastructure to continue to improve during this year. However, in infrastructure where we have long projects that will be impacted for a while by certain legacy low margin projects. On property development, we have several promising projects in the pipeline, which is promising not only for this year, but definitely for the years to come as well. So all in all, the foundation is set. We took tough actions last year. to go through our project portfolio. We did the necessary margin adjustments. We developed our new strategy, and we clearly see that the middle and the long-term prospects for our industry remain positive. We already see now, after the eruption of the Ukrainian crisis, that our strategy, our focus strategy, where we concentrate on our core competencies, that will help us to stay competitive even in the markets that are weakening. So we will continue according to our strategy, focusing on our profitable core and execute our strategy. Thank you very much. That was all from my side.

Thank you, Markku, and thank you, Tuomas. Operator, we are now ready for the questions.

Thank you. Ladies and gentlemen, if you wish to ask a question, please press the one on the telephone keypad. Our first question comes from Anssi Raussi, SEB. Please go ahead.

Yes. Hi, guys. It's Anssi Raussi from SEB. I have three questions and I take them one by one. The first one is that you mentioned that the selling price of, sorry, selling of Russian business has been proceeding slower than anticipated. Could you give some more information? What is the problem there? And sorry if I missed this one, if you mentioned that already. Thanks.

Yeah, thank you. Well, we are not facing problems. There are always certain steps in these kind of processes. And of course, under the current circumstances, they take some time. But we are progressing according to the steps. So, no problems in the process, it just takes a bit longer time.

Okay, and you don't have any difficulties to get the cash from Russia?

we don't see any difficulties in that. Of course, there are a few steps to be handled before doing that, and that's what we are exactly doing.

Okay, thanks. And the second one is about pricing. In what kind of situations you are able to use force majeure in your pricing if you have to increase selling prices after the contract has signed? or during construction, and what are the options for the customer in this kind of situation?

Well, it's according to our contract rules, and sometimes, again, we're having the dialogue with the clients, how we interpret the force majeure, and that's why the The approach is normally to have the best of both parties, even in those cases. And we have had good dialogues and good solutions with the clients as well. The general contract rules in Finland are a bit tougher than in Sweden, where in a normal situation, things like now the abnormal prices of energy increasing, we get through in a much easier way. But in Finland, in some cases, we have been successful with those as well.

okay uh maybe the last one from me is that you already talked talked about this a bit but what is the situation and availability with your material purchases as your inventory value has decreased by 12 percent but order book increased by seven percent so is there anything to worry about or is this just something seasonal and totally normal

Yeah, that's purely seasonal. No, nothing to worry there. That's according to our plans and expectations.

Okay, so you have been able to purchase materials normally? Yes. Okay, thank you.

Thank you. Our next question comes from Monty Cookford. Monty, please go ahead.

Yes, good morning, Svante Kruppas from Nordea. Thank you, Marko and Tuomas, for the presentation. Anssi actually asked a couple of questions that I had, but perhaps if I continue on the delays in the Russian disposal, is the deal conditional on something, or is it only kind of the approval process that is delaying it?

Yeah, it is the formal approval. So we have a very good relation with the buyer, and they're very eager to buy, and all contracts are fine with them, and very good dialogue. So it's the final approvals from the authorities and the banks that we are going step by step forward.

Okay, thank you. And then on... I mean, the housing division was stronger than even you expected, and you mentioned the MIKS as one. Was there any particular projects that impacted the margin positively in Q1?

No, not really. The key reason, like I commented, was a very high level of sales. So, on our... completed and unsold apartments, so overall it's the kind of the first half is what we expect to be in a normal level.

Okay, thank you. And then thank you for the extra slides on pricing and materials. Can you explain a bit about, I guess you have a better availability than your competitors. Could you explain a bit why that is, apart from that you are probably the biggest buyer?

Well, we have long term relationship with our providers and framework contracts. And of course, we are a big, big buyer. So we clearly have seen that we have been Firstly, prioritised by the suppliers, which we are, of course, very happy about. Then we have been able to negotiate reasonable price increases in our dialogues that we are having with them as well. So that is more or less as it is. And again, our substantial procurement network has been able us both by the existing suppliers to find new sources so that they are doing it, but then we have been very active on the market ourselves as well to find new material sources. And we actually see in the market that in some countries, the prices of steel is already now going down because of the lowering demand, as an example.

Okay, thank you. And you elaborated on the contract structures that have been adopted. Have you permanently kind of changed the way the contract structures look in projects now during the last, say, 18 months, given the current situation? And I mean, does the contract look very different now compared to before this situation? And will this be a permanent change that the customers accept also?

No, I wouldn't say that there's a major change. It's more the project selection from our side. So, fixed fee prices contracting competition, where we see too high risks on the material cost side so we then we just say have said no and we'll continue to do that as well so we are much more rigorously now starting already last year calculating the cost risk not only material but total cost like workforce and others as well and now we are having active dialogues with the clients I would say that that's maybe the change that is happening that we are sharing the risk and having areas where we have cost plus models. And maybe that's the way forward as well, to have a bit more open dialogue. And we are happy to do that. And it looks like the big clients, both on the public side and private side, are ready for that kind of dialogue moving forward.

Okay, thanks. And regarding workforce availability and subcontracting availability, have you seen any bottlenecks there, and how do you look at wage inflation?

We clearly see that no changes on that that we have been reported, so there's still a shortage of site management workforce in the industry, in all of the countries that we are working. On the other hand, we have been able to recruit, especially in business premises, several key talents on that area. We're very satisfied on that, so we have been successful on that. We see kind of outside of the growth centers in Finland, actually, Actually, the availability of workforce has been improved since the eruption of the Ukrainian crisis, so they are contacting us as well. Then, of course, we have the countries where already earlier there has been kind of a shortage of workforce, and after the crisis, that has continued as well. So far, we have been successful and don't really see that as a bottleneck. for our project in those countries either.

Thanks. And you have earlier warned that the current situation with high input costs could affect demand. Have you seen much postponements or cancellations of projects in the market because of that reason?

Not really notable in a big picture there. Of course, some of those, then we see a lower level of consumer reservations, reservations in apartments, but even that didn't go as low as in the beginning of the pandemic. That's the overall situation in showing the lower customer or consumer confidence. On the other hand, we have good examples on some very good locations, where the reservation rate has stayed and increased very fast, even since the eruption of the crisis.

Okay, thanks. And the last question regarding property development, and you moved the wind park. development into that? Is there a lot of promising projects, and what is your practice of informing the market about the developments there?

Well, there are several very good, and the market is good, and not least in the current situation where renewable energy in the whole Europe. We see that the share of renewable energy will increase. So we have several good projects and we are investing in that area. We haven't been really communicated earlier about the project and the progress. And of course, they normally take several years. As there will be something to report, we'll inform the market about where we are with those as well. But we really see big potential on that area.

Okay, thank you. That's all from me.

Thank you. Thank you. Our next question comes from Markku Moilanen, OP Financial Group. Please go ahead.

Yes, hi. This is Markku Moilanen from OP. I have two questions left. First of all, in housing segment, your profitability was supported by a better sales mix. Now, if you will look at the sales mix in your order backlog, how does it compare to Q1? And should we expect this in similar margin levels later this year as well?

Well, we overall see that the sales mix will be in the whole year as kind of originally planned. It was now a bit more positive, and again, resulting a bit higher than we expected. But we expect that to normalize moving forward.

Okay, that's clear. Second question is about your outlook. Your short-term outlook in housing and real estate market is pointing downwards, and you also highlight that consumers are getting more cautious and demand is expected to weaken, and also the construction material availability is becoming more challenging. Taking all this into account, how confident are you with your guidance at the moment?

Well, we have carefully analysed the situation As we see the situation in the market and in our business, we definitely are confident at the moment.

Okay, good. That's all from me.

Thank you. Our next question comes from .

Yes, thank you. One more from me. Just asking that you mentioned in your report that you have reached an agreement with the hospital district of southwest finland and you also mentioned that this agreement became final in april of this year and the initial claim was 20 million euros but i guess you won't be commenting this agreement but still thinking if there are some one-offs we should be expecting in q2 report can you comment anything about this

No, we are not commenting the details, but we are satisfied with the result of that one. Nothing to be expected, similar one-offs during Q2.

Okay, thank you.

Ladies and gentlemen, as a reminder, if you wish to ask a question, please press the one on your telephone keypad. We have no further questions. Dear speaker, back to you.

Thank you very much and thank you for the active discussion. Our second quarter results will be published on July 28th. Until then, thank you and goodbye.