Yit Oyj Unsp/Adr

Good morning and welcome to YIT's first quarter 2023 results webcast. My name is Samu Heikkilä and I'm YIT's Investor Relations Manager. The results and highlights of YIT's first quarter will be presented by our CEO, Heikki Vuorenmaa, and our CFO, Tuomas Mäkipeska. After the presentation, we will be taking questions from the conference call line. At this point, I would like to hand over to our CEO, Heikki. Please go ahead.

Thank you, Samu. And welcome all to the Q1 interim report call, also from my behalf. This year started under difficult market conditions, and the strong headwinds from the market continued throughout the quarter. Consumer demand on the Finland housing market during the first quarter was unprecedentedly low level, over 80 percent decline year on year. What we have observed is that lack of the long-term visibility to the housing interest rate development, energy prices fluctuation and the banking sector turbulence during the quarter postponed consumer decisions to acquire new homes. Early leading indicators, such as conversion rate, visitor and open apartment displays, increasing interests towards the housing loans were observed, However, those did not materialize to sales during the first quarter. We believe that the fundamental demand of the market exists, as the home is not a fashion product, as consumers are only postponing the decisions due to overall uncertainty. We believe that the market will recover over the time to normal level. However, the visibility to the timing and the speed of recovery is unclear. Even the positive leading indicators are strengthened as we speak. We have been adaptive to the market situation and launched our transformation program during the quarter to one hand weather the market situation and on other hand built the long-term competitiveness of YIT. We are very pleased to say that the program has got off to a strong start and we have progressed faster than anticipated and are in good trend to achieve our set targets and goals. Success of this transformation program is essential as we build our long-term competitiveness through YIT Group. As we look at Q1 financials more in details, the decline on the housing market and our selective tendering approach on infra is visible on our revenue, which declined 12% in year-on-year comparison to 455 million euros. Our adjusted EBIT declined to a negative 4 million euro, which was driven by the low consumer sales in housing and disappointing results in the business premises segment. All of these factors led also to the negative EBIT margin for the Q1, which is a disappointment for us. We double-click then on the segment results and the drivers behind the Q1 results for a moment. As said, the housing result decline is solely connected to the low consumer sales during the quarter. This is especially connected to the market situation in Finland. On the other hand, housing sales in the CEE performed as expected. Towards the end of the quarter, we started to see uptick, especially in Poland, Lithuania and Czech Republic. The Central Eastern European market is important for us on the full year outlook. Even 50% of the consumer apartments during 2023 are completed in the CEE. Business premises got off by a very poor start, as the material cost and inflation continued to erode the margins in earlier taken fixed price projects. And we experienced project management deviation on some of the projects as well. We have work to do to catch up the setback during the year. I think positive news is that the material cost trends are stabilizing over the past months already. On the infra side, the profitability decline is connected to the overall decline in revenue, while our relative project margin remained on the similar level. I think the most relevant news from the segment is the nomination of the new interim head of infra segment, Aleksi Leiden. He is recognized as an industry expert and has a stellar track record on infra business during the past 20 years. Then when we look at the property development segment, it is labeled by the fact that there were no significant transactions during the first quarter. The team has been focused to finalize our self-developed offices that can be commercialized during this year. There we see a positive development of the rental levels, both in Maistraatinportti and Tuultenristi, and we are expecting a good response in this overall demanding industry market for these two assets. We also continue to mature our wind power portfolio and moved 390 megawatts to permitting phase. Maybe one additional highlight is the Mall of Tripla, It was confirmed the largest mall in Finland by visitor during last year. In addition, it has a good start to the year, the total revenue increasing, and then the total number of visitors growing year on year basis. Let's then move to the order book. Our order book remains stable and is 3.5 billion. It is 6% lower than last year at the same time. despite the lower startups. We have communicated several contracts on the business premises during the past months, which is a signal both on our competitive offering as well as the market activity on that segment. Our view is that the order book that we have been taking is taken in with the healthy margins, and those will support our segment profitability going forward. I already mentioned that we had an unprecedentedly weak market on housing, especially in Finland. If we look at the public data, the overall Finnish market has been down somewhat 80% during the first quarter. This is also reflecting very well our sales on Finland, as it declined 82%. compared to first quarter on 22. On the other hand, the Central Eastern European sales declined 41% against the comparable quarter last year. What is positive is actually the trend in the CEE, as we see 20% increase in unit sales compared to previous quarters. We are having a strong land back and that will enable us to construct 33,000 new homes. This is our strategy asset. we have to create the long-term success. And our CFO Tuomas will cover the breakdown of the assets in more detail on this call. As we communicated earlier, the completions during the first quarter were low side during this year. Simultaneously, we activated tools from our toolbox to rent finished unsold apartments during the first quarter and shifted the portfolio to our investment asset side. This was mainly focused on one-room and two-room apartments, which are typically suitable also for rental purposes. Overall, our unsold finished apartment is well under control and decreased to 747 units. Overall rate of apartments sold under construction remained higher than average level on the five-year comparison period. Also, it's good to keep in mind that the majority of the portfolio of financial department is at low risk locations, capital regions or university towns in Finland and Central Eastern Europe. We continue to have those several tools in use as we are adapting to the market changes, monitor the market development with several leading indicators and adapt our commercial campaigns to unlock the market situations. On this market situation, we remain conservative on our new startups and plot investments. Yet holding good inventory on optimum location enables us also to have relevant offering to market as consumer confidence returns and market starts to normalize. A few words also about the transformation program. As I said in the opening, our transformation program is off to a good start. We are delivering faster than anticipated savings, transforming company and implementing new capabilities with the lower than anticipated costs. Our team is all hands on deck and take actions on topics that we can impact regardless of the market situation. We have now generated total of 16 million run rate saving with more under final validation. Additionally, we have taken several measures, such as temporary layoffs, to generate needed one-time impacts to support our 23 financial performance. Our new organization is off to a good start and teams are welcoming simplified and focused ways of working. A lot of work is still to be done to simplify day-to-day life on the construction site, improve our procurement practices, leverage all the best in class project management tools we have, lean manufacturing, just to name a few. I remain highly confident that we are on the right track. Provide needed focus for individual business segments and increase value for our customers and shareholders. On the ESG side, we updated our design principles for all new apartment buildings to energy class A. This will future-proof our business and keep us showing the industry leadership towards sustainable solutions. During the quarter, we also introduced new digital capabilities to track and prevent access of contractors to our sites that are not fully compliant with the local rules and regulations. We continue to observe time to time such challenges and resolve those in a good cooperation with local authorities. We as a YIT has a zero tolerance on such violations. But now let me hand over to our CFO, Tuomas Mäkipeska. Tuomas will cover our numbers with the greater details.

Thank you, Heikki, and good morning, everyone. Q1 was clearly a challenging quarter for us, especially due to the weak market conditions in housing. Our profitability decreased and cash flow was burned by very low consumer sales in housing. But let's see the financial highlights of the quarter. Here we have the Q1 key performance indicators and order book amounted to 3.5 billion euros despite the challenging market situation in housing and our selective approach in tendering as Heikki already described. Adjusted EBIT fell to minus €4 million from the strong comparison period from year 22. And the cash flow after investments amounted to minus €211 million, mainly due to the low consumer sales. Net debt increased, mainly driven by the negative cash flow during the period. Let's have a look at some of these metrics a bit closer. Profitability. Heikki presented the segments, adjusted EBITs, and here you can see the overall change in our adjusted EBIT split by segments. The EBIT decreased, especially in housing, which accounted roughly 70% of the drop. The main driver, as already described, behind the development was the weak consumer sales of our products, especially in Finland. Also, Heikki mentioned that the demand in CE countries has been clearly higher, which is also strategically important for us going forward. But as a total, the slow start of the year was evident in all segments. In business premises, we suffered from weaker project management in certain projects and increased material prices. In infra segment, the main driver for small decrease in profit was lower volumes of the business. And the volume drop was actually also the case in property development segment, since there were no significant transactions during the quarter. Let's spend some time on the cash flow. The cash flow was burdened by very low consumer sales in housing, and this was the main contributor to the weak results. Approximately half of the negative cash flow is attributable to housing, driven by, as mentioned, very low sales, but also payments or plot investments made before Q1, and the apartments currently under construction. In Q1, we slowed down plot investments and startups due to the unstable situation in the market, as Heikki mentioned. Our completed unsold apartment inventory remained stable during the quarter, and it is very important to note that more than 80% of the apartments are in the capital regions or university towns in Finland and CE countries. meaning that there are very current products to be sold as the demand recovers. On top of housing segment, the cash flow was also negatively impacted by the normal seasonality in other segments, as well as some financial items and taxes paid during the quarter. Also, the cash flow development was the main contributor to the increase in capital employed that you can see on the right-hand side. But then, here we have some new graphics to be introduced. On the left-hand side, you can see the distribution of key assets in our balance sheet. And on the right-hand side, you can see the distribution of our net interest-bearing debt. Due to the recent rapid market changes, we see short term timing related challenge in our balance sheet. At the same time, our underlying asset base is very strong. Our debt structure remains well balanced, but the timing challenge forces net debt increase in the short term. Starting from left, we have a land bank of nearly 780 million euros in our balance sheet to enable future operations and profits. Assets tied in production at the end of Q1 amounted to 655 million euros, and our inventory of completed apartments stood roughly at 230 million euros. Our investments were worth of nearly 300 million euros, Biggest single item there is more of Tripla, but also includes our investments to joint ventures and associated companies. These all together amount nearly to 2 billion euros. And on top of this, we have a valuable wind power portfolio of which we do not have significant assets in our balance sheet. Then on the right-hand side, you can see approximately 470 million euros of our gross debt is related to the IFRS 16 lease liabilities, including lease plots and housing company loans that are transferred to buyer at the point of sale. And just for clarification, when we are selling a single apartment in Finland, we receive a double positive impact to the net debt. in terms of positive cash effect from the sale and decrease of housing company loan and possible plot lease since they are transferred to the buyer at the time of sale. So, this leaves us with roughly 320 million so-called adjusted net debt to bear with the nearly 2 billion euros asset base, which illustrates our financial risk profile. To conclude, our underlying asset base is very strong. As you can see on the left-hand side, our debt structure remains well balanced, but the timing challenge has forced the net debt increase in the short term. Let's finally look briefly at the balance sheet and financing. Our equity ratio remained on a healthy level and interest cover ratio is strong. Gearing increased mainly due to the cash flow development that I described earlier. There were no major changes in the gross debt. Regarding financing, we consider financial needs continuously as usual and make new financing decisions accordingly as needed. We ensure that YIT has required financial means and strong liquidity For example, 300 million euros committed revolving credit facility, cash, and committed under on project loans. And typically, we also use commercial papers to balance short-term liquidity needs. Altogether, our balance sheet supports us when we navigate through the unstable market environment. To conclude our financial situation, the market has remained challenging, but we have a strong underlying asset base, our debt structure is well balanced, and we will gain substantial profitability improvements from a well-started transformation program.