Yit Oyj Unsp/Adr

Good morning and welcome to YIT's Q2 and half year 2023 results audiogast. My name is Samu Heikkilä and I'm YIT's Investor Relations Manager. The results and highlights of YIT's second 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 Q2 audio cast, also from my behalf. What you can see actually here on the front page is one of our projects in Poland, Zurawi, that won several awards during the quarter. I'm very pleased to have such projects in our Central Eastern European countries. Let's go to the first half year result and deep dive on the Q2. During first half of the year, the business environment was exceptional. Geopolitical uncertainty, increasing interest rates, high inflation and increased construction costs created almost a perfect storm to the market. Consumers postponed the purchase of the new homes while increased material costs created challenges to the contracting business. Market turmoil also postponed some of the infrastructure investment and changed the financial equation for many investors on our sector. Consequently, our second quarter result declined compared to previous year as housing market headwinds continued and impacted negatively to profitability during the quarter. On the positive side, demand for our housing units both in the Finland and Central Eastern European countries improved quarter on quarter, and our transformation program contributed positively already to Q2 results and cash flow. We responded to the challenging market, and robust cost and cash flow controls are undertaken across the operating countries. I'm also pleased that our order book increased in the contracting segments and our total order book amounted to 3.5 billion at the end of the quarter. In this market environment, both segments performed well on that metric. During the quarter, we also announced plans to reallocate capital from investments and certain businesses to optimize the use of the capital and create the best value for shareholders going forward. If we quickly look on the total group key financial metrics, we can see that during the second quarter, our sales actually remained at the same level as the previous year. The comparable EBIT decreased to 14 million euros and the margin moved from 4.5% to 2.4%. Additionally, to the residential market headwinds, comparison period included also positive one-offs. And as we deep dive more into our results to the segment levels, we can clearly observe the market headwinds impacting on our housing segment, both in absolute euro amount and EBITS margin level compared to last year performance. Sale and leaseback transaction of the plots and a bundle deal executed during the quarter diluted the Q2 margin level. However, operationally, housing segment continued to execute on very good level. And as there were no completions during the quarter in the Central Eastern European countries, overall segment profitability declined by 12 million euros compared to last year. Business premises continue to improve operative underlying performance. However, segment results continue to be negatively impacted of the increased construction cost on the project with fixed prices. And as I mentioned, the comparison period also included completions of two self development projects. Infra-segment improved performance by 2 million euros, Finland being on a normal level, while our operations in Sweden continue to burden the segment profitability. As announced during the quarter, we have initiated strategic review on our assets in Sweden. Like said, our housing demand improved on the second quarter compared to the previous quarter, both in Finland and Central Eastern European countries. In fact, this was the first quarter on the whole segment with the positive development since the fourth quarter of 21. We did observe some positive signals during the first quarter, which now realized an increase in sales on comparable quarter. However, as we compared the sales to the previous year's quarters, there was the overall low level of consumer sales on the segment. During quarter two, we continue to observe that the uncertainty over interest rates development, energy prices and negative sentiment have moved consumer decision making closer to the housing unit completions. Additionally, we observed consumers to consider their decisions longer as they carefully assess their own financial situation. During the quarter, we had 522 new startups on the countries with favorable market conditions in Central Eastern European countries. As Finland market is now balancing the demand and supply during the 23, and the overall industry startups are estimated to reach multi-year low level, we see a risk of market supply shortages on coming years in growth cities. During the quarter, we were very pleased to announce multiple new contracts, such as the renovation of Hotel Camp in Helsinki, Jätkäsaari Circular Economy Block and Brysmian Group's cable tower construction projects in both of our contracting segments. As a result, our confirmed order book increased on both segments. Our overall order book remained strong despite housing decline and our selective tendering approach. In addition to the contracts with clients of the contracting segment, our order book includes service revenue with more than 300 million value that will provide recurring revenue to the business premises segment in the future years. On such a market environment, we have adapted our housing production to match the market conditions. And today we have approximately 30% less apartments under construction than a year ago. As a result of improved sales activity on second quarter and bundle deal, our unsold apartments decreased slightly from the previous quarter to the level of 730 units. Sales rate of the apartments under construction is at 59%, which is close to the historical average. If you look at our sales rate of units to consumers under construction, we are on a similar level than our long-term average or slightly below. As mentioned earlier, consumers have been postponing their decision-making closer to the completion of the apartments. Then a few words about our transformation program. During the quarter, we continued the good progress with our transformation program. Our program is running ahead of schedule with the lower than anticipated costs. Total gained annualized cost saving by end of 24 amounted already to 18 million euros, and program costs realized year to date are 5 million. This program includes more than just adjusting the level of our fixed costs run rate. We are addressing holistically the company performance to build long-term success of YIT. As an example, the program includes investments and capabilities to improve our operational efficiency, reduce our lead times, investments and focus on systematic project management total renewal of the supply chain management and procurement capabilities, to name a few. Part of the transformation is also efficient capital allocation. During the quarter, we announced plans to release up to 400 million capital from selected investments and assets by the end of 2024. Our aim is to improve our capital allocation and increase return on capital employed of our operations during the coming years. Plans are in place. However, since we are on the early days, there are no further details or results to be shared yet. Another important element of our strategy and long-term competitiveness is sustainability. We continue to invest in this topic and show leadership in the industry as we became the first Finnish construction company to have emissions reduction targets validated by the SPTI. Additionally, we are very pleased to see our ecosystem partners continue to invest in new products to reduce emissions from the construction materials during the second quarter. We are observing increasing interest from customers towards these sustainable solutions across all segments. But now it's a time to look more in the details of our financial performance during the second quarter. Over to you, Tuomas.

Thank you, Heikki, and good morning, everyone. The second quarter of the year was really all about adapting to market conditions and taking determined actions to improve our performance, both in the short and long term. Our profitability decreased, but more importantly, the cash flow was turned to positive track. Let's have a look at the main financials of the quarter. Here we have the Q2 key performance indicators. The order book amounted to 3.5 billion euros, despite the challenging market situation in housing and our selective approach in tenderings. Adjusted EBIT decreased to 14 million euros from the strong comparison period. Cash flow after investments was turned to positive track and amounted to plus 14 million euros, mainly due to the planned measures according to the transformation program. And the net debt increased year on year, mainly driven by weaker cash flow from housing sales. But on the other hand, the net debt remained relatively stable compared to Q1, when it amounted to 791 million euros. I'll go through some of these KPIs a bit closer, starting with EBIT. Heikki presented the segments adjusted EBITs, and here you can see the overall change in our adjusted EBIT split by segments. The adjusted EBIT decreased, especially in housing, which accounted actually for roughly 100% of the drop. And the main driver behind this development was the weak consumer sales of our apartments, especially in Finland. As Heikki already mentioned, the demand in CEE countries has been clearly higher, which is also strategically important for us going forward this year and in future. As housing segment suffered from the challenging market conditions and the fact that there were no completions in CEE countries, the underlying performance improved in business premises and in infra segments. In business premises, the comparison period included sale of two self-developed projects, but actually our project management improved during the last quarter, which resulted in better underlying performance in business premises. In infra-segment, performance continued to improve in Finland, which is our main market. However, certain legacy projects in Sweden are still burdening the segment's overall performance. The other segment was positively impacted by the cost efficiency measures taken in connection with the operating model change and the transformation program. These measures supported our profitability on the group level as well. So, even though EBIT decreased in housing, the other segments were able to offset this impact slightly. So, as mentioned, we were able to turn cash flow to positive track during the quarter. Main drivers of the positive cash flow were improved working capital efficiency, the sale of apartments to Finland to wire this joint venture, rental housing portfolio and the sale and lease back transactions for 11 plots. We were able to maintain the capital employed roughly on the same level as in Q1. In housing segment, capital employed even slightly decreased as a result of the actions taken. In business premises, the capital employed increased just a bit due to progress of self-developed projects, mainly maestrat in Porti and Pasila. As mentioned, our completed unsold apartment inventory decreased slightly 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 Central Eastern European countries, meaning that there are very current departments to be sold as the demand recovers. I'm pleased to see that our transformation programme results are visible in both cash flow and capital employed. Also, the actions to manage our housing and plot portfolio have been successful. When we have a look at our asset base compared to interest bearing debt, we can see that we are in a stable situation with our balance sheet. On the left hand side, you can see the distribution of key assets. And on the right hand side, you can see the distribution of our interest bearing debt. Due to rapid market change, we see short let's say 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 has forced net debt to increase in the short term. We have a land bank of nearly 800 million euros to enable future operations and profits. The assets tied in production at the end of Q2 amounted to 635 million euros. And the inventory of completed departments stood roughly at 260 million euros. Our investments were worth of nearly 300 million. Biggest single item there is more of Tripla, but also includes our investments to JVs and associated companies. These components altogether amount nearly 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, and we are currently reviewing its strategic options as announced earlier. On the right-hand side, you can see approximately 490 million euros of our gross debt is related to IFRS 16 lease liabilities, including lease plots and housing company loans that are transferred to buyer at the point of sale. So this leaves us roughly 330 million euros adjusted net debt to pair with nearly 2 billion euros asset base. So to conclude, our underlying asset base is very strong. Our debt structure remains well balanced, but the timing challenge has forced net debt to increase in the short term. Gearing development was relatively stable, ending up to 99% during the quarter. Why at this target? is to return to below 50% level in the long term, as communicated in our strategy. And regarding the material structure of interest bearing debt, measures are ongoing. In May, we announced that we decided to withdraw from the contemplated issues of the new green notes due to the prevailing market conditions. As a result of that, and the overall maturity structure of the IBD, we have refinancing negotiations currently progressing, and when we reach the final solution, we will of course communicate it accordingly. To conclude our financial position in Q2, we have adapted well to the challenging market conditions, Our asset base is strong. The capital efficiency measures are already visible in the cash flow. And most importantly, we are well on track in improving our short and long-term competitiveness through the holistic transformation program.