YIT Oyj (YIT) Earnings Call Transcript
March 27, 2024
Earnings Call Speaker Segments
As a reminder, this call will be recorded, and the recording will be published on our website after the call. But at this point, I hand over to Tuomas. Please go ahead.
Yes. Thanks, Essi, and good morning, everyone, on my behalf as well. We will be covering four topics in the introduction here, starting with the market update regarding Housing business in Finland and CEE countries, then following with the market update regarding the other two contracting segments. And as a third topic, we will be handling the cash flow and the financial situation. And fourth one, the transformation program and capital release what we are executing. So basically, I'll cover these four topics first, and then we'll have some time for the questions. First, a few words about Housing operations. In our guidance and outlook for the rest of the year, we state that the Housing market recovery in Central Eastern Europe is expected to continue. And in Finland, the Housing market is expected to continue to be weak in the first half of the year. Overall, the year has started on a positive note with continued strong housing sales in Central Eastern Europe and a clear pickup in the Baltics, anticipating continued strong performance for the year in these markets. In the Central Eastern European countries, the recovery started earlier and has continued positively, especially in Poland, Czech Republic and Latvia. As we commented in our Q4 earnings call, our apartment sales in the last quarter of '23 increased close to 70% in the Central Eastern European countries. This year, over 70% of our apartments will be completed in our international operations, thus the good market conditions are key to the group's performance. The Finnish Housing market has seen positive developments in terms of reservations, ongoing negotiations and completed transactions, although the overall market has remained weak. The market has received our 5-year 2% interest rate campaign very well. And consumers have understood its significant potential impact in improving housing affordability in the current interest rate environment through lowering the monthly cost of housing. Last week, we also announced a new campaign where YIT is introducing a new rent-to-buy model to the housing market, where the process of buying a home starts with renting it. In this model, a preliminary contract is signed, subject to a deposit. Within 2 years of signing the preliminary contract, the buyer can become the homeowner and the deposit and rents paid will be deducted from the price when the sale is completed. And the deposit is 1% of the net price of the apartment. Regarding these two campaigns, we have received positive feedback from the market and many stakeholders, and both campaigns have clearly added activity. We see an increase in the overall interest and there have been a growing number of visitors in the open houses as well. So based on these experiences, we see that there is clearly consumer demand in the market waiting for the uncertainties related to interest rates and overall economy to ease. In Finland, we have a healthy inventory of apartments to sell to the market during 2024 and early '25. Our total unsold portfolio of completed apartments in Finland was 890 at the end of 2023. It is approximately 20% of the total Finnish markets unsold new housing units. So the share of unsold apartments in Finland is less than our market share has been during the last year. Our portfolio of apartments is located in the growth cities and prime locations. There is also a clear investor demand visible at the market. We have not made any bundle there so far, but we are constantly monitoring the opportunities at the market. There is clearly capacity to do bundled deals, but we haven't executed one yet. So that covers basically the Housing part of the market update. And if we then shift our focus to our contracting segments, Business Premises and Infrastructure. In Business Premises, the underlying operational performance is expected to improve during this year and the work continues, of course, to strengthen the segment's profitability. Unfortunately, the progress was more than offset in the last quarter of '23 mainly by the decline in fair values. Operationally, Tripla is performing well, though. The real estate market in our operating countries is on normal level, and we see activity both in industrial and public sector to remain normal. As one highlight of the activity, we announced recently that YIT has been chosen as the development phase partner for the new building of the Meilahti Pharmacy, central kitchen and parking facility in Meilahti, Helsinki. We actually won the tender with the highest price and highest quality points, which is an evidence of the value of our expertise in complex projects. We are currently building the Oak Hospital in Meilahti as a collaborative project management contract, and it's great to be part of developing a new property for who's using the same model. In Infra business, as we already commented in Q4 earnings call, the overall performance continued to improve and ended up with solid profitability in the last quarter of '23. We see this development very positive. YIT's Infra business in Finland has improved its profitability significantly and simultaneously increased the order book, which are clear demonstrations of our competitiveness in the market. This -- the Finnish Infrastructure market is active, and there are currently several tenders ongoing that fit our expertise as well. As an example of recent successes, we signed an agreement of the implementation of the excavation contract for the Espoo City Rail 2 weeks ago. The contract allows us to use the competence of our Infra segment extensively in both rail and bridge construction as well as ground and rock engineering. For our part, we want to promote the construction of emission-free traffic in cities and Espoo City Rail project is a great example of this. As we announced already in January, our strategic review of our Swedish Infra business was completed. And as a result of the review, the company decided to close down the Infra business in Sweden. The closing down will allow us to focus our operations and release capital for businesses that support our strategy. Then moving on to the third topic, cash flow and financial position. We announced 2 weeks ago that YIT had executed a substantial financing arrangement, including equity and enhancements to existing long terms, leading to an improvement in liquidity a net excess of EUR 100 million. We actually had a separate analyst call on the day of announcement regarding the arrangement and the recording is available at our website, but I will briefly go through the main elements of the arrangement here as well. So the arrangement consists of three elements: a directed share issue of EUR 33.5 million at market price; an issue of EUR 36 million convertible notes due March 2029 with a coupon of 8% per annum and a strike price of EUR 2.25 per share; and as a third, maturity extensions of the EUR 300 million RCF and a EUR 140 million term loan with other positive amendments to key loan terms, including postponements of amortizations. So combined, the amendments to loan terms increased available liquidity by over EUR 30 million. We are very pleased with this funding, which actually exceeded EUR 500 million in total. And the announced package reinforces our position as the largest and strongest player in Finland, with a significant position in the Baltics and the CEE countries and ensures our ability to respond to upcoming opportunities, especially in the Finnish Housing market. The transaction brings continued long-term support to our operative business and strategy implementation as we now have funding arranged for years to come. It also facilitates us to return to the debt capital markets when the market situation offers the opportunity. We have communicated earlier that we plan to redeem the EUR 100 million bond maturing in couple of days actually. And the bond will be redeemed with proceeds from the previous asset disposals and capital release measures. For the cash flow, we have guided for the year that the operating cash flow after investments is expected to be positive in 2024. In big picture, we see that running our business profitably requires clearly less capital than before, and we aim to release capital significantly from our operations and going forward. Increase in capital employed was actually stopped after first half of the year 2024 -- sorry, 2023. During the second half of the year, we achieved positive trend downwards, despite the fact that completed apartments in Housing Finland tied up more capital, and this is the path we aim to continue on. Sale of the apartments from inventory will release capital and low construction volumes will slow down the amount of additional capital tied to apartments in upcoming quarters. Then moving on to the fourth topic of transformation program and capital release. We have now started the second year of our transformation program announced in February 2023. And I am pleased to note that the program has continued to progress faster than originally expected. As we communicated in February this year, with the actions taken by the end of 2023, we will gain annualized run rate cost savings of EUR 25 million, which will be fully realized by the end of '24. We have had good progress in all our transformation program initiatives. Besides the actions focusing strictly on our cost discipline, we have also made clear progress towards improving our productivity, project management, procurement and pricing. With the changes implemented during the program, we will be able to clearly improve our competitiveness in the long term. The transformation program also aims to improve capital efficiency. In June 2023, we estimated that as part of the program, the company had the potential to release approximately EUR 400 million in capital, excluding current assets, such as self-developed projects, unsold apartments and land plots. With the actions taken by the end of '23, YIT had released approximately EUR 100 million of the stated potential and the work continues on that front. In January, we announced that the YIT had agreed on the sale of the entire share capital of YIT Kalusto Oy, the company subsidiary, which provides in-house equipment services and it was sold to Renta. As a part of the arrangement, YIT and Renta signed a long-term cooperation agreement on the delivery of equipment services to YIT in Finland. The enterprise value of the transaction was EUR 37 million in total. The estimated net cash inflow from the arrangement was specified to approximately EUR 28 million, and YIT recorded an estimated gain on sale of approximately EUR 17 million. The gain on sale is reported in EBIT adjusting items and thereby, it has no effect on YIT's guidance for this year. The transaction improves our capital efficiency and strengthens our financial position. And with the sale of our equipment services and the cooperation agreement, we can strengthen our own competitiveness and further increase the efficiency by focusing more strongly on our core business and ensuring that we have access to comprehensive range of equipment and latest digital services. The transaction was closed on 29th of February. Well, we have covered the four topics. And as a conclusion, we continue to focus on improving our segment's profitability and completing our transformation. We have achieved results from the capital efficiency measures and the determined work continues on that. We are building on our talented professionals to deliver solutions to our customers, and the recently announced financial arrangement enables us to also utilize the opportunities opening at the market. And that covers my part. So we are ready to take some questions if you have.
Thank you, Tuomas. [Operator Instructions] I think we have first question from Simen.
Can you hear me now?
Yes, now.
Yes..
Yes. [indiscernible] model, which you announced -- I have two questions by the way. [indiscernible]
Simen, we can't hear you.
Well, I'll come back in 2 seconds.
Okay, we'll take..
Let's take Emil next and maybe if you can log in again, Simen or something. Emil, please go ahead.
So Emil Immonen from Carnegie. Just a couple of questions. You mentioned that you have chosen to not do any bundled deals for apartments. What's the reason behind that?
Yes. Thanks, Emil, for the question. So yes, as I mentioned, so we have been monitoring the market all the time, of course. And as I mentioned, so there is clearly capacity in the market. There is demand for bundled deals. And we are, of course, looking at our options and kind of searching for the best deal that we can do. And that is also what we have communicated before. So every time we want to kind of maximize also the shareholder value. And for up until now, so we haven't seen so attractive deal. So we haven't executed one yet. But there is clearly demand and there are discussions going on.
Okay. I see it. And then on the capital release program, you had a target of EUR 400 million. Is the Mall of Tripla and the Swedish operation were those included in the EUR 400 million?
Well, in a big picture, we stated that we have EUR 400 million potential back last summer. And all in all, it is including, of course, Tripla as well. Tripla is a big ticket item there, EUR 190 million in fair value. So that was definitely included. Then there were also several other topics, one of them being also the Swedish Infra business, but several others as well, what we are executing as we speak.
Okay. But -- so you don't expect to reach that EUR 400 million, then we could assume?
We clearly have the potential left as we have communicated. And we are -- let's put it this way that we have a program going on with several activities. And we are determined to execute on that one. The big question is, of course, the Tripla Mall, and that is something what we are all the time looking into is there demand? I can say that there is demand in the market. But of course, in that case, we want to kind of secure best possible deal. And if it's possible during this year, fine. But if it's not so, it will be then executed later on. But basically, in the strategic perspective, that will be exited at some point. It depends on the market situation and the demand for the asset, of course.
Okay. Simen, let's try your lot. Is it better now?
I can hear you. Can you hear me?
Yes.
Yes.
Good. My question -- I have two questions. One is on the buy-to-let model, which you have released in Finland. Just wondering about how you plan to finance this and the potential scope of how much capital that might be tied up in this buy-to-let setup?
But I missed your -- was it regarding...
Second campaign.
The second campaign, yes...
And how the financing sites?
Yes. So basically, our campaign now is -- it's kind of a pilot phase now. It is in a limited scope of apartments. And we are piloting the campaign now to see, is there a demand for this kind of a product or entry of owning our own apartment? It is funded by the general funding of the company. No problems there. Let's say that the magnitude is not that big at this moment that it would require any further funding. The interesting point is that how the market perceives this kind of a product, which we haven't actually seen in Finnish market so far. So if it would be kind of picking up heavily, so we need to plan the financing more carefully going forward.
Okay. Do you want to say anything about potential sizes which you're now offering in the market?
You mean apartment sizes?
Yes, no, the overall volume of the program. You say it's small, but are we talking single digits or double digits? Or...
We are definitely talking about double digits, and we are focusing more on the smaller apartments, which would be as -- we anticipate that would be kind of interest for the markets and for the potential homebuyers. Double-digit kind of [pieces] apartments.
Okay. My second question is in terms of the refinancing, which you announced. You communicated a bit on delays in the term loan. It was some EUR 30 million amortization and EUR 140 million down payment schedule for next year, if I recall correctly. Can you say something about how much this has been postponed and the new profile of those term loans?
Well, you are correct. So the new package includes the postponements of amortizations. We haven't disclosed any specifics on that. It is based on the kind of agreement that we have with the banks. And there is some optionality, of course, going forward as well. But what we are not talking about kind of a long-term postponements there from quarter-to-quarter and so on. So there is the amortization program still in place, but it is a little bit of postponed in the new package. That's all that we can disclose.
But we're talking quarters and not years, if I understand it correctly?
Exactly.
Great. Then Svante, please go ahead.
Hope you can hear me?
Yes.
Good. You had some postponements in completions in CEE in previous quarters. Should we -- can we expect any on that side or are those issues solved? Or could you have an upper bit on that?
Yes. Thank you, Svante, for the question. You're correct. So we had in Q3 and Q4 actually some postponements of commissioning processes in CEE countries. And that is kind of a -- the situation at the end of every quarter. This is regarding the commissioning process locally. It's not related on the kind of a completing of the construction. So we don't have any issues regarding our own schedules and completion of the apartments, but there are still some uncertainties always with the commissioning processes in these countries. It's a bit country-specific process, and there is a risk of kind of delays from one quarter to another and one year to another. But we don't -- this is kind of a normal commissioning process or practice in these countries. And we currently see no kind of a specific risk on that.
Okay. Then regarding the new financing agreements, are there any restrictions from the banks introduced on, for example, your Housing sales or start-ups? Is there any restrictions to start-ups going forward?
That's a good question. Thanks, Svante. No restrictions on sales or start-ups of the apartments. So basically, what we say here is that we all know that the market here in Finland has been -- especially here in Finland, quite weak, and the market will turn at some point. And then at that point, it's more kind of analyzing and forecasting the demand of consumers and then making the start-up decisions. So that's now more based on the demand. And earlier without the financing package, it would have been kind of a more driven by the available capital. But now I think we have -- as we have communicated, so we have a possibility to play also a bit offensive when the market demand picks up.
Thanks. And then we have next question from Anssi.
A couple of questions left. First about Tripla Mall. So you mentioned that it's possible that you will postpone the sale of this asset to 2025. So how should we think about the fair value of Tripla Mall if this is the case because, of course, we know that you're willing to sell this asset? And if there's no demand, I guess, that the fair value is too high. So would there be any other reason than, let's say, asking price to postpone this?
Thanks, Anssi, very good one. So the fair value of the Tripla Mall in our balance sheet is EUR 192 million currently. And the valuation, you have the basics in our -- we have disclosed the basics of the valuation model. And the valuation model is, of course, reviewed by the third party and you kind of -- the applied yield is also provided by third party. And the valuation model, it's also audited every quarter. So basically, that -- I think our valuation model is based on the market facts and reviewed model, and we continue to use that. But then again, if we think about Tripla as an asset, it's quite a big one here in Finland and also for international investors. And it is always in this kind of a situation. It's kind of the price would be as a result of the negotiation process. Of course, debating on the yield and other topics, NOIs and so on. So my point is that the selling price will be determined by a selling process more than a valuation model that we have in place because the market situation is so, let's say, untypical right now. So that's basically what we can say here. And what I also commented already is that we are looking our options. And of course, the price or anticipated price of the deal is, of course, one of the biggest kind of a criteria here. But there are others as well. For example, the capital, which is tied to the assets and the cost of that capital.
Okay. But if I continue on that, I think you mentioned that you know that there is demand for this asset. So basically, what's preventing you from selling it right now? So are there any kind of contractual elements here regarding or are there owners of this asset or something like that?
Yes. So there are no restrictions. We could execute the deal from that perspective. It's more a commercial issue. And as I mentioned, we have mentioned already earlier as well that there is demand. There are potential buyers in the market. But if -- this kind of a process takes a long time. It's a big asset. It's a big mall, requires quite a heavy selling process before it's completed. So that's basically the situation. And as a part of that kind of a process, the price is also determined as we all know.
Okay. And finally, about your these campaigns in Finland. So you mentioned that you have seen good activity. But I think you have mentioned this in previous calls as well, like 1 year ago that you're seeing good activity. But do you see that this activity is actually converting to sales right now? Or should we expect intensifying in these campaigns in the coming months?
Well, this is something that we are, of course -- We, of course, hope as well that the market picks up, and we are, by our own operations, by these campaigns, we want to stimulate the market, for sure. But also in our guidance, we already say that we expect the market to be weak during the first half of the year. So this means basically that we are not kind of a dependent on the market pickup during the first half of the year. There are certainly good signs in the air, but we don't see kind of a effect that would be kind of a pickup in the market during the Q1 or Q2. Let's see how the spring goes. Normally, it's March, April and May or April, May are very kind of active months in housing. We'll see how the seasonality evolves now going forward. But anyway, we, for sure, are ready to utilize the opportunities in the market. And that's why we have also, I think, two quite attractive campaigns going on at this time of the year.
Okay. And actually, one more from me. It's about your Business Premises. And if we exclude Tripla Mall, can you remind us about the other, let's say, bigger projects in this segment, like what is the situation with Tuultenristi and so on?
Yes. So we have two self-developed projects, bigger ones in Business Premises. One of them is Tuultenristi which is actually completed already. We are renting out the spaces right now. And when we have, let's say, high enough renting ratio there, so we will be selling the asset. It's -- we are planning to sell Tuultenristi during this year, for sure. It's dependent on the, of course, the rental interest towards the asset. So that's one thing. Then we have the Sky Office in Latvia -- sorry, in Lithuania, a bigger office building, which is in the same kind of a situation, near to completion, and we are planning to sell that during this year. We are renting it out already. So those are the two ones, and we are not disclosing the value of those two. But of course, they are in Business Premises' balance sheet, significant ones.
Great. Simen, did you have a follow-up question?
Yes, I do. It's on the Infra segment. Hopefully, you can hear me this time.
Yes.
There has been a few light rail contracts out in the market the last 6 years, which all has gone to competitors of YIT. This has historically been orders you have done well with in the past, but now we have lost two large projects as I'm aware of in [indiscernible] there's two more coming. But can you give any flavoring on the competition landscape in the market, et cetera? And how you look at the recent contracts being awarded?
Yes, -- very good question. We have been actually quite successful in railroad projects. For example, in Tampere, we have constructed every part of the Tampere tram here, and we have extremely good references from there. We have -- you're right, we have now lost two competitions or tendering processes in light railroads or trams. We see that we definitely have competitiveness on that sector still. And there are going to be tender processes, for example, in Vantaa and Helsinki light tramways. And we are targeting to kind of win in those kind of tendering processes going forward. We think that we are definitely competitive in the market still.
Okay. Has it -- was it price that was the main difference? Or has it been on the criterias in terms of the orders you lost?
Well, probably, I'm not commenting any specific projects, but as we all know that price is always one factor there. Usually, the weight of the price as a decision criteria is something like 60% -- 40% to 60%. In most of our cases where we have been active, we have received quite a high quality points, in general, I can argue. And then in certain projects, there has been quite a tough price competition. So even though with the lower quality points with the low price, you can win this kind of a tendering process. And we are not willing to go to that direction. So we are focusing on the expertise and kind of the quality and our references. And for example, that's not in Infra, but I mentioned here in this call also a nice win of -- in Meilahti Pharmacy and central kitchen and so on. So we had clearly highest price but also clearly highest quality points. And that's the sweet spot we are aiming at. Definitely, there are competition to market. And that's good for us, everybody. So I don't see that as a big issue as such.
Great. And then Markku, please go ahead.
Regarding the Housing market, I'm just trying to understand, what is like the main difference between the CEE countries and Finland because the demand has already picked up in the CEE countries for quite some time now? And I would assume that like the higher interest rate environment is affecting those countries as well. So other apartment prices like lower compared to the overall income level of the people in those countries? Or what is the main difference or driver why these CEE countries are performing better than Finland at the moment?
Yes. Thanks, Markku. This is a very good question as well. We have -- as we said, so in Poland, for example, Poland has been the best-performing market during the last 2 years even though the market circumstances and the war in Ukraine and so on. So in Poland, the overall demand has been very high, and it's even increasing still. We see that very positive, and there are several factors behind. I think one is that the demand is so high because there are so many immigrants moving to the country. The second one is that there is a government support for buying a home regarding their interest rate -- mortgage rates. So that's also supporting the market. Then there are kind of a country-specific drivers behind. And in some of them, also the government support -- of course, in some form, government support, of course, supports the market. But then there are also kind of a -- for example, if we take Baltics. So the Latvian market is now also picking up. It was decreasing at, let's say, the last country in the Baltics was Latvia to decrease the market in the new situation. And now it's picking up again. Picking up again, and it's very good for us because we have some apartments to sell there. But then again, in Estonia and Lithuania, the housing demand has continued to be on a quite low level. Although for us, for example, the Estonian market is very, very small, but still -- so there are very country-specific kind of drivers behind the demand. It is related solely to the consumer demand and then, of course, the kind of amount of immigration and then the government support, which is country specific in this area. So very kind of challenging to give you a compelling answer to this because it's a country-specific. And for us, I think the main topic is that we are -- we run the businesses locally, country by country. We know the markets and the dynamics very well there locally. And we are very happy that 70% of our completions this year are in these countries and not in Finland.
Great. Are there any further questions? No, it seems that there are no further questions. So thank you all for excellent discussions. We will publish the first quarter results on the last of April, so talk to you then. Thanks and wish you a great rest of the day.
Thank you very much.
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