YIT Oyj (YIT) Earnings Call Transcript

Good morning, everyone, and welcome to YIT's Second Quarter 2024 Results Webcast. My name is Essi Nikitin, and I'm Heading the Investor Relations at YIT. Together with me here are our CEO, Heikki Vuorenmaa; and our CFO, Tuomas Makipeska. At this point, I will hand over to Heikki. Please go ahead.

Thank you, Essi, and welcome all to the webcast also from my behalf. We launched our transformation program 10th of February '23. At that time, we expected to reach our savings target by the end of '24. Today, I'm happy to announce that we have already implemented the measures needed to save EUR 40 million annually from our operations. The achievement does not mark the end of our effort. We continue to optimize our operational efficiency to identify further cost savings. Our profit for the second quarter was driven by Infrastructure, Business Premises, and Baltics and CEE performance as the Housing Finland remains affected by the muted market. Positive news from the Housing Finland is that, our apartment sales have been growing for the fifth quarter in a row, and the number of unsold apartments went down by 13% in 1 quarter. Our quarterly revenue declined to EUR 434 million, mainly due to onetime events in the Housing segment during the comparison period. Our adjusted operating profit decreased and was EUR 7 million for the quarter. Accelerated transformation savings also created anticipated onetime costs, that now took place during the second quarter and impacted our operating profit. Onetime costs amounted to a total of EUR 49 million, of which EUR 28 million associated with the transformation cost savings and the EUR 19 million was related to the closure of some historical projects in Sweden. One of the major cost items within the transformation costs is related to the use of our own premises. During the second quarter, we decided to partially release our leased headquarter premises for sublease to increase the efficiency of premises used. This impacted the program costs by EUR 20 million. Such one-off costs are naturally a burden within a quarter, yet will improve company performance going forward. Let's take a closer look at our operating engine and 4 cylinders before diving deeper into our individual businesses. As mentioned, revenue from the Housing sales in Finland declined by over 50% and the profitability decreased EUR 8 million compared to the previous year. On the other hand, our CEE and Baltic operations continued stable performance. Also, a low number of completions impacted revenue and profitability. Our Infrastructure segment significantly increased its profitability, achieving an adjusted operating profit of over 6% for the quarter. Business Premises continued to improve its underlying operational performance and maintained good project control of the business. Let's move now to individual businesses and start from the Housing Finland. As a result of increased apartment sales, number of unsold apartments decreased to 867 units at the end of June. We see this now as a trend going forward and the highest number of unsold apartments in Finland is behind us. Order book is at EUR 600 million, impacted by the low amount of start-ups and investor demand. Result for the period was negative EUR 6 million and we continue to accelerate actions and mitigate our operative costs to minimize losses during coming quarters. On this picture, we have included all the apartment completions to the Finnish market. So this is not only YIT completions or YIT production. The picture remains same as in the previous quarter. We do not observe new start-ups in Finland by housing market players. Supply to the market this year is substantially lower than last year, and '25, the supply will be exceptionally low. Total number of completions are approximately 1,500 apartments for the full year of '25. However, if we exclude already sold and special purpose apartments, true supply will be something between 800 to 900 units in '25 to the Finnish market. So we can say with a reasonable confidence that we are going to see supply shortages during '25, which may lead to increase in pricing. Our plan for a while has been to use our inventory as a buffer to balance the demand and supply on this market cycle. As we sell now from our inventory, our unsold inventory declined by 13% or 133 units during 1 quarter. If we use the second quarter sales base as a proxy for analysis, our stock of unsold apartments in Finland will last until end of third quarter '25. Our stock remains well balanced and located in the major university cities across the country. Some regional shortages are already present. As for example, in Jyvaskyla, we have only 1 unsold apartment, and in Turku, some 20 units. We see our inventory at the moment valuable asset as the pace and timing of the market recovery is still unclear. Lets then move to Housing in Baltics and CEE countries. The second quarter was relatively uneventful. Key KPIs are on the right track and business is progressing according to plan. Our capital employed remains under control, even though we added some more capital to our plot reserves during the quarter. However, we do see the potential for further releasing the capital through increased production and the sales over that period of time. Number of unsold apartments inventory declined, order book is healthy, and our rolling 12 months' profitability is up -- is at 14%. During this year, completions of 900 apartments will take place during the second half of the year. It will positively then contribute to the revenue and profit on those quarters. Then to the start-ups. During the second quarter, we started a total of 186 apartments, all in the CEE countries. It is a bit less than our quarterly sales. However, on the rolling 12 months basis, we are well balanced between the new starts and sales. In Finland, we have not started any consumer projects during this year. However, we have today 11 projects on the pre-marketing, another 29 ready to start as the timing is right. We have a strong land bank and secured financial position. So the decision is on our own hands to analyze right timing against our internal start-up criteria. What is the optimum to do the start-ups in Finland. On our production side, we have 3,000 apartments under construction. It is 30% from the peak volumes, what we have seen in years '20 to '21. It's also 50% less compared to the same situation a year ago. So we can say that we have really adjusted our production to meet the market conditions in Finland. The sales rates have remained on a good level for the consumer apartments. And actually, on the same level for the past 3 quarters, while the lower portion of investor sales continues to impact the overall number. Operatively, production runs well and we are able to enjoy already lower construction costs and so the lead times on our construction sites. Then to the completions more in detail. We originally planned to complete approximately 250 apartments in CEE during the second quarter. However, we had a total of 100 apartment project completions shifted to early July in CEE, which postponed both revenue and profit from the second quarter. Total completions during the quarter was 196 units. Now, we expect that 900 apartments will be completed in the Baltics and CEE during the second half of the year and approximately 250 in Finland. Then we move to the sales. As mentioned, we are really pleased that our segment, consumer sales, in Finland increased for the fifth consecutive quarter and were 154 units during the quarter. While the absolute number is still modest, the trend and the market sentiment is more positive than a year ago. Our campaigns, 2% 5-year interest rate cap on mortgage, and rent your own home have been successful. We have sold approximately 100 units through these campaigns by now. Sales reservations are on a good level and we are pleased with certain project pre-marketing reservations in Finland, which is a signal of trust from consumers towards YIT. In addition, we see that the private investors are back on the market and we have done small bundle deals with the private investors during the year. Overall, segment sales reached 350 units and CEE clear improvement came from the sales in Czech Republic during the quarter. Then we look on our joint venture portfolio. We are also operating in the Baltics and CEE through these joint venture structures. It is a part of our operating model to scale up the business and tie up less capital during the construction period. Apartment sales to market from joint ventures increased clearly compared to the previous year and amounted total of 84 units during the second quarter. During the quarter, we completed 135 units and estimate that, on the second half of the year, completions will be additional 200 units within those joint venture structures. Number of unsold completed apartments declined to 204 units and is on a healthy level. Capacity of this joint venture enables YIT to construct over 2,000 new homes in the Baltics and CEE countries, and we are very pleased with the ongoing cooperation with our partners. Then it's time to move to other segments and start from the Infra segment. In past 12 months, we have structured the Infra balance sheet through operative changes, business divestments, ramp down of our operations in Sweden, and more. Now, we have reduced over EUR 70 million capital employed from the operations year-on-year base. At the same time, we have improved the operative performance of the segment and reached our minimum target for the rolling 12 months adjusted operating profit. Our order book is strong and it provides work for following 24 months. All in all, Infra segment is now in a good place to see growth and further improve operational efficiencies. Business Premises is on the same journey as our Infra segment has been. Our plan is relatively simple, to reach negative capital employed with excellent order book, and through operational efficiencies reach profitability that will clearly exceed the minimum threshold. While operational efficiencies and order book is more on our own hands, lighter balance sheet will be connected to the successful timing of the divestments which requires increasing activity in the retail transaction markets. Result for the second quarter was still modest, EUR 5 million or 2.9%. However, we see that the segment is progressing according to the plan and underlying project execution is continuously improving. Then before handing over to our CFO, Tuomas Makipeska, I will go through our market outlook. We are not making changes to our housing market outlook in Finland yet. Yes, we see that the activity on the secondary market is picking up and the pricing levels increasing. Additionally, we also observe consumer sentiment and intentions to buy apartment improving, interest towards the Housing loans increasing, and shortening of the average marketing times. On the primary market, home buyers are on the market and making great deals for their new homes at the moment. We have also seen private investors returning to the market and buying a small bundle deals during the first half of the year. However, uncertainty continues high and the market recovery may still take more time than anticipated. Therefore, we remain conservative with our view and state that the market still remains weak and may not materially improve during '24. On the Baltic countries, housing market is gradually improving. Estonia remains weak. In the CEE countries, we operate in the normal housing market. Our sales on all 3 countries are on a good level, and some projects, our price lists are already increased during the project execution. Real estate market for us remains normal. In Baltics, we have had successes in tendering, especially in Lithuania. In Finland, market activity remains normal from our viewpoint. Infrastructure market in Finland is normal, both in public and private sector. Large amount of tenders will be decided during this year. So that's all from our market environment, and now it's time to hand over to our CFO, Tuomas, to go through numbers in more detail.

Thank you, Heikki. From financial perspective, the Q2 was a stable continuum after a positive start for the year in Q1. Especially, we continued on the right track to improve our financial position. The highlight of the quarter was the finalization of the planned multistep financing process and significantly improved maturity profile of the debt portfolio. Overall, the underlying profitability of the group was driven by the CEE operations and the contracting segments, the Infrastructure, and Business Premises. The housing market in Finland continued to challenge us and burned our revenues and profits in Housing segment as already described. We made progress in releasing capital from the operations and our capital employed decreased clearly. Consequently, we decreased the net debt by some EUR 80 million from the comparison period. The cash flow was slightly negative, mainly due to the payments of plots that have been acquired earlier. Let's have a closer look at the financials, focusing first on the capital employed development. On group level, we have released almost EUR 140 million of capital during the last 4 quarters by robust execution of the capital release program. In Housing Finland, we have been able to keep capital employed stable during the last 12 months due to the measures taken in the operations. Sale of the apartments from inventory and low construction volumes will further release capital in upcoming quarters. In Housing Baltics and CEE, the capital employed increased slightly due to the land bank and inventory development. However, we have released capital altogether some EUR 30 million during the last 12 months by conducting more capital-efficient ways of doing business. Majority of the improvement from the comparison period is a result of the formed joint ventures to develop large area projects together with RSJ Investments. This allows us to reach higher volumes profitably and tying less capital. In Infrastructure, we now operate with negative capital employed and positive cash flow, which contributes to group financials very positively. In total, over EUR 70 million of capital have been released during the last 12 months, demonstrating solid performance in capital release measures. Majority of the impact is attributable to the sale of equipment business and the ramp down of the operations in Sweden. Also, the negative capital employed have further increased in the operations in Finland. Finally, in Business Premises, we are on a positive trend and some EUR 60 million of capital has been released during the last 12 months. Largest single item remaining in the balance sheet is obviously the Tripla Mall. The execution of the capital release actions continues to improve the return on capital employed of YIT. Overall, we will be able to run our business profitably with clearly less capital than before. Let's move on to the cash flow development. Operationally, cash flow was positive in the period and continues on the right track. However, the operating cash flow after investments includes EUR 39 million payments of plots in CEE countries that have been acquired before 2024. These plots strengthen our land bank in CEE countries and provides basis for profitable growth in these markets in future. The last 12 months' cash flow was EUR 59 million positive and measures to improve net working capital efficiency have yielded results. As we have stated in our guidance for 2024, the operating cash flow after investments is expected to be positive. If we then compare our key assets to the net interest-bearing debt. Our underlying asset base continues to be very strong and amounts nearly 2x the gross debt. We have a land bank of over EUR 830 million to serve as a platform for future operations and profits. Inventory assets under production decreased to EUR 314 million, reflecting the declining number of apartments under construction. Completed apartments and real estate in our inventory decreased to EUR 417 million due to the increased sales and lower number of apartments completions in Finland. Investments were worth of EUR 279 million. The gross debt decreased by over EUR 130 million from the end of March 2024. This is due to the term loan and RCF amortizations, as well as lower amount of commercial papers. Approximately EUR 500 million of our gross debt is related to the IFRS 16 lease liabilities, including leased plots and long maturity housing company loans. The adjusted net debt amounted to EUR 290 million. So our asset base is nearly 2x the gross debt and balance of the debt structure has improved. Going forward, YIT's target is to operate with clearly less debt and utilize mainly project-based loans. Next, a few words about the financing situation of the company. We have now completed a comprehensive multistep financing process, which included several actions and transactions during the last couple of quarters. By that, we are currently in a stable position in our financing with long maturities in the instruments in use. By issuing the new EUR 100 million green bond in June, we effectively refinanced the matured bond which was redeemed in April this year. Already in Q1, we executed this -- when we executed the substantial financing arrangement, we committed to amortize EUR 40 million of term loans and cancel EUR 50 million of the revolving credit facility in use. Consequently, we have now reduced the gross debt by EUR 130 million compared to the end of March this year as already mentioned. As a result, our debt portfolio is now more in balance between different instruments and more importantly, the maturities of financing instruments are significantly extended. This enables us to focus in improving our financial performance and optimize timing of certain capital release measures to maximize shareholder value. We are very satisfied to have reached such a position at this phase of the cycle. We would like to thank our owners and equity investors, as well as debt investors and financing institutions who contributed to the successfully finalized financing process. Next, a glance on the balance sheet. The equity ratio of the company has remained stable at 33%. And regarding the interest-bearing debt, we are on downward trend and on EUR 80 million lower level compared to the last year's Q2, even though there was a slight increase from the end of March 2024 due to the lower cash and cash equivalents. Gearing increased from Q1 due to the increased net debt and lowered equity due to the negative net result in Q2. However, gearing decreased clearly from Q2 last year due to the favorable net debt development. Overall, YIT's target is to deleverage balance sheet and to return to below 50% gearing level going forward. In maturity structure of the interest-bearing debt, having only minor amortizations to be performed this and next year provides a stability and possibility to focus on improving the profitability of the company as already mentioned. One of the highlights in the quarter was definitely the transformation program going on in the company. The program was launched in February '23 and the rigorous execution of it has been a priority in the company. We have created tangible benefits, both operationally and financially. The run rate cost savings target of EUR 40 million for the program was achieved ahead of schedule by the end of June. Transformation-related costs has been estimated to be between EUR 50 million to EUR 70 million in total, of which EUR 51 million was realized by the end of Q2. A large item in the costs were related to the decision to partially release the leased headquarter premises for sublease to improve efficiency of the premises used. Also, the capital release stream of the program has progressed favorably. With the actions taken by the end of June, we have released approximately EUR 140 million of capital. We are determined to continue the transformation program to gain further efficiencies and other benefits during the second half of the year. Heikki, would you like to elaborate from your perspective of the program as well?

Thank you, Tuomas. And when we talk about our transformation program, it is truly a holistic transformation. Of course, we are providing the insights to the numbers, cost-saving numbers, as well as how much we have been releasing capital. But what we talk here is a holistic change, the way we are changing our operating model structure and building new capabilities. And if I then think about those capabilities, what we have already implemented during the program life cycle, almost 18 months that we have been now running. So we have been significantly upskilling our procurement functions, our project management capabilities, which is already visible when we talk about the segment performance. Our commercial excellence and so on and so forth. And the -- I think when we are truly addressing a transformation, there is a lot to do with the company culture and how do we, as a YIT employee, see that? Where is our -- what the good looks like? What is the right ambition level and what do we really want to achieve? And we have been redefining that together. And I'm very pleased also about the progress of changing the company culture and bringing those great elements to our business that I know that the team is capable to do. And to say, here, we have achieved this ahead of schedule, but this doesn't really mark the end of our efforts. We will continue to do this and eventually, we are transforming this transformation as a part of our continuous improvement where we are substantially still seeing potential to improve our operational efficiency and performance of the company.

Exactly. Thank you, Heikki. Moving on to the guidance. Our guidance remains intact. We expect group adjusted operating profit for continuing operations to be between EUR 20 million and EUR 60 million this year. The operating cash flow after investments is expected to be positive. However, we have made an elaboration in the outlook regarding the housing market in Finland as already described. The housing market is not expected to materially improve during the 2024. Rest of the outlook remains unchanged. So to summarize the finance section. We completed a comprehensive multistep financing process and reached a stable position with long maturities in our financing. This enables us to focus in improving our financial performance and optimize timing of certain capital release measures to maximize shareholder value. We will continue to execute the capital release plan as the top priority to improve cash flow and return on capital employed of YIT. We already achieved the set target for the transformation program, and are determined to continue the program to gain further efficiencies and other benefits during the second half of the year. This concludes my part, so handing over to you, Heikki.

Thank you, Tuomas. And now we have both covered here in great details our financial result, transformation programs, all the actions to improve that, what we have been doing on the financing side, and it is highly important to provide that frame and context where we are working as a company and -- but really important points that I want to take is -- on our greatest asset is our employees. And even during this type of market cycle, we have continued to invest in our people. We continue to provide trainee positions. We have been focusing on the safety, holistic well-being of our employees, our teams, so that we can enhance the company culture. The work and results are clearly important for us. For one hand, it's already for the sites where we have the construction activities ongoing, it's improving the way of working and the safetiness. But at the same time, as we have been providing training, for example, people that have been on temporary layoffs, we are able to ensure that we have talented professionals ready to come back to work as the timing is right to do the start-up, so that we have our team in place and we have everything ready as we are accelerating then the start-ups of housing projects in Finland as well. But now [ it's start ] to be the time to wrap up and recap our business priorities in the future before opening to potential questions. On the Housing segment, we remain focused to boost our sales throughout the operating countries and close deals with consumers. We believe there is a good opportunity to continue on an increasing trend and further increase our market share. Consumer start-ups in Finland will take place as the timing is right. We have a good level of pre-reservations on projects, and decision-making is on our own hands, how to proceed. Infra segment tendering is active and we see a lot of project opportunities for us on the market. We need to be prudent on our tendering and continue to seek operative efficiencies going forward to positively surprise our customers. Infra has already a strong and healthy order book and we see growth potential on this segment in the coming years. Business Premises is up to speed to improve operative performance. I'm pleased that we have, generally speaking, projects under control and net project deviations are turning to positive. Our order book healthiness is improving and we continue to focus on complex demanding projects that are suitable for our competencies. So all in all, we remain positive on future ahead of us. Our performance is supported by actions taken, competencies of our people, and successful progress of the transformation program. So moderator, now it's the time to open the line for potential questions. Thank you.

[Operator Instructions] The next question comes from Anssi Raussi from SEB.

A couple of questions from me and I start with the guidance. So what makes you so confident that you will actually reach a positive cash flow after investments this year? Like, is it relying on your business -- underlying business, or do you see something, let's say, extraordinary happening in H2?

Thank you, Anssi. I can take this one. So regarding the operating cash flow, so definitely the major source for the operating cash flow are our businesses. And as described in the presentation, 3 of the 4 so-called cylinders of our engine are working and providing cash flow. So definitely that's the major source for operating cash flow. And as mentioned, for example, the Infrastructure business is now operating on a positive cash flow with the negative capital employed, to give you an example. That's the major source. Then we will support our cash flow development by continuing the execution of the capital release program.

Okay. And another one is about your Infra business, as you mentioned, that one. Like, can you remind us about the schedule about or regarding the close down of the Infra business in Sweden? And what kind of gradual decline we are going to see? And also, if it's going to trigger any onetime costs or not?

Yes. So if -- generally speaking, if you look at our Infra now, what we have been doing part of the transformation is to really to peel the onion and show that where we are -- how well the Finnish operations are going. And at the same time, we decided to start the close down of the Swedish operations. And now, what we saw here, those onetime items were related to historical project closures. That project that has been taken quite a time ago. And therefore, we had the onetime profit impact there, not that much cash-related items. The volume of the Swedish Infra business is all the time going down and we have a very small amount of programs continuing there beyond this year. So the impact of that is getting less and less. What we are actually doing at the moment is that, we have a lot of our Finnish teams expatriates to operate those projects in Sweden to ensure that we are, first of all, keeping our commitments and that we have a good operational pace on those projects. And on that, we haven't seen actually major impact, even though we made the decision at the beginning of the year how the projects are going forward. So that's where we are standing. Of course, when you are closing the projects and ensuring that all the last sales and discussions have been completed, so this type of onetime items may happen and now those took place in the second quarter of the year.

The next question comes from Svante Krokfors from Nordea.

A couple of questions. Also a question regarding the guidance, specifically the EBIT guidance of EUR 20 million to EUR 60 million, which is unchanged. Could you elaborate a bit on the logic here as you basically downgraded the Q4 outlook for Housing Finland? Q4 has typically been an important quarter and obviously, you have completions in Finland also there. So should we interpret this as CEE -- Baltics and CEE, Infra, and Business Premises outlook is better for H2 than earlier?

Thank you, Svante, for the question. I can take this one. And first of all, obviously, the outlook and the guidance for this year are kind of tied together and corresponding to each other. A little bit of repeating what I already said regarding the cash flow. So 3 of the 4 cylinders in the engine are working, providing cash flow and profits as well. So that's 1 part of that. Also regarding the Finnish housing market, so as we say now that we don't expect the market to materially improve. So that's taking also into account in the guidance and in the range that we have provided.

Yes. If I continue -- a couple of -- Thanks, Svante. And a couple of words on the individual businesses. And now the market in Finland for housing market has been weak for quite some time. And it was a fifth consecutive quarter that we still increased our own sales. So it has a lot to do with our own actions that what we have been still capable to do even the market picture hasn't improved, campaigns and individual sales efforts. We also present in all the major cities, and therefore, there are city differences between kind of micro markets. And as discussed there, for example, Tampere and Turku demand picture is different than what we have in the capital region. However, the capital region in Finland is driven the largest amount of volume, which kind of represents the market as such. Then when we look at our Baltics and CEE. So the completions are tilted towards the second half of the year. On an Infra and Business Premises, we are very pleased with the trend. Business Premises has been impacted by the fair value changes on the balance sheet, but the project level execution has been there on the improving trend. And as you can see from the Finnish Infra, so it has been now trending already above our rolling 12 months target of 4% and it is a good place to further improve. So that is how do we see the businesses and the performance of those on this year.

Okay. Then a question regarding land plot investments worth EUR 39 million in Q2. It's very difficult for us to see what is coming up for the coming quarters or years when it comes to timing. I think you have disclosed the total amounts, but can you comment anything about potential commitments that you need to meet during the near future?

Yes. Thank you, Svante. Yes, as we described, so EUR 39 million of the cash flow was related to the payments of plots that were committed before this year in CEE countries. We will continue to invest in CEE countries with a slow pace going forward as well. But also, if you look at the kind of milestone payments of the committed plots, so we see kind of a stable way ahead. We don't anticipate any major payments of the already committed plots for the coming quarters.

And then on Housing, still the completion issues or postponements that you had in CEE, is it similar reasons as earlier?

Yes. It's not a construction project management related, it is timing of the documentation. And it was completed in the very early part of July. So that was a postponement -- the reason for the postponement.

And then looking at the housing and investor side, do you see any demand in the near future for the good start investor projects on the Housing side?

In Finland, if you look at, it is more likely to see the investor project demand to pick up '25. There is -- there are, I think, more projects that are today starting on this so-called governmental ARA projects that are -- that type of projects on the segment. I see that investors -- the individual investors are buying either one kind of individual apartments as a bundle deals. There is also an activity on the market where investors are buying already fully rented buildings and shifting between the portfolios. So we expect that it's more likely that those will take place in '25 than '24, the start-ups.

And the last question regarding your headquarters sublease, EUR 20 million impact. Could you -- at least I have missed that. I might have read the news a bit. I haven't seen that announced earlier. So could you elaborate a bit on what that includes?

And if I first talk about operational and Tuomas, if you take the numbers there. So -- but it was a part of our transformation program. We announced that we are also assessing the need of our -- use of our own premises and how much space we need. And if we look, our own headquarters invested somewhere in '90s and expanded there at the time when the company was significantly on different scale. So we now assessed how much we can release for a sub kind of -- the space for the subleasing purposes and operationally that was the change and it was done within the transformation program. And on the numbers side, if you Tuomas take on that one?