YIT Oyj (YIT) Earnings Call Transcript & Summary

Good morning. This is Ilkka Salonen from YIT.

Yes. Good morning, and welcome to YIT's Q1 presilent call. My name is Tommi Järvenpää. And as Ilkka said he is here with me today as well. We are living currently exceptional times. And next, Ilkka will give an update on our business in Q1 and discuss the impacts of corona situation to our business as well. And after the introduction from Ilkka, we will also then take questions from you. So go ahead, Ilkka.

Thank you, Tommi. Yes, I have a traditional outlook or the review of the operations as those are going, but then to other topics, one is the coronavirus and the other one is about the -- just a few words about the transaction of the Nordic paving and mineral aggregates transaction. But if we start from the operations, the Q1 has went operationally as planned. In Housing Finland, we see that the demand for apartments has been in a good level. Although the last couple of weeks have been somehow lower levels than the previous 2.5 months. And this is related to the Finnish and CEE operations. And none of the sites have been closed in our operations. Housing Russia, pretty much as planned. No exceptions over there. But of course, there are the depreciation for ruble has had an impact for our operations. In Business Premises side, favorable order intakes. If you look at then the tenants in Tripla offices, it's almost fully rented. But of course, the coronavirus have had an impact for Tripla as well. If we look at the volumes about the customers over there, it doesn't have so much impact for the Q1, but because it has the impact for the operations and it is -- benefits that the tenants are succeeding. So we are thinking different opportunities on that side with the other owners as well. In Infra business over there, also pretty much as planned. There has been one advantage during this winter time as the -- we didn't have winter in the capital area, almost at all, which means that we have been able to have more activities in the outdoor projects than we were planned and what traditionally is during the first 3 months. That was a short update of the continuing operations. Then if we look at the discontinuing operations, which is the paving Nordic and -- as well as the mineral aggregate side, of course, in that business area, there doesn't have too much operations of Q1, but it has went as planned, say, the positive news on that side is that in Finland, which is the biggest market, actually the state have bigger budget for this year, clearly bigger bulk budget for this year for paving operations than the previous couple of years. That was a short update for the Q1. Then if we look at the coronavirus and impact for YIT, we can say that it's coming from 3 areas. Mainly in our case, it's about manpower in the sites, it means the employee's sick leaves, which ends up sometimes to the closing of the sites. And also, it has an impact for the availability of employees, especially non-Finnish employees. So far, we haven't closed any of our sites the -- due to those reasons. And of course, the major question in -- if we look at -- to the future is that how our sites are able to continue their operations. If the situation continues as today, there is no major impacts. The more sites we have to close of course the more impact it will have for the result. But those are pretty much driven by the -- let's say, the binary risks, which are partly related for the political decisions also. And of course, it has an impact for our result. If we have to close, it means postponements of results due to reason that the completions will be postponed in the owned-development side and also on the cash flow side, in the tendering part of the business where after the closing, there is no in cash flow, but there are 1 or 2 months invoices to paid. So that is clearly the -- one of the biggest uncertainty or risk in our side. What comes to the situation today, we have had 2 employees who are suspected to have -- suspected have the coronavirus, but now take granted results. And what comes to the employees, basically the non-Finnish employees, even the borders are closed, actually very few non-Finnish employees from our sites left the sites. So -- and of course, that is reflecting also that our sites are going on. It means that, that risk hasn't been -- or hasn't materialized almost at all. Of course, the more this situation continues, the more risks are in both of those areas. I mean the availability of employees and the employee sick leaves. Then the other part is the material side. This business is pretty much local, but there are some materials which are coming abroad. Those ones are, for example, elevators, sanitary equipment and materials. And in those areas, yes, there has been closing of the factories of our suppliers, but we have been able to mitigate those ones. And so far, we haven't been forced to close any sites, neither from the material reasons. And then the third one, which is an uncertainty as well, is what comes to the market sentiment, how it will be affected due to coronavirus. Of course, over there, it depends on how long this will last and how the economies are surviving from this part. Over there, however, if we compare that situation what we have today compared to the 2018 (sic) [ 2008 ] financial crisis, we have less, let's say, ready unsold apartments. And the market is more diversified today than it used to be still 10 years ago. That means that there are real estate funds, rental funds, there are more segments in the market than there used to be still about 10 years ago. How we have been prepared for that one? I mean if we look at in the short term and how we are steering this one. The top management is heavily involved. We have special teams who are not doing at the moment anything else except this, mitigating this risk and creating the full insight how our people are doing, meaning that what is the situation in the health of our employees, our operations are running. Then if we look at how we have prepared for this one in the financial point of view. We have to say that we entered to the corona crisis nicely prepared measured in balance sheet and finance and liquidity. Actually, this is the first time when YIT is facing a turbulence time with a healthy financial position. And in addition, that's our reality today. And in addition, the closing of the Nordic paving and mineral aggregates business with Peab actually tomorrow that will further strengthen our financial position in the absolute term and also in the relative terms in the construction business. If you look at our -- also preparing about the liquidity, we've refinanced our bilateral EUR 30 million loan to EUR 50 million, already in April, when it was expired in the beginning of -- in March, when it was expired in the beginning of the April initially. And we have also raised more commercial papers, say, some EUR 50 million to EUR 60 million than in a normal situation just to be prepared that the liquidity -- liquidity will not be the bottleneck. And in addition of that one, we have the revolving credit facility, about EUR 300 million unused. That was shortly about the coronavirus and then just a few points from the transaction with Peab, I mean, the Nordic paving and mineral aggregates businesses. We've got the approval from the EU just last Thursday -- Friday, and it is planned to be finalized tomorrow. And if I look at a little bit to the mirror and above the fundamentals from both parties, I mean, from YIT. And they haven't changed at all, even the turbulent market situation outside of the companies. And as we announced last summer on July 4, that time the impact for the -- of the transaction for YIT is in the cash flow part. It's more than -- clearly more than EUR 250 million. Of course, it's good to mention that we have run the business for the first 3 months, and the first 3 months are usually very negative in paving business. So that's the reason why the cash flow is somehow higher than it was previously announced. And then the capital gain is above EUR 40 million. The enterprise value was EUR 280 million. So that will have a clear positive impact for our balance sheet matrices, that is basically in the liquidity side, its impact for the net debt is clearly positive. That was shortly about the instructions, the last word, we think, which I won't say about the -- let's say, the big picture is that, yes, the coronavirus is impacting for our business. If you look at the external word, it's -- it is somehow more difficult to forecast in this time, the year as the uncertainties are all driven by the -- not about the financial metrics, but about political decisions. But that was shortly my update for where we are in the Q1, and how we see the coronavirus and just to catch up about the Peab transacts.

All right. Thanks, Ilkka. And now we are ready for the questions. We don't have operator in the call today. So I would just like to ask you to step up and ask a question if you have one, and let's try to do it in an organized way.

Can...

Yes?

Can I ask questions?

Yes, sure.

This is Simen from DNB Markets. I have a few questions. First of all, the -- just in terms of paving, will that be impacted by the [ Nunes ] situation at all or will that just be passed on as problems to pay out? And the second one is in terms of sales, you said in Finland, it's slowed a bit down at the end of the quarter, especially the last few weeks. We all know why. But could you give us some figures on like how much is actually have changed in terms of sales? Are we seeing like 50% drops, 70% drop in sales versus what would be normal levels? That would be a great help to understand how big the impact is of the coronavirus.

If we start with transaction of paving transaction, and you were asking about the [ Nunes ]. Actually, when I say that this is good for both parties and the fundamentals haven't changed. One benefit what our paving operations has is that we started to -- previously, all the Nordic players were pretty much supplied by [ Nunes ]. We started to build up an alternative sourcing -- alternatives in about 3 to 4 years ago. And today, we have a depot in Pori and smaller in Uleåborg, but for YIT operations, there is no impact of [ Nunes ], whatever happens over there. We can get the supply, either from the -- with the vessels, from the European market or with the trains from Reso. And then what comes to sales inside in Finland, of course, the things have been pretty much in remote, more different for last 2 weeks. And the drop over there what comes to the sales, yes, it is clear. I cannot say the exact figures. And of course, it is somehow volatile, I wouldn't -- I would wait for a couple of weeks till that we would stay -- we would see that where it will stay. But the positive news are that there are sales. I would say that compared to the situation, I'm -- I see that it could be clearly worse and what is probably more important is that there is also activities in the reserving apartments for the new houses.

And have you had any supply disruptancies like getting shipment of concrete from Portugal? I know a lot of construction companies have been having problems getting things shipped into local markets?

No.

Anyone else?

It's Anssi...

It's Robin here from -- okay, please Anssi, go ahead, I will continue after you.

Thank you, Robin. It won't take too much -- I -- too much time. I have only one question. You highlighted there that you -- the construction sites are continuing as planned or continuing without disruption, but are there any delays and have the efficiency in the construction sites declined? And thus, will this have some kind of impact to your Q1, Q2, potentially even Q3 results going forward?

I would say that not reported, not seen the working in the construction site is today pretty much the same than it used to be. So it's more a question that how the material supply is coming to the site, and there hasn't been any disturbance over there either. So as far as we don't need to close the site, they are working pretty much as planned.

Thanks, Anssi. And then Robin.

A few questions. Do you expect significant political support now for new Infra projects and maybe changing some of the housing projects to this kind of other projects that has at least happened in the past?

Based on the, let's say, public information as well as the -- all the information which is available. It's quite clear that after the first talk of this coronavirus, the states are thinking that how they can improve the economic situation. And usually, in those cases at least there are construction as well as the Infra. The Infra projects are usually those ones where -- among the others, where the states are focusing on. And of course, there, the question is that which are those works what you can start quite rapidly, meaning that the total new projects usually takes a number of quarters before they really start to have an impact for the local economy because you have to plan first. But there are already quite good number of big projects going on, but there are also quite many potential ones which could start relatively reasonable time frame if the decisions are made. But I would say that first we have to get the emergency situation to stabilize. I mean, the first one is to get the -- to keep people healthy and to run the exceptional times and after that, but quite true and after that, actually the state is expected to invest for the society and then it usually means also new projects for the Infra as well as for the construction side, whatever vehicle they are able to use.

All right. Then you already commented a bit about your cash flow, but could you go through, it would be very helpful, per business line now how you see the implications from the current situation affecting the cash flow?

I would say the -- in the big picture, pretty much the same than last year, meaning that the last quarter is clearly the biggest one. There is the -- in the initial plans, the biggest cash flow of the Q1 is usually the time when the cash flow is in negative. So the pattern for the full year, in a situation where we are at the moment is pretty much the same than last year. Then if we go for closing of the size, and in the end of, let's say, to the lockdown situation, then it has an impact in the cash flow a little bit different way. In the tendering business, yes, we get -- the inflow is stopping, but the negative working capital is melting as the payments has to be paid. That has a negative impact for the cash flow side. And then in the housing business, when the last payments are always -- when you actually completed and the customer gets the apartments, the postponements on those ones, of course, has an impact for the cash in. So it has a negative cash flow impact for us. But I would say that based on the balance sheet, what we had and the liquidity and boosted by the deal what we are closing tomorrow with Peab gives quite good confidence for CFO for the time being.

All right. Then maybe one final question from me. Have you commented what the share of foreign employees is for you?

No. We haven't.

Okay. But it shouldn't perhaps deviate much from the overall situation in Finland or in the capital region?

Not too much, not too much.

All right. Anyone else?

It's Olli from Inderes. I have one question about your guidance. A lot of companies have adjusted guidance this year. But for now, at least, you're sticking to yours. You must have been going through it and thinking different scenarios behind it. What is kind of the main scenario you are expecting at the moment for the remainder of the year, how this will play out?

There are -- yes, you're right that there are different scenarios and the challenge what comes to the situation is, of course, that when you have the binary risk there, it's difficult to make the -- let's say, the standard deviations and look at those ones. If you look at that, we are -- if we are in the situation where the sites are running mostly as planned. And if you look at our revenue recognition type where the -- in the owned development, they will be recognized when the apartments have been completed. And on the other hand, in the tendering side, a big part of the projects are actually somehow related for the state operations. So it means that, that is one scenario. Then one scenario is that so-called U-curve that we -- everything more or less slow down and it stays there for a number of quarters before actually the economies are starting to recover that has a different end result. And then the most pessimistic is probably the L-curve, which means that the economies are going heavily down and stays there for quite a long time and the recovery will be slow. But if we look at where our guidance at the moment is, it is based on the present situation where we see that the state -- and it's good to remind that our Finnish operations is about 70% of our businesses that the state has done its actions, they will have an impact -- the positive impact for the situation, meaning that there will not be a lockdown or clearly more heavily actions to the operations or the business environment than what we have seen. Somehow, some actions there will -- for sure, will be. But of course, if the situation is that as we see today in Spain, that all the economical activities are shutdown at least for 2 weeks, for sure, it's a different scenario. But let's say the challenge at the moment is that if we look at the -- be honest is that the external world and how it will develop. It's not only econometrical models, but it also political decisions, which are quite difficult to forecast or -- yes, to forecast those ones. And they are binary risks, which are also quite difficult, as you know.

Any further questions?

This is Pauli Lohi from Nordea. I have one question regarding fair value changes. Are you going to reevaluate more of Tripla on quarterly basis? And does that impact on your adjusted EBIT?

Easy answers, yes, we will. And if there are changes, yes, it will have an impact for adjusted EBIT.

And then regarding the housing joint ventures there won't be any favorable changes because you don't own the majority, right?

The housing joint ventures, you mean FinCap and the others?

Yes.

If there will be -- yes, there are impacts for the fair valuation point of view. But I would say that those are not remarkable ones, of course, the biggest fair valuation in our cases is in Tripla.

Any further questions?

It's Anssi again. A couple of more follow-ups from my side. If I remember correctly, your liquidity position was somewhere slightly above EUR 800 million at the end of Q4. So could you give us some kind of indication where it will be after the payment transaction, i.e., 1st of April?

If you add the amount of -- we announced last July and add for that one about say, normal paving negative cash flow from Q1, it's about EUR 30 million. And then you add the IFRS 16 leasing agreements, you end up to quite close to EUR 300 million. Net debt decreased in -- on April 1. It will not be seen in Q1 figures, but it will be seen in Q2 figures.

And the overall liquidity, all the schemes that you have in place, cash plus commercial papers plus term loan, et cetera?

Yes. It's -- if we look at the liquidity point of view, we have the -- in cash, we have somehow more than, let's say, in the normal level even before the transaction has been fulfilled. Then we have revolving credit facilities about EUR 300 million. And then we get this paving deal, and we still have room in the commercial paper side. And if you look at from the gearing point of view, yes, the paving deal has an impact for that one as well. So -- and also, if you look at that, we were able to refinance our bilateral quite nicely and quite easily last week that is also helping our liquidity position.

And could you comment a little bit on the business split? Because the development business is significant. But on a running rate basis, how much do you have typical contracting business in terms of sales and EBIT, kind of, roughly so that we get an idea of what's the kind of recurring business like and which part is then 100% development driven?

[ So it's ] to reflect for the year 2018. Those figures are public ones and openly presented, and it hasn't changed too much from there. In the net sales side, a little bit more than EUR 1 billion tendering business from the, let's say, continuing operations. And then over there, you should make some 4% EBIT. Of course, at the moment, we are not over there but are going towards that one.

All right, any further questions? Looks that we have no further questions. So I would like to thank you for your participation. And then I guess we'll talk again on the April 30, the latest when we come out with the Q1 results. Thanks.

Thanks.