YIT Oyj (YIT) Earnings Call Transcript & Summary

Good morning, and welcome to YIT's 2020 Earnings Webcast. My name is Tommi Järvenpää, I'm the Head of YIT's Investor Relations. With me here today are also our Interim CEO, Antti Inkilä; and CFO, Ilkka Salonen. We will first go through the presentation followed by Q&A. At this point, I would like to hand over to our Interim CEO. Antti, please go ahead.

Thank you, Tommi, and good morning to everyone. I will start with the safety, as it is in the core of our operations. In 2020, our safety performance improved. The group's rolling 12-month combined lost time injury frequency amounted to 9.8. And in 2019, the same figure was in the level of 10.7. It's good to note that this figure reflects our new reporting method as since the beginning of 2020, we renewed our safety report in practices, encompassing both own personnel and subcontractors. The aim is to lead the safety development of the industry in a more comprehensive direction. Although we made progress, it's clear that more work is needed to achieve a step change in our safety performance, and this is a key focus to our management also in 2021. We made great progress in several areas in 2020. Our measures to minimize the impact of COVID-19 pandemic were successful. We kept our construction sites open, with only minor disturbances. And we completed project according to plans. We also take a giant leap in digital sales in housing segments which helped us to achieve good sales results. Our strategy execution remained determined in 2020 and we continued to focus on the core of our strategy: sustainable urban development. We streamlined our business portfolio by completing the sale of Nordic paving and mineral aggregates businesses and made decision to close down our operations in Norway. Our balance sheet was strengthened, and our full year operating cash flow after investment was solid at more than EUR 300 million. Furthermore, the target to halve the CO2 emission of our own operations by 2030 got an excellent start in 2020 with 21% decrease. We have speeded up work in several sustainability areas, including the prevention of the, pre-economic and improving occupational safety. Looking ahead, we had a solid portfolio of projects. We have won, but which have not yet been added to our order book. We also have a strong order reserve and competent personnel. And we will focus more to select projects in which we can utilize our capabilities and strengths in the best way. However, financially, our performance was very disappointing in 2020. Our adjusted operating profit amounted to EUR 85 million, and it's clearly lower than EUR 165 million during the year before. The biggest delta comes from fair value changes. Compared to previous year, there was a negative EUR 94 million bridge impact for fair value changes, mainly related to the Mall of Tripla investment. The negative fair value change of EUR 60 million in the fourth quarter relates to increased market yields caused by the COVID-19 pandemic. On the contrary, during 2019, there was a significant positive fair value change related to Mall of Tripla. Operationally, our financial performance in 2020 was mixed. On a positive note, results in housing segments were very strong. Market situation was favorable for us during the second half of the year, but more importantly is that we have also been able to increase our market share. Our hard work to develop relationship with customers and enhance digital tools has now started to show tangible results. Customer feedback has been excellent throughout the year, and our customer satisfaction rates increased to 62 in Housing Finland and CEE and to 60 in Housing Russia compared to previous year -- previous year's 51 and 57. Unfortunately, [ the school ] development was overshadowed by product management issues. The three challenging project that we have been talking about throughout 2020 led to financial settlements of EUR 15 million in total during the year. Therefore, our Business premises segment posted a heavy loss, which obviously is a big disappointment for us. Thereby, we have already taken decisive steps to improve management to avoid similar issues in the future. Those steps include work in several areas to change the ways how we operate. We have divided these actions for 3 -- for 4 categories. First, forecasting and reporting. Meaning that we need to perform systemically with high quality and in accordance with common YIT-wide practices on all sites and segments. This requires more disciplined ways of working compared to current state. Secondly, supply chain management, which means that all work and materials for each product are and site primarily ordered through common systems. Suppliers will be managed with commonly agreed principle for each type of supplier. And thirdly -- yes, thirdly, productivity [ leap ] based on well-defined daily management and planning routines on all YIT sites and unified way to resource project based on operational priorities. Fourthly, a management system that enables high-quality product management, uniform and used in each project and thorough risk management in cost estimate estimation base. This is not actually rocket science. We do all these things already today, but we need to harmonize the processes, decrease variance in managing project and ensure flawless information flow to improve visibility and enable immediate decision-making when needed. As said, the work has already started and is ongoing in all these areas, and we expect to get tangible results already this year. In 2020, our strategy execution remained determined. We streamlined our business portfolio by completing the sale of the Nordic paving and mineral aggregates businesses. And we also made the decision to close down our operations in Norway. Our balance sheet was strengthened, which is visible in our improved gearing figures. On the other hand, our return on capital employed dipped as the result declined. However, our measures to free up capital continued. In light of our 2020's weak group profitability, our key target is to ensure profitability growth in the future. We will continue to focus on top location plot investments and development in growth areas, which requires a strong balance sheet. Hence, the Board of Directors has decided to propose to the Annual General Meeting a dividend of EUR 0.14 per share. YIT set long-term targets for climate change mitigation in September 2019, one -- and one of them being to halve greenhouse gas emissions of our own operations and self-developed projects by 2030 compared to 2019. Last year, we achieved minus 21% reduction on the emission intensity of our own operations compared to last year. And it means that low-hanging fruits have now been picked and the future progress in the emission reduction is expected to be slower when we move towards 2030. Now I hand over to Ilkka.

Thank you, Antti, and good morning, everyone. Just an outlook for our financial performance for the last year. If you look at from the revenue side up, it was peaked as expected in Q4, and it was about EUR 200 million lower than the previous year Q4. But it's good to remind that at that time the big revenue recognition over there was related for the Tripla. The more interesting is what comes to the order book over there. The drop is roughly about EUR 600 million. And the housing operations, Finland and CEE and as well as in Russia, that covers about EUR 450 million, and it's driven by the fact that the start-ups are on the lower level and also in Russia, as well as in Finland and CEE segments. In Business Premises and Partnership Properties, if we combine those to the order book was somehow higher. And then the Infra project side, the order book was about EUR 300 million lower. There are actually three components over there. One is related for the lower activities in the Scandinavian countries and Baltic countries. We have, for example, starting the closing of the Norwegian operations. In Finland, there are big projects coming to the end, which, of course, means that there is less in order books. And some of the big ones are in the development phase where the amount in order book from the total value is very small. And the third one is that, over there, we have also chosen what we want to get to our order book. So that's also a selection question. So roughly, pausing operations, lower startups Infrastructure, Baltic and Scandinavia, large projects about to get ended and selection of projects. Then if we look at the last quarter result, EUR 56 million, that was burdened by EUR 16 million fair value change in Tripla Mall, compared to the last year, EUR 121 million. We had quite good bridge over there already previously. The segment by segment, this is -- this can be divided for 3 categories as well. Housing operations, very good result from result in all areas. And especially if we look at for the spring when the COVID-19 started, I believe that this kind of picture was not at anyone's eyes. Then the other categories is what comes to Business Premises and Infrastructure. There, we have struggled with project management issue in some projects. However, the Business premises was slightly positive. And then the last one is related for the market dynamics and the yields in the markets. Last year, we finalized Tripla in Q4 and took it to the fair value, that EUR 79 million at that time. And as the yield increased this year or last year, we took fair valuation loss, about EUR 15million in Q4 from that way. So three areas. Housing did very well. Business premises and Infrastructure was weak. And then the Partnership properties related for the market development. Housing Finland and CEE, adjusted operating profit, EUR 65 million. There we did see the strong apartment sales during the last quarter. The apartment start-ups was at a good level. As you remember, in Q1 -- in the end of Q1, in the beginning of Q2, we actually stopped the startups in the beginning of the COVID virus. And then the leading services, that continues to grow. Housing Russia, adjusted operating profit, EUR 11 million. The sales over there developed very favorably also in Q4. Margins continued to increase. Strategic measures, proceeding as planned, as we have announced in the summer of 2019 that we are closing some of our units over there. That's going to continue as planned. One transaction over there was announced in the fall when we announced that we are selling plots in Moscow area. And one topic where it's good to stop for a while is that Russian escrow accounts, and that is the change in the local legislation previously. The construction companies were able to collect advanced payments from the customers. And the local legislation changed, so that construction companies cannot collect those ones, but those money has to be put for the escrow account. So what it means in our side is that our net interest-bearing debt has increased by EUR 55 million due to that reason. So we have -- we take external loan from those banks, of course, with very favorable margin, but it is seen in our gearing figures. Business premises, adjusted operating profit slightly positive. The second box is showing that our solid -- that our order book is solid and healthy. Usually, this business area is seen as only the offices, but in the real life, 77% of our order backlog is related to the public sectors. There are hospitals, there are schools, different kind of contracting models, life cycles and so on. So that's good for the coming years. And there, there are actions to improve project management, it is ongoing. And during the Q4, we sold several business premises. And in order book side, I want to remind over here is that in the spring last year, we transferred the real estate management from Business premises to Partnership properties. So the underlying order book in Business premises is higher than the year earlier. The Infrastructure, the adjusted operating profit was EUR 2 million. Last year, EUR 6 million. And as we announced in December that we sold the Murtomäki wind park. And that -- so that is impacting positively for the operating profit. So it's quite clear that we had some challenges in a few projects over there. And also, as we mentioned, that we are closing the Russian -- the Norwegian operations. That also has the impact for the production volumes in Baltics. It's more related for the market dynamics. Partnership properties side, adjusted operating profit, minus EUR 15 million, out of which EUR 16 million was related for the fair values change in Mall of Tripla. We also sold housing stock of AB Kodit. And then the Workery+ concept was launched in 2021 in January. And what is Workery+? It's related for the using of office premises, that it brings flexibility for our customers. In their premises need, they can reserve spaces from [books]. That has been very well taken in the market. The customers are interesting. And during this year, we are targeting to ramp up that concept to the market. Moving to the cash flow and balance sheet side. Our cash flow after investment was very good, EUR 336 million. EUR 250 million out of that was related for the paving deal last year. If you take that away, the cash flow is also very good compared to our results. Where we invested last quarter? Of course, plot investment, EUR 36 million and EUR 13 million for associated companies. If you look at last year, the total amount we invested for the plot investments was about EUR 150 million, a little bit more, which was exactly the same figure than in 2019. And if you look at for the further and to the coming years, we are definitely willing to invest for the plots as well because that's the source where we get the profitability and cash flow in the future. Of course, when the cash flow was strong, the net interest-bearing debt was down from EUR 862 million down to EUR 628 million, so about EUR 230 million. And that was, of course, driven by the paving sales. But as I mentioned, operational cash flows also very good last year. Our maturity structure. We last year prolonged some of our loans [and debts]. And this year, there is EUR 213 million in maturity, out of which EUR 100 million is in one bond. The other bond is expiring in 2023. Financial key ratios. Yes, the gearing is 68%. We are not yet in the target area where we want to be, in 30% to 50%. But of course, last year was a good performance towards that target. Equity ratio, 33%. And net debt to adjusted EBITDA was increased, and that is fully driven by the profitability of the last year. That was certainly about the financial structure. And I will pass it for Antti, please.

Okay. Thank you, Ilkka. So let's go to the market outlook. As you can see, our market outlook is relatively stable. However, COVID-19 pandemic is still causing uncertainties and limits our visibility. In the housing businesses, demand has been on a good level, and it's expected to remain slow in Finland and CEE. In Russia, Russia, the consumer demand is expected to normalize after a very strong peak at the end of 2020. In Finland, the real estate investor demand is starting to recover and the contracting market is stable. The yield requirements for commercial projects are expected to be impacted by accelerating online sales and uncertainty caused by the COVID-19. In the Baltic countries, the contracting market is recovering in both Infra and real estate businesses. Infra demand is expected to continue subdued in Finland, but remains good in Sweden. When we look at the estimated consumer apartment completions in Finland and CEE, we see that we will see a similar pattern in 2021 compared to 2020. So the quarter 4 is expected to be clearly the strongest. This also means that the large part of our profit we'll realize then. We also see a decrease in total amount of completions compared to previous year. And like Ilkka already told, this is due to lower number of start-ups during the spring 2020 when we stopped start-ups for 1.5 months. Then if we go to our guidance. We expect our full year 2020 adjusted operating profit to be higher than 2020. And the fourth quarter is expected to be clearly the strongest. As mentioned, housing completions are expected to decrease in Housing Finland and CEE compared to last year. In Russia, solid underlying performance is estimated to continue. In Business premises, performance is expected to stabilize, up the poor performance in 2020. And project management issues in the Infrastructure segments are still burdening earnings, but those issues are expected to be resolved as the year progresses. In Partnership properties, portfolio development is expected to continue. What comes to the -- our management agenda? It remains unchanged if we compare that to last interim report. So firstly, we need to improve our project management. Absolutely crucial is to reduce the number of negative surprises. And to achieve this, promoting an open culture, disciplined and common ways of working and, of course, sharing the best practices with better product management, improve our profitability. Secondly, we will continue to expand digital service further. It is very important, understand our customers better and, hence, provide better customer experience. And we have made excellent progress in this area for the last year. And we expect that this will continue also next -- this year. Thirdly, sustainability is in the core of our business. And like what I have said, we have announced that we are going to halve our CO2 emissions by 2030. Finally, but definitely not -- last but not least, are the people. Our people are our assets and improving safety performance in all areas, especially nowadays, ensuring health of our people during this pandemic are the key priorities. We really have a good, great team of people, and I'm sure that we will be successful in these 4 priority areas this year. So thank you for your time. And now I hand over to Tommi. Please, Tommi.

Thank you, Antti. And operator, we are now ready for the questions.

[Operator Instructions] Our first question is from Anssi Kiviniemi from SEB.

It's Anssi Kiviniemi from SEB. I have a couple of them, so I will take them one by one, if that's okay. Firstly, one of the reasons you are now cutting dividend is increasing profitability focus and both acquisitions and the development business all together. Could you elaborate a bit on this side? What will happen in the next year so that you need more room in your balance sheet in large projects but also in the housing business? What are the kind of ambition levels to tie more capital?

If we look at that, that's not only tie more capital. If we look at the, for the last year, yes, the cash flow was strong, driven by the cash flow from operations, but especially from the paving deal. On the other hand, if you look at it from the balance sheet side, where we had a drop in equity, which, of course, has an impact for our -- negatively for our gearing. And there was -- of course, the drivers over there was the dividends we paid last year, but especially the translation difference in ruble. And also the result didn't distributed as much as it should have been. And as our gear target is really to ensure the increased profitability, it means that we have to be able to invest for the plots and start-ups and, at the same time, we have the gearing target in 30 to 50. And that is the rationale behind the dividend proposal for the last year.

Okay. And kind of what should we expect from the housing business? How much you're going to increase your start-ups on that side? I mean the consumer market, especially in Finland, seems to be quite okay or even booming currently. So what are your ambitions there?

Well, let's say so that last year, we had 1.5 months break in start-ups. And if there won't be any big surprises related to pandemia, we could see that we don't have to use that break this year. But at the same time, I have to say that in -- especially in Central Europe, this pandemic has been more difficult than in Finland, and it has had [ effects ] to building permits. So we hope that there won't be any postpones of start-ups, but it is possible. It is related to building permits and how authorities are able to handle our applications.

Okay. Then on large projects, is there anything around the corner? I mean mostly Keilaniemen, Helsinki Garden, Maria Hospital. Are the projects looking attractive in the current market environment? And when will they go ahead with full speed?

Well, of course, all big projects are on our table and we are developing them further. And when it's possible to start up, we will see. We will see. But anyway, we are developing them all at the moment.

Okay. Is it a good assumption to assume that this will kick off this year? Or kind of what should we expect?

Sorry? I didn't hear.

Yes. Yes, the question was, is it a good assumption to assume that these projects will kick off this year? Or how should we look at the development ratio?

Yes. I think that, yes, the target is that. Anyway, we are planning at least some of them to start this year.

Okay. Then on the guidance, you highlighted Business premises, you expect the performance to stabilize. So probably this means that there's no additional bookings from Tripla, right?

Could you repeat, please?

Yes. In the CEO comments, you highlight that -- no, in the guidance section, you highlighted Business premises, you expect the performance to stabilize this year. So probably, this means no additional bookings from Tripla or from any other sources, right?

It's quite good in reading, meaning that if we look at the 3 challenging projects from the last year, not those kind of -- not those kind of negative topics in the projects in those three. Those have been more or less closed. In Tripla, we still have some last financial settlements under negotiations, take Q1, Q2, but not that kind of performance than last year. Yes, you're right.

Okay. Then the last one is, on Infra business, you highlighted that project management issues are expected deferred in earnings. Are we talking about tens of millions? Or are we talking about single millions of the kind of potential burden from project management in Infra?

It was more helping that not too much expectation for the first half of the year when we still are struggling with a couple of projects.

And our next question is from Svante Krokfors from Nordea.

I hope you can hear me.

Yes, we can.

Great. So yes, I have a few questions left after Anssi. I also wondered regarding the Infrastructure, if you could be a bit more specific on the sizes and what kind of issues it really is, because I couldn't -- or I didn't find what kind of magnitude it would be. I guess, it's significantly smaller than -- or the projects are smaller than in Business premises where the problems have been. But could you try to be a bit more specific on the size?

Yes, you're right. When it comes to the challenges in the Business premises compared to Infra projects that -- the size of the projects are different. And it is related for a couple of projects. But for the size, we haven't stated that one. It's more related for the -- for having that the expectations are not too high in the -- in the Infrastructure side in the first half of the year.

Okay. And then on Housing Finland, CEE, do you expect -- I mean, how you -- when the coronavirus broke out, you correctly estimated that there could be perhaps more need for larger apartments. Can you comment on what kind of mix changes have happened after that? And also keeping in mind that there appears to be an oversupply of smaller apartments for rental purposes. So could you elaborate a bit on the mix in your housing projects?

That's true that the demand for bigger apartments has increased, but now we are in a same situation than the last year. So we are not increasing the average size of our apartment anymore, but we have done that before. And it seems that also bigger apartments, maybe not just in the Helsinki City area, the demand is increasing. And that is something that we are -- we try to quite good project and also make start-ups over there.

Okay. And then the last one on Mall of Tripla. If I remember correctly, you earlier said that the holding company or entity that holds, that there's roughly 50% debt and 50% equity. Has there been any equity calls from the lenders regarding this write-down? And how do you look at that going forward?

No. If you look at the Tripla last year and its performance, yes, the visitors, the number of visitors was lower. Of course, the sales in the Tripla was also lower. But it was probably one of the best ones in Finland anyway. It was lower than the budget. But I would say that taking in account that there was corona or the coronavirus going on that the Tripla Mall made a good year for that one. And of course, when COVID will start to ease, we also believe that people want to be once again together and one place to be together is Tripla. But there hasn't been extra equity call from the owners.

[Operator Instructions] Our next question is from Matias Rautionmaa from Danske Bank.

A couple of questions. Firstly, could you elaborate more on the strong figures in Housing Finland and CEE during this Q4. Was there any effect from the sale of the housing fund in Partnership properties? Or was this just driven by the good sales?

No effect from housing funds, in that sense that if you think about selling this housing fund, it is in Partnership properties because of good sales in housing.

Yes, one which impacted it also, thanks for Antti's team is that the unsold ready apartments, there was -- there was a good performance in Q4. Yes, which, of course, has impact also for the balance sheet.

Sorry, could you repeat, what kind of apartments had good performance?

Unsold completed.

Okay. All right. Then another question concerning housing business. So can you help me to understand the low level of housing start-ups that you have currently? And if I look correctly, the amount of units under construction is now on the lowest level that I can remember. And to me, at least, it seems that housing markets are performing well, even if not even booming. So are you held back by resources or some timing issues? Or is your increased leverage affecting your willingness to start? Or is it -- is it project financing, which is still burdening you? Can you help me to understand this?