YIT Oyj (YIT) Earnings Call Transcript & Summary

[Audio Gap] Salonen, and I'm Tommi Jarvenpaa, Head of YIT's IR. Please note that the call is being recorded, and the recording will be published on our website after the call. We will then take questions after Ilkka's update. But at this point, Ilkka, please go ahead.

Thank you, Tommi, and welcome to the silent call. If we look at the Q3, as such it's -- it has been pretty much as expected. Previously, we have started with a COVID update. At this stage, it's quite easy one, just to say that it is expected that those will be -- restrictions will be removed in Finland in the beginning of Q4, and things from that side are going to the right direction. But then if you look at the segment by segment, generally, the solid performance in the housing businesses in Finland, CEE as well as in Russia. Continued into Housing Finland and CEE, the activity itself has continued in a good level after the summer vacation, and that is, of course, good item. Also, as our target has been to start more -- to have more startups during this year compared to the last year, that is -- that we are performing. And of course, the completion pattern, which was also seen in the Q3 reporting, it is heavily all weighted to the last quarter. Actually, in the third quarter of this year, we have roughly about 150 apartments in Finland and [Technical Difficulty] quarter we expect that's about 1,200 units. In Housing Russia, also the activity has continued to be in a good level. And as already in Q2, our warehouse for the completed unsold unit was in a historical low level and that trend has continued. And even the COVID situation in Russia has been more severe than in Finland, both the sites have operated normally over there. In Business Premises side, we can say that activities among customers and investors are more or less normalized. There has been a number of tenders in the public sector, especially. In the private side, it is still open, as it has been for a while, and how the whole office premises will be removed, renovated due to the corona situation. There is one clear, let's say, expected change. Due to last months and quarter independent processes the sustainability has become a criteria, not only on the public side but also in private sectors. And in a couple of public tendering, actually, we have won the cases based on our sustainability, not with the price, and that's, of course, where we are also focusing and investing in the future as well. In the Partnership Properties side, the activities among investors, it has mostly returned. And that part, which has been more active than it was in the beginning of the year is what comes to the tenants that is the companies. They have activated to start to look at their next office location. And it's good to remember that there are expiring a number of old rental agreements in the market every year. And actually, the customers, they also think that they have to make an active decision what kind of office premises they will have in the future. So the investors, so it has more or less activities at the moment around there has more or less returned. And in the tenant side, it has clearly activated during the last quarters. And then if you look at the customers which is there in Tripla, they have improved steadily in terms this year as the COVID restrictions are less severe than they used to be at the beginning of the year and last year. And also, if we look at the COVID restrictions they are expected to be removed in Finland early next quarter. So the further improvements are expected over there for the -- towards the end of the year. And Ilkka Tomperi, he started in the beginning of August in his position as Executive Vice President. The infra side, on the infrastructure side, there has been and there will be a number of [Technical Difficulty] and we have seen lately there has been quite many price tenders in the market. And in September, we signed the Crown bridge agreement with the City of Helsinki. Governments, they are expected to stimulate, but it takes time. Planning and designing phase takes time. But one part which has activated is the major truck investments. They are expected to come in the coming years. Of course, they are still in very phase, so it's not -- not any major things within the coming quarters. And as we have mentioned earlier this year, there is a stabilizing period from COVID in the infrastructure, and that's [indiscernible] we have had in business premises starting last year. And that is progressing as planned. Of course, then -- the big topic of the infrastructure side is the latest infra project. It was signed in February and closing latest in 2022. But of course, we are targeting to get it done before the end of this year. But in that process, we are not in the driver's seat, so -- but that's for sure our target. And in Infrastructure segment, Pasi Tolppanen, he started in the end of August as the Executive Vice President. Then what we have stated earlier here is that we are preparing our strategy -- making the strategic update. [Technical Difficulty] Going in second quarter, and over there, we will announce the new or the updated way at this strategy later this year. An operating model work for the exercise, what we started also in Q2. That is ongoing as planned. And the new operating more or less as well as the cost savings from the new models, those will be reported later this year as well. The one part which has been on the table for a couple of quarters, the inflation and price increases in the construction materials as well as subcontracting. Yes, that is true. If we look at the moment, how we see the world is that the price inflation should start to ease in the end of this year, beginning of the next year. And actually the first indications in certain areas, we have seen already. And if the [Technical Difficulty] impact for our profitability will not be materialized this year and also, they will be materialized next year. But that was my sort of update and introduction for the Q3 performance, and we are ready for Q&A session.

Yes, indeed. Let's move to the Q&A. And then always, please raise your hand if you have a question. And Anssi goes first. Go ahead.

Starting with the large projects. As you highlighted, the demand from investors side as well as consumer side it has normalized. So this is crucial part when you are making these processes in the background, trying to finalize the deals and start the large projects. So could you a little bit elaborate on project-to-project basis, how is the development phase going on in the background?

If you look at -- let's look at the big ones, the Keilaniemi, [ K-Tower ], Trigoni, Vallila, Maria Campus. Let's start from the Maria Campus, over there, is a claim what comes to the city plan in the, let's say, public process where it is the decisions or the -- say, the core decisions are expected to be to come through in the end of this year, in the beginning of next year. And so that's -- waiting for that one. In [ K-Tower ], there we are in the design phase, and of course, over there, it's more what comes to the tenants, financing, that kind of topics over there. Then in the Trigoni, over there, we have discussion with the City of Helsinki. So that is still in the planning phase. And then when it comes to the Maistraatin, while we are over there, we have activities in the tenant side as well as in the investor side. And the same stories in the Maistraatinportti.

Okay. And on Maria hospital, when you get the court decision, is it a go?

It's -- of course, it depends on what is the end result from there because there is -- the claim is what comes to the size of the permits over there. And of course, when we get the core decision over there, then it's time to look at with our JV partner that -- what is our next step.

Okay. Then second theme. Now talking about the turnaround process in Business Premises and Infra project management and all that stuff. Could you indicate what's the situation? Starting with Business premises. Still stable and things are progressing as you planned question mark. And then on Infra kind of have there been any surprises? Because during 2021, we have seen a couple of surprises coming from Infra. So any surprises there? And what's the situation in the turnaround?

Yes, if you look at in the Business premises side, say that, that will be -- that started -- that segment fixing started last year in the quarter. And that has been stabilized. And of course, there are still some, let's say, old tales of the long-lasting projects, which are still pressuring. But over there, say that no surprises from that side has been seen during the last couple of quarters. When it comes to the infra project side, there has been -- there is some number of projects, which are underperforming. Of course, Pasi Tolppanen has just joined to the segment head. And what comes to the, let's say, totally surprised is not so much in that side. But of course, when you dig into the -- deeper to the projects, the margin decreases or the risk related for the margins. Yes, there, we have seen some more -- but at the same time, I have to say that the big part of infrastructure business is healthy and good, especially those ones which are the Alliance type of projects, for example like trams and so on. So we have seen also some positive surprises in some projects. But to make it simple, the -- last year, we started with business premises. It takes roughly about 1.5 years to get it back on the track. And then the infrastructure, pretty much the same. We are in a stabilizing mode at the moment. Not too much expectation for this year when it comes to the projects side, but of course, the next year should be already in the stabilizing phase.

Thank you, Anssi. And then next, we have questions from Simen.

First of all, wood has been -- and wood prices during the quarter has been something most construction companies have seen fluctuate quite significantly. And how has availability been for that for you guys? And how has price volatility impacted, for instance, your own developments in housing? Has it been an issue? The second one would also be in terms of access to labor. How has that been from instance in Finland, from the Baltics? Are you seeing that it's easy to get the capacity you need? And issue -- also, as some other has reported seeing that getting people back is an issue, and you might say actually? And how our wage inflation developing in terms -- in relation to that? Can you please answer the first questions first?

Yes. If we start with the price inflation and procurement and a lack of some materials, we haven't has seen lack of materials in our construction side. Of course, there are some lagging, but doesn't have impact for the completion of the products or the buildings. And then if you look at in our own development side and price, price development over there in Finland, of course, the -- before we start the marketing and -- or selling the apartments, it's about the same time when we make the startup decision and quite many of the materials and contracts have been locked on that point. So it means that the price inflation doesn't have a too big impact on during the construction side. Of course, there are some parts which will be procured later during the process. Then in the other countries, we have the dynamic pricing model, which means that the prices of the apartments are increasing or decreasing. So it's during the construction period. So over there, the natural hedge is quite easy to make. Then when it comes to the lack of resources, I see that it's pretty much permanent -- quite permanent situation in the construction companies. But I don't see that there would have been a clear development that it would be tighter than it used to be, for example, 3 or 6 months ago or 1 year ago. And of course, now we have been -- the new YIT has been roughly about 4 years. I would say that more indications from the businesses and flagging of the lack of resources was actually 2018 rather than at this stage. But of course, the market is quite hot in Finland. And it is one of the resources, which has to be tackled. And so far, we are -- I would say that we have subsidied on that side, not only the own employees, but also among the subcontractors, getting the subcontractors to the sites. Then what comes to the wage inflation, there has been wage inflation in Finland, but I would say that not only in the construction side, but also in some other industries as well. But over there as well not a remarkable impact from that side either. Then how to get the people back to work. Of course, in our industry, most of the people have been working on site all the time. So it's more related for the people working in the offices. And over there, we actually have rules and instructions country by country because the restrictions are also related country by country. In Finland, which is clearly the biggest operation country, we are getting back to the office starting when the restrictions have been removed. Now it's expected in the middle of the October. And for example, in my organization, where we have, I think, about 150 people, I don't see that -- or I haven't heard that it would be a problem to get people back to the office. Of course, there are some individuals who are scared to come back or some other reasons, but in the big picture, not a big challenge. But of course, let's say that during the rest of the year, we are having more or less a hybrid model where everyone will be in the office a certain period. And then certain period can be more offsite. And for sure, we also look at the operating model that is there some growth -- or the duties which you can actually do mostly in remote, which we didn't do previously. And I can say easily in my organization, some of the works which are in the transactional side, where most of the work can be done at home. And it's more efficient, not only for the company but especially for the employees. But also for the company.

I just have another follow-up question and goes to the Alliance projects. Tampere line, to my understanding, first, one of the projects stages they were completed in Q2. How has that impacted figures? And like, for instance, the Jokeri line also that those line train projects up and running again, well enough to cope with the revenues Q-on-Q? Or are we going to see because we had a project completion in Q2 dip into the Q3 figures in infrastructure? And how has that impacted the overall progression, and also before the Crown projects eventually start entering the books?

Yes. If we look at the Tampere tram that was completed in Q3 until it came to the operations in the end of August and also the Jokeri tram. Those revenue recognition is based on the presence of completion. So we have seen them already during the construction period, so there is not a one-off in the end. But in both cases, as they are Alliance type of projects, there are some incentives for the construction company or the bonus scheme, where, let's say, the measures are usually related to the public or, let's say, how you are seeing in the press, whether is it the negative or positive attitude what the people have towards the projects and the end product and also when it comes to the occupational safety and different kind of topics. And they will be settled after some months, the completion. But those are not a big jumps. So shortly, those Alliance trends, you can see and you have seen those ones beyond the construction period. And then the Crown bridge, yes, it was a free -- or the agreement was signed early September, but really the construction doesn't start until next year.

Sorry, there was a bit weak line, but I'll come back to Tommi later on. I couldn't hear at all.

Next, we have a question from Svante.

Yes, thanks. Perhaps a question regarding your land bank plots. How do you feel about that? And what's the price development there? Are you starting to get short of good plots?

See that, not a short, but it is a resource which is -- where is more demand than supply, especially when we are talking about the hotspot. I would say that we have succeeded on that side. But definitely, it is an area which is in our focus and must be the focus because otherwise we will not have the end products what we want to have. And when it comes to the price development when the COVID came quite many expected that the plot prices will come down. No, it is -- we have seen, let's say, price inflation on that side in the last 1.5 years. And probably the hottest area on that side has been actually our Russian operations, especially St. Petersburg and Moscow.

Okay. And then perhaps really interested to hear your view on the residential market and the investor demand. And I mean looking at, for example, Helsinki region, quite a lot of completions, quite a lot of completion of rental apartments. How do you look at that segment going forward? Do you think that there could be a clear slowdown -- a significant slowdown in construction of investor apartments?

Actually, on that side, I wouldn't say so. And if we look at the market and the demand over there has been very active during the last couple of years or last years. And also, there has been newcomers to the market and there is a number of players abroad who would like to come to the market. So based on that, I would say that we expect that the investor market remains as a good market and not any drastic slowdowns over there.

Thanks, Svante. And next question from Matias.

Yes. I have a question concerning on the cost side and inflation. So what is the typical share of cost that you have fixed before the start-up in housing production and in Business premises production?

It's in the housing side, in the own development side, I would say that most of the costs are fixed when we start. In the Business Premises side, it depends on about a little bit case by case. And it also relates to the contract type what we are having. And based on that one, the impact for ourselves. To -- let's say, to summarize about the inflation in our side, I would say that the own development housing as well as for the sales for the investor side it's because they are our own developed project anyway. But we don't sell those ones to the consumer, but to the investors over there before we start -- before we set the price. Our own price, we can set most of our costs from our materials as well as from the subcontractor side. And in the other countries, also during the construction period when we sell them, unsold apartments we can use the dynamic pricing method over there. Then in the Alliance type of projects in Infra as well as in Business Premises side, because there the price increase is shared with the Alliance partner. It's usually in the city or the state. So based on that one, the biggest risk what we have is in the cases where we give a fixed price in the tender process and the tender process will last a longer period of time. And those -- proportion of those ones is clearly lower than the rest of our product mix.

Okay. Just to get some concrete idea here. So if you look at projects like this PPP project of this schools in Espoo, so obviously, you have won that project a long time ago, and of course, there is some kind of fixed price tacked there. How do you hedge the cost side with this kind of project? Because I think most of the construction works have just begun.

Yes. But over there, actually, we made the agreement in the summer of 2020, and then we have had the design and developing phase. And over there, we have been able to make the subcontracting as well as the material orders during the last during the last one -- roughly 1.5 years. In the processes where you are -- I would say that the riskiest ones are just price competition cases where you have a tendering, which may last for 3, 4 months, especially if you had those ones in the beginning of the let's say -- or in the end of the first quarter of this year. And you will get the answer in Q3 this year, there you have been in -- or at risk. And there are players in the market who has actually, even they have won, they have rather taking the penalty not to start the smaller ones. But we haven't been in that phase. And as we have in both business lines, in Business Premises as well as infrastructure, we have decreased the proportion of the price competition projects during the last years. So that hasn't -- that has had an impact for our operations as well.

So to conclude is that you wouldn't say -- you don't say that your margins in this kind of PPP school projects in Espoo, they don't have a squeezed -- they are still intact and in the planned level.

Yes, over here, because it's quite late to say that no impact. I'm sure that there is some impact, but it's not a material impact.

Okay. Then a question about this Finnish housing market. So we saw a record high housing starts during Q2. So what is your feeling? Is the market peaking now? What do you see the demand going on when we go into the next year?

Yes. It is a record high. The demand is over there. Actually, the -- if we look at the mix between the investors and consumers, in the consumer side, what we have seen in the market is tight areas known situation, which has been there already for a while, meaning that the capacity with the banks have towards the [ RS ] loans for the construction period is limited, that has an impact for the start-ups in the own development. And then the investor side that has been reactive, and let's say, investment money from that side, it has been over there and it will be. So the fact is that the demand for the new apartments is over there. But will we see the same kind of levels as we see today, if you look at that we have speeded up our start-ups, and we will further have higher startups than, let's say, 12 or 24 months earlier, in our proportion of course the start-ups development is increasing.

Okay. So then, my last question concerning your layoffs and this operational model that you are planning. Do you see any risks that you would lose some competencies and resources in your development businesses?

Of course, it's always a risk, but once again, not material a material one. I mean if we look at our side, the development is definitely one area where we have our competencies, which is our focus area. In the operating model, it's more a question that how we organize certain type of doings. Are they centralized or are they spread segment by segment? What we don't continue to do these kind of topics. And all those are not, let's say, part of development side.

So you are not cutting costs from the development side?

No. On that phase, as you think. Of course, we look at different kind of other -- but it's not -- yes, that was a very good question. It's not a haircut. The cost cutting too big, it's -- we make up the operating model first, and then we look at that where we have overcapacity internally. And the cutoffs will be over there.

Thanks, Matias. Does anyone else have any questions left? I see that there's no more questions. So thanks for the questions. Thanks, Ilkka. Our Q3 results will be published in October 29. See you then.

Good. Thank you very much.

Thank you.