YIT Oyj (YIT) Earnings Call Transcript & Summary

All right. Let's get started. So good morning, and welcome to YIT's Q1 finance call. My name is Tommi Jarvenpaa. I'm the Head of YIT's IR. And I'm here with our CFO, Tuomas Makipeska. We will first hear sort of intro from Tuomas and then we will move to Q&A. So at this point, Tuomas, go ahead.

Thank you, Tommi. And welcome from my behalf as well. We will have a short summary of the situation in Q1 first. And as Tommi mentioned, so we will have time for Q&A afterwards. And now that the situation is somewhat different than anticipated earlier. So we will spend some time discussing the Ukrainian crisis situation and also our situation in Russia. And after that, I'll just have a brief comments on Q1, general situation so far and also our strategy implementation status. So first of all, if we go to the situation of the Ukrainian crisis and the geopolitical situation. So as everybody, so we are devastated of the situation, what has happened and how the situation has evolved. And of course, this has also impact on our Russian operations and also to the entire industry. And maybe the first point from our perspective is that we have limited or actually stopped buying an importing construction materials from Russia from now on. And also we've stopped investments -- lot investments and startups in Russia as we speak. Also, these kind of purchases can be replaced by alternative materials and sources to a large extent. So this won't have at the short term a significant impact on our business. But all in all, we see that the Ukrainian crisis brings, of course, certain uncertainties to the market. And also, this will have impact on construction material availability and also prices globally, especially steel, timber and glass as construction materials will have an impact of the crisis. And it is, of course, under evaluation every day how much this will have an impact on how the costs are developing and what kind of impact it will have on our operations. So far, it hasn't had a significant impact on our cost base, but if the situation kind of prolongs, it certainly will have a negative impact on our operations as well. Also, if we think of the higher prices and the cost level so that they might have added pressure on apartment prices, which then could have an impact also on the demand side. But as mentioned, so this is something that we are evaluating every day, and it is still a bit too early to say how it will play out. Also, if we think of the consumer confidence in this kind of situation, it is very hard to predict how it will play out. But so far, there hasn't been significant signs on the demand side. Some kind of a prolonged longings of decision period and so on in consumer side, but nothing major has been seen yet, and of course the coming months will tell us more. One topic which is important for us is the availability of the workforce, of course, as well. And it is becoming more challenging in the Central European -- Central and Eastern European countries and in the Baltics, and also a bit in Finland. And this is something that we are, of course, monitoring carefully every day as well. But every day -- in any case, so we kind of summarized the situation or the impact of the crisis for our businesses, so it increases the uncertainty in our businesses. But so far, major impacts on our cost levels and material availability hasn't seen yet, so that's the situation as we speak. Now the second topic today is our operations in Russia. So as we informed a couple of weeks ago, so we've sped up our strategic review regarding the business in Russia. We still have all options open with our Russian business. But of course, the sale of the business is kind of a preferred option in this kind of situation, while it the market environment has changed dramatically. So we prefer sales of the business, but we still have the other options open as well. We have active -- very active discussions going on all the time and we will then, of course, inform you more when there's something to inform. It's -- the situation of -- in Russia and the options of exiting operations quickly. So it's difficult, as you might all know, that from kind of a [indiscernible] point of view. So it's pretty complex how to exit Russia so that it won't have a significant impact our liabilities and finances. So this is something that we are evaluating all the time. Also continuing the operations there is becoming more difficult or it has become more difficult so far because of the sanctions and also the constant changes in the regulations in Russia. The good thing in our operation is that we have a going concern, where our business is running pretty much normally so far in Russia and our management, of course, is doing constant evaluation how the sanctions will play out and what kind of impact they will have the business. But so far, so we are continuing the operations pretty much in the normal mode in terms of construction, of course. So that's the situation in Russia right now. And as I said, so we have active discussions going on. And when there's something to tell, so we will, of course, publish new information. The third topic maybe here is the Q1, how it has started and what it looks like. So except for Russia, the rest of the business has developed pretty well according to the plans. No significant signs of weakness in the market during the Q1. Of course, during the March, there has been more turbulent environment in the market -- in our markets. But still, if you look at the Q1 as a whole, so no significant signs of weakness there. One kind of a major topic for us has been that we have implemented our operating model, the new operating model as of start of January. And we will also publish the new financial figures or last year's financial figures will be restated before the Q1 reporting as well. If we then look at the situation from a strategic point of view. So of course, this current situation and the circumstances we operate. So it has an impact on short term on our operations. But from a strategic point of view and in 5 years perspective, we think that our strategy remains intact. Of course, the acceleration of the growth will be evaluated again, what is kind of the reasoning and what is the possibility to invest in growth in the changing situation, but still the core of the strategy is still accurate and intact. The good thing, of course, as we mentioned in the CMD in November and also when publishing the Q4 and last year's results, we have a strong balance sheet, which of course gives us let's say, stability in this kind of operating environment, but also it opens kind of opportunities in this kind of situation when needed. So the strong balance sheet that we have -- still have. So it kind of gives us a good position to go through the crisis and also tap on the opportunities on what we see on the market. But that's basically a short summary of the situation. I think Tommi, we will now have time -- a good time for the questions and so on. So I will welcome more questions from your side.

Yes. Thanks, Tuomas. And then yes, as I said, we have now time for questions. [Operator Instructions] Just as a reminder please note this session is recorded and the recording will be published on the website later on. And I think we have a first question then from Olli. Go ahead.

Olli Koponen from Inderes. First, on the Russia business there. You said you have been able to continue the business there pretty much as usual and you're able to finish or do your projects there. But have you seen any kind of problems with money flows or anything relating to the current situation? Are you able to continuing the business normally there?

Well, thank you for the question. And it's a good question. Of course, kind of the money flow, it isn't working normally because of the sanctions and because -- the banks are so carefully also monitoring the new rules and the sanctions and so on. But so far, it hasn't had a major impact on a local level and between the countries. So we've been able to continue so far normally. But of course, on a local level and also on a cross-border level, there has been changes and so on, but we have been able to manage them or navigate through them. So in that sense, we've been able to continue normally.

Okay. Do you think this will have any kind of impact on you? Or do you think -- or have you had any kind of discussions about future sanctions that might be coming? And what kind of effects might they have on you?

Yes. As mentioned, of course, we have been evaluating the situation for the past months on a daily basis, and also on a local level in Russia, but also on a group level here in Finland. So this is kind of a we have an ongoing process on monitoring the current sanctions and what kind of impact they have on our businesses, but also we are playing out scenarios, how this could evolve and also planning for the mitigation or mitigating activities against those risks and scenarios. So this is something that we are working on a daily basis.

Okay. Then I would like to ask one question about that housing demand, especially in Finland and CEE. You said that kind of the consumer confidence is quite on a good level and the demand is there. But on the investor side, how about that? Have you seen any changes in that behavior towards Finland and CEE now after this situation?

Thanks for the question. And if you look at -- first, from a consumer point of view, so as mentioned, so we still have a very good reservation rates and we haven't seen major impacts on the demand side in that sense. Of course, this might change in the near future. But so far, no big changes from the consumer perspective. also from investor perspective, so far during March -- during the March month, so we haven't seen any impact yet. Also, I like to, of course, note here that there might have -- there might be some effects on the investor side during the coming months if the situation prolongs, but so far, no major impacts either there.

Next question from Svante.

Olli actually asked a couple of questions that I had. But also on the investor demand side, have you seen that the high input cost level has already led to hesitation among investors and projects not becoming profitable anymore?

Well, referring back to what I already mentioned. So, so far, we haven't seen any major impact there. And also, what I just said, if the situation prolongs, so this might have an impact, of course, on the investor side and also the possible delays of our projects. But so far, no major impact. This is -- and the situation is, as you all know, so it's extremely hard to forecast how it will play out. But I can say for now is that -- so far, no major impact has been seen.

Okay. And then on the Russian side, trying to grasp what's actually at risk for you in Russia. So I mean, you have the equity EUR 210 million and then also the prepayments, a bit more than EUR 100 million in escrow accounts. What is -- and now you continue to complete the apartments, which are under construction. So how should we look at this kind of in a worst-case scenario?

Well, if we look at the -- from an invested capital point of view. So as mentioned, so we had at the end of last year, so a bit more than EUR 200 million there. So this is something that has been has been, of course, at risk. But if we think of the situation now, so it actually has changed because of the exchange rate development. The ruble has weakened a lot during the Q1, of course. So that has an impact, of course, on the exchange rates impact, and also what we said already, so we have the cumulative translation difference from Russia, from the previous years. So that is something that we will have in any case. And of course, it at the same time, dilutes the equity impact what is under risk. But on a gross level, the amount is pretty much the same. So that's basically the risk position that we have. And as mentioned, so we are, of course, carefully monitoring what would be the best option from a strategic point of view, and that's still in process.

Okay. And then I think your growth investments in Housing Finland and CEE, I think you mentioned that 2/3 of investments would be made in Central Eastern Europe. What does the situation look now in your 3 countries and the major cities there that comes to consumer and investor demand?

Yes. So as I pointed out earlier, so this is something that we need to reevaluate in which kind of a schedule and at what speed we will increase our investments in housing in Finland and CEE countries because of the current situation. From a strategic point of view, as mentioned, so we will invest -- still invest on those areas and in the housing business. But of course, now the situation. So we are currently evaluating how much this will have an impact on the speed of investments. But it's too early to say from a strategic point of view, since we don't know how long the market will be as it is right now, how much it will -- how fast it will recover then.

Okay. And then on Russia, you said that you make no more investments, no more plots, acquired no start-ups. When will the last apartments under construction in Russia be finished roughly?

Well, if I comment on the major projects that are going on there. So we have a big -- we have basically 3 big projects coming to an end. First of all, 2 of them, -- the two first ones will be financed during April and May. And the third one will be finalized in June. So these are the 3 major ones that we have going on there. So that will, of course, those are the more crucial ones, and they are pretty near already now.

Next, Simen?

Just as a follow up on those questions. In terms of those large completions in Russia, it all seems to be in Q2 if I understand correctly. Can you say something about the presale ratios in these 3 projects?

Sorry, can you repeat the question?

Can you say something about the presale ratios in the Russian project?

Yes. The presale rates are on a high level. This has been also interesting to see how it evolves during the crisis. And we still have -- we have a pretty good situation with these 3 major projects that are going to be completed during the Q1, as you mentioned. So from that sense, on the short term, so we don't see any big risk. The ratios are high as they have been actually pretty long already now.

Yes. In terms of high levels, are we talking in 80s or below -- can you comment like?

Yes. Well, this is something that we are not disclosing, but they are -- let's put it this way that they are on the same level as they have been on the longer term. So no major changes there. either in a situation.

And in terms of the Russian operations, the rest of it, how self-financed is this? To what extent are you using local currency, local banks, long term versus group financing, perhaps then finance through euros in terms of your debt financing and what kind of exposure do you have?

Yes. So well, -- in a big picture, we have, of course, the project launch that we are using locally there in rubles, and they are used to finance the project. So in that sense also, the business is pretty much actually funding itself. So in that sense, we don't have a big need to inject euros from Finland to Russia. So that's a good situation. They are -- they are also managed in a pretty strong cash flow mode during Q1 or has been during the March period. So it's pretty much self-funding business as we speak.

And the existing plots?

Well, we have the plot reserved what we had basically at the year term, but we have been -- as I mentioned, so we haven't been investing in newer plots there. So this is also, of course, included in the capital employed there.

Yes. But do you have a debt on those? And what kind of financing is on that -- those plots?

No, we don't have debt on those.

Second question is from my side or second team is the billing cost inflation. And in terms of tendering, how do you handle this now. Based on what I've seen in other Nordic markets, fewer and fewer construction companies are now willing to enter fixed tenders based on the high situation of uncertainties? And also, we have seen quite significant step-ups in the cost in terms of like building a residential plots in terms of price per square meter. Can you give us some commentary on how you handle the risk? Or are you still bidding for fixed cost and in terms of the price gains on new tenders are you seeing in the market?

Yes, that's a good question. Thank you. Of course, this new situation or change of situation has had a major impact on our tendering. And we, of course, we have a couple of ways to mitigate cost increases during the projects also, but in every case, so we have been taking into account the new situation, and we have priced in, of course, the cost inflation that we understand is going on right now. And of course, we have been increasing our kind of risk buffers in our tenders as well so that we will mitigate the risk of further cost inflation. So from that perspective, we haven't been taking any more risks than previously. Actually, we've priced in pretty much cost inflation and risk buffers on our tenders.

Yes. Do you want to quantify something on those figures? Or is it something you don't disclose?

That's something that we are not disclosing, but we will be kind of describing the situation in more detail in Q1 release because this is something that we are, as mentioned, so on a daily basis, we are analyzing how much there will be cost increases or cost inflation by construction material and so on. And of course -- of course, we will elaborate on those a bit more in Q1. But as mentioned, so those are taken into account in tendering, of course.

And my last and third and final question is in terms of disruptions in deliveries and in project supply lines, et cetera, if I understand correctly that hasn't been halted yet in terms of like lack of transport with truck drivers from Ukraine, which usually they don't. We've seen some disruptions in other markets in terms of getting products to the building side, how that impacted you at all so far? Or is that something you haven't seen?

Well, yes, thank you for the question. And this is also part of the package that we are evaluating. So how much the material availability and is there delays or kind of a shortage of materials in our supply chain. So far, as I mentioned, so we haven't had a big impact yet, we have been kind of cautious and we have kind of ordered a bit more materials already in February. So we have not been suffering the shortages yet. But if the situation prolongs, so this will kind of become more challenging, that's for sure. So far, we've been able to manage pretty well in situation. But the material shortages and, of course, combined with cost inflation, so that's a risk that we are constantly monitoring.

Just last final question. In terms of risk of project [indiscernible] or plot value changes to the negative side [indiscernible] especially on the Russian assets, at what time you think you will look at that and if any, communicate something to the market? And secondly, is that something? It is natural risk, especially in Russia. But when will you, at least ahead of Q1, make us a risk assessment of that?

Yes. So as mentioned, so we have active discussions now going on about the Russian operations. And this, of course, as I mentioned, so when we will have something to inform. So we will, of course, do it. And that's all that we can say right now.

Even in some periods, you will come out with something like that, if I understand correctly?

Of course, if we have something to tell, so we'll tell it immediately, of course.

And then question from Anssi.

It's Anssi Kiviniemi from SVB. Quite many of the questions I was thinking have been asked already, but to summarize some of these points, you said Tuomas, that you're quite happy with your balance sheet and it actually seems strong enough but you do not see any need to strengthen it further just in case, just to make this clear?

We don't see any current needs to strengthen our balance sheet further. Of course, I always get back to what I already said. So the situation right now is it's pretty challenging to forecast how it will play out in the geopolitical situation, also the kind of supply chain developments and cross-border actions and so on. So it's difficult and challenging to forecast. But right now, so we don't see -- we don't have any plans to further strengthen our balance sheet. There's no need.

And second one about Eastern Europe, and you said that you haven't seen any major slowdowns at least so far. But some companies I've been talking with have been saying that at least the renovation activity has been taking a hit already due to current situation. and it has been estimated that the startups might be cooling down as well later this year, but -- and just to make clear with this as well. You haven't seen anything of this yet?

Yes, you put it correctly. So we haven't seen any impact yet. But of course, I think, for sure, if the situation prolongs, so it will then have an impact, of course, on the demand side and also our kind of appetite to invest and so on. But this is something -- we've been kind of 4 weeks now since the war started. So we've been evaluating the situation and the situation has been changing all the time because of the sanctions going on and coming in. And we are, of course, monitoring the situation country by country. And so far, there hasn't been any big impact but I need to still point out that if the situation prolongs, I think it's inevitable that it will have then an impact on our operations as well.

All right. And then we have a follow-up from Olli.

Yes. Just one follow-up on the Russian operations. Have you been able to continue the Russian operations with kind of normal profitability? Or have you seen any changes in that?

Yes, we have been able to continue on a normal profitability level so far.

All right. Thank you, Olli. And it seems that there are no further questions. So thank you for the participation, and thank you Tuomas,and we'll talk to you soon.

Thank you from my side as well.