YIT Oyj (YIT) Earnings Call Transcript & Summary

Good morning, and welcome to YIT's Q2 2022 Silent Call. I'm Tommi Jarvenpaa, the Head of IR; and Tuomas Makipeska, our CFO, is here with me. And then we are going to go through the key messages for the second quarter ahead of that silent period, which will start at the end of next week. And please note that the call is being recorded and the recording will be published on our website later this afternoon. And at this point, I will hand over to Tuomas. Go ahead.

Yes. Thank you, Tom, and good morning on my behalf as well. All in all, we've had an eventful Q2 so far. Of course, the sale of Russian business has been one of the top priorities. But also, we have put a lot of effort on execution of our strategy. And of course, we're focused on monitoring and also managing the extraordinary market conditions and its impacts on our businesses. We have a couple of topics, basically 5 topics in the call, and then we will have time for some questions at the end. And first of all, we will cover the sale of Russian businesses, then we will cover the consumer confidence and the demand outlook for housing, construction material inflation and availability as a third topic and also covering then the operating environment in the other segments than housing and of course, a couple of comments on the strategy execution in the end. So that's basically the topics we will cover here. First of all, the sale of Russian businesses is now completed, and we've announced that we completed the sale to Etalon Group PLC, which is a Russian construction company listed in London Stock Exchange and its well-known construction company in Russia. So it was a good kind of a -- good for our former employees as well. With this, we have withdrawn all the operations in Russia. And of course, this then allows us to focus fully on our core businesses and the strategy execution. All in all, the sale was completed in line with the agreed sales price and the other terms agreed in signing phase of the process. The exact financial impact will then be published in Q2 report since there's, of course, still or then all the numbers are not completed since there is the exchange rate effect that will be then calculated on an average basis, and it will be then published all the impacts in Q2. But that's basically it. So we are, of course, happy that we could complete the sale of the Russian business and now focus or going forward, focus on the strategy execution on the core businesses. Then a couple of comments on the consumer confidence and the demand outlook for housing. So as we all know, so the general consumer confidence is weakening. Consumers are getting more cautious, and this is basically due to the growing uncertainty in the macroeconomic environment. And of course, the cautiousness is now, as we can see it, it's increased universally. But as we see it, so the cautiousness is more on a consumer side than on the investors side from our business perspective. We expect this cautiousness to continue at least for the next couple of quarters. But as we all know, so it's very challenging to forecast how it will play out. While now the near term outlook is somewhat subdued, so the mid- and the long-term prospects remain positive for our businesses. And urbanization is continuing and of course, the need for sustainable living is increasing, especially in the selected growth cities where we operate at the moment already. And we own a lot of attractive urban plots in these growing areas. So this gives still us a good kind of a foundation to go forward. Then a couple of comments on the construction materials availability and inflation situation. So of course, the challenges on the availability of some certain construction materials have persisted. But so far, we have been able to mitigate the impacts. And we have found alternative materials and sources and supply chain kind of alternative supply chains as well. So we have been, as earlier mentioned also, so we have been able to mitigate the situation pretty well so far. Of course, this is pretty much due to the very good long-standing relationships with our suppliers. This has, of course, benefited us in the changing and challenging situation. But still, we think and anticipate the situation continue at least a couple of next quarters and we are kind of continuing that tough work with, of course, our suppliers but also with our clients. So far, the impact of the inflation and the availability of the construction materials, so the impact hasn't been material. Actually, if we look at the situation now, so in some construction materials, the prices are already showing indications of decline. For example, in rebars, the price increase has already stopped, at least for now, and that's one good example. But of course, the situation differs by material class, of course. But of course, we will mitigate the situation by having a tough, let's say, conversations and negotiations with our customers and clients, our suppliers and kind of using our purchasing power in procurement as well. Then the fourth topic to cover here is more the operating environment for Business Premises, Infrastructure and Property Development. All in all, we can argue that the operating environment has been pretty stable, actually, and the demand has remained on a good level. Also in these businesses, especially in Business Premises and Infrastructure. So we have continued to execute our transformation and actually turnaround strategy. And we have been able to deliver on the plans that we have internally. So it's good to see the progress even in a bit of uncertain market situation. The investor activity has remained on a good level during the first half of the year. In general, we might say that the investor sentiment has turned slightly cautious, but more -- kind of being more selective, the investors are being more selective, or let's put it this way that the selectiveness has increased during the Q2, but the best locations and the sustainable buildings are still of interest as before. So in that sense, the kind of investor sentiment has stayed maybe on a better level than the consumer confidence has been. Of course, if we look at the interest rates and if the interest rates keep rising, so they will naturally have an impact on the yields, and consequently, they might have an impact on the selling prices as well then. One good kind of success in Business Premises was the sale of Pradiaren that we published in April. It was a building in Bratislava, what we renovated the old factory building that we renovated and turned to office, basically mainly office building, and we were able to complete the sale of the project in April, which will then have a good impact and positive impact on the Business Premises profits for Q2. In Property Development, basically no major transactions during the Q2. And there has been also a bit of a conversation in public of our exit of the Trigoni project, and we are targeting to agree on the exit with the counter-parties still during the Q2, and this might then have a negative impact on the Property Development profits in Q2. But that's basically around Business Premises and Property Development businesses. Regarding the strategy execution and first of all, the strategy itself. So when the crisis in Ukraine began, so we, of course, evaluated our strategy again and concluded that our strategy, what we launched last year's November, so it is still the right one. And it's actually, we think that the actions that are planned are especially good in this kind of rapidly changing market conditions. So the strategy is still intact. The balance sheet is strong, as we've been communicating also before. So this also gives us kind of a bit of a buffer and kind of a room for maneuver in this extraordinary conditions. And of course, everybody else doesn't have the luxury that we have with our strong balance sheet now and going forward. In our view, the mid- and long-term prospects remain positive. We will continue investing in growth in housing in Finland, in the growing cities and especially in the CEE countries. But we would like to still remind you that the lead time in housing is approximately 18 months. So of course, we expect the demand in our key markets to gradually recover. But also, of course, the decisions made today will have the impacts on 1.5 years later. And the key message here is that we continue to invest in growth. But of course, it's for sure, we are continuing to monitor the situation and the markets -- and the different markets that we operate in are very closely. And of course, when and if the situation kind of changes dramatically, so we will adjust accordingly, of course, our plans. But all in all, so we have been able to mitigate the situation pretty well during the Q2 and continue with the same strategy. So that's basically the key messages that we would like to give you.

All right. Thanks, Tuomas. And now we are ready for the questions.

So if you have a question, just raise hand, and then we'll then ask you to ask the question. So I think Svante was the first one. So go ahead.

Thank you for the presentation. Regarding the situation now with the consumer confidence, investors being more cautious now. Perhaps first on the consumer. So how do you really look at startups with prices still at or input prices still at the elevated level and the consumer confidence taking a big hit. How do you -- do you want to comment anything about the startups?

Yes, sure. Basically, as mentioned, so we have been monitoring the situation very carefully. And as I just mentioned, so the lead time for -- from the startup to completion is 1.5 years. And as we know also that when we slowed down the startups when the COVID started, so now with impact of the -- on the completion side taking this kind of a lead time into account. So we have been still starting projects as planned before. But of course, we have kind of increased our selectiveness also and the timing of the startup. But so far, no major changes regarding the plan that we have had already. So we have been continuing the startups as planned so far.

Okay. And how -- I mean, how does the situation in the CEE countries look when it comes to the consumer side and perhaps investor side also? Is there any changes that differ from Finland? I mean, obviously, the vicinity to the crisis area is one thing, but any other issues?

Well, yes. And I will actually kind of on a general level, and it's good that I just visited some of the CEE countries and the Baltic countries just this week and a couple of weeks ago. So I've been having a discussion with the locals and with the clients there. So actually, the market situation is better than in Finland. The consumer confidence has been on a general level higher than in Finland, even though the inflation rates are higher than in Finland. So it's a bit -- it's an interesting situation because the markets are kind of reacting so differently to the situation. And for example, in Lithuania, Poland, the consumer demand has stayed on a very good level. Actually, no major changes compared to the last year. And also, this goes -- the same goes for the investor market so far. So in general, I'd argue that in CEE countries, the market situation is better than in Finland.

Okay. That's very helpful. Then on Business Premises and Infra, have you seen any shift in demand between public and private customers?

No major shifts, at least so far and the infra market as it is it's not that cyclical than the other businesses, the market, and it doesn't react on the same way. And during the downturn, the public kind of spending for the buildings and social buildings usually stays on a good level. And this is something that we've seen so far at this time as well. So the infra market situation is actually pretty good at the moment and also no major shifts from the private to public clients so far.

Okay. And then perhaps last one on the investor sentiment in Finland when it comes to perhaps residentials, mainly. I guess there has been some larger portfolios in the market for some time now, and it seems like the spread has increased quite significantly because no deals have closed. So how do you put this into perspective for you? And do you believe that kind of the quality and the fact that you sell new apartments as a big advantage in that?

Well, yes, this is something that we've been monitoring carefully as well. And in general level, we can argue, actually, I mentioned, so the location and the quality of the product is kind of the key. And it's, as I mentioned, so the selectiveness also in residential. So it's a key. And basically, we have -- you put it right. So basically, one might argue that we have a bit of an advantage since we are active on the growing cities and selling new apartments. So at least for now, the situation has been pretty stable compared to the last year.

Thanks, Svante. And next question from Anssi.

It's Anssi from SEB. I have a couple of questions left after Svante. And the first one would be that have you changed anything in your pricing mechanism or maybe better to ask, how have you changed your mechanism mandate? For example, if I was planning to buy an apartment, when is the first possible moment in the process for me to lock the price? And if we compare this to your costs, how much of your costs are locked at this moment?

Thank you, Anssi. It's an extremely good question, and I'll try to answer on a general level since we are not disclosing the pricing process of our business. But anyway, so this is something that we've been using now in the situation in this kind of the market situation. We have basically 3 different points where we can still kind of change the price. And we have been using these phases in the process and so far, pretty successful. The thing is that if we kind of turn it around, so the price increase is, of course, or let's put it this way, that the price sensitivity of demand is, of course, the key. So how much -- and in this kind of interest rate situation, so how much you can raise the price, it's, of course, tied to the demand of the apartments. But we have been using our ability to increase the prices as we go.

Okay. And the next one may be about your financing costs in the coming quarters, as we all know that the cost of debt is increasing. So what kind of refinancing needs you have? Simple one here.

Yes. Yes. Basically, we don't have any refinancing needs. But of course, the interest rate situation is, it is interesting, and we are monitoring that as well. We have also -- we use interest rate hedging as well, and this is something that I think every company kind of considers now what to do in this kind of market environment. But basically, we don't have a near future refinancing needs. So in that sense also, we have a stable situation.

Okay. And maybe finally, I continue a bit on Svante's question about the Finnish housing market. As we have heard that the prices are somewhat stalled at the moment, but you should be increasing your selling prices due to cost inflation. So a bit more. How do you see the situation? And what kind of message you received from your customers? So how do they see this situation? And are they -- what are they expecting in the future regarding this spread between new buildings and other ones?

That's a good question. And there's -- also here, we kind of need to note that the apartments that are now completed and we are selling or we have been selling during the construction phase, the costs have been locked already a lot earlier. And the inflation of the cost materials was actually, it's guarded pretty heavily already in 2020 November or something like this, and the prices have been increasing -- sorry, the inflation has been increasing during the last year. And in that sense, so the apartments that we are now selling, which are completed, so they are kind of locked on a lower construction cost level. But then if we kind of look at the situation from consumer perspective, so of course, the rising prices and the rising interest rates, so it's not a good situation for the consumer in the longer term, and this has been also reflected on our reservation rates in the projects that are under construction right now. And we have kind of a -- we have an active -- also active discussions with the consumers about the price levels, but also kind of a layout of the flats and the changing needs there. But that's basically what we can tell that in this point. But it's not -- we all know that it's not a good situation from a consumer perspective.

Thanks, Anssi. And then we have Markku.

Yes. This is Markku Moilanen from OP. Still a couple of questions left. First of all, how would you describe your sales mix now in Q2? If I recall correctly, you said in Q1 that you had exceptionally good sales mix there. So has there been any change in that? And will that affect your margins?

Well, all in all, the sales mix has been, let's say, on a very ordinary level on Q2. No major changes to the normal situation. A bit of a more, let's say, unfavorable mix compared to the Q1. And in Q1, as we had mentioned, so kind of the sales mix then was a bit extraordinarily good. So we don't have the tailwind in Q2. So that's the main message here.

Okay. That's clear. Then regarding your housing financing. When you are talking with banks, have they still become more cautious in the housing company loans? And then have you been able to obtain all the housing company loans you have applied for?

Well, so far, we have been able to obtain all of them, but it's sure that -- well, let's put it this way that we have a pretty high market share in housing company loans in Finland and we have been able to keep kind of the market share so far. But also, with the banks and with the housing company loans, so we have the active discussion in this kind of a new situation going on. But so far, no major changes there, either.

Good. And then finally, at the end of Q1, approximately 40% of housing under construction was for investors. How are the margins in those units developing in this inflationary environment?

This is something that we cannot directly kind of comment here. But all being said so far, so we understand that also from investors' perspective, if the interest rates are increasing, so that will have an impact on the yields and consequently on the selling prices as well. But that's kind of a general comment of the situation.

Thanks, Markku. And then the next question from Simen.

Yes. I only had one question in conjunction with the other questions already assessed here. You stated that, of course, we know that the increase in interest rates may have a detrimental effect on the demand for apartments, but you still stated that you are still starting projects as planned. So you're not worried on that. But just connecting the dots here. You have stated that half of your interest rate portfolio is from floating rates and 16% of the interest-bearing debt is housing company loans related to unsold apartments. So if we would see a decrease in demand for apartments and you're still starting projects in terms of financial risk management, do you see any kind of risk associated with that?

Good question. And first of all, the situation, as mentioned, so it differs a lot by market area. And basically, if you look at the -- this is not maybe a relevant question regarding the CEE countries. But still, I would like to mention that we are growing in the CEE countries, and we are starting projects in CEE countries, where we see still stable demand for apartments. So that's the first of -- kind of the first part of the comment. Secondly, in Finland, as we can see, there is a weakening kind of a consumer confidence here in Finland, and we have been a bit more selective on the startups during just last months. And of course, we can't see -- we can't have a kind of clear forecast going forward, but we will be a bit selective going forward maybe in Finland. But all in all, this doesn't have a major impact compared to our original plan of startups this year.

So in terms of financial risk management, you're saying that you're still pretty confident relating to the macro environment here?

Well, basically, we are. Yes, you are right. But of course, we either don't have a crystal ball on the macroeconomic situation. But still, as I mentioned, so if we would now kind of a slow down dramatically, so the output and the completions would then be kind of lower in 1.5 years. So we kind of need to take into account the lead time of the construction, and that's the major -- kind of a major argument that we haven't been slowing down the startups significantly.

Thanks, Simen. And next question from Mika.

Concerning the housing business and the reservation rates in new projects. Have we seen any cancellations?

Yes. As mentioned, so the reservation rates has -- have been a bit lower and -- or put it this way, that they are increasing a bit slower than in a normal situation. But what we haven't seen a lot of cancellations during the last couple of months or during the Q1 and Q2. It is pretty rare that our customers would cancel the deal. There might be just a couple of them, but not in big picture kind of impacting the business heavily.

Okay. And then the last one for me. In Business Premises and Infra, you have had these problem projects. So any effort to shares on those ones, how they are progressing?

Yes. We still have the kind of -- some of the legacy projects that we are continuing to execute. And we have now during the Q1 and Q2 being able to continue as planned. No major negative surprises there after the year-end last year. So basically, we are managing the situation with the old legacy project pretty well also. So -- and when we go forward, so the share of these legacy projects is, of course, all the time decreasing. So we are moving into the right direction, and it shows also in the results of Business Premises and Infra.

Thank you, Mika. And seems that there's no further questions. So thank you for the participation. This also was my last Silent Call at YIT, as I will be taking up the position outside YIT in September, but this is not a goodbye as I will be still around until the end of August and obviously responsible for the Q2 report as well. But at this point, thank you. Thank you, and see you at the end of July.