YIT Oyj (YIT) Earnings Call Transcript & Summary

All right. Let's get started. Good morning, and welcome to YIT's Q3 2022 silent call ahead of our silent period starting at the end of this work week. My name is Tommi Jarvenpaa, and I'm YIT's Investor Relations Manager. I'm here with our CFO, Tuomas Makipeska. We will first hear a short intro from Tuomas and then we will have time for questions. Please note that the call will be recorded, and the recording will be published on our website this afternoon. At this point, I will hand over to Tuomas. Go ahead.

Thank you, Sam, and good morning on my behalf as well. As Sam mentioned, so I will give you an introduction to the market and business situation, and I will cover a couple of topics. First of all, the demand and the market situation in housing business and, of course, the apartment start-up situation as well. Then I will give you an overview, of course, of the other segments, Business Premises, Infrastructure and Property Development as well. And at the end, we will cover a bit of the situation in our strategy execution. So starting with the housing situation, housing business situation and the market environment. So as we all know already, the operating environment in housing, housing business has been a bit of challenging, as we already mentioned in Q2. And the demand for apartments has come down from, of course, the last year's exceptionally high levels. And the main reasons behind that are, of course, the rising interest rates and the mortgage rates for consumers, but also the high inflation, high inflations that are then causing kind of uncertainties in the near term and also diminishing the consumer confidence. However, the outlook for housing businesses varies by market, as we already in Q2 mentioned. So in Finland, basically, the demand has been more impacted by the uncertainty. And in CEE countries, still today, the demand has been more favorable for us and -- or healthier, so to say. Of course, it is not the normal situation, either in the CEE countries, but still, in a big picture, so the market looks better in that region. A couple of, of course, kind of notes here as well. Even in CEE countries, for example, in Poland and Czech Republic that are outside of the Eurozone, the interest rates has been rising more rapidly than in Eurozone. And that, of course, has an impact -- negative impact on the consumer demand as well. But we've been evaluating the market constantly, of course, and we have been a bit more careful with the start-ups concerning the reservation rates before starting a project. And that is something that we have been practicing, of course, from -- already from the Q2. But even though the market outlook now looks a bit of challenging in the short term. So we, of course, don't want to slow down our start-ups too much, since the lead time from starting till completing an apartment is, on average, 18 months. So now, after 18 months, the market situation could be a lot more -- or a lot better. So we are very carefully, of course, looking at that. We are not kind of slowing down too much and losing then the opportunity to accelerate when the demand recovers. We are completing a good number of apartments in second half of the year. And that -- even though that we had a low number of completed, unsold apartments, so to say, inventory at the end of Q2, so now that the completions are increasing, so we could see a bit higher inventory levels in Q3 and Q4. But we have a strong balance sheet, and we have ability to kind of complete the project that we have started, and we are not closing down any project at this stage of the business. One thing to also to remember that we communicated in Q2 was the sales mix of housing in the second half of the year, and we communicated that the sales mix, in general, will be weaker than it was in the first half of the year. So that will also have an impact on the housing results on second half of the year. But that's basically about the apartment start-up situation. And now, moving forward to the other segments, Business Premises, Infra and Property Development. So first of all, the inflation rates and concerning, of course, the construction material and labor cost increase, that has, of course, given us headwinds in Infra and Business Premises businesses. And the biggest impact comes to the Business Premises segment. We've been now working with increasing inflation now for 1.5 years. So basically, the same story continues that we are -- we have been able to kind of push the higher costs pretty well to our clients and then, of course, also negotiating our purchasing agreements and so on. So the situation is basically similar as it has been in the previous quarter as well. But, for example, in Infrastructure, the more common way to price the project is that it includes the indexes, which, of course, then safeguards us against the construction cost increases. So basically, the Infra business is not that heavily impacted by the inflation than Business Premises is. In Infra business, we have already communicated that we have certain legacy projects. And of course, as we go on and kind of complete some of them and majority of these projects increases, so this will have continuously a less impact on our profits. But it's good to remind that infra projects are -- in general, they are long and big projects. So we will have this kind of a negative impact on our profits, going forward, but it's all the time coming down. So that's good to remind regarding the Infra business as well. But despite the challenges in the operating environment for Business Premises and Infrastructure, so the transformation, which is in line with our strategy, it has progressed well. Our productivity has increased. Due to the productivity gains in the projects, we have been able to increase the margin deviation compared to the targeted one, so the deviations have gone down significantly from the previous years. And that's kind of a proof point of our strategy execution as well. In Property Development, good to mention maybe that the wind power development is something that we are, of course, focusing according to our strategy. And we have a good and solid pipeline of wind power projects in our Property Development business. And this kind of gives us then opportunities for increasing profits and revenues as well, going forward, in the future. Then, if you look at the strategy execution in general, so of course, this near-term market instability and exceptional situation, this has an impact on our strategy execution as well. But as we have communicated so, we think that even though the market is pretty exceptional, we have a right strategy. We have a strategy which focuses on our core competencies and focuses on the regions where we see a very high growth potential in the long term. So we have been investing to plots and started projects in these regions. And we already now see that the demand on these attractive locations are very much on a higher level than on average in the market. So this also kind of gives us safeguards when going forward, even if the market would not pick up that rapidly. Our order book is on a strong level. And of course, this safeguards our volumes in the near term. And this is also kind of an illustration of our competitive advantage in the market. So we have been able to keep up a good order book, even though the challenging situation in the industry. As mentioned, so we will continue the investments according to our strategy. But of course, we are a bit more careful than we were half a year ago and make kind of -- based on stricter criteria, so we make the investments more carefully, but we continue to do them even in this kind of a market situation. Our strong balance sheet, of course, allows us to do so, and -- but we are not willing to take any major risks, going forward. So this is something that we are balancing at the moment, playing the long-term strategic game for growth and then, of course, maintaining the risk levels in the near term on a reasonable level. But that's basically kind of a short introduction to the situation, and we are now ready to take. I'm sure you have some questions, so we are happy to answer them now.

Thanks, Tuomas. Indeed. If you have a question, please use the raise hand function. And it seems that we have a first question from Svante. Go ahead.

Yes. Thank you, Tuomas, and [ Samu ]. Perhaps that's the first question regarding your plots. You have made some cleaning-up there. Are you happy with the situation now? And will you continue to invest there at the same pace as earlier? Or what's your reasoning there?

Yes. We are -- in a big picture, we are happy with our land bank, so to say. We have been investing to the plots, as mentioned, to the attractive locations, in a big picture. So we are happy with the land bank, and we will continue to invest in the plots in very attractive locations, as already mentioned, because we see that the demand for apartments kind of keeps up on a reasonable level, even though the market situation kind of weakens. So in that sense, yes, but we are not -- we have, of course, kind of slowed down the pace of the investments a bit because of the near-term challenges. So this is exactly what I meant kind of balancing the near-term risk management and playing, again, the long-term growth strategy.

And then on the housing side also, how have you seen the investor demand developing there? I mean it's roughly 30% of your housing businesses, I guess, in the investor side and obviously important for you, but also, kind of a way to -- if there's drop in consumer demand, a way to at least you have built joint venture to solve that problem. So how do you look at the development there? Is it so that the funds still have a lot of cash that they need to deploy or how should we look at it?

Yes, that's a good question. And regarding the investor side, I think, as we already mentioned in Q2, the same kind of situation has continued, kind of the demand situation there is more stable than it is in the consumer side. So that is clear. The demand has been actually quite good up until now, and we already -- we have, of course, continuous discussions ongoing. And we see that the market will be more stable on that side. But of course, we know that the -- for example, if the war escalates or kind of a geopolitical situation gets even worse, so -- of course, the investor market would then get hit as well. But in these circumstances, it has been keeping up better than the consumer side.

And then third question regarding your cost savings, which you managed to achieve EUR 40 million year-to-date in Q2. I guess that was both from central functions and also from the divisions. But is there more to come on that side?

Yes. We had a EUR 40 million savings compared to the last year in Q2, and we have been continuing according to our strategy. So there -- where we kind of target higher productivity, one big element there is our operating model and also kind of a cost efficiency regarding the fixed costs. So we have been continuing to kind of find cost efficiency -- new cost efficiency measures, and we will keep up with that, of course, for the long-term competitiveness, but also kind of safeguarding the near-term profits.

And then the last question on Mall of Tripla. It's a relatively big part of your balance sheet. And how do you look at; a, the operational performance there; and b, the investor market in shopping centers?

Yes. We can comment on a general level this one. And the Mall of Tripla operationally goes actually quite well. The visitor amounts are on a very high level. And altogether, kind of the business performance of the mall is on a good level at the moment. And also, if we look at the kind of investor side there, so the kind of pressure on yields has been, of course, increasing as well, but not that much in the commercial side and logistics side. Then, again, of course, looking at the kind of a pressure on rising yields is higher in kind of an office building type of real estate, but not that much in commercial and logistics side.

And also on Mall of Tripla, last question. Could you remind us about your official exit plan for Tripla?

Well, we don't have an official exit plan, but as we have communicated already in the CMD last year, so in our plans, the exit would probably happen on 2024. So that -- there is no change in that. But we don't have any official plan, and that is -- was our view then, and that is intact.

Thanks, Svante. And next, we have a question from Anssi.

Yes. Thank you guys. I have a couple of questions, and I start with [indiscernible], and according to some news, there were some problems with the foundation works of [indiscernible]. So have you seen -- or are you estimating to see any impacts? And if so, what kind of, and like any significant news from there?

Well, first of all, we are not commenting on specifically any projects. But on a general level, I would argue that actually the [indiscernible] project is progressing quite well. We don't have any big risks, financial risks related to that project. But of course, kind of the market situation that I described earlier, so that has also an impact on Infra projects, but we don't have any bigger challenges in [indiscernible] project.

Okay. Good to hear. And the second question is about your wind power pipeline. So what's the size of the pipeline if we talk about megawatts, can you comment on that? And are you planning to strengthen your pipeline with acquisitions? And if I continue on this topic, should we expect any significant development profits in the coming quarter?

Well, first of all, so the wind power, in general, so that is in the core of our strategy, and we have been investing to that. And if we look at the current pipeline, which is also part of our earnings release, so we have the Murtomaki 2 and Taraskallio projects going on, and planning and zoning phase is where we are with them. And the total capacity with them is a bit less than 140 megawatts. And that's the current situation of the pipeline. But this is, of course, kind of a long term -- or the projects are taking long time. So now, in the coming quarters, so we are not expecting any bigger returns from the wind power, but this is more kind of to the coming years, and we will be investing to the new projects in wind power going on -- going forward, I mean.

But your investments are like more into organic side? Or are you planning to make any acquisitions, for example, some early-stage pipelines?

Well, we are looking at our options in the market, of course. But so far, the approach has been organic and will -- the market is in the situation -- in interesting situation, and we are looking at it, but we don't have any kind of current plans to do any bigger malls there in order.

Thanks, Anssi. And next question from Mika.

Your sales rate in the housing projects, which will be completed in H2 this year, could you comment on that one?

Well, in general, what I covered in the introduction, so we have a good number of completions in second half of the year. And the situation, of course, what I described already, so this is continuously kind of dependent on the demand situation. And we have had completions, and we have been kind of increasing our sales campaigns to boost sales, going forward, in this kind of more challenging situation. And we might see kind of an increase in our inventory levels in the second half of the year, but that's basically what we can tell you. And also, I remind you again about the sales mix of the second half, so that is, compared to the first half, that will be a bit weaker.

Thanks, Mika. Do we have any further questions?

If no, just a comment still from my side is that in Q3, we will, of course, then elaborate on the market situation a bit more. And of course that the situation has been changing all the time, and it hasn't been changing to the better, so far. So in a month from now, so you'll get a new update in the Q3.

Yes. Thanks, everyone, for participating, and thank you, Tuomas. We will talk to you soon after our silent period ends. Thank you.

Thank you.