YIT Oyj (YIT) Earnings Call Transcript & Summary

Good afternoon, and welcome to YIT's Q4 2022 silent call ahead of our silent period starting at the end of this month. My name is Samu Heikkila and I'm YIT's Investor Relations Manager. With me here today is, as usual, our CFO, Tuomas Makipeska but also our new CEO, Heikki Vuorenmaa. Heikki will be able to participate in the call for the first 20 minutes. We will first hear short intros from both Heikki and Tuomas, and then we will have time for questions. As a reminder, this call will be recorded, and the recording will be published on our website this afternoon. At this point, I will hand over to Hank. Go ahead.

Thank you very much sam and hello, everyone of you on the line. So this Heikki Vuorenmaa speaking and I started as a CEO and the President of the YIT at start of the December. The company for myself is not a new as such. So I spent years 2015 until 2020 in the construction industry. And the last time 2 years ago, when I was with YIT, I was leading the Paving segment, leading it through the transformation, all the way then to the divestments to pay up. The past 2 years, I spent with the consulting company, McKinsey, leading the transformation with several clients here in the Nordics but also in the other parts of the Europe. My background before joining the construction industry is from the Nokia where I spent 7 years focusing on procurement, supply chain and also leading in different types of change management project and situation in that context. Now my first weeks, I will spend a lot of time meeting our customers, suppliers, employees, visiting construction sites and also spend the time with our main owners. We have also launched an internal survey to further analyze the organization and the cultural baseline that I'm starting with the team. But I'm personally been very impressed about is the spirits as well as the competencies and capabilities we have, especially on the urban development side, where we have the recent victory of announcement on this Kupittaa site. It's a quite impressive and true testimony of the capabilities that the YIT has to provide on this industry. Personally, also being 2 years away and now rejoining the company, it has been very positive to notice the steps that the company has been taking during those 2 years. Lot has been improved on the key processes and the practices that are in place. Then there's a very short intro about myself and about first few weeks. I do look forward to close cooperation with every one of you in the coming years.

Thank you, Heikki. And it's Tuomas Makipeska speaking here. Hello, every one of you on the line as well from my side. And just going forward with the silent call on the traditional way, so I'll I have a few comments on the general market situation and then moving on to our Housing segment and the demand situation there and then covering briefly our other segments as well. And if we look at the market situation and what we actually communicated already in Q3, the market has been or it has remained challenging from many aspects. And it actually hasn't improved, its vice versa in certain dimensions, the market has been actually getting even more challenging, and I'll get back to that as well in a while. The inflation, the rising interest rates and energy crisis that is emerging. So they are giving us headwinds in the market. And we all know if we look at the news -- rate the news, we know the overall inflation situation. But of course, for us, it is more -- or the direct impact comes from the construction material costs and the service costs. So for example, now, in construction materials, certain materials, the inflation has continued to stabilize. They already started to stabilize during the Q3 or at the end of Q3, actually, and this development has been progressing during the Q4 as well. But then again, if we look at the kind of -- for example, the recent statistic Finland report, even though the construction material costs are still up some 9% year-on-year but if you look at the last couple of months, last 2 months, so it has actually been decreasing. So this is, of course, for our business, good news are helping us in tackling the inflation impacts that we have been seeing now for 1.5 years. Also, if you look at the material and workforce availability, so they -- the situation there has been improving again during the Q4. It started to improve already in Q3 as we communicated, but kind of a favorable progress there has been continuing during this quarter as well. But then if we have a look at the consumer and also the investor demand, but starting with the consumer demand. So the overall inflation, combined with the higher interest rates for the mortgages and then adding up the energy crisis. So they have a big impact on the consumers and their confidence. As we all know, the consumer confidence are close to all-time low at the moment. And as we are -- as a big part of our business is consumer business and selling flats to consumers. So we see weakening demand in that side as well. And of course, the other kind of a key segment for us is the investors in general. And even during the Q3, the investor demand has actually remained on a pretty active and high level. So now during the Q4, we have seen increased cautiousness in investor demand as well. And that is, of course, linked to the kind of a money market situation in general as well and the rising interest rates. But then if we have a look at the Housing segment situation, so -- as reported earlier, so we are completing a good number of apartments during the Q4, and a quite low number actually during the Q1 next year as we've been showing you. So it is natural that we could see higher inventory levels now as the demand has been decreasing significantly. But -- and again, it's good to know that our balance sheet withstands cyclical changes in the sales side as well. And our kind of a strong liquidity position still and the undrawn committed facilities that we have. So we don't have any risk -- big risks regarding our liquidity situation and the financing situation going forward. We also have a big refinancing rounds coming up at the end of next year and at the start of year '24. But of course if we look at the situation in the consumer's demand. So we have been keeping a close eye on the investments to plots and also regarding the start-ups. And we have been requiring higher reservation rates before starting up any projects. So the cautiousness and kind of the risk management has been in our focus during the Q4 as well. And that was already the case during the Q3, as communicated earlier. But as I just commented, so the market hasn't been picking up during this quarter. So we are continuing on those practices heavily also going forward. And then just a couple of comments on the other segments, basically, as during this year already, so the transformation in business premises and infrastructure, they have been progressing quite well. Of course, the market situation has an impact and a negative impact on those segments as well. But still, the transformation activities that we have been communicating. So on those, we have been progressing well. Let's say, a sign of our competitiveness in the market is that even though the market has been getting more challenging, so the order book has been growing during this year. So that gives kind of a volume or insurers volume now going forward. And so that's one sign. Then we have also -- we have won a couple of big cases. Now just during the last couple of weeks, such as Kupittaa and Karki, the partnership project in Turku and also at Tampere, the Tampere City, central office building and the Pon Bike factory in Lithuania as well. So those are kind of showcases of our competitiveness in the market even though the market situation in general is getting more challenging. So that's it about the business premises and the Infra -- infra side as well. But kind of wrapping up now the situation. So of course, we are not immune from the marketing instability. But then looking at our business portfolio, so our somewhat diversified business model provides us balance in this kind of a situation where the consumer demand is decreasing. So that also stabilizes our way forward. And as mentioned, also the pretty strong order book at the end of Q3 supports us also going forward. But then again, it's good to note that the market situation has changed pretty dramatically during this year, and this makes us kind of a -- to seek more productivity gains in our operating model in our segments. So we are closely looking at the improvement levers and of course, planning some actions also to improve our cost efficiencies and so on. So this is something that we are taking very seriously. And actually, we are accelerating the productivity improvements as stated in our strategy as well. So having said that, so we are confident that with these actions and our strong capabilities that Heikki was referring to as well. So we are capable and we will steer the company forward, even though the market situation looks challenging. But that is to conclude the introduction now, and I would now be happy to take on questions for you guys.

Yes. Thank you, Heikki. Thank you, Tuomas. No, we are ready with questions,[Operator Instructions] And it seems that we have the first questions from Svante.

A couple of questions from my side. First one -- you mentioned the declined investor demand, which is not a surprise. But how do you look -- I mean looking at what you have done in recent history when you have had unsold consumer apartments, which we probably can assume will happen this time around too, do you think there is any possibilities to unload those into JVs? Or is that now more difficult or it probably is more difficult, but is it possible now to have that kind of solutions?

Thank you, Svante. So definitely, we are looking at the situation very carefully as always in this kind of a situation. And it is possible to do this kind of moves on the market as well. But we are, as mentioned, so we are considering our options and looking at the situation all the time, what would be the best for the company and that's basically where we are right now.

And then on productivity, I think you had run rate of EUR 20 million in cost savings after Q3. So should we expect that still to grow in Q4?

Well, that's something that we cannot disclose at this point. But as mentioned, so this is at the core of our strategy, and we are targeting productivity gains throughout the organization. So that's basically all we can comment now.

Thanks, Svante. Next questions from Olli.

On the property market and the kind of the yield requirements, what kind of fair value impacts are you expecting on your assets based on the rising yield requirements this year, mainly talking about Tripla here.

Yes. Thank you, Olli. As mentioned, so the investor demand has been decreasing. And one of the reasons there is, of course, the rising pressures on the yield. So that's for sure. And this, as mentioned, so we are closely monitoring the situation and kind of evaluating the impacts and then, of course, Tripla is one of them, but also we are looking at the market as a general. And if there is some -- if there is some impact, so that they will be then reported in Q4.

All right. Just to follow up on Tripla. Can you comment on how Tripla sales and traffic has been in the shopping mall this year and the year is coming to close. Has it been any better than last year?

Well, in general, we can comment that the situation in Tripla in general. So it is -- it has been developing to the favorable direction. In general, the shopping mall is doing well. And the kind of traffic and the sales are developing well, let's put it this way. So no major changes there.

Next question from Anssi.

It's Anssi Kiviniemi from SEB. I have a couple of questions, and the first one is about the material costs and like how do you think that decrease in costs will affect your selling prices of apartments like how long it takes before we see any impact? And how would you describe the dynamic as you have been building apartments now with higher material costs. And if I understood correctly, you're now seeing decrease in cost. So -- and you have higher inventories maybe than usual when going into the next quarter.

Well, yes, and that's a good -- thank you, Anssi, a good question. As we've been communicating, during this year. So we've been seeing the material and construction services inflation on a rise, let's say, for the last almost 2 years now. And we have been tackling, of course, the rising costs with our suppliers and using our, let's say, buying or purchasing power appropriately. And this is something that we have been kind of seeing now for 2 years. And now the situation has changed a bit since at least for some of the material costs has been actually already decreasing. So in this kind of a situation, we are -- it's fair to say that we are pushing pretty hard also now in the situation to the suppliers as well. And we are kind of heavily negotiating the prices as we speak. So that's, I think, the basic thing. Now if we look a bit forward, so it's very challenging to predict how the material costs are now kind of going to develop, how is the energy crisis going to kind of impact the costs and so on. So we are in a kind of in a situation where it's hard to forecast, but all we can say now is that we are using our purchasing power appropriately. Then again, if we look at the selling prices of the apartment, so that's more tied to the general market situation. And this is something that actually I already commented. So now the market situation from the demand perspective has been decreasing and you know the price sensitivity of demand. So this is something that we are closely kind of analyzing and making changes. But since the apartment, some of the apartments are already completed or pretty much of them are already completed and the cost has been tied long before. So there's the time lag between the cost incurrence and then selling the apartment. So there's a big kind of a time lag behind -- between them.

Okay. And the second one is about your balance sheet. And of course, this is like purely speculative question, as you have said that there is no need or risk for an equity issuance. But if you had to name one metric you are worried about or something which could be a trigger for equity issuance, what would it be like, some equity ratio or whatever it is, anything to point out here?

Well, you put a challenging question, but I can comment on that on a general level. If we look at our debt structure, what we've been presenting you in Q3. So I would still argue that we have a pretty low risk profile in our gross debt and getting back to the IFRS 16 lease liabilities and the housing company loans related to the unsold apartments. So those present pretty big amount of our net debt. And when we would be excluding those from so to say, adjusted net debt. So that would actually kind of illustrate our risk levels more appropriately. And from that sense, so we are in our view, on a pretty low risk side, still with our gross debt perspective.

Okay. Thanks, Anssi. Do we have any further questions? It seems that we do not. So thank you all for participating. We will publish our full year results on the 10th of February. And at this point, we would like to wish you all happy holidays.

Thank you. You too.

Thank you.