YIT Oyj (YIT) Earnings Call Transcript & Summary

Good morning, and welcome to YIT's Full Year 2022 Results Webcast. My name is Samu Heikkila, and I'm YIT's Investor Relations Manager. The results and highlights of YIT's 2022 will be presented by our CEO, Heikki Vuorenmaa; and our CFO, Tuomas Makipeska. After the presentation, we will be taking questions from the conference call line. At this point, I would like to hand over to our CEO, Heikki. Please go ahead.

Thank you, Samu. During the 2022, our execution of strategy progressed on a multiple fronts. We sold our businesses in Russia, improved our profitability and productivity as well as emphasize sustainability in all our operations by introducing, for example, new construction material innovations to our production and setting ambitious goal for us to become a carbon-neutral construction company. If we take a look for the year 2022 to the numbers. Our revenue declined by 9 percentage points year-on-year, driven by the lower number of apartment completions and lower sales in Housing. On the Business Premises and Infrastructure, our revenue remained stable, but decreased in the Property Development, where the comparative period was supported by the Lestijarvi wind farm sale. Our increased profitability, both in adjusted EBIT and EBIT margin reflects the stabilized underlying performance in the Business Premises and Infrastructure side, the productivity gains and enhanced project management. During the '22, we took those decisive steps on our strategy execution. As I mentioned before, one of the key events of the year was the sale of the YIT business in Russia. The strategic review of the Russian business was originally initiated already in November 2021 and then accelerated after Russia's innovation of Ukraine in early 2022. The sale was finalized under challenging conditions, which led to a weaker financial outcome than originally anticipated. However, after the sale, we were able to fully focus on our strategy and grow businesses. In our strategy, we also outlined the plans to achieve annual cost savings, EUR 15 million to EUR 20 million by '23 in our continuing operations. By the end of '22, the annual cost savings amounted to over EUR 20 million, exceeding the goal outlined in that strategy. We also achieved additional efficiencies from enhanced project management. At the end of '22, we set ambitious goals to carbon-neutral construction by updating our climate targets and created a carbon road map to reduce emissions. We are aiming to be a carbon-neutral on our own operations by 2030, and we are committed to cut at least 30% of our value chain emissions by the same year. We have already reduced the emissions from our own operations by over 55% compared to the reference year 2019. We have also taken an important step in reducing our value chain emissions like mentioned earlier. If we take a look in the numbers through the different segments. First, let's start from the Housing performance. In 2022, we had approximately 3,000 consumer apartment completions, which is 300 less than 2021. In addition to lower completions, profitability was impacted by lower sales. We again achieved very high customer satisfaction and renewed our #1 position in the annual EPSI Rating. This is a result of a long-term work and reflects our personal commitment to exceed customer expectations. During '22, we were able to strengthen our land bank in selected growing cities, which enables us today to construct approximately 34,000 new homes. On the Business Premises segment, we progressed by improving our profitability. Our adjusting operating profit increased to EUR 20 million, which was supported by enhanced project management, but also by the sale of 2 self-developed projects during the second quarter. Over the year, we experienced increased construction material costs that had a negative impact on margins. While maintaining the order book on a healthy level, we have continued our focused tendering efforts on projects in which we are the most -- which we can deliver the most value for our customers. In Infrastructure segment, our underlying performance stabilized, yet the profitability is still on a very modest level. Our portfolio continues to carry certain legacy projects, which impact negatively to our overall performance. During '22, we have had a good accomplishment in alliance projects, delivering the solutions to our customers within the budget and ahead of the schedule. On the Property Development side, there were no major transactions during 2022. The comparative period was supported by a positive impact from the sale of Lestijarvi wind farm. Our profitability was also impacted during Q4 by an impairment related to a development project. The fair value of YIT's partly owned Mall of Tripla remained stable. Market yields increased but the negative effect on fair value was offset by other factors, including increases in our cash flow estimates. The Mall of Tripla continued its good performance with all-time high sales both in November and December 2022. We also received multiple awards, for example, awarded as the Best Shopping Center in Helsinki in Finland and also in the Nordics. We also continued our determined work to develop significant wind power portfolio, which currently has 2,900 megawatts in preliminary study phase and 550 megawatts in permitting phase.

Okay. Thank you, Heikki. And good morning on my behalf as well. Q4 was another strong quarter for us, and by that, we closed an overall solid fiscal year in a challenging operating environment. Our profitability improved and the order book remained healthy and solid, which ensures our future revenues and profits. Let's see the financial highlights of the quarter and the year. Here, we have the key performance indicators of the year for continuing operations. As Heikki already mentioned, so the adjusted EBIT improved both in absolute and relative terms significantly. Our net debt increased, which reflects our investments for the future and ensuring the future profits as well. The earnings per share increased clearly and amounted to EUR 0.28. And our Board of Director -- Directors proposes to the AGM a growing dividend of EUR 0.18. So these are the highlights of the fiscal year, but let's then have a look at the overall financials a bit closer. Here, we have the order book development on the left-hand side, and the order book decreased slightly from the last year and also from the last quarter. And the order book decreased somewhat in Infrastructure, but remained relatively stable in the other segments. And when taking into account our selectiveness in the market, the order book remained on a strong and healthy level, and I think it's again a good evidence of our competitiveness in the market. The healthy order book will safeguard our volumes and profits going forward in the unstable market conditions. The revenue decreased, driven by the Housing and Property Development, while we also achieved growth in Business Premises. The Housing revenue decrease was due to the lower apartment -- lower number of apartment completions and lower sales. But our top priority and the target has been profitability improvement instead of increasing volumes. And despite of the lower revenue, we delivered a clear EBIT improvement in '22. Let's then have a look at the adjusted EBIT. We were able to improve our absolute EBIT significantly despite the lower revenues, as I mentioned, especially in Housing. But in the big picture, the underlying performance was stable in all segments. And actually, all segments gained benefits from the executed fixed cost reductions. Heikki already mentioned that in total, the fixed cost savings amounted to over EUR 20 million compared to the last year, mainly driven by the more efficient operating model that we launched in the beginning of the year. As we look at the adjusted EBIT improvement from segment breakdown perspective, the improvement compared to year '21 was heavily driven by the Infrastructure. There were project write-downs in the comparison period, which, of course, impacted improvement, but also the underlying profitability improved in the segment. The main source for EBIT improvement was the project management and decreased project deviation -- deviations or project margin deviations. In Business Premises, the increase was mainly due to the 2 self-developed projects recognized already in the second quartile of the year. One of them was in Bratislava, Slovakia, the Pradiaren and the other one in Turku, Finland. Those had a positive impact on the earnings of Business Premises in year '22. In Housing, the adjusted EBIT decreased due to the lower volumes as discussed already earlier. But in Property Development, there was the Lestijarvi wind farm sale in the comparison period, which makes the delta negative here as well. In year '22 -- sorry, in year '23, no corresponding -- sorry, in year '22, no corresponding wind park sale occurred. But we see our wind park portfolio very attractive at the moment, which will improve our profits in the coming years. And finally, there was an internal margin reversal in our structure that also supported the profitability improvement in '22. Then moving on to the balance sheet side and cash flow and capital employed development. The development reflects our investments to the future earnings, and this is according to our strategy as communicated earlier as well. During the year, we continued to invest in plots in growing cities of Finland and CEE countries and grew our land back -- land bank further. We started up self-developed projects in Housing and Property Development. And the project will be completed during the years '23 and '24 ensures our profits going forward as the market picks up again. Also, our number of completed unsold apartments increased due to the challenging market situation and muted demand for the apartments. But it is very important to note that more than 80% of the apartments are in capital regions or university towns in Finland and Central European countries, meaning that they are very current products to be sold as the demand recovers again. As we have communicated, we are taking a bit more cautious approach to new investments and start-ups. And this was already reflected in Q4 cash flow, which was EUR 40 million positive, EUR 40 million positive. Then if you have a look at the net debt structure, and the net debt, which increased during the year, that was mainly driven by the cash flow development I just described. But it is very important to note here that our net debt structure and the low financial risk profile that we have is illustrated on the left-hand side in terms of the gross debt. Our net debt, excluding the IFRS 16 items and the Housing company loans is approximately [ EUR 130 million ]. So adjusted net debt, [ EUR 130 million ] approximately, and that was also decreased from the Q3. Also, as I mentioned earlier, we have a valuable inventory of apartments to be sold when the demand picks up again, and this will again support our cash flow, cash flow generation and net debt development. Then if we have a look at the maturity structure of our debt portfolio. So we can argue that it's a healthy structure and the maturity. And as normally, we proactively manage our debt portfolio and evaluate our options for the refinancing well in advance. All in all, our balance sheet remained strong during the year, and it allows us to execute our strategy going forward. As mentioned, the increase in net debt is related to the growth investments to plots and construction volumes, and it is also visible, of course, in the gearing development as well. As already Heikki mentioned, it is good to note that the sale of the Russian operations in Q2 already had a negative impact on the gearing and our equity ratio. But after the transaction, the development has been stable during the year. Our solid balance sheet supports us as we navigate through the unstable market environment. So to summarize, the improving performance drove our earnings growth, and by already made investments and solid order book, we are well equipped to continue executing our strategy. Thank you. And now back to you, Heikki.

Thank you, Tuomas. Let's take a look then a little bit on the market, how we see the 2023 to be. On the Housing market, with -- the consumer demand has remained at the low level as a result of the weakened general consumer confidence, rising interest rates and higher energy prices. Demand on the investor side has also affected and investors grew more cautious due to the uncertain economic outlook. The demand outlook on the Housing market remains muted in the short-term. Real estate market and the growing cost pressure have slowed down customers' decision-making, but only a few projects have been postponed. On the investor side, demand has also weakened as rising interest rates is increasing yields and financing costs for the projects. In the Central Eastern Europe, the market was supported especially by the private sector demand for new Business Premises. Headwinds caused by uncertain macroeconomic outlook are expected to persist in the short-term. Cost inflation in some construction material showed signs of leveling off and the workforce availability improved. Infrastructure market in Finland, the public sector demand remained at a moderate level with several projects in the planning and bidding phase. Private sector demand is driven by industrial construction and the transition towards renewable energy. The increased [ cautiousness ] in the overall market could lead to postponement of some upcoming projects. In Sweden, the market remains active, yet the competition for project remains intense as well. Let's then double-click a little bit on the Housing market and the same time, zoom out to take a look at the big picture in the light of our apartments under construction and unsold pipeline. As mentioned before, the number of unsold completed apartments increased to 794, of which more than 80% are in the capital regions or university towns in Finland and Central Eastern Europe. Percentage share of the sold apartments under construction is at 60%, which is in historical perspective within the standard range. Like Tuomas mentioned, we've taken the prudent approach to the new consumer start-ups to react on these market changes. And we continue to have typical level of promotional campaigns to support the sales. On the consumer apartment completions side, we see, we plan to have approximately 3,000 units this year, of which 1,500 units or 50% in the Central Eastern Europe. This is reflecting well our strategic ambitions to [ react ] growth in the region. In addition, we have 3,400 units under construction for investors that will be recognized over the time. Over to you, Tuomas.

Yes. Thank you, Heikki. So YIT expects its group adjusted operating profit for continuing operations to be lower than in year '22, which was EUR 110 million. In Housing, the demand outlook remains muted in the short-term. And in Business Premises and Infrastructure, the underlying operational performance is expected to improve, but certain legacy low-margin projects will still affect Infrastructure's performance. YIT's performance will be supported by the increased efficiencies from the transformation program that we just launched. It's good to note that the developments in Housing markets may have an impact on the outlook and the rising interest rates may have a negative impact on the fair value of our investments. And back to you, Heikki.

Thank you, Tuomas. We have covered the market, but let's talk about topics that are on our own hands as we today announced the new program to generate further efficiency gains. The program target is to support our short-term profitability while also increasing our long-term competitiveness. We expect the main part of these operating expense savings comes from the IT facility expenses, operating model changes as well as other indirect costs. Additionally, we continue to increase our efficiency in the procurement, project management and productivity. These cost savings will come on top of the cost savings that we already have achieved by the end of 2022. We expect to achieve more than half of the planned run rate cost savings during this year. As a summary, we continue to take decisive actions to generate further efficiency gains and improve our profitability. We focus on maintaining our capability to invest while we navigate through the challenging market. And we are very committed to continue our journey towards the carbon-neutral company, and we see the future growth potential in it. Thank you.

Thank you, Heikki, and thank you, Tuomas. Operator, we are now ready for the questions.

[Operator Instructions] The next question comes from Mika Karppinen from Danske Bank.

Yes. This is Mika from Danske. Could you comment on the EBIT margin development in the Housing business in Q4? Was there something exceptional compared to previous years in mix or something else? Has it improved despite lower sales?

Yes. Thank you, Mika, for the question. I can answer that. So in Q4, in our Housing segments, we had a large number of completions with actually pretty good reservation and sales rate, both in Finland, but especially in the CEE countries. And this was supporting our Q4 earnings in the Housing segment.

Okay. Then if I continue with the unsold inventory, it clearly increased. So what kind of measures you are planning to lower the sort of those inventories?

Yes. As we see the increase in the inventory has been actually developing during the year, which is, of course, related to the market demand, which we have been seeing decreasing. We have been monitoring the inventory pretty closely and looking our options. And of course, the main thing that we have been doing is supporting our sales with the marketing campaigns and so on. So that's the main mean to accelerate the growth as the sales. We have also looked at several other options and looking at them now going forward as well. So basically, what we say that our inventory is very current, and we have good apartments in the inventory. And when the market picks up again, so we have very, very good products to be sold. So this is basically what we are doing.

This is Mika. Can you hear me? I lost sort of your answer to my last question.

Did you hear my answer at all?

No.