YIT Oyj (YIT) Earnings Call Transcript & Summary

Hi, everyone, and welcome to YIT's fourth quarter 2023 silent call ahead of our silent period starting soon. My name is Essi Nikitin, and I'm heading the Investor Relations here at YIT. Together with me here is our CFO, Tuomas Makipeska. We will first hear a short intro from Tuomas, and then we will have time for your questions. As a reminder, this call will be recorded, and the recording will be published on our website after the call. But at this point, I will hand over to Tuomas. Please go ahead.

Thank you, Essi, and good morning on my behalf as well. We'll cover basically four topics in this intro, following pretty much the same structure as before, starting with the market update related to the Housing segment. Then moving on to the market update related to the other business segments. And then a few words about our cash flow and financial position and fourth one being the transformation program and the capital release. So starting with the first one, the market update related to the Housing business. In our guidance and outlook for the rest of the year, we've stated that we expect the market recovery in CEE countries to further continue. And in Finland, we have said we expect the market to continue to be weak in the fourth quarter. And starting with the current market situation in Finland. Although the demand has still remained on a historically low level, we have started to see some clear positive signs of gradual recovery in the operating environment meaning that the inflation has slowed down faster than expected, reflected in the quite significant decline in market interest rates towards the end of the year. According to several banks' recent housing market reviews and the Finnish Real Estate Agents' Association's recent study, the number of trades has increased towards the end of the year, and market is starting to recover. The government's decisions related to taxation of the first-time homebuyers have also accelerated the activity in the last months of the financial year. In CEE countries, the overall market has continued to be more active compared to Finland. As we commented in our Q3 earnings call, the market has continued to improve, especially in Poland, the Czech Republic and Latvia and the gradual market recovery is expected to continue. Business in CEE countries have proceeded according to plan during the Q4, but as mentioned before, during the recent months, we have seen some delays in commissioning processes in those countries. Therefore, as we have communicated before, delayed apartment completions or commissioning processes could lead to the postponement of revenue and profit from one quarter to another. If we then shift our focus to our contracting segments, Business Premises and Infrastructure, we have seen quite a good level of market activity in both of them. In Business Premises, as we announced during the quarter, we have identified the need to change the operating model of the segment to be more customer-oriented and to strengthen our competitiveness and the actions are ongoing to implement the change. As communicated earlier this week, the change in negotiations relating to the organizational change in the segment have been concluded now. And the new operating model and the ways of working will be effective starting 1st of January next year. There is a good amount of planning and bidding activity in the markets. As one highlight of the activity we announced during the quarter that we have agreed on the construction of a new research building in Otaniemi, Espoo with Technopolis. And there are other examples as well, and we're happy about the commercial successes achieved so far. In the Infrastructure segment, the low-margin legacy projects in Sweden continue to burden -- to burn the profitability in an otherwise well-performing segment. The infrastructure business in Sweden is under strategic evaluation, but we have no news to comment on that yet. Then few words on our cash flow and financial position. We announced a month ago that we have signed a new EUR 140 million term loan facility agreement replacing previous loans totaling EUR 150 million maturing in late '23 and in spring '24. The new loan is secured and will mature in April '25. The financing arrangement supports our operative business, it strengthens our financial position and adds flexibility to our financing structure altogether. I'm very pleased with the successful completion of this arrangement and the opportunities it brings for the further development of the company. In accordance with the refinancing announcement we communicated that as a part of the measures aiming to lower the indebtedness through the previously announced capital efficiency program. We plan to redeem the EUR 100 million bond maturing in the spring '24. We also announced that as a separate decision, the Board has assessed the industry's business cycle, prevailing market conditions and the projected cash flow of the company and determined based on these factors that it will not propose profit distribution for the financial year '23 to the AGM to be held in March '24. As mentioned earlier, for us, one of the main drivers of cash flow is, of course, the sales of apartments to consumers and investors. Our main focus is on improving sales. But as communicated earlier, we have also continued to focus on our cost discipline to support our cash flow in this current market, and the measures have continued also in the fourth quarter. Then moving on to the final and probably the most important topic our transformation journey towards improving our profitability and capital efficiency. Our transformation program has continued to progress faster than originally expected. As we communicated in November, by the end of the third quarter, we have proceeded with the measures to achieve the targeted cost savings. With the actions taken by the end of third quarter, we will gain annualized run-rate cost savings of EUR 20 million, which will be fully realized by the end of '24 and this work has continued also during the fourth quarter. We've had good progress in our transformation program initiatives altogether. Besides the actions focusing strictly on our cost discipline, we have made clear progress during the quarter towards improving our productivity, project management and especially procurement. With the changes implemented during the program, we will be able to clearly improve our competitiveness in the long term. And we will, of course, come back to the progress of the transformation in more detail in accordance with the Q4 results. The transformation program also aims to improve the capital efficiency. And in the beginning of the fourth quarter, we announced the selling of our stake in the Sia LiveOn co-investment vehicle in Latvia. And in early December, we announced that as a result of the strategic review, YIT has signed an agreement on the sale of the renewable energy business to Eolus Vind AB and the sale includes the YIT project development portfolio of wind and solar power and the personnel working with this -- with the business. The transaction was closed actually last week. And YIT recorded an estimated purchase price of EUR 48 million and a gain on sale of EUR 46 million for the fourth quarter. The gain on sale is reported in EBIT, adjusting items and thereby, it has no effect on our guidance for '23. I'm very pleased that the strategic review of the renewable energy business has been now successfully completed through this transaction. The deal strengthens of course, our financial position and improves our focus on our core businesses. We are working on the capital release program on many fronts as we speak and we have several negotiations ongoing, and we will come back with further communication related to that in due course. So to conclude, all in all, in a challenging business environment, we have again taken many steps ahead and made good progress on our key initiatives. We are very pleased to see clear positive signals in the market that we have seen that has been apparent in the market lately. And of course, hope that the positive development continues. We have a clear plan, and we are executing it to build the stronger and more competitive YIT going forward.

Excellent. Thank you, Tuomas. We are now ready for questions. [Operator Instructions] We have a first question from Anssi Raussi.

A couple of questions. And starting with this market recovery you mentioned. And you said that you see clear signs of recovery in Finland. But, like, are these your own expectations based on the market fundamentals or are you actually seeing some kind of concrete signs of recovery in your own business?

Thanks Anssi for the question. And it's actually a bit of the both. Mainly driven, of course, the market fundamentals and as mentioned inflation -- decreasing inflation and interest rates. So those are supporting the consumer confidence, of course. On top of that, we have seen actual, let's say, activity increase in the market also in our business. Of course, it is supported by the governments' decision on the tax, what I mentioned before for the first home buyers. But at the same time, if the market fundamentals continue to go in the same direction, so we expect that it will have a positive impact on the market during the next year as well.

And then about this bond maturing next spring. So I have understood that you are planning to finance this buyback with your capital release program, but do you have any plan Bs because, of course, it might put you in the position of being a forced seller here? And I guess that buyers would notice as well. So any plan Bs because I guess your own operational cash flow is not enough.

Yes, thanks Anssi. Again, yes, we are planning to redeem the bond and finance it by the capital release program that we are executing. But of course, we always have plan Bs and Cs. And -- but we are determined to execute on our capital release program, that's number one priority. If there would be some hiccups or we would be in the position of, let's say -- let's put it this way that the financial conditions viability to execute certain deals, so then we would, of course, not execute them and then we would need some plan Bs, and we have those in place already.

Okay. Next question from Olli Koponen. Please go ahead, Olli.

First, on the Housing market, few questions. There, I'm mainly focusing on Finland now. We have seen some quite clear discounts in the market for new apartments for [ certain construction ] companies in your field. Have you been able to sell your apartments without any kind of major discounts to [ list ] price?

We have, of course, continued our determined sales efforts during the Q4. And as we actually mentioned in our Q3 earnings release, so we have new campaigns in place also in Housing for the consumers. And the thing has been mainly that we kind of attract the consumers to the negotiations and look individually what would suit best for the individual consumers. That has actually worked quite well. In some cases, of course, there has been some discounts. And we had already in Q3, the discounts related to the operating cost of the apartment and taking over those for 2 years and so on. So yes, we have been negotiating discounts as well. but not that heavily that it has been probably in the media or so.

And a follow-up on that, how about have you done kind of any smaller bundle deals on consumer apartments? Because, I think, we haven't seen any kind of bigger ones.

Yes. We haven't seen any bigger ones. We have been active ourselves in the market, and I can confirm that there is demand for bundle deals in the market currently. And we have, of course, evaluated our options during the quarter. At least so far, no major bundle deals done, some smaller ones, yes. Now when we look at the situation from the market fundamentals point of view and kind of a decrease in interest rates. So that has had a positive impact on the investor markets as well. Now the so-called [indiscernible] are starting to work a bit better than before. And we have seen activity in the market, and there is demand for larger bundle deals as well. So that's of course, good place to be or better place to be. But we are currently evaluating our options on executing on those.

Okay. And just a last one, continuing on the -- Anssi's question on the redeeming the EUR 100 million bond next year. Could you kind of elaborate if you can, your kind of plan A, plan B, plan C, what you have in mind if the market situation is as it is right now?

Well, yes. On a high level, I can communicate that we have -- as we have mentioned before, so we are currently executing our capital release program, and it's targeting to increase our liquidity and deleveraging the company. So that's -- those are, let's say, the most important short-term goals for the company. And as mentioned, so of course, we are, in a sense, in a capital release program. So we have actually progressed quite well. But we are in the situation all the time that we need to evaluate certain deals and the financial conditions in them and then based on our judgment to execute or decide -- decision on a go or no go. And of course, the capital release is a function of those kind of disposals or asset sales. So that's what we can communicate. Also on top of that, we are releasing capital from our operations from the net working capital side as well, improving our days payables outstanding at the same time. So there are several sources of cash to be released from the operations. And by that, so we are planning to redeem the bond, that's our plan A.

Thank you Olli. And next question from Svante. Please go ahead.

A couple of questions left. The first one is regarding the secured EUR 140 million term loan. Could you give some color on terms and how much assets you have to pledge and so on?

Yes, thank you, Svante. As mentioned, so first of all, we are happy to have concluded the process and have the EUR 140 million facility in place, and it is secured and maturing in the spring '25, we are happy about that. Of the covenants, so we have that also, when we announced the deal, so we also announced the covenant. So we have covenants related to the liquidity and gearing there and possibly ICR as well. Also, we announced that some of the covenants are tested on a monthly basis and some of them on a quarterly basis, and that's all that we can disclose at this point. But it's good to kind of note also that we had a very, let's say, constructive process with the banks. It took a long time and it's very understandable also from the bank's perspective that the whole sector and their exposure in the sector is something that had an impact on the negotiation. But anyway, so we are happy to have concluded those at this point.

You don't want to go into any more specifics regarding how much -- what kind of assets, how much you have had to pledge and what the margins are?

Well, unfortunately, that's information that we are not disclosing.

Okay. Then second question about your capital release alternatives. Is there an investment capacity left in your housing JVs, which could pick up some of your unsold apartments?

Well, as mentioned, altogether in the market, there is capacity, and there is demand for bundle deals. So that's -- as mentioned, so it's a better and good place to be. I think the market in that sense has improved during the Q4. So there is capacity altogether in the market, and that's a good thing for us. So we have options going forward.

And last question about the competitive landscape. I mean we have seen the news flow that on your smaller peers and they're difficulties. What -- can you give some color on competitive landscape both from domestic and Scandinavian players?

Yes, thanks Svante. I think overall, as we all know the market situation is pretty challenging for all of the companies operating in the sector. And we have seen the news, of course, the bankruptcies and so on. It's very unfortunate for the companies in this kind of a business cycle. We are in a cyclical business, and we have seen the results in this kind of -- this low cycle, it has had an impact on the players in the market. Of course, from our perspective, so it gives bit of a room -- more room to operate or improve, let's say, our position in the market. But anyway, for the whole sector, of course, it's challenging and it's unfortunate that it has these kind of consequences as well, not commenting any specific competitors' moves, but there are -- let's put it this way that there is clear change in the market, which kind of gives us probably more competitive space going forward.

Then we have a follow-up question from Anssi Raussi. Please go ahead Anssi.

Actually, a couple of questions. The first one about the divestment of wind power business. So did you have multiple bidders in this deal or how was the competition for this business because I think that the price was actually on the low side. So was it about the quality of this pipeline or was it just that there were no other bidders?

Thanks Anssi. We had a thorough process, and I can confirm that there were several, actually plenty of, let's say, companies interested in our assets. And also at the end of the process, so we had -- we weren't in the situation that we only had 1 player to negotiate with. So from a process perspective, this was a good and thorough process. What comes to the price, not probably commenting specifically. But as we mentioned, so there is a significant upside also in the variable part of the purchase price. And the variable purchase price is defined based on project sales and completed projects. And it's amounting to EUR 0 million to EUR 75 million, I mean, the variable part of the purchase price. So that gives you kind of a more color on the probable final price. But of course, we have been prudent and we have -- now based on the information that we have in our hands, we estimate the variable purchase price weighted with the probabilities of the project development portfolio and ended up with 20 -- recognizing EUR 23 million of that variable part. Also, it's good to note that now the portfolio has found a new home in Eolus, and they are very professional player in the field, focusing on renewable basically solar and wind energy. And we are confident that they are very capable of taking our portfolio forward.

And maybe the last one from me. I'm not sure if I have asked this before already, but good to hear an update. So going into 2024, and we know that the construction volumes are coming down significantly. So how do you see the whole value chain if you think about your own suppliers, like, are they able to survive this cycle? And do you have to make some significant changes in your own supply side and, of course, your own organization? Like do we have to see some kind of concrete recovery already in Q1 to continue with the current organization? Or how do you see situation if we think about the big picture here?

Thanks Anssi. That's a very good question, actually. And of course, the whole -- or the players in the whole value chain are in a challenging position, that's fair to say. But at the same time, internally, as we have mentioned that we have been as part of the transformation program. So we have been actually developing our procurement heavily. And based on that work, we are kind of moving more towards category-based approach, which means actually that we are more -- we have -- we consolidate our supplier base a bit more heavily, so that we, of course, kind of choose the suppliers that we want to do business with. And of course, in that kind of selection criteria, we take into account the situation of the financial position of the supplier so that's one thing. And the suppliers that we want to work with also in future. So we are, of course, by the means that we have in our own hands, so we are supporting them to secure the long-term capability to do business. So that's something that we have been working during this year quite heavily actually. But it's fair to say that also there has been a lot of challenges in our suppliers already now. And I'm pretty confident that we will see these challenges to continue also during the next year. That's very unfortunate.

But, I guess, you won't be building any so close ties to any suppliers that you would be dependent on those and those suppliers surviving this cycle?

No. That's not the approach that we are taking.

And then we have a question from Emil Immonen. Please go ahead, Emil.

I just had one more question related to housing completions in CEE countries. You were expecting quite a lot of completions now in Q4. Have you seen any more delays in those? And if you have seen delays, what are they related to?

Yes. Thank you Emil and that's true. We have, as stated earlier, so pretty much completions in CEE countries. As mentioned already, so from kind of operative and production point of view, no major delays during the quarter so far. So in a sense, from our production perspective, we are in a stable situation. But as I mentioned, so there has been some let's say, delays or hiccups in the commissioning processes in these countries during this year actually. And this is something that gives us a bit uncertainty. Is it going to continue and how it's going to play out now that we are approaching the year-end. So that's what we can comment. We are working on that as well. And it's good to know that we don't have any, let's say, internal production challenges there.

Are there any more questions? It seems to me that there are no further questions. So thank you all for good discussions again. We will publish our financial statements bulletin on 9th of February. So I'll talk to you again then. Thank you all. I wish you happy holidays and all the best for the new starting year.

Thank you very much. Merry Christmas.