YIT Oyj (YIT) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to YIT's Fourth Quarter 2023 Results Webcast. My name is Essi Nikitin, and I'm the Head of Investor Relations at YIT. Together with me here are our CEO, Heikki Vuorenmaa, and CFO, Tuomas Makipeska. At this point I will hand over to Heikki. Please go ahead.

Thank you, Essi. Good morning, everyone, and welcome to fourth quarter and full year '23 result webcast. Since first quarter of the year, we experienced a notable positive trend in Housing sales, especially in Central Eastern European countries, showcasing impact of our own actions and market resilience. Operating cash flow continued to improve towards the end of the year, and our debt level declined during the last quarter. Both of our contracting segments continue to improve underlying performance even though the fair valuation of assets impacted our fourth quarter results. Throughout the year our diligent cost management initiatives have been implemented across the organization. As a result, we have streamlined and customer focused operations at the moment. Additionally, strategic capital release actions have been successfully executed, contributing to a strengthening financial position and setting the stage for the coming years. I would like to thank all YIT employees for the overall solid closure of the year, given the market environment. We then look at the full year '23 in brief. Our financial performance during the year was clearly impacted by the Finnish Housing market demand. To respond effectively to the market challenges and also secure the long-term competitiveness, we launched a holistic transformation program at the beginning of the year. We decided to focus on our 3 segments, Infra, Business Premises and Housing, and to ensure we have the right competencies and capabilities to serve our customers most efficient way. Our target is to improve our competitiveness and financial performance while reducing and reallocating capital employed between the segments. We have progressed faster than anticipated, and by now we have achieved EUR 25 million net recurring benefits and released significant amount of capital from the operation. Quarter 4 strong cash flow and reduced net debt level is a signal that we are on the right track. However, there is still lot work ahead during this year. If we then look at the full year in numbers, our revenue stood at EUR 2.2 billion, which is 10% less than in a comparison year. Adjusted EBIT decline is mainly connected to the Finland Housing market and changes in fair valuation of fourth quarter in Business Premises. Let's break down the EBIT more closely to the -- our segment level. On Housing segment, profitability is driven by all-time high performance in Central Eastern European countries. Market conditions in Finland continued muted throughout the year which impacted the segment's full-year profit. Despite the declined profitability, our operations are in great shape on all operating countries and we are well-positioned to deliver again as the market turns in Finland. Our Business Premises profitability were impacted by the rising yields and high construction material prices in fixed price projects. As mentioned, our operative performance in that segment is improving, and throughout the year we implemented significant amount of changes and control points to improve segment competitiveness on coming years. On the Infrastructure segment, good performance in Finland operations continued, reaching 5.1% EBIT level, while the Sweden and impacted our segment's full year results. Next we go more into the details on each segment and start from Housing. Main driver for the declined EBIT was low apartment sales in Finland as mentioned. During the year, we sold approximately 400 apartments in Finland. It is approximately 1 quarter normal sales for us in more favorable market conditions. Clearly positive highlight is the sales in the CEE countries, total of 767 units. Our demand and supply is in balance as we started almost same amount of new units during '23. We also continue to have a good stock of apartments available. Now more than 90% of those on the capital region or university towns in Finland and Central Eastern European countries. Our apartment sales on the fourth quarter increased close to 70% in the Central Eastern European countries. Quarter 4 was actually a third consecutive quarter of improved sales in the total Housing segment. On the Central Eastern European countries, recovery started earlier and has continued positively, especially in Poland, Czech and Latvia. Actually, if you look the Q4 sales, the total sales in units exceeded already the comparison quarter volume. As I mentioned, we started to adapt our operations to the market situations strongly during last year. It is also visible now on our ongoing construction volume where we have approximately 3,400 units under construction. Vast majority of those in CEE countries. Our sales rate of apartments under construction is approximately 50% which reflects the lower portion of investor sales. We will continue to accelerate the construction volumes in coming year, especially outside of Finland, and will return to the Finnish market as the market conditions are more favorable. When we look in the -- from the completions perspective, also our capacity assessment is visible here. During '23 we completed approximately 2,600 apartments, 50% in Finland and 50% in Central Eastern European countries. Year '24 will look different. We expect to complete approximately 1,800 units, of which almost 70% in the CEE market. And as mentioned in Finland, we have a healthy inventory of apartments to sell to the market during '24 and early '25. Our total unsold portfolio of completed apartments in Finland was 890 at the year end. It is approximately 20% of the total Finnish market's unsold new Housing units. So the share of unsold apartments in Finland is less than our market share has been during last year. Our portfolio of apartments locates on the growth cities and the prime locations. Then if you look on the city-by-city level, example in Tampere and Turku, our sales stock is approximately 2 months sales on the normal market conditions. When we then look at overall Finnish market, so here we have summarized all the completions from the players to the Finland market during '24 up to '25. And this is then illustrating the supply to the market. The total supply to the market on this year is approximately 3,700 units. 15% of completions comes from YIT. The supply will even further decline during the first half of '25 as the industry balancing is expected to continue. And to summarize the segment situation, our segment is operatively in very good condition and is ready to deliver as the cycle starts to turn at scale. But let's move to the other segments, and we start with the Infra business. Our management and all the Infra employees, they have really improved the profitability during the year '23. Our operating profit improved to 3.3% on the segment level and as mentioned in Finland, we raised over 5% while our order book continue to increase. This is a very strong result from the team. And as we then gradually are exiting from Sweden, our segment profitability still continues to improve. Excellent progress. And we all have good reasons to expect a similar track to continue on the coming years as well. Then to the Business Premises. The year was overall challenging for the segment. Rising yields impacted asset's fair valuation and material cost increased to fixed price contracts. During last quarter we changed management of the segment and also reorganized ourselves to face the challenges that we have. Several improvements are already implemented to improve the operative performance and leverage the group best practices all the way from tendering to the final product delivery. I'm very confident that we can expect similar profit improvement and reach similar operating margin as we already see on the Infrastructure segment in the next 2 years. We had success to release capital from the segment during last year in the form of selling our office premises Maistraatinportti. And we need to continue on that path. Potential to reduce segment balance sheet is almost EUR 400 million. And we are working on with that in full speed. We then look overall the market environment where we are operating in. The market environment continues similar as in the last quarter. Housing market in Finland and Baltic countries is expected to continue weak. Central Eastern European market continues on a normal level already. And real estate market on our operating countries are on normal level and we see activity both in industrial and public sector to remain normal. Infra Finland, we see actually several potential project under calculation this year, of which construction will start early '25. Overall, the market remains normal for us. Now it's time to hand over to you, Tuomas, to go through our financials more in detail.

Yes, thank you, Heikki. Also from financial perspective, the fourth quarter was another step forward for YIT. And we consequently closed the financial year of 2023 on a positive trend. Despite the market situation, our order book remained strong, ensuring future volumes and profits. However, the Housing market in Finland challenged us throughout the year, which led to a clear decrease in overall profitability. During the year, we took determined actions to improve our financial performance. We made progress, especially in releasing capital and generating cash flow from our operations. Consequently, we decreased the net debt by over EUR 70 million during the last quarter of the year. Let's have a look, closer look at the financials. We are pleased with the fact that the order book development was relatively stable throughout the year despite the Housing market conditions in Finland. In the contracting segment, Business Premises and Infrastructure, the market conditions have remained on a fairly normal level. In fact, the order book improved in Infrastructure segment both year-on-year and quarter-on-quarter, which we see very positive. There, our approach of focusing on the tendering processes where we have competitive advantage is paying off. Business Premises segment's order book has developed relatively steadily and currently includes also more than EUR 300 million of lifecycle project service periods, providing recurring revenue and profits for long term. Housing segment order book declined during the whole year due to the lower apartment startups in Finland. But altogether, the order book level of EUR 3.2 billion ensures our operations and profits going forward. Let's next have a look at the profitability more closely. As mentioned, the overall profitability decreased clearly from the comparison period. The change in adjusted EBIT was roughly EUR 70 million, and profitability decreased especially in Housing Finland. The main driver behind this development was the low consumer sales of our apartments in Finland. As Heikki mentioned, the demand in CEE countries has been clearly higher, and we reached all-time high profits there, which is also strategically very important for us. The underlying performance improved in Business Premises and the work continues to strengthen segment's profitability. Unfortunately, the progress was more than offset mainly by the decline in fair values, especially in Mall of Tripla, which is operationally performing well though. In Infrastructure, the overall performance continued to improve and ended up with solid profitability in Q4, which we also see very positive. YIT's Infrastructure business in Finland has improved its profitability significantly and simultaneously increased the order book, which are clear demonstrations of competitiveness in the market. Moving on to the development regarding the cash flow and capital employed. From cash flow generation and capital employed perspective, the year was clearly twofold. In Q1, we recorded a very low cash flow due to high construction volumes tying a lot of capital, while simultaneously consumer sales nearly stopped in Finland providing very low cash inflows. But as a result, we launched several cash flow improvement and capital release actions. With the measures taken, we were able to turn cash flow positive already in Q2 and continue on positive track rest of the year. In fact, from Q2 to Q4 year-on-year, the operating cash flow after investments improved over EUR 300 million. In Q4, the cash flow reached nearly EUR 70 million. Main drivers behind the cash flow improvement were the determined actions according to capital release program, on which I will elaborate a bit in a minute. Increase in capital employed was topped in Q2. And during the second half of the year, we achieved positive trend downwards despite the fact that completed apartments in Housing Finland tied up more capital. Sale of the apartments from inventory will release capital, and low construction volumes will slow down the amount of additional capital tied to apartments in upcoming quarters. In big picture, we see that running our business profitably requires clearly less capital than before, and we aim to release capital significantly from our operations going forward. For example, we have shifted our Housing focus to CEE countries and reached growth and all-time high profitability while simultaneously decreasing capital employed by adopting capital-efficient ways of doing business there. Let's double-click on the capital release measures taken so far. First of all, I'm pleased to see that we have executed our transformation program according to plan. Results are clearly visible in both cash flow and capital employed, as demonstrated on the previous slide. Altogether, we have taken actions worth of EUR 200 million so far. By the capital release program measures worth of some EUR 100 million has been executed. During the Q4, we were able to sell our renewable energy business to Eolus Vind and recorded a EUR 46 million gain on sale. We have put focus on achieving permanent improvements in cash conversion cycle, and some results are visible already. In that area, we see a lot of further potential to be realized this year. The cost efficiency measures, especially in IT and procurement supported the profits and cash flow as well. We also completed the sale of the Sia LiveOn co-investment vehicle in Q4. But on top of the capital release program, we have achieved net working capital efficiencies worth of some EUR 120 million. Sale of Maistraatinportti office property was of course a successful closing for Q3. We have also sold some plots in Finland and CEE countries to improve liquidity. And finally, we have executed some apartment bundle deals to investors to deleverage the balance sheet. This work continues, and we are expecting significant further gains during 2024. Let's next have a look at the key assets and net debt position. Our underlying asset base continues to be very strong. Key assets totaled to EUR 1.9 billion. We have a land bank over EUR 800 million to serve as a platform for future operations and profits. Inventory assets under production amounted to EUR 400 million, decreasing EUR 100 million from Q3 and reflecting decline in number of apartments under construction. Completed apartments and real estate in our inventory increased to EUR 390 million and investments were worth of EUR 290 million, decreasing from the Q3 by the sale of Sia LiveOn as mentioned. Net interest-bearing debt decreased significantly to EUR 795 million due to strong cash flow in Q4. Approximately EUR 520 million of our gross debt is related to IFRS 16 lease liabilities, including the lease plots and long maturity housing company loans that are then transferred to buyer at the point of sale. So the adjusted net debt is consequently only EUR 280 million. So our underlying asset base continues to be strong, and our net debt structure remains balanced. And going forward, we see that optimal situation for YIT is to operate with clearly less debt and utilize mainly project-based loans. We are aiming to reach this kind of a position by the end of 2026. Equity ratio of the company remained stable throughout the year and ended up with slight improvement in Q4. Gearing decreased nearly 10 percentage points due to the strong cash flow and decrease in net debt in Q4. Overall, YIT's target is to deleverage balance sheet in short term and to return to clearly below 50% gearing level in the long term. Regarding the interest-bearing debt, we completed the refinancing of the term loans during the Q4 and consequently improved the maturity structure of the debt portfolio. There is EUR 100 million bond maturing in the spring, which we are currently planning to redeem. Now moving on to guidance and outlook. We have updated the guidance for 2024 as follows. YIT expects its group adjusted operating profit for continuing operations to be between EUR 20 million and EUR 60 million in 2024. The operating cash flow after investments is expected to be positive. The Housing market recovery in Central Eastern Europe is expected to continue. But in Finland, the Housing market is expected to continue to be weak in the first half of the year. In Business Premises and Infrastructure, the underlying operational performance is expected to improve. And the YIT's performance will be supported by the increased efficiencies from the transformation program launched last year. Changes in macroeconomic environment, especially in interest rates may impact the Housing market demand and the fair value of investments. Delayed apartment completions could lead to the postponement of revenue and profit from quarter or year to another. Actions to release capital may have an impact on the company's profits. So to summarize the financial situation, we have key assets of EUR 1.9 billion. We have achieved results from the capital efficiency measures and the determined work continues on that. And most importantly, cash flow has improved significantly, and net debt decreased consequently. Thank you, and back to you, Heikki.

Thank you, Tuomas. And before we open the lines for questions, let me recap the main messages. We continue to focus to improve our segment's profitability, complete our transformation and substantially release capital employed from the operations. We are building on our talented professionals to deliver solutions to our customers. And we have a high focus on risk management while sizing all the opportunities this market provides for us. Thank you. And operator, it's now time for the questions.

[Operator Instructions] The next question comes from Svante Krokfors from Nordea.

The first question regarding your guidance at EUR 20 million to EUR 60 million in adjusted EBIT seems a bit shy given the support that you will get from the exclusion of Swedish Infrastructure business. Could you give some guidance per division? And also regarding Business Premises, do you still have fixed price contracts that will burden in '24?

Yes, thank you, Svante. If I little bit elaborate and provide more color segment by segment there. So we do expect that the Finland Infra business to continue on a good path. And like you mentioned there, so the impact and the influence of the Swedish Infra is going to decline. We actually are having less and less revenue coming from there as we are then gradually managing it towards the end. So that's where we see the Infra business this year. When we then look at the Business Premises side, the vast majority of those contracts that has been taken on a fixed price with the lower material costs were executed during last year. We may still have a couple of those continuing this year. So what we are expecting overall is that underlying profitability on the Business Premises is going to increase this year. And what we were impacted last year was also the sales of our asset base as well as the fair valuation of the assets on that segment was quite significantly improved -- impacted the performance on '23. And of course, those are then unknown factors on the '24, how the yields and the interest rates you are going to develop on the market. On the Housing segment side, twofolded. So the CEE, where we have now the 70% of the completions during this year, we expect it to continue on a very strong path. The Finland market, as we mentioned there, we see at the moment that the first 6 months to continue on the weak level, which has the highest, I would say, uncertainty on our outlook, hence the relatively broad range what we are now stating. Anything, Tuomas, you would like to complement to that.

Not really. That I think covers it all. Thanks.

And then you have a new campaign with interest rate caps on new apartments. How has -- I think that has now been running for a bit more than a week. How has the response been there? Can you give any color on that?

Yes, absolutely. So first of all, that has been very well received. I think it is a signal, and it has been welcomed as a positive new product to the market. Since we are now capable to give 5-year certainty for a home buyer, what would be the interest base rate, 2% or lower on that period of time. And if you look at from the individual's perspective, that is actually quite a significant decline on those monthly payments that one has to make in order to buy a new home. What we are already seeing is that there has been interest on consumers in terms of conducting the banks that are supporting us here, Nordea and Aktia. And also, what we have seen is amount -- the people visiting the open houses and the apartments and the contacts has been increasing now since we have been launching the campaign. Too earlier to conclude the full impact, obviously, we expect and also wish that the individuals are taking their own time and considering the best apartment to select for their own need.

And then, I guess, a lot of focus in the next month or 2 will be on your bond maturing at the end of March. Can you give some color? I know that you don't want to comment that, but could you give some color on that and also the fact that you have been growing slightly on your RCF during the quarters. How will that impact on your bond refinancing options?

Yes. Thank you, Svante. I'll take this one. And yes, our plan currently is to redeem the EUR 100 million bond at the beginning of April. And the idea is to fund that one by the capital release, capital release and the cash conversion that we have been actually generating throughout the second half of the last year. Also, we had cash and equivalents roughly EUR 130 million at the end of December and planning to continue on that path, releasing capital and increasing cash flow. So that's basically the idea and the funding behind redeeming the bond.

Perhaps the last question regarding your EUR 400 million capital release program. You elaborated a bit on that earlier, but you still believe that EUR 400 million is a relevant number given that you probably received less for the renewable business and you didn't receive anything from Swedish Infra operations?

Yes. I can continue from here and probably you can fill in then. But yes, the EUR 400 million potential what we have stated is still intact. And we stated that there is EUR 400 million potential. And of course, we are looking at our options in several items on the plan or on the road map. It's for sure, one kind of a big ticket item. There is the Mall of Tripla, what we have disclosed publicly as well. There, we are looking our options during this year and making, let's say, best possible decisions to our shareholders. And that's, of course, one thing which is still unsure. The other ones, let's say, the kind of a smaller capital release items, we are at full speed on executing those. And as I mentioned already in the presentation, we see a lot of potential, both from the net working capital and the disposal items to be gained during this year.

[Operator Instructions] The next question comes from Olli Koponen from Inderes.

I have few questions left. And first, I will start with the Infra segment. Can you tell us was there some extraordinary in Infra segment profitability in the quarter? Or should we kind of assume that you're able to make this kind of profits now in the segment now that the Swedish Infra has been downgraded?

Yes. Thank you, Olli. And we had very successful completion of the projects during Q4. What you should expect is the full year, I would say, the level, not the individual quarter, as the project starting and completions might vary a bit on -- within the year. But that is a level that we are pleased with. And there is actually where our Finnish Infra has been already for a period of time.

Okay. And just another question about the cash flow, on the guidance of the cash flow. You expect your cash flow after investments to be positive this year, but how do you kind of expect it to be had in the first half? If you can elaborate on that. And does it depend on you selling lots of apartments from your balance sheet?

Specifically maybe not comment on how the -- between the quarters and the years. But the main driver for us on the past quarters, tying up the capital has been that within the construction volumes has been tying the capital for the finished apartments, that we haven't sold all of those. And as we mentioned now, so the completions in Finland, especially will be really low, and we are approaching a point in time where we have less and less production ongoing. Hence, the production itself doesn't anymore tie up much capital into it. The capital starts to decrease. If you look at the point there that Tuomas was presenting. And historically, you compare the level of net working capital between the years '21 to '23, you can observe that we have been buying approximately EUR 400 million more capital into our net working capital during the period of time. And what we are seeing now in messaging here is that that tide is going to turn, and we see that we're going to have a positive cash flow this year, and we are taking steps to release the capital, both on the investment side as well as the net working capital side. And as a consequence, as a result then to have a healthier balance sheet, deleverage the company and return on our capital employed result as well.

Exactly. And if I may continue a bit on that. So for sure, there is the underlying seasonality in the cash flow for sure. But also what will impact the cash flow and the timing of the cash flow development is dependent of course the capital release program and the items and the measures that we are taking there. So that will kind of impact and give some seasonality for the cash flow for sure. But anyway, so that's in a big picture, what Heikki mentioned is that we are releasing capital totally from our operations throughout the year.

The next question comes from Emil Immonen from Carnegie.

Emil Immonen from Carnegie. I just wanted to understand a little bit better the financial costs in Q4, EUR 20 million. Is that -- is there some one-offs there? Or are those expected to continue at this higher level?

I'll take this one. Thank you, Emil, for the question. Regarding the financial cost in Q4, so there are actually kind of 2 kind of items. First of all, the increase in the interest rates have started to be visible in our financing costs. And then on top of that, so related to the refinancing procedure that we completed during the Q4. So regarding that, there are some one-offs as well.

Okay. So but they will still be higher than maybe we saw in the 3 first quarters this year?

Well, we are not disclosing any financial cost development through this year. But anyway, so it's good to note that the overall increase in the interest rates will have a kind of a negative impact on the financing costs as in general.

Okay. Because I was thinking that with your guidance, which was quite soft, I think, you're then almost guiding for a loss-making in 2024. Is that correct?

Well, as mentioned, so we are not guiding specifically the financing costs, but it's, of course, true that with the EUR 20 million to EUR 60 million adjusted EBIT, there is -- somewhere there is also the breakeven point for the net profit as well. That's for sure.

There are no more questions at this time. So I hand the conference back to the speakers.

Great. Thank you. So yes, it seems that there are no more questions. So we thank you all for participating and wish you all a great rest of the day.

Thank you.

Thank you.