YIT Oyj (YIT) Earnings Call Transcript & Summary

Okay. I think we can start. So hi, everyone, and welcome to YIT's analyst call proceeding the silent period of our third quarter 2024 results. My name is Essi Nikitin, and I'm heading the Investor Relations at YIT. Together with me here is our CFO, Tuomas Makipeska. We will first hear a short intro from Tuomas, and then we will hear -- 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 hand over to Tuomas. Please go ahead.

Yes. Thank you, Essi, and hello, everybody, and good morning on my behalf as well. First of all, I hope you have all received yesterday the invitation to our Capital Markets Day to be held in mid-November. We are extremely excited about arranging CMD after a couple of years. It's great to be able to discuss the future of our company in more detail after a while and we look very much forward to seeing you all there. But let's start with a short recap on our transformation program. The program has continued the progress to progress faster than originally expected. And as we communicated in accordance with Q2 with the actions taken by the end of June, we already reached the original cost savings target and we'll gain annualized run rate cost savings of EUR 40 million, which will be fully realized by the end of 2024. As you all know, we held an Analyst Day in early September, and what we wanted to highlight in the presentations there is that the company is going through a truly holistic transformation. Naturally, we are providing insight to the numbers and cost savings and capital released targets, but the program is much more, it's a holistic change in our operating model, our structure and our ability to build new capabilities in the company. Within the program, we have been significantly upskilling, for example, our procurement functions, our project management capabilities and our commercial excellence. These are already visible in our segment's performance. In addition, we have been redefining our culture and ambition levels together. We will continue to work eventually after the program, move towards continuous improvement, where we still see substantial potential to improve our operational efficiency and performance of the company. And as a reminder, all the materials of the Analyst Day are available at our website. Then, a few words about our financial position and cash flow. As you all know, we have had several successful transactions during the past months, improving our liquidity and safeguarding the company's financial position up until 2027. And as discussed earlier, the highlight of the second quarter was the finalization of the planned multistep financing process by issuing the new EUR 100 million green bond in June. The maturity profile of our debt portfolio has significantly improved, and our financing is secured for a healthy period of time. This gives us possibility to concentrate on our business and enables us to focus on improving our financial performance and to optimize the timing of certain capital release measures to maximize shareholder value. If we then look at our cash flow, it has continued on the right track. In the second quarter, the operational cash flow was actually positive, but the operating cash flow after investments included $39 million payments of plots in CEE countries that have been acquired before 2024. These plots strengthen our land bank in CEE countries and provide basis for profitable growth in these markets in the future. The last 12 months cash flow was positive EUR 59 million and measures to improve the net working capital efficiency have continued in the third quarter as well. As we have stated in our guidance for this year, the operating cash flow after investments is expected to be positive. In housing, the sale of apartments from inventory will release capital in the upcoming quarters. And in the CEE countries that formed joint ventures to develop large area projects together with RSJ Investments, will allow us to reach higher volumes profitably tying less capital. In Infrastructure, we now operate with negative capital employed, demonstrating solid performance in capital release measures. And in Business Premises, we are on a positive trend as well. But then moving on to the businesses and first, an eye on housing. The housing sales has continued on a good path in the Central Eastern Europe, with the Baltics actually continuing to pick up. And altogether, the business is progressing according to plan. Our capital employed remains under control, even though there was some more capital tied in the land bank in Q2. We see significant potential for further release of capital through increased production and increased sales over time. The number of start-ups in Baltics and CEE countries is well in line with sales to maintain a healthy balance between demand and supply. And as discussed in accordance with the Q2 results, a healthy bunch of completions will take place during the second half of the year and about the CEE countries, which will positively contribute to both profit and cash flow. The Finnish housing market has seen some positive developments in terms of reservations, ongoing negotiations and completed transactions although the overall market has still remained on a low level. The rapid decline of the market interest rates has been seen to impact positively the demand for mortgages and the activity mainly in the secondary housing market. We are pleased that our consumer sales in Finland increased for the fifth consecutive quarter in Q2. While the absolute numbers are still modest, the trend and the market sentiment are somewhat positive. Sales reservation is gradually increasing, and we are pleased with the level of premarketing reservations in few projects, which is a signal of trust from consumers towards YIT. We also see that the private investors are slowly getting back on the market, and we have done small bundled deals with the private investors during the year. We, of course, monitor the market very actively in regard of starting to construct again. Early this month, we communicated that YIT has agreed on three ARA-funded apartment building projects in Helsinki, Joensuu and Tampere and the total value of the contracts is approximately EUR 28 million, and it is recorded in the order book of the third quarter of the year. We are pleased to continue our long-term cooperation with TA-Asumisoikeus Oy and TA-Yhtyma Oy. With these projects, we can offer their customers more high-quality housing options in excellent locations. We have a healthy inventory of apartments to sell to the market in Finland during 2024 and 2025. Our total portfolio of unsold completed apartments in Finland started to decrease during the second quarter and was 867 at the end of June. There has been considerable demand among investors for these apartments in large quantities and even for the whole stock. So far, the offers have not been financially attractive enough, but it is, of course, good to see there is capacity and appetite at the market. Our primary target is to sell the apartments to consumers. We see the apartment stock as an asset for the following quarters as completions of consumer units will be at the historically low level for at least 1.5 years ahead. The portfolio continues to be well balanced and located in attractive areas in major growth cities in Finland. With the population growth continuing in all the major cities this year, we can say with the reasonable confidence that we are going to see supply shortages during the 2025. If the sales continue at the pace we have seen in the past few months now, the stock of these apartments will last to somewhere approximately a year ahead from now. This presents a quite promising outlook for us. But that's about housing. And if we then shift our focus to contracting segments, infrastructure and business premises. In Infra, the overall performance has continued to improve as we commented in Q2 and the segment increased significantly its profitability, achieving an adjusted operating profit of over 6% for the second quarter. During the past 12 months, we have restructured the segment's balance sheet through operative changes, business divestments, ramping down of operations in Sweden and more. We had reduced over EUR 70 million of capital employed from the operations by June, at the same time, improving the operative performance of the segment. In Infra, our order book is strong, and it provides work for following 24 months now. All in all, the Infra segment is now in a good place to see growth and further improve operational efficiencies.. In Business Premises, the underlying operational performance is expected to improve during this year and the work continues, of course, to strengthen the segment's profitability. In the second quarter, Business Premises continued to improve its underlying operational performance and maintained a good project control of the business. Business Premises is on the same journey as our Infrastructure segment has been. Our plan is relatively simple to reach negative capital employed with excellent order book through operational efficiencies and to reach profitability that will clearly exceed the minimum threshold set for the segment. While operational efficiencies and order book are more in our own hands, lighter balance sheet will be connected to the successful timing of divestments which requires increasing activity in the retail transaction market. But all in all, the market is active in both of the contracting segments, and there are multiple large projects in tendering phase, for example, in the industrial sector, supported by the green transition. So concluding what has been discussed, supported by secure financial position and strong asset base, we have a firm focus on delivering full impact of the transformation and taking the performance of the company to a new level. In the Housing segment, we remain focused to boost our sales throughout the operating countries. In Infrastructure, tendering is active, and we see a lot of project opportunities for us on the market. And in Business Premises, we are up to speed to improve our operating performance and continue to focus on complex demanding projects that are suitable for our competencies. All in all, our performance is supported by the actions taken, the competencies of our people and the successful progress of the transformation program.

Thank you, Tuomas. We are now ready for questions. [Operator Instructions]. First question comes from Svante. Please go ahead.

Thank you, Tuomas and Essi. And perhaps regarding the Housing segment in Finland, could you give an update on possible campaigns, how those have developed and what you have been in pipeline there?

Yes. Thanks, Svante, for the question. We have, of course, continued to evaluate the situation in the market also what our competitors are doing and so on so. With the regards of the situation in the market, we have seen some public discounts on the housing as well, but we have been concentrating on designing new campaigns to support sales since we haven't seen the price elasticity of demand in the market so far. So what we have concentrated on is to design and plan for the new campaigns. And the active ones, what we still have in the market, they are actually performing well. And as we see, they are actually resolving the problems or challenges that the consumers have at the time being, that's what we can comment at this point.

And what's the situation on investor projects in Finland. I mean you disclosed the ARA projects in three cities. But how is the activity on the private side?

Yes. Yes, it's true that we have been active on the kind of a public, publicly supported housing projects in the market because that demonstrates a larger part of the market in this kind of market situation. Regarding the investors, the private investors, the market has been on a very low level. It has continued to be on a low level. What we expect regarding the investors coming back to the market that might happen somewhere during the next year. At least for now, so we haven't been seeing any increased activity.

And then last question regarding the start-up situation in Finland, you don't have many completions for next year in the pipeline?

Yes, that's correct. We continue to monitor the market very actively. We see, let's say, increased demand and a pickup in the reservation rates as well. We have several projects in the premarketing phase. And in few of those, we actually see very high pre-reservation rates already. And we see, let's say, potential for starting up new projects during this year, but no decisions have been made so far. It's kind of a factor of, of course, the demand and the certainty of the demand and also project financing.

So then next, we have a question from Anssi. Please go ahead.

Yes. Thank you for the update. A couple of questions from me. And first about the comment that when you mentioned that you have received some orders, but the price has not been high enough for you to accept. So how much below like balance sheet values, we are still -- in these bigger offers?

Yes. Thanks, Anssi. If you're referring to the kind of offers that we have seen or discussions, what we have had regarding the whole stock of apartments or large quantities of that. So the development in that regard has been also positive. If you look at the discussions what we had at the end of last year, at that point of time, we saw that kind of understanding and our mutual understanding of the price or the terms were pretty far from each other. During this year, we see positive kind of a development in terms of price as well. But still, as I commented, so we haven't seen financially attractive enough deals to execute. But for us, it's very important to know that there is capacity and there is appetite in the market. If we would like to do such a deal with a certain terms. But at least at this point, up to this point, so we really focus on consumer sales, and that's our first priority. Then if we see that there is attractive enough kind of price levels available for larger quantities, we will then, of course, execute such a deal.

Okay. And then about your adjustment items in your P&L. And related to this, maybe any comments on profitability of Swedish Infra business. And if you could remind us about this transformation program costs you're expecting to book in H2 this year?

Yes. Starting with the Swedish ramp-up, ramp-down of Swedish operations. We have continued, operationally, we have continued to ramp down the operations. And actually, we have been pretty successful with the actions taken so far in Sweden. Also regarding the projects that are still continuing, so very much kind of a progress according to the plan or even a bit ahead. So that's kind of a good place to be. But as we have communicated, so there is a very low number of projects still going on after this year. And those are the ones that we are concentrating and kind of minimizing the damages and maximizing the value creation out of the situation. So that's from the Swedish part. Then about the transformation program, as in Q2, we communicated EUR 50 million of the total costs roughly was realized up to that point. The work continues, as we communicated, the program continues, even though that we reached the original targets. We see still quite let's say, a lot of potential, both regarding operational efficiencies and also capital release measures and it is kind of in our own hands, what kind of actions we are still going to take during the program, and that hasn't then, of course, impact on the costs and benefits that we'd be realizing during the H2.

And then Simen, please go ahead.

I have two questions. One, you talked very warmly about the Baltics and CEE countries. Just you take on starting new projects in this market, what kind of ramp-up potential do you see? I'll start with that question first.

Yes. Thanks, Simen. Yes, we are very pleased about the development in the market and also in our own operations in the CEE and also Baltics. Just to be a bit more precise of the market. So if we look at the CEE countries, as we have communicated, the Polish market has been pretty active all the time during the last 2 years or very active actually, especially during the end of last year but continuing this year as well. Then a pickup in Czech market actually has happened during this year and now even Slovakia, a bit kind of following behind, but increasing demand also in Bratislava area for our products. So that kind of that covers the CEE countries, and that gives us pretty much confidence in starting up new projects also from the perspective of capital employed, we have a very good land bank on that area. We have capital employed regarding the plots. What we have there and when we're kind of a starting up a project there, the additional capital tied to your project is actually quite limited. So from that perspective, we see a lot of good demand and not kind of a major, more capital to be tied in operations. So that supports quite a healthy start-up plan there. Then just a couple of words of the Baltics. What we see now that -- starting with the Estonian market. The Estonia market presents a very limited in terms of volume, very limited amount to us, but the market has been quite weak all the time. No kind of, no major pickup has been seen there so far either. But then Latvian and Lithuanian market actually starting to pick up again, where we see, where we have on housing operations there. Also a small inventory in both of the countries, and we now monitor pretty closely on the development of the market and the demand in those countries and then making new start-up decisions based on that. But still, we have some kind of apartments in the inventory to be sold to the market before starting up.

Okay. My next question is you sent an invite for the CMD, very few details on the agenda there. Can you tell us a bit about the current plans you might announce. Are you considering new financial targets? Are you considering any restructuring of geographies? Any kind of flavoring of what you might expect at the CMD?

Yes, sure. As mentioned, so we are, ourselves, very pleased to be kind of in a position that we would like to inform you guys more about our strategy and actually the financial targets as well. So we are planning to announce our new updated strategy including a new financial targets for the strategy period. What we are going to have during today is presentations of, of course, CEO and CFO of the full picture, but then also from each of the segments will be presenting their strategies, their financial targets and kind of providing more color why we will be reaching those financial targets. So that's basically the plan for the CMD. And it's good to know, I would probably say also that it's good to note that quite a lot has happened since our last CMD, it's already 3 years ago. And we have -- we, ourselves, kind of feel that we would like to open up a bit more of our segments and our cylinders. We all know that the Finnish kind of a housing market is still on a low level. But then again, we have three of the other businesses operating pretty normally, and there are quite interesting plans to support reaching the financial targets. So that's we would like to kind of give you a big picture, and then, of course, segment by segment as well.

Okay. It seems that there are no more questions.

There is one.

There is, Emil, go ahead, Please go ahead.

Just one more clarifying question on the Infrastructure segment. The adjusted EBIT was pretty good in Q2. Was there some one-offs making it better than normal? And what is the underlying profitability in the Finnish operations there?

Very good. Thank you, Emil. There were no major one-offs during the Q2 in Infra. So that was real, the 6% -- above 6% EBIT was real. Not supported any positive one-offs there. And also what we actually said back then was that the rolling 12 months EBIT margin was above 4% and on a positive trend. So that is a kind of a good data point as well to look at the rolling 12 months development, and that's already on a 4% level. That's mainly or fully actually done in the Finnish operations. And we have kind of the Swedish operations profitability -- profitability impacts are recorded in the adjusting items. So that's fully from Finnish operations.

Excellent. That clarifies a lot. Can you just remind then on the Business Premises, is the target to be at a similar kind of profitability there? Or is that even possible?

Yes. The target, what has been actually communicated 3 years ago was the 4% EBIT margin for the Business Premises as well and getting back to the CMD. So we will be publishing new financial targets. But anyway, so what we communicated back then was 4%, and we see that it is, definitely, it is possible. And it is possible to exceed that 4% level as well in that segment. No problems there. One regarding the business premises is, of course, if we have a look at the balance sheet on that segment is that we still have the Mall of Tripla there, burning a bit of the balance sheet. But excluding and also what you have had some kind of write-downs in the fair value because of the yield rises there but excluding that and looking at fully the operational contracting business, so it's definitely possible to exceed 4%.

Thanks, Emil. Any more questions? Anyone? No. In that case, I thank you all for great discussions. And as I said, we will publish our third quarter results on 21st of October. So I wish you a great rest of the day and talk to you again soon. Bye.

Bye-bye.