YIT Oyj (YIT) Earnings Call Transcript & Summary

Okay. I think we can start. So hi, everyone, and welcome to YIT's analyst call preceding the silent period of our fourth quarter of 2024 results. My name is Essi Nikitin, and I'm heading the Investor Relations at YIT. Together with me, I have our CFO, Tuomas Makipeska, on the line. We will start with the recap to recent developments in the company. And after that, we will have time for questions. As a reminder, this call will be recorded, and the recording will be published on our website after the call. At this point, I will hand over to Tuomas.

Yes. Thank you, Essi, and hello, everybody. We will be covering a couple of topics here in the call, starting with our strategy and kind of relating back to the just held Capital Markets Day. And then we'll go through the market updates of each segment, starting with the residential businesses and then moving on to the contracting segments. And then finally, we'll have a short recap on the financial situation and cash flow. And actually, at the end of the call, we will be also covering a bit, in the more details, of the joint ventures that we have in the Residential CEE business. So that's basically the topics that we will be covering here. And if I start with the strategy, and as you all know, YIT published a new strategy in November in accordance with our Capital Markets Day. And the benefits of the transformation program that will be completed now in 2024 set, really, the basis for the new strategy period. In a nutshell, the new strategy will enhance our resilience, enabling us to navigate the industry cycles successfully. We will focus on strengthening our core, improving productivity and optimizing the capital allocation. We aim for targeted growth and our priorities include capital efficiency and operational excellence. We also published new financial targets for the company to assess the success of the strategy. The targets are adjusted operating profit margin of at least 7%, return on capital employed of at least 15% and net sales growth of at least 5% with a compound annual growth rate based on this year. I'm confident about us reaching the financial targets set for the strategy period. Over the 2 past years, we have completed our transformation program ahead of schedule. And now the new financial targets set will drive the progress. Initially, we will reinforce our core and achieve capital efficiency, then accelerate growth with productivity gains. We also commit to our 4 nonfinancial targets to enhance work safety and customer and employee experience. And I look forward to achieving these ambitious targets together with the entire YIT team. In accordance with the strategy announcement, we also announced a change in our segment structure. To really enhance focus and transparency and to accelerate the speed of strategy execution in the residential operations, the Housing segment will be divided into 2 separate operating segments and renamed to Residential Finland and Residential CEE. Following the division into 2 segments, we will also have, as announced, some changes in the management. The search for leader of both residential segments is ongoing. And until permanent segment heads have been recruited, Heikki Vuorenmaa, our CEO, will take the interim lead of the Residential Finland, and I will take the interim lead of the Residential CEE segment. And here, I want to take the opportunity to thank Antti Inkila for his significant contribution to YIT's residential business and a long career in YIT and also wish him all the best for the future. The Business Premises segment will also be renamed to better illustrate the nature of the business. And from the 1st of January 2025 onwards, YIT will have 4 operating segments. Residential Finland, Residential CEE, Building Construction and Infrastructure. But that's basically about the strategy. And now moving on to our businesses, and I will start with the Residential CEE business. In our new strategy, we plan to achieve significant growth in the Residential CEE business. The financial targets for the strategy period are to achieve at least 15% annual growth, at least 15% adjusted operating margin and at least 25% of return on capital employed. The residential sales have continued on a good path in the Central Eastern European countries and Baltics. And altogether, the business is progressing according to plan. Our capital employed remains under control, and we see significant potential for further capital release through increased production and increasing sales over time. The number of starts in Baltics and CEE countries is well in line with sales to maintain a healthy balance between demand and supply. We announced in November that as we continue to grow in the CEE countries in line with the strategy, YIT is expanding its operations in the Czech Republic to the second largest city in the country, Brno. And we have explored this possibility for a long time, and now we have a great opportunity to expand YIT's business there. The project will be implemented through a co-partnership model in which YIT and our long-term partner, RSJ Investments, each own 50% of a joint venture. And the business model of the project allows the parties to execute the project in a capital-efficient way with limited equity contribution. And located right next to the city center of Brno, the project is an area plot in which approximately 750 apartments will be built. The construction of the first apartment building is planned to start in spring next year. And the last project in the area is expected to be completed by summer 2031. And the estimated market value of the apartments is over EUR 200 million. YIT uses joint ventures in residential CEE project development to split the development and sales risk and allow for a capital-efficient operating model. The joint ventures are also a versatile partnership where the competencies of both parties are combined and utilized. We have received some questions from the market on the basic logic behind the joint venture structures. And based on that, we have now prepared a short presentation to share with you in this call. And I will be -- I'll come back to the topic at the end of my intro. But that's about the Residential CEE. And now if you look at the residential business in Finland and in our new strategy in Residential Finland segment is to continue to seek operational efficiencies and build readiness to capture market share when market recovery in the Finnish housing market starts. The financial targets for the strategy period are to gain market share, achieve at least 10% adjusted operating margin and at least 20% return on capital employed. And the financial targets set for the strategy period include an assumption of the Finnish residential market recovering to a historical average level during the period. The residential market in Finland has now 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 also the activity mainly in the secondary housing market. While the absolute numbers are still modest in our Finnish residential business, the trend and the market sentiment are somewhat positive. Sales renovations are gradually increasing, and we are pleased with the level of premarketing reservations in few projects, which is a signal, of course, of trust from consumers towards YIT and its products. Consequently, we have started a few new self-developed residential projects in the last quarter of this year. At the end of October, we announced that YIT had started a construction of a self-developed residential apartment building in Vaasa and the new homes are scheduled for completion by the end of 2025. Earlier this month, we also announced another start of self-developed residential apartment building in Tampere. And construction for these apartments began in November and the new homes will be completed in December 2025. But despite these new starts that we have now initiated, it is good to note that the extremely low amount of new starts this year will limit our capabilities to generate profit in this segment next year. We see the apartment stock we have in Finland as an asset for the following quarters as completions of consumer units will be at the historically low level for quite some time 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 a reasonable confidence, that we are going to see supply shortages during the next year. And if the sales continue at the pace we have now seen in the past few quarters, the stock of our apartments will be sold before the end of next year. If we then shift focus to our contracting segments, Infrastructure and Business Premises or Building Construction as the segment will be renamed starting from 1st of January. During the new strategy period, growth in the Infrastructure segment will be mainly driven by energy and industrial construction, rail infrastructure and defense sector. Target is to achieve at least 5% annual growth, at least 6% adjusted operating margin and to continuously operate with negative capital employed. The overall performance has continued to improve in the infrastructure, as we commented already in Q3, and the segment has significantly increased its profitability, achieving a rolling 12 months adjusted operating profit margin of over 5% for the third quarter. In October, we were extremely pleased to announce that YIT was chosen as an alliance partner for the first phase Pirkkala-Linnainmaa tramway implementation. The construction has started and will be completed in the August 2028. The value of the first phase order for YIT is approximately EUR 150 million, which will be recorded in the order book of the last quarter this year. We are, of course, pleased that the good cooperation in the development phase of the project and the strong expertise of us and our partners have now led to the construction phase. In November, we announced that YIT was selected as a partner for the development phase of the Helsinki Urban Development and Tramway Program Alliance. The projects included in the program are the Western Helsinki Tramway, the West Harbor light rail and the Viikki-Malmi light rail as well as the related investments. The maximum investment estimate specified by the client for the implementation phase is approximately EUR 1.2 billion. We are excited to bring our strong capabilities and experience to the use of the program alliance in cooperation with our partners. So all in all, our order book is strong and the Infrastructure segment is in good place to seek for growth and further improve operational efficiencies. As discussed earlier, our Business Premises segment will be renamed to Building Construction from the beginning of 2025. In the strategy period, the segment will target growing industry sector investments, growing its own capabilities in building technology and focusing on growth in the CEE countries. The target is to achieve at least 2% annual growth, at least 6% adjusted operating profit margin and to continuously operate with negative capital employed. The underlying operational performance of the segment is expected to improve during this year, and the work continues to strengthen the segment's profitability. 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, a lighter balance sheet will be connected to the successful timing of divestments, which requires increasing activity in the retail transaction market. In October, we announced that YIT and the City of Helsinki had agreed on the construction of the Melkinlaituri elementary school and daycare center using a life cycle model in Jätkäsaari, Helsinki. YIT is responsible for the project's design, implementation and 20-year service period, which also encompasses responsibility for the property's optimal energy consumption. The building will be owned by City of Helsinki. And the total value of the contract for YIT is approximately EUR 44 million. This project will be recorded in the order book once the project's building permit has gained legal force. In November, we announced that YIT and Senate Properties have signed a contract on the renovation and alteration of the K2 city block, which is located in the city center of Helsinki and houses government activities. The scope of the project is about 15,000 gross square meters in addition to which earthworks and blasting will be performed as a part of the contract. The value of the contract to YIT is approximately EUR 40 million, and it will be recorded in the order book for the fourth quarter. Then last but definitely not least, yesterday, we were happy to announce that YIT signed a project management contract with Hitachi Energy for the construction of a new production and technology center in Vikby's industrial area in Mustasaari in Finland. The value of the construction contract for YIT is approximately EUR 105 million, which will be recorded in the order book of the last quarter of the year. We are delighted that we were chosen as partner for this project that advances green energy transition and supports the journey towards a carbon-neutral energy future. The project is in line with YIT's strategy, also supporting the core technologies that are key to Finland's electricity supply security, promoting the growth of Finland's renewable energy production. So all in all, the market is active in both of the contracting segments, and there are multiple large projects in tendering phase still. Then a few words about the cash flow development. Operating cash flow continued on the right track and was slightly positive in Q3. And for the last 12 months, cash flow was EUR 63 million positive and measures to improve the net working capital efficiency have yielded results. As we have stated in our guidance for this year, the operating cash flow after investments is expected to be positive. And maintaining positive cash flow has been a key focus for us, and that, we have delivered on a stellar manner. In our residential business, the sale of apartments from inventory will release capital in the upcoming quarters. And in the CEE countries, the formed joint ventures to develop large area projects together with RSJ Investments will allow us to reach higher volumes profitably, tying less capital. In Infra, we now operate with negative capital employed, demonstrating solid performance in capital release measures. And in Business Premises, we are also on a positive trend. So now to conclude, we are on track in achieving the expected results for this year. Our stable financial position enables us to focus on improving the financial performance of the company and to optimize timing of certain capital release measures to maximize shareholder value. That concludes the intro so far. And now as I mentioned, before opening the call for questions, let's take a short deep dive into our joint venture structure operating model in the Residential CEE operations. We have here also with me [ Petri ] Helin, who is the Senior Vice President of Group Accounting and Reporting, with me here to provide you also some insights on the accounting procedures around the joint venture. So we will be jointly presenting or giving you a short presentation on the joint ventures -- joint venture that we use in CEE countries. And first of all, I think it's clear that the usage of capital, and more especially the capital efficiency now going forward, is very much in the core of our strategy. And as we stated already in the Capital Markets Day, so we will be releasing capital from our balance sheet by divesting some of the assets, but even more importantly, continue to conduct our core businesses more -- by more efficient use of capital. And the joint ventures are one example of using the capital more efficiently. So this is very much in line in our -- with our strategy. And then if we have a look at the basic logic in the joint venture. So first of all, we use the joint ventures to develop, produce and sell residential projects jointly with co-investors. And we use the joint ventures to split the development and/or sales risk and allow, as mentioned, for more capital-efficient operating model. In the model, co-investors and debt financiers provide capital and further, the model releases capital to YIT through the project and plot sales at establishment. And altogether, as we have stated already earlier, the YIT's associated companies and joint ventures enable, currently, YIT to construct over 2,000 new homes in the CEE countries. And the basic process in the joint ventures was so that the joint venture buys the project concept and the plot either from YIT or from a third party. The project is contracted by YIT or a third-party contractor. And then eventually, the joint venture targets to sell the apartments during the construction period or soon after the completion. So that's the basic process in using the joint ventures. And we have a couple of examples here that you can see that we have actually already performed or formed the joint venture. For example, the second phase of the M?rpagalmi project in Riga in Latvia, we began already last year, and the completion is scheduled for the next spring. Then we have here in the middle, we have a project called Larnaca in Bratislava, Slovakia, which is a large area project. And the first phase of that project is planned to begin at the end of next year in Q4. And it's a long area project, and it is projected to take around 10 years to complete. And then the last example here is regarding the expansion to Brno. And as mentioned, so the joint venture is formed and then the plot has been acquired to the joint venture. And the expected start of construction is going to take place during the spring next year. And altogether, the whole project is expected to be completed by summer 2031. So this gives you an idea of the magnitude and the kind of a time span of these large area projects where we typically use joint ventures as structure, really to kind of use capital efficiently and share risk. So that's basically, in a big picture, regarding the joint ventures. And now I would be handing over to you, [ Petri ], to go through a bit about the accounting perspectives on that matter as well.

Okay. Thank you, Tuomas, and good afternoon. Okay. Purpose is to have a brief overview of consolidation of joint ventures and associated companies, focusing on project development joint ventures. Firstly, let's start with the short summary how entities are consolidated to YIT Group figures. We have mainly 3 types of entities in our consolidation. These are subsidiaries where YIT hold control over the entity, joint ventures where YIT has joint control with 1 or several co-investors, third, associated companies where YIT has significant influence over the investee. It's good to keep in mind that the IFRS is based on holistic assessment of power over the investee. Thus, the percentage of ownership does not directly define the consolidation as the power may arise from different sources. There are 2 types of consolidation method for these companies. Subsidiaries are consolidated using line-by-line consolidation, whereas joint ventures and associated companies are consolidated using equity method. In equity method, YIT consolidates to its balance sheet, its share in investee's equity and possible goodwill if the entity is acquired. The investment is presented in 1 line item named Investments in Associated Companies and Joint Ventures. Correspondingly, the investee's net result is consolidated to YIT's profit and loss in line item named Share of Results of Associated Companies and Joint Ventures. All internal transactions between these entities are eliminated. Of course, taking into account YIT's shareholding, when it comes to joint ventures and associated companies. Okay. If we move on to next -- in this picture, we can see how project development joint ventures and related main transactions are presented in YIT's profit and loss. Firstly, there are 4 typical phases in project development joint ventures, which we can see at the lower part of the slide. First, establishment of entity; second, the development phase, which may include, among others, permitting; third, construction phase; and the fourth, exiting phase when remaining completed unsold apartments are sold. There are 3 main profit streams to YIT. First, net result from the JV, which is consolidated throughout the entire period of ownership. It's good to keep in mind that also, in project development joint ventures, the revenue from self-developed apartments are recognized when the project is completed and the apartments sold. The second profit stream is possible plot or project sales to joint venture. These sales are typically done in connection to establishment of JV. YIT recognizes revenue from these sales at a point in time at the establishment phase. The internal revenue and margin related to these transactions are eliminated. The elimination is released when the apartments are sold from the JV after completion. In third profit stream, possible construction services provided by YIT are recognized over time during the construction period. And the same way as in plot sales to JV, internal revenue and margin are eliminated and the eliminations are released in connection to apartment sales after completion of the project. I hope this short overview of consolidation and presentation of project development joint ventures clarified the topic. So back to you, Essi, and Tuomas.

Thank you very much, [ Petri ]. And really, this was to kind of increase transparency and to explain kind of the logic or the reasoning behind the usage of joint ventures and also a bit of the kind of accounting perspective so that you can give a kind of a clear understanding how this works in our balance sheet and P&L. So thank you very much, [ Petri ], for your part of the presentation as well.

Thank you, Tuomas and [ Petri ]. And we are now ready for the questions. [Operator Instructions] And the first question comes from Svante.

Going straight to the JV presentation that you had, could you tell us a bit about the balance sheet side of the JVs also? What kind of financing is there? How much debt is used? What kind of debt is it to also make shareholder loans? Could you please elaborate a bit on that?

Yes. Thanks, Svante, for the question. And first of all, about the financing, and that's -- it's typical that those who invest in such structures want to use nonrecourse debt financing in the structure. And the ratio between debt and equity varies depending, of course, on the project and the availability of the finance. But the leverage in these -- in joint ventures is on the typical level that is used in real estate sector. So that's about the financing of these structures. And then about the commitments also, kind of YIT's commitments. So first of all, our commitments are related to our YIT services to the joint ventures, and those are according to market practices. Often, as mentioned, so we own the 50% of the joint ventures and then the investors have joint control over the investee, as [ Petri ] here mentioned as well. And normally, YIT is liable for its investment in the JV and the project financing itself is on a nonrecourse basis.

Okay. You mentioned -- when talking about Residential Finland, you mentioned that obviously, we'll have low level of completions in Finland next year and -- but could you repeat what you mentioned regarding the profitability? I think you said that reaching profitability for Residential Finland will be difficult in '25.

I didn't mention reaching profitability targets or anything about that. But I just wanted to point out that, as you all know, so we have had a very limited number of starts this year. So that has an impact on the profits next year.

Yes. But you clearly also, at least, hope that you could be able to dispose of the completed unsold apartments also during '25 or at the current rate, reach 0 inventory by the end of '25.

Yes, definitely. And as mentioned, so with the pace now that we have been selling the apartments in Finland during the last couple of quarters, so with that pace, not kind of an increased pace, but with the same pace, we would be having basically sold all of the inventory at the end of next year. So that's basically the situation that -- and that's the same situation that we have been communicating earlier as well. So definitely, the work continues on selling the apartments from the inventory. And then as mentioned, so we've had now a couple of starts this fourth quarter. And these kind of starts that we have now performed, these will be completed at the end of next year as well.

And last question regarding consumer apartments in Finland. What kind of -- what is the actual process when discussing with consumers who want to buy an apartment? What kind of discounts are you talking about? Obviously, it varies case by case, but could you give a picture of what the process looks like in reality?

Well, of course, the process itself is kind of a case-by-case negotiation with consumers. So that's kind of a pretty normal course of action. But anyway, I would like to highlight here that, as we have mentioned several times, so we haven't seen that much of price elasticity of demand in the market so far. And that's why we have launched several campaigns to boost the sales. And those campaigns have been actually improving the sales at the time they have been performed. And also when looking at the market in general, we have seen some public discounts, direct discounts given in the market, and despite of that, not increasing volumes in terms of sales. So we see, still, the market in similar kind, that there's pretty low elasticity of demand regarding pricing. So there, we, again, kind of refer back to campaigns that we have used. But also on top of that, of course, you're right that we are negotiating with consumers one by one.

Could you remind us what kind of campaigns you have currently ongoing? I mean you had the -- where you could rent an apartments for up to 2 years, and then you had also the interest rate cap campaign, but what's ongoing currently?

Yes. We had the interest rate cap-related campaign earlier this year. Currently, we have the rent-to-buy campaign still ongoing. And on top of that also, kind of a home change service where YIT pays the customer sales commission for the old home and then the moving costs. So that's to support the transaction to happen at the moment. So 2 campaigns now running.

And then we have a question from Emil.

One question maybe on the comparison period, so 2023, Q4. On residential, is there some one-offs or something we should take into account when comparing this year's Q4 to last year?

We have had kind of -- in this kind of a market situation, we have comparison back to the kind of last year's figures is, of course, a bit of -- that's one kind of a reference point as well. And now in each of kind of the quarters, this and last year, we have done some bundled deals. And that's something that -- which has, of course, an impact on the quarterly revenues and profits. Then not that much in Finland, but in CEE countries, also, the kind of completions and occupancy permit and the commissioning process, as we have communicated, they have a significant impact if kind of moved from quarter-to-quarter. So those are the kind of larger kind of one-offs that has a quarterly impact on the result. But in the big picture, it's only a timing kind of -- or relevant from timing perspective.

Okay. But so last year, you showed that in Baltic and CEE, the adjusted EBIT was EUR 30 million, which was quite high. So that was kind of a timing type of thing related to construction completions or something?

You are right. And you're right. And if I remember correctly, so it was actually last year Q2, we had a larger kind of commissioning that was postponed from the Q2 to Q3 -- sorry, from Q3 to Q4, yes. Yes.

Okay. And then just a question on the residential market in Finland. Are you seeing any increasing interest from investors towards your apartments? What is the market like?

Yes. Thanks, Emil. We have seen kind of, I would say, more interest from the private investor side towards our kind of individual apartments. And therefore, we have discussions ongoing or have had during the quarter as well regarding so-called bundle deals, which is, of course, nowadays pretty normal course of business for us. But anyway, so there's kind of a positive change that there has been quite a lot of interest in the private investor side. But then going back to the kind of a professional investor deal. So in that sector, no major kind of increase in interest.

Yes, we have a question from Anssi.

One question from me, and it's about the Housing segment EBIT in 2025. So if I look at your last 12-month operating profit in this whole segment, it was like -- was it EUR 20 million. And now if I look at your order book, it was down by 23% year-over-year in Q3 and units under construction was down by 42%. So how should we think about this EBIT level going into the next year? Like, are there some kind of elements that you could actually improve your EBIT from this run rate? Or is it just reasonable to assume that it will come down?

Well, you're kind of pointing out the components around the EBIT. All we can say now is that if we look at the number of starts this year, so that has an impact, of course, on the profits next year. But as mentioned, so of course, the market demand for kind of -- for our products in the inventory has also an impact, of course, on the profits. And that is, of course, pretty much related to the market development. And there are -- I would say that there are a lot of uncertainty in the market still, but we see some positive signs in the market with the lowering interest rates, the consumer confidence a bit increasing and so on. So those are kind of 2 things in focus to sell the apartments from the inventory, to support the profits, and then, of course, the starts that we have now initiated during the Q4 will have a positive impact then at the end of next year.

And then a question from Mika.

Could you give us some update on your sort of capital release program as you have those certain bigger assets for sale. So what's the situation there right now?

Yes. Thank you, Mika. I would say that we continue the capital release, and we have been working a lot on the topics, and there are several streams as mentioned, and we have been improving the net working capital efficiency. But anyway, your question was more towards the kind of larger divestments, and it's fair to probably talk openly about the Tripla. And regarding Tripla kind of divestment process, no updates on that at this point. This is something which we are looking carefully and looking at the market and kind of monitoring the market, is there a demand for an asset like this and so on. So no major kind of news around the capital release so far.

What about the sort of these a bit smaller commercial projects, what you have in Espoo and in the Baltics. So any progress there?

Yes, you are right. So we have 2 office buildings, one in [ Vilnius ] and one in Espoo. And we are continuously looking at the situation and renting out the spaces. So that's what we have been focusing on and of course, looking at the opportunities to divest those as the timing is optimal or right. And that's all we can comment on those at this point.

Any comment on occupancy rate in those projects?

Unfortunately, not really something that we can disclose here.

Do we have more questions? It seems that there are no further questions. So thank you all for the great discussions.

There's one from...

Excellent.

This is just a detailed question about -- have you announced when you will publish the new division numbers?

We haven't announced an exact date on that. But anyway, so we will be doing or kind of reporting those well ahead of Q1 next year reporting. So that's the normal procedure, but no exact dates have been announced yet.

Excellent. If there are no more questions, I thank you all for the discussions. We will publish the financial statements bulletin on seventh of February. Wish you all happy holidays and all the best for the next year. Thank you.

Thank you very much.

Thank you.