YIT Oyj (YIT) Earnings Call Transcript & Summary

Okay. I think we can start. So hi, everyone, and welcome to our analyst call regarding the news we published this morning related to the change to a new revenue recognition method in segment reporting. My name is Essi Nikitin, and I'm heading the Investor Relations at YIT. Together with me today, I have our CEO, Heikki Vuorenmaa; Interim CFO, Markus Pietikainen on the line. We will start with a short presentation on the topic by Heikki and Markus. And after that, you have an opportunity to ask questions. As a reminder, this call will be recorded, and the recording will be published on our website after the call. Without further ado, at this point, I will hand over to Heikki. Please go ahead.

Yes. Thank you, Essi, and welcome also to this call from my behalf. Thank you also for taking it with such short notice. And like Essi already mentioned, so we provided some news earlier today, and we'll try to provide you the context and the background information and then really happy to take your questions at the end of this call. But let's start with what we are actually doing in terms of our new operating model, what we are implementing here, the Finnish residential business. And as we already mentioned in the Q4 report announcement, so this is quite a shift from, let's say, traditional line organization towards a function-based organization going forward, and that will be divided into 3 different important areas internally. And the reason that I'm walking this true is, of course, this has an impact on our -- how do we manage and steer our performance also in this segment going forward. But first time, we will concentrate our internal product development efforts, all the R&D activities as well as the layer designs to one internal organizational element, which then will be clearly divided to distinctively different product categories, reflecting the customer demand. So if you would be kind of buying a home, which is targeted for upper middle class or you would be on a suburbs. So the product will, going forward, also be different and will be suited for the different needs. And there, the primary focus is, of course, to maintain and drive the gross margin for our projects that way that we are we are meeting our targets. Then we are building a single centralized production entity that will oversee both of the quality control as well as the manufacturing process development. And as we have discussed earlier, so we made significant progress already in terms of our lead time shortenings and we'll continue on that path. And the team will be then taking care of so-called supply chain end-to-end and ensure that the continuous improvement is also reflected on our capabilities same way across the operating country here in Finland. And the primary focus there is also to maintain the production efficiency, quality and costing under control. And then third element, which is obviously the big impact also for our performance is that how are we engaging with the customer, customer insights, marketing and ensuring that the apartment sales is meeting our expectation. And there, we are having a third part of this functional-based organization where we then are also working across the organization. And as we move from the previous historical kind of line organization, regional approach to this different type of function-based organization, it also will be reflected on how do we steer the business and those primary focus and KPIs are here highlighted under and that connected then to our -- also the segment reporting is then the change behind that what we are going to reflect. And Markus, over to you if you want to walk through a bit more details that what does it mean for us.

Yes. Thank you, Heikki. I think mentioned on the previous slide that we completed the plans now to the previously announced change in the operating model, and we will adopt the percentage of completion revenue recognition for the self-developed projects. And starting from Q1 2026, we report all operations using the percentage of completion in segment reporting. And this is in the contrast of previously using the method where we recognize both the revenue and profit only when the control was transferred to the customer. So going forward, we will present the financial information both according to the IFRS accounting standards and also the percentage completion. And reconciliations between the 2 reporting methods will also be provided. The essential completion method impacts the timing of the revenue and in the segment reporting, but it has no impact on the financial targets set for the strategy period 2025 to '29 or the adjusted operating profit guidance given for the year 2026.

Very good. Thank you, Markus. And let's come back to what is the big difference or the real difference there and that starting from what is not a difference between the IFRS and calculating based on the POC methodology is that the actual profitability for the project is the same. It is just recognized the revenue during the construction period. And you can see here an illustrative example on this page how the POC revenue is recognized already during the construction and whereas the IFRS is then only highlighting the revenue at the point in completion. So this is the major difference. Also, how do we calculate that revenue is that it is based on the completion rate multiplied by the sales rate on the project, and that gives us then the total estimated revenue. Good to note on here is that the completion rate is based on accumulated on-site costs. So it's not based on any internal assessment, but it's based on how much of a cost has been accumulated on that construction side, which is giving then us the completion rate of the project. If we then have a couple of additional examples what is then the implications. So we see that the book will reduce quarterly variance caused by the completion schedules of the developed projects. And you can see here a few type of an example. So there is an example when the project is fully sold during the construction period. This is illustrative example, obviously, but it shows that how the sales rate completion rate and how the revenue is then recognized in the POC mode, whereas on the IFRS, it would have been done just during the quarter. There is also an example on a project if the sales would continue after the construction period, so i.e., there would be some of the unsold inventories. And of course, after the completion, the difference between the IFRS revenue and the POC revenue isn't there anymore, therefore, because actually the handing over the single apartment happens after the construction is completed. So those are a couple of illustrative examples still further to explain how the methodology work. If we then talk about the completion rate, I already mentioned that it will follow the on-site cost accumulation. This is not exact accurate picture, but let's say that it is a good illustrative reflection how the completion typically happens. So when we start the project on the self-developed residential side. So there is earthworks and the groundworks, which typically maybe takes a bit more time than accruing costs when you can then go to hoist the frame as well as completing the internal works, the fit-outs and the bathrooms and kitchens. So you tend to accumulate more cost in the shorter period of time and then finalizing the yards and the clean area is again, of course, time consuming, but the less of cost accruing and quite close to finalizing the project. So it's -- typically, the project is not linear, but it may be more follows the S curve type when we are then measuring it based on the accrued costs on-site. Then back to Markus to you. So what are the implications to our financials for '25?

Very good. Here we have the bit of the numbers. First, starting with residential Finland financials for 2025. And here, we have the new comparison financial information. We have the segment reporting in blue and IFRS in a darker color. And we can see that there is a slight -- only slight change when it comes to the revenue, slightly lower segment reporting revenue. But then on -- if you look at also the -- on the operating profit side, we can see that there is no impact between the IFRS and the segment reporting. Here, it's good to note that we reported minus EUR 8 million adjusted EBIT for 2025, but this also includes a EUR 1 million adjustment from the nonstrategic adjustment, nonstrategic items, which we announced previously this year. So that's the reconciliation to the reported EUR 8 million. Then if we move on to the CEE financials and the comparison numbers. Here, we can see that there is a greater impact on the numbers. We have both an increased sales for 2025, but also an increased adjusted EBIT for 2025. Here, we can perhaps see that the -- there is a better balance on the profit between the quarters. However, the volatility still remains, and this is obviously driven by the completion rate and the sales rates and the combination of the 2. Here is to note that there is no impact from the previously announced nonstrategic item adjustment. So this EUR 9 million here is the timing difference driven from the percentage of completion. Then we have finally, the group numbers. Here, we have also the contracting segments included here. We have a EUR 46 million increase in sales for the full year. And we have also then an increase of EUR 8 million on the adjusted operating profit for 2025. So the reconciliation goes that we adjusted -- we announced the EUR 54 million adjusted EBIT for 2025. Then there is an impact of EUR 4 million from the nonstrategic items. And then there's EUR 8 million positive due to the percentage of completion, the timing. And this ends up then to EUR 58 million. Perhaps additional note, which we provided also in the release is that the change in the capital employed, there's an increase of EUR 17 million at the end of 2025 due to the percentage completion method.

Very good. Thank you, Markus. And before opening the lines for the questions, so just a couple of key takeaways from this call is that, firstly -- so as we adapted the new reporting method in the segment reporting, we do not see that there would be impact on the group full year guidance, where we see that this new segment reporting methods, it reduces the dependence on the timing of the completions, but it will also provide more timely information as the profit generation reacts then faster to the market dynamics than the IFRS or what we historically had in the segment reporting. And then this new segment reporting will be applied from the Q1 '26 onwards and the comparison figures are available now for 2025. That's all from our side, and I think we are happy to take questions if there are any.

Thank you, Heikki and Markus. We are now ready for questions. [Operator Instructions] Please, Atte, go ahead, you have the first question.

Good day from my side. This is Atte Jortikka from Inderes. Just a very quick question from me. Given the current volumes and timing of expected completions and the sales rates, what kind of impact from the change in reporting you expect for the current year in terms of net sales and adjusted EBIT?

So as we mentioned, so we do not see that the change would impact the adjusted EBIT guidance of EUR 70 million to EUR 100 million for 2026, even using the new method.

Next question we have from Lars Norrby.

It's Lars here. So when you say that it has no impact on targets or guidance, so basically, does it mean that the guidance for '26 and your financial targets are still based on the IFRS adjusted EBIT or that the targets are the same, but based on the segment's EBIT?

So the latter one. So the targets are the same based on the segment reporting -- new segment reporting EBIT.

All right. Very clear. Then maybe a second one on the sort of -- when looking at the sales patterns between Finland and the CEE countries, could you remind that how the timing of sales of apartments during the project differs between these 2 regions? And maybe also on how the actual cash flows -- the timing of the cash flows differs between the regions?

Yes, of course. And that being said, so there's also significant differences in the CEE region on the country level, but I provide you that overall view. So typically, we make the early part of the sales at the starting of the construction where there are the ones that are reserving and interested on the apartment. And then there are the customers -- consumers that are then making decision closer to the completion. And that's the, I would say, the pattern that you could see on the kind of quite a normalized market condition. Where we have been now seeing the Finland pattern on the recent years is that consumers are making a decision quite close to the completion, quite close to the completion of the apartments. And that has been a bit more Finland specific for now for 2, 3 years -- 2, 3 years. So that is kind of deferring. Then on the kind of how the payment terms for the consumers, so varies. So in certain countries, the payment terms are following the construction milestones, which is then, I would say, typically in Europe. So for example, Poland is one of those countries. And then, for example, in Finland. So it is based on the -- that you pay certain percentages at the sales transaction and then as the whole product is completed, so then you pay the final amount. And then there is anything in between that 2 in the 7 countries that we operate in.

And next question from Anssi.

Yes. Anssi from SEB. Just to double check that, are you planning to provide segment-specific numbers with both methods? Or do we have to make some group level adjustments here or reconciliations? How do you plan to report segment-specific numbers?

Thank you for the question. We will only provide the percentage completion numbers for the segments. So the IFRS numbers will be available for the group.

So it means that we have to figure out like where the difference is coming from. How do we make these assumptions?

Well, I guess the question is that do you need to forecast the IFRS numbers? Or would you then only do the segment-based percentage completion numbers as still is the -- there's no change in the business. It's just a timing difference. So in the end, the numbers will be the same over time.

And next question from Jerker.

I was wondering a bit about -- you said that -- or understanding the kind of operating profit will balance out more in the previous model, but maybe it's more a question about Finland. But given the kind of weather seasons we have here, do you kind of expect to see that some quarters will be stronger than others, just considering the cost accumulation?

Thank you for the question. I think that the kind of cost accrual is more related to the project timing and when those have been started compared to the prevailing weather. I would say that today, we are -- the weather is giving us less of a kind of factor on the residential construction side than other construction methods because we are capable to hoist the frame and get the heats up relatively quickly and going to the internal kind of -- then the weather is not playing there anymore a role. So I would say that there is -- the variance on that is more based on the -- when the projects have been started than the prevailing weather.

Understood. And maybe could you kind of give some light on kind of the sales or your expectations on projects and sales? How much -- or could you give some light on how much you expect to -- or what kind of rate you expect to see that has been sold by completion? And how much remains unsold? What is kind of norm nowadays?

Perhaps one observation. Thank you for the good question that as the capital employed has increased by 17% in this comparison numbers for 2025, that indicates that all the projects ongoing, EUR 17 million has been on the percentage completion method already been recognized in '25. We don't comment on the full number, but this provides an insight on how that reporting works. So effectively, when a percentage completion booking is done, the capital employed will increase accordingly. And when at completion or whenever everything is sold, then that's been released. And then on the IFRS side, you would see the full numbers being recognized only then. So that's the bridge.

Yes. And if you think about -- if you think about it, of course, optimum in terms of how many percentages are sold at completion, I think the optimum is that we are selling -- we are not in a business to build an inventory. Realistically speaking, if we look at the inventory, for example, what we have had in CEE at the time when the market is good. So we are carrying about 2, 3 months of inventory there in a normal market. In Finland, obviously, now the situation has been quite different in terms of market conditions. So that is maybe not a good comparison to what we are internally targeting to have as a percentage of sold at the point in completion. But for sure, we are pushing for the maximum result there.

Do we have any more questions? Yes, Anssi.

Yes. Just to come back on this timing difference per segment per quarter. So I think at least you provided it in the comparison figures here, but it would be maybe helpful to provide that as well in the future because, of course, your balance sheet, I have understood, remains the same and unchanged. So it's, to be honest, quite important element in forecasting YIT's numbers. So we have -- yes.

Thank you, Anssi, for the feedback, and we will take that and definitely look at it how can we -- we are on much favoring on providing as much as relevant information as we can for the analysis purposes. So we will take a look at that. And just like you mentioned, so it's good to know that all the balance sheet items and elements that we are very keen on also on management side, as we have been vocal about it and communicating will be IFRS based. So this is -- this change in the segment reporting doesn't bring you that type of kind of new elements that much on the balance sheet. But let's take a look at that, how we can accommodate that best way to our numbers.

Because yes, I guess all the analysts are -- their estimates are based on segment figures. And of course, then we have to also estimate the IFRS numbers, so it would be helpful.

Thanks, Anssi. Do we have more questions? Okay. It seems that there are no more questions. So thank you all for a good discussion, and thanks for participating and wish you all a great rest of the day.

Thank you all.

Thank you.

Thank you.