Good morning, and welcome to YIT's second quarter earnings webcast. My name is Tommi Järvenpää. I'm the head of YIT's Investor Relations. Our strategy execution continued in the second quarter. Profitability improved despite prevailing market instability, and the sale of the businesses in Russia were completed successfully. Next, our CEO Markku Moilanen and CFO Tuomas Mäkipeska will go through the Q2 results and highlights. After the presentation, we will be taking questions from the conference call line. At this point, I would like to hand over to our CEO. Markku, please go ahead.
Thank you, Tomi, and good morning on my behalf as well. As Tomi commented, we continued to implement our strategy during Q2. The first part of our strategy is to focus on our core competencies and focus on businesses which we see attractive and profitable growth in the future. As a result, we completed the sale of our businesses in Russia, so we have now stopped all operations in Russia. It's important to highlight that all the liabilities from 60 years of business from YIT and Lemminkäinen are now behind us.
The sale of the Russian business is a clear testimony of the great expertise and commitment of our people, not only from the Finnish side, but from our former employees in Russia who kept the business well running since the eruption of the war in Ukraine.
If we look at the profitability and the rest of the business, our operating profit increased despite the prevailing market instability. The operating profit increased from last year's numbers, and more importantly, I would say that the profit margin telling about the efficiency of our operations and our productivity increased more than one percentage point to 4.5%.
While we have been very selective in our projects, especially in business premises and infrastructure, we're happy that our order book was strengthened during the quarter as well. We signed significant deals during the quarter and even after that, like the new R&D center for Nokia in Oulu, the seawater heat recovery tunnel for Helen, and right after the Q2, the health and wellbeing center in city center of Helsinki, Kamppi, in Finland. Just a good example of the order book which secures the workload for the coming quarters and years.
If we look at the numbers, during the second quarter, our revenue decreased, which was planned, and the reason for that was a lower number of apartment completions in housing compared to last year's very high number during Q2 as well. Despite that, our adjusted EBIT, as I just mentioned, increased, and the margin increased as well, and it's really as the result of our productivity work, so lower level of project deviations and again more efficient operating model. Again, all our businesses are in good shape. Yes, housing, while the level of apartment completions was lower, the revenue is lower, so naturally the EBIT was lower as well.
On the other hand, our transformation in business premises and infrastructure continues according to the plans and that can be seen in the results. The good results in business premises, it should be mentioned, it is driven by two self-developed projects during the quarter, one in Bratislava, Slovakia, and one in Turku, Finland.
These were planned during this year but came already during Q2, so we have several of these, a bit smaller self-developed projects ongoing in different countries and now we could harvest the good result from them. I would like to highlight that even the underlying performance is improving according to our plans as well.
In property development, yes, we had a stable result, and our pipeline on developing self-developed projects looks promising moving forward as well. Just to mention, we have been investing clearly to the wind power development, which we see very attractive in the future.
Two of the projects, Murtomäki II and Taraskallio, are now under zoning, and we have hired several experts to strengthen our wind power development team as well. The whole market has changed a lot during the first half of the year. We have seen the eruption of the Ukrainian war. We have seen the consequent inflation of material costs and challenges in material availability.
Now lately during the last couple of months, we have seen increasing interest rates and rising inflation, which has taken the overall consumer confidence down. Of course, we have evaluated the situation, evaluated our strategy as well, and our conclusion is clear.
Our strategy is the right one. One could say that just under these circumstances, it is the right one because we are focusing on our core competencies and where we are good and where we can perform and grow profitably. Secondly, we are working hard to improve our internal productivity. Thirdly, we are preparing for the future to strengthen our position in ESG.
If we look at the progress during Q2 in these three strategic priority areas. Firstly, yes, of course, in focus, the sale of the Russian business is an important milestone for that. In property development, we divested the YIT. While not the largest transaction in size, it's a good example of our strategy execution where we are cleaning our portfolio and divesting our service business.
Thirdly, we invested in attractive urban plots in housing, and again, of course, carefully selecting the plots. We during this period invested in attractive plots in Poland, in Warsaw, and in Kraków during the period as well. If we look at our progress in productivity.
Firstly, last year, last autumn, we announced that we were designing a new operating model, which we implemented since the 1st of January this year. Of course, we had related cost savings targeted based on the new operating model.
We're happy to see that the progress has been very good on that. During the first half of the year, we have already amounted to EUR 14 million cost savings from the new agile operating model. Secondly, in terms of productivity, we have gained substantial gains from our enhanced project management. During the first half of the year, our project deviations have been clearly lower than during the past years.
In addition, we are on track to reduce lead times in our housing projects, so to finish our apartment houses in a shorter timeframe, where our goal is to reduce that by 20% by end of 2025. Looking at ESG, what I'm really proud is that we have already achieved our goal which we set in 2019. Which was to reduce our own emissions by 50%.
At the end of Q2, our CO2 emissions from our own operations was 51% lower compared to 2020. We are continuing our work to reduce our emissions in Scope three according to the Science-Based Targets, and our process to approve the Science-Based Targets is progressing according to the plans as well.
When it comes to health and safety, our combined lost time injury frequency was at a level of 12.0. Our focus has been on leading indicators, management walks and talks, and safety observations on our sites where we are well ahead of our targets. When it comes to the good governance, we have continued good work and ensuring that everybody working on our sites has a valid working permit as well.
I mentioned about our investments in the land bank, and it's important to highlight and understand that when it comes to housing and self-developed projects, a strong land bank in good, attractive plots is important for any company and of course for us as well.
We have a land bank in Finland and in the CEE countries, and according to our strategy, we're strengthening that as well. Like we have told, we are seeking even more growth in the CEE countries, especially in Poland, Czech Republic, and Slovakia as well. Our land bank value was close to EUR 700 million at the end of Q2. This of course enables us to grow in a very profitable way in those countries in our housing business. At the same time when we analyzed our strategy, we of course looked at our overall strategic goals.
Even if we are looking at the short term and clearly all signs are indicating that we are heading towards a recession. We clearly see that our financial targets to reach over 6% EBIT by end of 2025 is still achievable and a right one. We see that because our strategy is supporting us so that we are focusing on our core competencies. We are increasing our internal productivity, and then we are growing in the attractive areas when the market growth starts again. At the same time, we are well aligned with our gearing targets. Almost at our target, which is below 50%.
It's good to note as well that our gearing will increase in short term as we invest in growth and most importantly in investments in new attractive plots and housing startups in those areas where there's good market looking forward. Again, thirdly, yes, we are well on our way to have stable growth on our dividend as well. We are keeping our strategic targets, financial targets as they have been before. Let's have a look a bit more closer to our numbers during Q2, and I'll hand over to our CFO, Tuomas Mäkipeska. Tuomas, the floor is yours.
Thank you, Markku, and good morning on my behalf as well. As Markku described, we had a successful quarter. Our profitability strengthened and the balance sheet remained strong. Let's have a look at the highlights from the financial perspective. First of all, the order book strengthened to above EUR 4 billion, which very good starting point for going forward in the market situation where we are right now.
The adjusted EBIT improved both in absolute and relative terms, and the net debt remained on a low level, especially when taking into or excluding the IFRS 16 and housing company loan effect there. I will cover these items in a while, but let's first have a look at the financial impacts of the sale of the Russian business. We are first of all very pleased that the sale of the business in Russia was completed successfully.
The total transaction price amounted to EUR 71 million. We booked an accumulated negative translation difference of EUR 253 million, which did not have an impact on the group equity and cash flows. This led to a result for discontinued operations of minus EUR 293 million. As earlier announced, as well, in Q1, we already booked an impairment of the assets related to the Russian businesses.
Now looking at the order book and the revenue development, it's good to see that we were able to grow our order book to above EUR 4 billion levels. Which is again, I think, a great evidence of our competitiveness in the market, despite the selectiveness in the project that Markku already mentioned. Majority of the growth in the order book came from the housing business, but it was also supported by business premises and infra business order book growth.
This really safeguards our volumes going forward in the unstable market conditions. Our revenue decreased notably as it was also planned, mainly due to the lower number of completions in housing, as Markku already mentioned. Also at the same time, we were able to grow our revenues in business premises and property development segments. If you look at the profitability perspective, the adjusted EBIT, we were able to improve both in absolute and relative terms.
Productivity improvement due to the new operating model was one of the drivers behind the improvement. In the big picture, it's clearly visible here that our diversified business model also protects us against the market instability and was the enabler actually to overall profitability improvement in Q2. The housing EBIT was decreased notably due to the volume change. This meaning lower number of completions, resulting from the slowing down of startups because of the COVID-19. On the other hand, we improved the profitability significantly in business premises and in infra business.
In both segments, the turnaround has progressed well, and the margin deviations were decreased a lot compared to the previous years. Business premises improvement was positively impacted by the two already mentioned self-developed projects, of which sales took place in Q2. These projects are business as usual for us, as Mark mentioned, but it's the timing of these projects that gave us also tailwind for just second quarter.
If we look at the capital employed and the cash flow development, in the big picture, the cash flow and the capital employed development reflects our growth investments according to our strategy. Impact to both comes mainly from the plot acquisitions and higher number of apartments under construction in the growing cities in Finland and in CEE countries, as has been planned ahead.
Of course, we continue the selectiveness in the project and risk management procedures to manage our capital employed level. On the other hand, our strong balance sheet continues to allow us to invest in growth. Our debt structure, it is very important to note that our debt structure and the low risk financial risk profile is kind of highlighted on the left-hand side here. If we look at the net debt excluding the IFRS 16 impact and the housing company loans, we would have roughly EUR 80 million net debt. This is kind of reflecting the low financial risk profile of our company. This is a...
I think this is very important to understand because these two components are not in the same way interest and risk-bearing financial instruments as the other ones are. Also, if we look on the right-hand side, the maturity structure of the debt, so it's healthy and there's only a minor payback coming in during this year and a bigger one at the end of next year. This also is clearly visible here that we do not have any refinancing needs currently. From balance sheet perspective, so as mentioned, our balance sheet remains strong and it still allows us to execute our strategy going forward.
As mentioned, increase in net debt is related to the growth investments to plots and construction volumes, and it is also visible in the gearing development. Our interest cover ratio continued to improve, and the equity ratio remained on a healthy level. We see the strong balance sheet as a platform for growth and navigating through the unstable market environment. To summarize, the well progressing transformations and improving performance grow our earnings growth, and we are well equipped to continue executing our strategy. Thank you. Now over to you, Markku Moilanen.
Thank you, Tuomas. Let's have a look at the market and the expectations moving forward. All in all, we expect our profitability and our profits to improve during this year compared to last year's number where our result was EUR 85 million. However, it should be noted that the short-term market outlook is clearly cloudy. Like I mentioned earlier, all indicators are showing that we are moving towards a recession. If we are looking at the different markets in the different countries, we can clearly see several negative trends.
Firstly in the housing markets, we can see in Finland and in the Baltic countries, it coming from a very good market to a more normal level, but the trend is negative and the overall consumer confidence is clearly impacting the housing apartment sales in the Finnish and the Baltic markets. We clearly see a bit better situation in the Central Eastern Europe where the clear expectation is that due to the inflation the apartment prices will continue to grow. And many private citizens see investments in their own home to be a safe investment. Sales is progressing clearly better in those countries compared to Finland and Baltic countries.
In the real estate market, yes, we see the market slowing down again due to the overall market instability as well. On the other hand, going back to the history and looking at our position in that market, we already during the COVID time started to move more towards public sector projects and clients. From our project base and order book, more than 70% already is from the public sector. Which is of course during this a bit more unstable times to come very favorable for us, and we have a lot of good projects in our order book and in the pipeline as well.
The infrastructure market is clearly the market which hasn't been impacted so much by the overall market change. The Finnish market remains, as we say, to be in a good level, and the Swedish market is continuing to be good, even if the competition is very tough in the Swedish market. One thing which has clearly impacted the whole construction industry has been, like we have discussed one and a half year so far, is the building cost. Actually, Statistics Finland just released their Building Cost Index, which is showing year-on-year building cost increase by 9.4%.
It's really the materials which has been growing the most, so 15.3%, whereas labor increase was only 3.2%, and services 1.6%. If we are looking at our situation again, we have our actions to mitigate against the cost increases using indexing whenever possible, using our strong, good relations with the suppliers and our procurement organization, which has been actually very important for us to ensure material availability on our sites as well. We've been able to get materials for all of our sites.
However, it should be noted looking moving forward that even if we see that the material price development is stabilizing, some of the material prices even coming down, they are already on a high level, and that will have an impact now in the short term, especially for our business premises business as we have a few fixed price projects which are still continuing during the rest of the year.
If we are then looking at the housing business, and like we have communicated, the key KPI on our revenue and profits is the number of apartment completions. Looking at 2021-22, we are at a somewhat lower level than in '21, and the reason for that is the low level of startups in the beginning of the COVID-19 pandemic as well. That's why we have the variability between the quarters moving forward. Q2 completions were in a lower level, and we expect them to grow moving forward.
Other KPI which is impacting our earnings and profits in each quarter in housing is our sales mix. Like we communicated during Q1, we had a very favorable sales mix. The prices in the apartments were on a higher level. That normalized during Q2. Looking now the rest of the year, our sales mix will be weaker, even if the number of completions will grow as described in this picture as well. Again, a slide that we have showed now during earlier quarterly reports as well, showing that why are we having a dip in the consumer apartment completions.
That's the reason of the blue curve here, where we had lower level of startups. Actually, we stopped startups for a while due to the market uncertainty at the beginning of the COVID-19 pandemic. Now, moving forward, because we have increased the number of startups, we expect the completions to grow as well. All in all, looking at our guidance, we keep our guidance, which is that we expect our group adjusted operating profit to be higher than 2021, when it was EUR 85 million.
Again, the factors in each segment impacting the operating profit are described here as well. Housing, it is the completions especially, but the sales mix as well. We are looking at the business premises. We expect good progress in our transformation to continue in business premises. I'm very satisfied with that. Again, like I mentioned earlier, the project deviations have been on a lower level in business premises and infrastructure compared to the past years.
We see the same positive trend in infrastructure as well, even though there are a few legacy low-margin projects which will continue for a while. In property development, we have, like mentioned, several promising projects, you know, pipeline. I would like to mention one especially, which is the renovation of Maistraatinportti Business Center in Länsi-Pasila district.
We are not just renovating a building, but creating a new kind of working environment that supports employee wellbeing after the kind of pandemic. We have already signed a lease agreement with our anchor tenant, a private employment service company, Eezy Plc, in that one. That progress, focusing on our core competencies on property development moves well as well moving forward. To summarize, looking short-term and more kind of medium and long term, yes, we have subdued cloudy outlook short term as we are heading towards recession.
On the other hand, we will be focusing on rigorous strategy execution, which already has and will give us competitive advantage moving forward. We have a strong balance sheet as Tuomas explained earlier, and that enables us to select when do we want to grow and when it's time to grow, especially in housing and in property development as well. That withstands us against cyclical changes as well. Our new diversified business model and our strategy where we are focusing on our core competencies is supporting us.
Again, like I mentioned earlier, our new operating model has already gained us savings in costs, and our productivity has increased as well. Our investments are geared towards future growth and opportunities, attractive plots. Of course, we are carefully looking at the market development, carefully looking at plot investment, evaluating housing startups much more carefully in the prevailing situation than before, and therefore stabilizing the situation.
Short term, we believe that even if the market ahead of us is cloudy, maybe even sometimes stormy, so we believe that with this model, with our capable people, we can navigate through the storms and we are prepared for the long-term success of the company. Thank you very much, from my behalf. Now I think, it's time for questions.
Yes. Thank you, Markku. Operator, we are now ready for the questions.
Thank you. If you do wish to ask a question, please press zero one on your telephone keypad now. Our first question comes from the line of Svante Krokfors from Nordea. Please go ahead.
Yes, good morning, and thank you for taking my questions. Regarding your cost savings of EUR 40 million, sounds good. I was a bit disconnected there, so could you perhaps repeat where those cost savings mainly come from and what's the focus area there?
I can comment on that. Basically, the EUR 40 million cost savings, it was, as Markku already mentioned, so due to the operating model and its implementation. The cost savings are regarding the fixed cost levels in the company. The source of the cost savings came from both from the group operations and all of the segments. That's basically the reason behind that.
It's both personal FTE savings as well as other.
Yes
other operating costs.
Yes.
Okay. Thank you. Can you give some guidance about the EBIT impact from the sale of the two developed projects in business premises?
Well, as mentioned, the business premises result was of course positively affected by the sale of these two projects. Basically, we are not disclosing exact numbers from specific projects, but it had an impact of several million EUR on our results.
Okay. Thank you. How do you reason about startups in the current environment, especially in Finland, given the development? How do you reason around that?
Well, like I mentioned, we are carefully evaluating all startups. Of course, we are back to the very fundamentals of real estate business and housing as well. It's about location. It's about the apartment mix as well. All in all, we are more careful than before. We are evaluating the reservations levels and when making the decisions moving forward. We clearly have a plan to continue those moving forward.
Your apartments under construction for investors has remained quite stable. Do you have any comments on the demand outlook there? Is it only funds that have raised money and need to deploy that money? Or do you see also other parties being interested?
Yeah. We see that, in general, the investor market kind of has remained kind of quite stable. The interest remains there during the quarter.
That probably goes for commercial buildings also. You said that 70% is now from the public sector within business premises. What does the competition look like in that segment now? Has there been any changes?
Well, I would say that it's been the whole pandemic the situation has been like that. Traditional offices and commercial locations, there have been too much of those being built during the pandemic, and that competition kind of. We clearly saw the kind of competition to increase because others were coming to that market as well. But no changes now during the first half of this year compared to what it has been the last couple of years.
Okay. Thank you. That's all the questions I had.
The next question comes from the line of Robin Nyberg from Carnegie. Please go ahead.
Hello. Robin Nyberg here. It sounds like you are not planning to reduce housing starts now, and still you expect the market to move towards a recession, and we have all-time low consumer confidence in Finland. Isn't there a risk that the profitability in housing will decline if you are still aiming to grow in housing in a weaker market?
Thank you. Good questions. I would like to kind of remind the one slide and what happened in the beginning of the COVID-19 pandemic. Making a startup now this autumn after this summer practically means that we are completing the house in 2024. We are really looking for more of the long-term growth. When we are talking about short-term, we are definitely talking about this year, next year as well. It's more investment for the future when we are talking about apartment startups that we are doing now.
The completions that are coming now during the rest of year are projects which are under production currently. We need to kind of differentiate the short and long term, and that's why we have the strong balance sheet, and we'll use to the profitable growth in the future, which we strongly believe that we will see that in the coming years.
Thank you. Fair enough. Coming back to Svante's question, related to business premises where you had a couple of divestments that supported margins there. Could you comment about the underlying profitability level? And I think you also mentioned some headwind from cost inflation in second half, and if you expect this underlying margin improvement to continue to improving in second half despite of a couple of more challenging projects.
Yes. The underlying performance in business premises continued on a good level. As mentioned, the transformation is progressing there well as well. A very good indicator on that is also the margin deviations from the projects that we were able to decrease significantly from the previous years. That's one kind of a source of operational performance there. On the other hand also, the cost inflation kind of hits the toughest in business premises. That has had an impact already in Q2 and this will have an impact also going forward in Q3 and Q4. In a big picture, also the underlying performance was improving in the business premises.
All right, that's all from me. Thank you.
The next question comes from the line of Olli Koponen from Inderes. Please go ahead.
Hello. Olli Koponen from Inderes. Thank you for the presentation, and thank you for answering my questions. Most of my questions have already been answered, but I would just like to know, do you kind of expect others of this kind of self-developed business premises projects to be sold during this year, or was this it?
Well, we have several of these kind of smaller development projects ongoing all the time. These two were planned a bit later originally, this year. Now, they were finished, the sales already during Q. In business premises, we are not expecting more of those to come during this year.
On the infrastructure profitability, do you guys see the same kind of cost inflation challenges there as you see in business premises in HQ?
If we look at our project base and order book, it is more common in the infrastructure project to tie the material prices into indexes. Again, that is protecting us somewhat more in the infrastructure compared to the business premises. That is a key reason that we see, yes, it has impacted, but it's not really material in the infrastructure, where our project performance and transformation is clearly giving us kind of much better results than the impact on the material prices.
Okay. Thank you. That is all from me.
We have one more question from the line of Mika Karppinen from Danske Bank. Please go ahead.
Yes. Hi, good morning. Concerning some of the housing operations in Q2, you signed the bigger 300 rental apartment deal with OP-Rental Yield Fund. Are you looking to sign similar deals more going forward?
That is part of our normal business model and the sales mix as well. This was notable and we are having negotiations and discussions all the time, so it's premature to tell when and with whom. Those are discussions that we are having, and we are very glad of that deal. It's a good deal for us and OP as well.
Okay. Good. Thanks. Concerning the housing still, have you noticed any increased cancellations in the pre-sold apartments?
Well, there has been a few, but not really in a big picture, a lot of cancellations. Of course, the overall consumer confidence has. We can see that in the overall interest and the sales times are much longer than they used to be in a very hot market.
What about the pre-reservation rating in the new projects which you are starting? Have you raised the bar before starting the projects? How those rates have been developed?
Yes, definitely. So that when the market was extremely good, we lowered the bar, and now looking forward, we are more careful for that. On the other hand, like to remind my comment earlier that we are looking for more for long-term growth on that. Of course, it's about risk management, which we are rigorously following up during these circumstances, and it's the level of capital employed and our gearing, which we will have in control when doing the startups.
Okay. Good. Thank you. That's all from me.
As there are no further questions, I'll hand it back to the speakers.
All right. Thank you, and thank you for the questions. Our Q3 results will be published on October twenty-seventh. Thank you, and have a great day.