Good morning, and welcome to YIT's Q2 and half year 2023 results audiocast. My name is Samu Heikkilä, and I'm YIT's Investor Relations Manager. The results and highlights of YIT's second quarter will be presented by our CEO, Heikki Vuorenmaa, and our CFO, Tuomas Mäkipeska. 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, Heikki. Please go ahead.
Thank you, Samu. Welcome all to the Q2 audiocast, also from my behalf. What you can see actually here on the front page is one of our project in Poland, Żurawie, that won several awards during the quarter. I'm very pleased to have such a projects in our Central Eastern European countries. Let's go to the first half-year result and deep dive on the Q2. During first half of the year, the business environment was exceptional. Geopolitical uncertainty, increasing interest rates, high inflation, and increased construction costs created almost a perfect storm to the market. Consumers postponed the purchase of the new homes, while increased material costs created challenges to the contracting business. Market turmoil also postponed some of the infrastructure investment and changed the financial equation for many investors on our sector.
Consequently, our second quarter result declined compared to previous year as housing market headwinds continued and impacted negatively to our profitability during the quarter. On the positive side, demand for our housing units, both in Finland and Central Eastern European countries, improved quarter-on-quarter, and our transformation program contributed positively already to Q2 results and cash flow. We responded to the challenging market, and robust cost and cash flow controls are undertaken across the operating countries. I'm also pleased that our order book increased in the contracting segments, and our total order book amounted to EUR 3.5 billion at the end of the quarter. In this market environment, both segments performed well on that metric. During the quarter, we also announced plans to reallocate capital from investments and certain businesses to optimize the use of the capital and create the best value for shareholders going forward.
If we quickly look on the total group key financial metrics, and we can see that during the second quarter, our sales actually remained at the same level as the previous year. The comparable EBIT decreased to EUR 14 million, and the margin moved from 4.5% - 2.4%. Additionally to the residential market headwinds, comparison period included also positive one-offs. As we deep dive more into our results, to the segment levels, we can clearly observe the market headwinds impacting on our housing segment, both in absolute euro amount and EBIT margin level compared to last year performance. Sale and leaseback transaction of the plots and a bundle deal executed during the quarter diluted the Q2 margin level. However, operationally, housing segment continued to execute on very good level.
As there were no completions during the quarter in the Central Eastern European countries, overall segment profitability declined by EUR 12 million compared to last year. Business premises continued to improve operative underlying performance. However, segment results continued to be negatively impacted of the increased construction cost on the project with fixed prices. As I mentioned, the comparison period also included completions of 2 self-development projects. Infra segment improved performance by EUR 2 million, Finland being on a normal level, while our operations in Sweden continued to be burdened by the continues to burden the segment profitability. As announced during the quarter, we have initiated strategic review on our assets in Sweden. Like said, our housing demand improved on the second quarter compared to the previous quarter, both in Finland and Central Eastern European countries.
In fact, this was the first quarter on the whole segment with the positive development since the fourth quarter of 2021. We did observe some positive signals during the first quarter, which now realized and increased in sales on comparable quarter. As we compare the sales to the previous year's quarters, there was the overall low level of consumer sales on this segment. During quarter two, we continued to observe that the uncertainty over interest rates development, energy prices, and negative sentiment have moved consumer decision-making closer to the housing unit completions. We observe consumers to consider their decisions longer as they carefully assess their own financial situation. During the quarter, we had 522 new startups on the countries with favorable market conditions in Central Eastern European countries.
As Finland market is now balancing the demand and supply during 2023, and the overall industry startups are estimated to reach multi-year low level, we see a risk of market supply shortages on coming years in growth cities. During the quarter, we were very pleased to announce multiple new contracts, such as the renovation of Hotel Kämp in Helsinki, Jätkäsaari Circular Economy Block, and Prysmian Group's cable tower construction projects in both of our contracting segments. As a result, our confirmed order book increased on both segments. Our overall order book remained strong despite housing decline and our selective tendering approach. In addition to the contracts with clients on the contracting segment, our order book includes service revenue with more than EUR 300 million value that will provide a recurring revenue to the business premises segment in the future years.
On such a market environment, we have adapted our housing production, to match the market conditions. And today we have approximately 30% less apartments under construction than a year ago. As a result of improved sales activity on second quarter and bundle deal, our unsold apartments decreased slightly from the previous quarter to the level of 730 units. Sales rate of the apartments under construction is at 59%, which is close to a historical average. If you look our sales rate of units to consumers under construction, we are on the similar level than our long-term average or slightly below. As mentioned earlier, consumers has been, have been postponing their decision-making closer to the completion of the apartments. A few words about our transformation program. During the quarter, we continued the good progress with our transformation program.
Our program is running ahead of schedule with a lower than anticipated costs. Total gained annualized cost saving by end of 2024 amounted already to EUR 18 million. Program costs realized year to date are EUR 5 million. This program includes more than just adjusting the level of our fixed costs run rate. We are addressing holistically the company performance to build long-term success of YIT. As an example, the program includes investments and capabilities to improve our operating operational efficiency, reduce our lead times, investments, and focus on systematic project management, total renewal of the supply chain management and procurement capabilities, to name a few. Part of the transformation is also efficient capital allocation. During the quarter, we announced plans to release up to EUR 400 million capital from selected investments and assets by the end of 2024.
Our aim is to improve our capital allocation and increase return on capital employed of our operations during the coming years. Plans are in place. However, since we are on the early days, there are no further details or results to be shared yet. Another important element of our strategy and long-term competitiveness is sustainability. We continue to invest in this topic and show leadership in the industry as we became the first Finnish construction company to have emissions reduction targets validated by the SBTi. Additionally, we are very pleased to see our ecosystem partners continue to invest in new products to reduce emissions from the construction materials during the second quarter. We are observing increasing interest from customers towards these sustainable solutions across all segments. Now it's a time to look more in the details of our financial performance during the second quarter.
Over to you, Tuomas.
Thank you, Heikki. Good morning, everyone. The second quarter of the year was really all about adapting to market conditions and taking determined actions to improve our performance, both in the short and long term. Our profitability decreased. More importantly, cash flow was turned to positive track. Let's have a look at the main financials of the quarter. Here we have the Q2 key performance indicators. The order book amounted to EUR 3.5 billion, despite the challenging market situation in housing and our selective approach in tenderings. Adjusted EBIT decreased to EUR 40 million from the strong comparison period. Cash flow after investments was turned to positive track and amounted to +EUR 40 million, mainly due to the planned measures according to the transformation program.
The net debt increased year-on-year, mainly driven by weaker cash flow from housing sales. On the other hand, the net debt remained relatively stable compared to Q1, when it amounted to EUR 791 million. I'll go through some of these KPIs a bit closer, starting with EBIT. Heikki presented the segment's Adjusted EBITs, and here you can see the overall change in our Adjusted EBIT split by segments. The Adjusted EBIT decreased, especially in housing, which accounted actually for roughly 100% of the drop, and the main driver behind this development was the weak consumer sales of our apartments, especially in Finland. As Heikki already mentioned, the demand in CEE countries has been clearly higher, which is also strategically important for us going forward this year and in future.
Housing segment suffered from the challenging market conditions and the fact that there were no completions in CEE. countries, the underlying performance improved in business premises and in Infra segments. In business premises, the comparison period included sale of two self-developed projects, actually, our project management improved during the last quarter, which resulted in better underlying performance in business premises. In Infra segment, our performance continued to improve in Finland, which is our main market. Certain legacy projects in Sweden are still burdening the segment's overall performance. The other segment was positively impacted by the cost efficiency measures taken in connection with the operating model change and the transformation program. These measures supported our profitability on the group level as well.
Even though EBIT decreased in housing, the other segments were able to offset this impact slightly. As mentioned, we were able to turn cash flow to positive track during the quarter. Main drivers of the positive cash flow were improved working capital efficiency, the sale of apartments to Finland's joint venture rental housing portfolio, and the sale and leaseback transactions for 11 plots. We were able to maintain the capital employed roughly on the same level as in Q1. In housing segment, capital employed even slightly decreased as a result of the actions taken. In business premises, the capital employed increased just a bit due to progress of self-developed projects, mainly Maistraatinportti in Pasila.
As mentioned, our completed unsold apartment inventory decreased slightly during the quarter. It is very important to note that more than 80% of the apartments are in the capital regions or university towns in Finland and Central Eastern European countries, meaning that they are very current apartments to be sold as the demand recovers. I'm pleased to see that our transformation program results are visible in both cash flow and capital employed. The actions to manage our housing and plot portfolio have been successful. When we have a look at our asset base compared to interest-bearing debt, we can see that we are in a stable situation with our balance sheet. On the left-hand side, you can see the distribution of key assets. On the right-hand side, you can see the distribution of our interest-bearing debt.
Due to rapid market change, we see short, let's say, short-term timing-related challenge in our balance sheet. At the same time, our underlying asset base is very strong. Our debt structure remains well-balanced, but the timing challenge has forced net debt to increase in the short term. We have a land bank of nearly EUR 800 million to enable future operations and profits. The assets tied in production at the end of Q2 amounted to EUR 635 million, and the inventory of completed apartments stood roughly at EUR 260 million. Our investments were worth of nearly EUR 300 million. Biggest single item there is Mall of Tripla, but also includes our investments to JVs and associated companies. These components altogether amount nearly EUR 2 billion.
On top of this, we have a valuable wind power portfolio, of which we do not have significant assets in our balance sheet, and we are currently reviewing its strategic options, as announced earlier. On the right-hand side, you can see approximately EUR 490 million of our gross debt is related to IFRS 16 lease liabilities, including leased plots and housing company loans that are transferred to buyer at the point of sale. This leaves us roughly EUR 330 million adjusted net debt to pair with nearly EUR 2 billion asset base. To conclude, our underlying asset base is very strong. Our debt structure remains well-balanced, but the timing challenge has forced net debt to increase in the short term. Gearing development was relatively stable, ending up to 99% during the quarter.
Why at this target is to return to below 50% level in the long term, as communicated in our strategy. Regarding the maturity structure of interest-bearing debt, measures are ongoing. In May, we announced that we decided to withdraw from the contemplated issuance of the new Green Notes due to the prevailing market conditions. As a result of that, and the overall maturity structure of the IBD, we have refinancing negotiations currently progressing, and when we reach the final solution, we will of course, communicate it accordingly. To conclude our financial position in Q2, we have adapted well to the challenging market conditions. Our asset base is strong, the capital efficiency measures are already visible in the cash flow, and most importantly, we are well on track in improving our short- and long-term competitiveness through the holistic transformation program. Now, back to you, Heikki.
Thank you, Tuomas. Let's then look a little bit forward. As we look there, the housing market developments continue to be a major source of uncertainty for us. If you go through segment by segment, and the different markets, we have made some changes on our outlook or, or view on the, on the market development. As a result of increased sales activity, we upgrade our outlook on the Central Eastern European countries from weak to normal level. While the Slovakian market is yet to be fully recovered, we see normalized activity in Poland and Czech. Good situation in Latvia market continues. However, we observe weak sentiment in Estonian and Lithuanian market, hence maintain short-term market outlook weak on Baltic countries. Finland housing market is still balancing itself, and it's yet to show a definite recovery.
We continue to observe signs of recovery with a lot of uncertainty. We maintain our view of the weak market in Finland. However, we estimate that the market will gradually improve during the second half of the year, and it looks like that the second half of the year could be better than the first half. As mentioned, the Finland housing market continues to be a major source of uncertainty for us. On a real estate market, we see normal market conditions to continue. Demand will rise between the sub-segments, however, we see demand on our addressable market on a normal level. Infrastructure market in Finland remains on the normal level, and Sweden infrastructure market continues on the good level, driven by the state, municipality, and industry activities. Based on this market outlook, let's look our guidance. Over to you, Tuomas.
Thanks, Heikki. Our guidance remains intact. The 2023 group-adjusted operating profit is expected to be lower than in 2022, but at least EUR 50 million. We have made one elaboration in the outlook regarding the housing market. The gradual housing market recovery in Central Eastern Europe is expected to continue in the second half of the year, while the recovery in Finland is expected to become more pronounced only towards the end of the year. Previously, our outlook was concerning the whole housing market in all our operating countries, stating that the demand outlook remains weak for the first half of the year, but is expected to gradually recover in the second half of the year.
Thank you, Tuomas.
Thank you, Heikki.
Yeah. Let's then look at the historical and the forecasted completions of the housing unit. As I mentioned, we only had completions in Finland during the second quarter, and the total amounted to 432 units. On the third quarter, we expect similar amount of completions in Finland and approximately 600 completions on the Central Eastern European countries. Overall, second half of the year, more than 50% of the apartments are to be completed in the Central Eastern European countries. We do continue our promotional activities during the third quarter and execute the best alternatives from our sales playbook to optimize the return to our shareholders. If further bundle deals are needed, those are also on playbook to maintain the level of unsold inventory on a reasonable level.
I mentioned earlier the potential consequences of this ongoing market situation to the demand-supply balance during the 2024 and 2025. As you note, our first half 2024 completions in Finland are estimated to be approximately 150 units, or 1 month normal sales. If we double-click a little bit on our current unsold completed apartments, we noted already that the total amount declined slightly quarter on quarter. Of those 730 units we have, total of 623 were in Finland at the end of the second quarter. The portfolio continues to include a relevant offering in the major cities in Finland. Those unsold completed apartment locates in 51 different projects across the country, of which only 7 project sales rate is below 50%.
An average sales rate of those 51 project is over 70%. As you note, for example, in Tampere, we had only 18 unsold apartments at the end of the quarter. Another lens we can apply on this portfolio is to look it from the size distribution viewpoint. What we can clearly observe is that the portfolio is balanced between different size, sizes. Apartments with less than 40 square meter represents 28% of the portfolio, and more than half of those are located in Helsinki metropolitan area. As mentioned earlier, portfolio of unsold completed apartment is higher compared to the situation a year ago. However, we continue to be on top of the situation and manage it accordingly. Let me finally summarize our next steps during the second half of the year before opening to the questions.
Firstly, we continue robust cost and capital efficiency measures to secure our competitiveness, maintain our cash and liquidity position, and capability to invest in future. Secondly, we focus on serving customers with the market-leading capabilities and invest into more sustainable future of our whole sector. Thirdly, we do expect market uncertainty to continue, yet are prepared with the multiple scenarios and ready to take necessary actions to navigate through this market cycle.
Thank you, Heikki, and thank you, Tuomas. Operator, we are now ready for the questions.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Svante Krokfors from Nordea. Please go ahead.
Good morning, Svante from Nordea. Thank you, Heikki, Tuomas, and Samu, for the presentation. First question regarding your, your cash flow, which improved EUR 146 million year-on-year. Obviously, there, there's a number of items there, the, the plot sale, JV sale, internal improvements. Could you elaborate a bit on the composition there? How, how much, for example, cash flow from the plot sale?
Yes, I can answer this. Thank you, Svante, for, for the question. First of all, we do not give forward guidance on, on our cash flow, but as, as mentioned, so we have taken several actions to improve our capital efficiency, which is already visible in our Q2 cash flow. We, of course, will continue to implement these actions to mitigate the negative impact from, from the housing market headwinds. We can, we can say that without any actions, our cash flow would have likely been negative still during this quarter. It is very good to note that we have systematically improved our cash management, cost discipline, and networking capital efficiency, in addition to the bundle deal and the plot sale, sale and leasebacks.
Okay, thank you. The second question regarding the JV sale of 119 apartments that you have had. Should we assume a zero margin on that, or are we in negative territory? A follow-up on that, do you believe you can dispose any apartments to other investors than your own JVs?
Yeah, thank you, Svante. This is Heikki here. We, we do not disclose or comment specifically on the, on the, on the price or profitability of such a transaction. What I can say is that there are several players still in the market keen on, keen on, on the, on discussion and have the conversation about, about the bundle deals. There are, there are alternatives available as well.
Thank you. Then on consumer apartment sales, what kind of negotiated discounts are you giving a consumer? Has there been a change in your approach to that?
We have, we have now expanded and extended the promotional campaigns where we are providing support for new home buyers for first 2 years, where we are, we are supporting on in terms of the payments and the, the, the, the costs there. I think that is a 1 very concrete and clear, let's say, campaign or, or you could call it a discount that we are, we are at the moment running in Finland.
Thank you. couple left still. you, you used EUR 45 million of your, your RCF. do you have any comments on, on this?
Yes. Thank you, Svante. I can comment on, on that. Yes, we utilize RCF just as a part of our normal liquidity management. As, as the commercial paper market has been or was, mixed, during the quarter, impacted by the headwinds in the sector. We decided to utilize, RCF as a, as a source of liquidity.
Thank you. Then the final one regarding your off-balance sheet debt situation. Is that something you want to comment regarding the JVs and Mall of Tripla, where I guess there is the biggest part of the off-balance sheet debt?
This is something that we, don't want to specifically comment. In a big picture, the debt, which is in our own balance sheet, is our debt, and we basically do not have a off-balance sheet debt. Anyway, I can comment that no major changes there from that perspective.
Okay, thank you. That's all from me.
The next question comes from Mika Karppinen from Danske Bank. Please go ahead.
Yeah. Hi, this is Mika. You have been selling during the last two quarters, these, housing apartments to your own, own rental housing JVs. Do you still have a financing room in these joint JVs to, to buy even, even more in the coming quarters, if needed?
Yeah, that. Thank you, Mika. We, we don't want to specifically start to comment behalf of the final situation, behalf of our partners. What we have observed overall on the market, is that the rental activity actually has been a little bit picking up and improving during the first quarter, which kind of gave the confidence also on the second quarter there. I, I think maybe that's all, all we want to, we want to comment specifically with the notion that we do still continue to have a multiple options available on our toolbox to, to be executed on the Q3 if needed.
Okay, good. Thank you.
The next question comes from Lauri Petrell from Alma Media. Please go ahead.
Hello, this is Lauri. You haven't started yet any, any new housing projects in Finland. Can you tell a bit more about this?
Yeah, thank you, Lauri, for the question. We, we are considering all the startups based on the, on the market situation and the outlook, and what is a financial responsible. During the, during the second quarter, we decided... We didn't make any decisions to, to, to have a startup in Finland. Our startups were, were only on the, on the markets with the favorable market conditions, and those 500+ startups were made on the Central Eastern European countries.
Thank you.
As a reminder, if you wish to ask a question, please dial star 5 on your telephone keypad. The next question comes from Venla Kuokkanen from Helsingin Sanomat. Please go ahead.
Hello, this is Venla Kuokkanen from Helsingin Sanomat. I would like to ask about the net debt-
How concerned are you about the net debt increasing to 99%? Could you please repeat which level is your target?
Yes, thank you for the question. It's Tuomas here. I can comment, comment on the net debt situation. As I mentioned in the presentation, the net debt increased year-on-year, but quarter-on-quarter it remained pretty stable. If we look at the structure of the net debt, as I mentioned, there's Adjusted net debt of EUR 330 million since there is so big amount of ours, our IFRS 16 lease liabilities and the housing companies, housing company loans that are then transferred to the buyer. Of course, this is in connection with our gearing situation.
As, as I commented, so in the long term, our gearing target is to, is to be lower than 50%. Now, we stood at 99%.
Thank you.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time. I hand the conference back to the speakers.
Yeah, it seems that there are no further questions. I would like to thank you all for participating. Going forward, YIT's third quarter results will be published on the first of November.. Thank you all. Have a great day!