Earnings Call: Q2 2021

Jul 30, 2021

And welcome to YIT's Second Quarter 2021 Earnings Webcast. My name is Tomi Arendta. I'm the Head of YIT's Investor Relations. With me here today are also our CEO, Markku Moljanen and the CFO, Ilkka Salonen. We will first go through the presentation followed by Q and A. At this point, I would like to hand over to our CEO, Markku. Please go ahead. Thank you, Tommi, and welcome on my behalf as well to this webcast. So let's start from health and safety. And that's our focus in everything that we are doing. And during the last quarter, our focus has been on preventive actions on safety. We have been fighting against the COVID-nineteen pandemic and We are satisfied with the successful actions that we have had. Our sites have been open and the infections have been locked. However, We have clearly now the 4th wave coming in several countries in Finland, in Russia, to mention a few. So we are continuing our vigorous actions in that area. If we are looking at our Safety development, the number of accidents and the injury frequency of the LTIF, it's been stagnant for a while. And for that reason, we had our Safety Week, our Annual Safety Week in May, where we really had a focus on proactive and preventive actions, actions Safety observation and management safety walks and talks as well. So we will continue the focus because this is highly important EFORS. Looking at our results during the Q2, As we have reported, it was a satisfactory quarter. I would say that this is another solid quarter, driven by good results in housing. Our adjusted operating profit ended up to be €30,000,000 compared to €5,000,000 during the same period last year as well. And the good result is driven by good results in housing segments in all of the in geographies that we are working. However, we had loss in infrastructure due to margin reduction in some projects. On the other hand, our business premises segment Continued to stabilize like it did during the last quarter as well. As a result strong sales. Our operating cash flow was solid during the quarter as well. And after investment, our operating cash flow was €109,000,000 compared to €247,000,000 during the same period last year. We have to bear in mind that last year during this period, we had cash flow from the sale of our Nordic Paving and Mineral Aggregates Businesses. So operationally, clear improvement compared to last year. As a result, Our balance sheet strengthened further and our gearing improved further. We are using our strong balance sheet to answer our customer needs, especially in the housing market. And we have actually accelerated our housing start ups significantly during this year compared to last year. So the annual growth is around 40% compared to last year. And with this, we are not only answering our customer needs, but ensuring for the company a solid margin for next year. Like we reported during or after last quarter, we have 3 management priorities. The first one is project management, where the work started already during autumn 2020. And that's progressing on a fast pace and very well. We are Implementing common practices and processes and reports in our project management. For example, new Project portfolio forecasting and reporting tools, new criteria for suppliers, new production reporting practices to mention a few. So this is really the backbone of our business and backbone of being able to deliver predictable results in the quarters to come as well. Secondly, our work on our operating model is progressing well, And we will give you more info during the coming months. Thirdly, we started our strategy work from our infra strategy. We were not satisfied with the performance of our infra segment and therefore we started the strategy work from there. The most notable finding That we already have now before doing the full group strategy is that we see that infrastructure business will continue to have a strategic role in the YIT group also in the future. We already see that in large urban development projects, having our own infrastructure business enables us to achieve clear synergies and Synergy Benefits and Financial Opportunities. In the future, we will be focusing on our core capabilities in infrastructure, such as rock tunneling, Foundation Engineering, Rail and Tram and Urban Bridges and Marine to mention a few. However, we will also trim our offering to become more competitive and efficient, So we will be more selective in projects. So therefore, as a conclusion, our Future infrastructure business will be somewhat smaller than today, but clearly more predictable and profitable. We have, during the Q2, done the analysis of our project portfolio that led today's Freitas. And we will have a new director for the segment to start in late August. So this is a good basis for Pagit Tolpane to continue to drive infrastructure business further. So let's go to the Q2 results and the numbers through a bit more in detail. So I have Ilkka Salonen, our CFO here. Please, The floor is yours. Thank you, Mark, and good morning, everyone. If we look at the Q2 starting from the revenue side, We had growth over there driven by the housing business and Slight decrease in business premises going more for the Annual volatility, but then also declining in a slight decline in infrastructure, Net sales partly driven by the fact that we are exiting from the Norway as well as from Estonia. In order book, there we see a, I'd say, the clear drop about SEK 200,000,000, but it's good to Divided into a couple of items that requires a little bit explanation. First of all, in the housing side, housing Finland and CE, roughly about SEK100 1,000,000 lower than We had last year after Q2 and it's just from the fact that we had roughly about 330 Apartments less under construction, that will be fixed as we are speeding up about our start ups later this year. In Russia, it will be the same story. And on the other hand, as we are declining the or closing down operations in some cities over there that has an impact for that one as well. In business premises, A clear increase, about SEK 130,000,000. There are several projects. One of the biggest one is Tomi is at all our hospital in Helsinki area, which we won this year. And then the major drop in infrastructure, CHF 200,000,000. And And actually, that's coming from different sources. One is that, yes, we are exiting from Estonia As well as from Norway, that is having impact for the order book. We have in Finland big projects In their in the end of their life cycle, it's that way meaning that the amount in the order book is lower than last year. And when it comes to the new big projects, just like, Alliance in the TRAM Alliance in Helsinki area, It is still in the design mode, so there is not too much in the order book. The third one is that, yes, We have been more selective for the new orders, new deals, and that has had an impact to the order book as well. In the profit side, Our adjusted operating profit was CHF 30,000,000 compared to last year CHF 5,000,000. So, clear improvement over there. And of course, in the absolute levels, what we see on the right hand side, publishing Finland and CEO as well as Houssaint Brasov made a good result for the Q2. Business premises Stabilized infrastructure minus 12 and there we are Stabilizing that one at the moment and then partnership properties 3 months like last year. And then the deviations segment by segment compared to the last year, there you can see the very good Performance in the housing side. SEK 22,000,000 in Finland and CE and SEK 4,000,000 in Housing in Russia. And then business premises, even the absolute result is not satisfactory level yet, but the is clear. And so the stabilization over there has performed quite nicely during the last 1 year. And infrastructure is in the stabilizing mode at the moment. And the negative clear negative deviation compared to last year, It is driven by the margin reductions in some projects. Cash flow, €109,000,000 that is a once again a good performance from the businesses. Last year, we had SEK 247,000,000. It's good to remind that SEK283,000,000 was driven by the Divestment of the Nordic Paving and Mineral Aggregates business. So the improvement and performance in the businesses themselves As being clearly from the negative side up to NOK 109,000,000. And then, yes, we have continued to invest for the plots and we are Eager to buy plots in the future as well and especially when we are increasing our start ups, it also requires in New Blocks. And net interest bearing debt, euros 350,000,000. If we take comparing the Q2 last year, That's about SEK 350,000,000. And in that SEK 750,000,000, The paving deal is already in. So in the beginning of 2nd quarter 2020, the net debt was €950,000,000 So the Gas generation has been quite nice. And of course, there is also impacting the €100,000,000 hybrid, which we took in Q2 in Q1. We have made up major refinancing programs during the first Half year this year, actually, all the big items have been refinanced. The 2 bonds, 1 hybrid And also the revolving credit facility has been renewed. So the financial Portfolio, if we look at the maturity and the diversity, it's very good and We'll be solid for a number of quarters forward. That was And then yes, of course, equity ratio and gearing ratio, we are at the moment in 35% over there. But already at this stage, it's Good to highlight that we are increasing our start ups, Which will tie capital more than we have had in the Hospital in Housing Finland and CEE. And then, of course, when the cash flow is working and the profit is improving, All the other metrics are also getting to the better level. That was shortly, and now I pass back to Marc, please. Thank you, Ilkka. And let's have a look at the market outlook. The market is quite stable in the housing, real estate and infrastructure. However, there are minor changes in real estate and infrastructure. Housing remains to be good, as we see during Q3 in all of our geographies. The minor chases are that in real estate market, The Baltic real estate market has turned, as we see, or will turn from yellow to green as the investor demand is seemingly strong over there. On the other hand, in the Baltics, the infra market Has turned will turn to red. It's weakening as the government's budgets have already been running over, so we see less opportunities over there. Let's have a look at a couple of other items that impact the outlook for the next quarter. The first one is the material cost inflation. So all the building material as well as subcontracting costs are clearly inflating in all of the geographies and in all of the markets that we are active. However, We have taken and will take mitigation action in YIT. And I want to open you a couple of these. The first one is procurement practices. It is like indexing materials on our purchasing. Then as we have majority of our business is housing, so we can do We can buy the materials in advance when we know when we are going to do the start ups. So there's a A bit more tools to mitigate against the cost inflation in housing, whereas in traditional contracting in business premises and infrastructure, We don't have these mitigation tools available. Then we have pricing and contractual practices Like dynamic pricing in Russia and sea housing. So that enables us to Mitigate against the material cost inflation. We continue to follow the development closely, And we don't see a major impact for YITZ Group during this year. But if the inflation continues for long, it will have more impact to us and for the entire construction industry. Another item that will have an impact for our Q3 is our housing completions. And as you can see From this chart, we our completions are reaching a bottom during Q3. So we'll have around 300 units completing compared to 874 units during the Q3 in 2020. On the other hand, We expect the Q4 to be back on a high level again. So there's a volatility in the completions between the quarters. And this will, of course, have an impact on our Q2 results. So this less completions than last year It's expected to have an approximately EUR 50,000,000 impact to the segment's adjusted operating profit year on year. We expect otherwise housing business, housing Russia Continue in a solid way. We expect business premises performance continue to stabilize as well. However, we expect that our infrastructure business We'll have a low level of profitability due to certain low performing projects. Then I want to remind of the Leste Jarvi windmill park sale, which will have a swing effect. We are still expecting To get the sale around SEK 40,000,000 during this year, but there's a probability a low probability that, that will fall to next year as well. In Partnership Properties, our portfolio development is expected to continue. The good news is that so far in Mall of Tripla, which has a major weight on partnership properties, the number of visitors has been increasing and that will, of course, have a positive impact on Parthesid Properties. But we need to Remember the impact of the 4th wave of the pandemic as well, so there could be volatility in that area as well. Finally, we have communicated a new member to our management team. So we are Going to continue to strengthen our management team, we have announced earlier 2 new segment heads, So Ilkka Tomperit and now starting actually next week in Partnership Properties. Pasitolp Panin, as announced earlier, will start later in August heading the infrastructure segment. And today, we have announced that Tuomas Maki Peska will be our new Chief Financial Officer. And as Communicated Ilkka Saulin, who is here together with me, this is his own request. So Ilkka Wants to continue on board memberships and advisory roles, so I want to give here big thanks to Ilkka. He has had a long career both in Lamingkar and in YIT and a major role important role in the integration and the businesses And not least, strengthening our financing and balancing this year. So I expect that with these Three members and the existing members in our management team, we have a good team to go forward in our management agenda. So our focus during the second half of this year is to Continue the actions to stabilize our performance. Do the actions continue the actions in our project Improvement. Have a really, really close look at our projects, And we will implement our new operating model, which we'll communicate later during this quarter, Q3. Secondly, we will develop our sharpened strategy. As communicated today, we have started the work from the Infrastructure segment. And now we'll do similar work in other segments and then finally look at the whole group strategy as well. And last but definitely not least, we will have A close eye on the preventive and proactive actions in health and safety. And as part of our strategy work, We will develop our sustainability roadmap as well. So thank you very much. That was in our presentation. So I guess, Tommi, now it's time for questions. Yes, indeed. Thank you, Marco. And operator, we are now ready for the questions. Okay. Antti, if you try to ask your question again. Okay. I will definitely do that. Hi, guys. It's Anssi from SEB. Thanks for finally taking my questions. I have a couple of them. I will take them 1 by 1. So kicking off with the infrastructure, Sure. I mean, margin reductions and one offs once again in Q2. Could you indicate the scale of margin reductions? I mean, without the One knows, would the infra business be in positive figures? Or what's the situation there? Thanks. Yes. Thank you, Antti. Yes, there are 1 offs In certain projects and without that, the underlying business is profitable, as you are asking it. So there is a number of Actually, old project that we are finalizing, but still continue, so their margins were deducted, and that's the reason for the loss. Okay. And can you indicate what projects are those? Unfortunately, we are not sharing that information publicly. Okay. Then looking at second half, you indicate that the margins will be diluted also in the coming quarters. So what's the scale? I mean, should we expect similar impacts than in Q2, 2 in Q3 and Q4, what's the situation? Yes. And now talking about the Interactive Segments. Yes, we see similar level of reductions in projects in the coming quarters that we had. On the other hand, we have the operative the underlying business, as mentioned earlier, running pretty well. So we have overall in a similar scale that we are talking talking during the coming quarters that we had now during Q2. Okay. Thanks. Then your comment on focusing your infra business. There is still quite a lot of business disciplines that you have and you are focusing. But could you elaborate what are the projects, What kind of business, in what sectors what is the business you are not keen staying in? Yes, we are sharing all the details as part of the group strategy, But open to you that a bit is that firstly, it is certain project types where we see that collaborative projects, but Alliances are the ones that we will be focusing also in the future, whereas Traditional project management consulting are the ones that we have not been successful and profitable, so We are not keen on those in the future. Then we are focusing on the core capabilities that has clear synergies Like rock channelling and foundations, so synergies with the other segments as well. Hoping a bit more about the ones that we are not doing is very traditional road constructions, which is not urban related and many other kind of non urban related projects. And we are very careful on Non urban project as well. And as an example, we have been already very selective, which has had an impact to our audiobook on some mining projects in Sweden, where we were not tend in Norway due to the risk and the probability of low profitability. Okay. And if we think about energy and that kind of industrial projects, thus Is this also a business you don't want to take part in? I would say that we have sustainability high on our agenda, and many of these energy projects So, a really urban sustainability like the one that we just won For Vantaa Energy, Vantaa Energy, the big heat battery beyond the Ring 3 road. So we see that there When we have we can use our core competencies, we are competitive and they are high on our agenda, like in sustainability, Then energy is okay for us as well. Okay. Thanks. Then the last question is on input cost pressure. Assuming that the input costs remain at current levels in wood production steel and what have you, Did you indicate any margin dilution impact for 2022 as you highlighted that there won't be any impacts in 2021? Well, we are closely looking at the markets, and there are some indications that this inflation would turn down at the end of Q4. So we are, of course, looking at that. And it's premature at this stage to say what the impact would be for 2022. And as I said, not only for YIT, but for the whole industry. So we are looking at the trends and the development. And of course, we'll closely report that as well during the coming quarters. Okay. That's all from me. Thank you very much. Thanks, Aasir. And the next question comes from the line of Svein Krogfos from Nordea. Please go ahead. Yes. Good morning, Swante from Nordea. Thanks for taking my questions. If If we continue on infra side and the margin reductions, just to make it clear, so It's not kind of you haven't made a write down. You have reduced the margins and you expect that this kind of Events could occur still in H2. So it's not that you have made a kind of a one off write down. Could you elaborate on that? Yes, it's about this old project where we have done the thorough broader reviews And we have some disagreements or complaints with our clients, which has resulted that the rest of the project margin will be lower than initially anticipated. And that's the reason for this Q2's in the Q3. A result turning to loss and similar impact will continue during the coming quarters, 3 and 4 as well. Okay. Thanks for clarifying that. And then on business premises, there were some old completions that burden still. Should we Assume that, that is now cleaned out for H2. We still have Some old tales of project that we are closing during this year, Not really a major impact that we are doing. And We are really hoping that we could close them during this year. That's our timing, so we could have a fresh start for Business Premises for next year. Okay. And could you give us some indication of the financial impact On this old project in Q2? No. That's as I said, that's really not material impact in the whole group results as it is from Intra. Thank you. And then, Molof Tripla, obviously, Performance dependent on the pandemic, but can you say something about the shopping center market situation, any Changes in yields? Yes. That's, of course, driven by the number of visitors in the shopping center and the parking hall as well. And as I mentioned, so the number of visitors is increasing, Not really to the pre pandemic level, but month after month increasing. And of course, That if that would continue, that would have an impact to the yield and finally to our result as well. So but as I said, the 4th wave is a kind of question mark. So therefore, we are a bit closely following that situation. But so far, the trend is positive. Okay. Thanks. And then on Housing Finland, has there been any change to your Apartment mix lately, what you want to start up? Any increase in average square meters, something like that, owing to the pandemic. Yes. We actually see that the Pandemic has resulted that the average size has increased. So people working from home clearly We'd like to have another room for that purpose. And therefore, we see an Increase of square metres and number of rooms. And of course, we will take that into account when having the new start ups of our project. And what kind of impact do you think that Has on your margins in consumer? Not really margin impact. This is more kind of answering the market need. Okay. Thank you. And then perhaps do you have some comments on investor demand for apartments, both private and institutional? That continues on a high level, so there's high interest on that, which is from one side Driving the good housing market. Thanks. And then just to I'm not sure I heard it all, but did you say that regarding the wind park, It's more likely that it will close this year than next year. Yes. That's our understanding and expectation based on the information that we have so far. Okay. That's all from me. Thank you very much. Okay. Thank you very much. Thanks, Martin. And the next question comes from the line of Oli Kopponen from Inderes. Please go ahead. Yes. Hello. It's Oli from Ingers. Thank you for taking my question. I have one question left After these questions, it's about your outlook and just that I understand it correctly What you say there? You said that in housing Finland and CEE, you expect the adjusted So operating profit to be EUR 50,000,000 lower than in Q3 2020. Is that correct? Yeah, that's the volatility between the quarters. So we are talking about just the 3 results will be compared to last year around SEK 50,000,000 low. Yes. And if I read that correctly, that would mean almost 0 result for the segment in Q3. Is that right? That is yes, if you look at the deviation, that SEK 50,000,000 is driven By the fact that we get so much lower level in the commissions, but of course, then there are other items Just when it comes to the completed sold apartments, which means that they have been already completed, but not sold. Those have an impact. And also, of course, we have the investor sales, which is going on over time, but that gives just about the magnitude that what's the impact on The difference between the completions this year Q3 and last year. Okay. Is there any other explanations? Or do you have any kind of Margin pressures there on certain projects? Or is this just because of the completions? No, and that's why we wanted to collect this and highlight this because this is a kind of a quarterly volatility regarding the completions in housing, and we want to lift it up. There's nothing else expected in Q3. Okay. That clarifies. That's all for me. Thank you. Thank you. Thanks, Oliver. And we have one more question from the line of Matthias Streitomaz from Tesco Bank. Please go ahead. Good morning. I have still a couple of questions left. And I'm trying to understand The very high revenue in Housing Finland and CEE, so you obviously had higher completions and The Ready inventory came down. How about the investor sales and the investor Is the revenue higher this year compared to last year? Yes, it is. So the inverter sales is higher this year compared to last year. So that contributes positively to the revenue level. Okay. And how about the average selling prices? You noted that and we have seen that apartment prices have increased. But can you elaborate What is your average selling price level in Finnish consumer houses and in CEE? Could you elaborate that? We are not sharing that information publicly, I'm sorry. Okay. Could you comment something about the year on year change in prices? Well, I can comment the overall price levels in the markets and especially In the metropolitan areas, the prices are in the market increasing. So that is what is happening in the market. And of course, we are a major player in the market, so we can draw some conclusions from there. Okay. Is there other factors like mix, geographical mix or in the apartment mix That is driving prices that are you overperforming the overage market level? Or how would you describe that? I would say that we are still Very competitive in all of our geographies when it comes to housing, and that's driven By high quality and consequently, high customer satisfaction that we are measuring very, very closely. And of Of course, that brings us a competitive advantage in that market. Okay. Thanks. Then question on margins in this Housing in Finland and CEE segment. Do you expect to improve your margins also next year? Or do you see this year's margin as an extraordinary high As the new starts, we'll obviously have significantly higher costs. How do you see this? Well, if we talk the margin, of course, the absolute margin is driven by the volumes. And we are, this year, increasing our volumes and that's one part. But I would say that Then on the other hand, we have the material inflation, which has an impact to the pricing. So I would say that the overall margin level when it comes to kind of margin percentage, we are in a very good level on good level at the moment. We are not expecting next year any material changes on that. So it's more driven by the volume. Okay. Very good. Thanks. And then question relating to the consumer start ups in Finland. So they have been quite low level before this quarter, Given that the demand has been very strong, why it was so? We actually increased already during Q2 the start ups and we'll further do it now during Q3. So the annual growth is 40% 2021 compared to 2022. So It's really, really now peaking. Already, we started to increase during Q2 and continue that. We'll have the peak of start ups in Q3. So we are really, really listening to the markets and listening to the customer demand. Okay. And are you happy with your land bank and building rights? Do you have enough building rights That allows you to respond demand quickly enough. Are you happy with the situation? We are so far happy with the situation. The competition on plots is tightening, especially on the major cities and the price level are increasing, which puts a pressure for us to acquire the plot and to our margins as well. So we are having a really, really close look at that moving forward. So that is Something that is impacting on our plot reserve, which we, of course, need and will have for the future. Okay. Very well. That was all from my side. Thank you very much. Thank you. Thanks. And as there are no further questions, I'll hand it back to the speakers. Thank you very much, operator. And thank you, everyone, for the questions. YIT's 3rd quarter results will be published on October 29. Until then, thank you and have a great day.