Good morning, and welcome to YIT's Third Quarter Earnings Webcast. My name is Tommi Järvenpää. I'm the Head of YIT's Investor Relations. We will be discussing today how our good profitability progress continued in the third quarter. The results will be presented by our CEO, Markku Moilanen, and CFO, Ilkka Salonen. After the presentation, we will be taking questions from the conference call lines. At this point, I would like to hand over to Markku. Please go ahead.
Thank you, Tommi, and good morning and welcome on my behalf as well. We'll start, as always, from health and safety, which is, as we have said, number one in our priorities. Unfortunately, I have to start today by telling that during the third quarter, we have had two fatal accidents, one in Latvia and one in Lithuania. We have, of course, analyzed the cases thoroughly, have done an action plan and are implementing the actions, reviewing and adjusting our processes and practices to prevent these kind of accidents to happen in the future. As we are doing in every occasion in our organization, when we have been informing about these cases, we have had a silent moment for a while. Let's have it even in this case.
This year in health and safety, our measures have been quite much around fighting against the COVID-19 pandemic and, now during the third quarter, the situation in all those countries that we are working is getting to a better direction, thanks to the vaccinations. But we have continued our actions to make sure that our personnel, both on sites and offices, can continue working in a healthy environment. The results have been good. If we are looking at our combined lost time injury frequency, which is our key KPI on this area, that is still on a too high level for us. We are targeting to get it below 9 and during Q3, the rolling KPI was 9.8.
What we have done is that we have started a rigorous plan, and starting from management walks in the sites. We have started that from the management teams. I've been to several sites myself and all the directors are doing the same as well. That has led to a higher than ever number of safety observations and fixing things, but the good observation. We are in a process to change and improve our health and safety culture with these actions. If we are looking then at the results during Q3, w e had a good profitability progress. This is the third quarter in order where we have a good result. Our group-adjusted operating profit ended up to be EUR 18 million compared to EUR 16 million last year.
More importantly, our January-September result more than doubled, our adjusted operating profit more than doubled compared to last year during January-September to EUR 69 million. The result was from our solid performance in our housing segments, where we have improved margins overall, but a favorable sales mix as well. We have sold higher price apartments, especially in the CEE countries as well. In addition, we have been able to shorten our lead time, earlier project completions have led to higher results in that area. Our hard work in improving our profitability and performance in Business Premises continued. We were having black numbers and positive numbers, but the underlying work is really a question of cleaning up the old projects.
Even with all that work, we ended up to a positive result. The same happened in Infra. We have started the turnaround or the transition to a new mode in Infra about a year later than in Business Premises, but the work has continued very well. We had the underlying operating result was very good. Despite of the margin reduction in certain old projects, our Infra result during Q3 remained positive. The key things that we have done during this year have been our focus on improving our process management. We have looked at our operational model, and then we have had the work to make our new strategy.
On project management, the work has continued that, to remind you, we started the work end of 2020 actually, and we have launched new processes, practices, systems, reports, training for personnels, controls. Again, you can see the results already paying off in Business Premises and in Infrastructure segments. Secondly, we started last spring our operating model work, and the target was to create a more customer-oriented, closer to the customer operating model and a more efficient model as well. We have concluded that work and the related statutory negotiations we have ended as well during Q3 as we have earlier communicated. The result is that we will reduce maximum 230 employees in the whole group globally, of which 190 employees in Finland.
Out of these 190, approximately 110 will be achieved through redundancies and the rest 80 through voluntary departures, terminations, retirements, and fixed-term employment endings. We will start the new operating model from January 1 as part of our strategy as well. Now we are in a process to implement the needed changes. We are coming back to the model when we tell about the new strategy. The strategy work has progressed very well as well. We are ready to tell about our new strategy then before our Capital Markets Day, which is on the 23rd of November. Let's go a bit more in detail in Q3 results. Ilkka, please, the floor is yours.
Thank you. Good morning, everyone. Yes, if we look at from the revenue side, starting from that part, that was roughly about EUR 100 million lower than last year. There are the two major topics over there. One is related for Infra, roughly about EUR 70 million lower, and that is pretty much driven by the fact that we have been more selective in projects when we are tendering. Also, as we sold our Estonian operations in Infra, there is lower volumes in the Baltic countries. A couple of large projects are in their final stage. It means less revenue from there. From the order book increasing quarter- by- quarter this year, and also it is higher than the Q3 last year.
The growth is seen in the right places, meaning that housing, Housing Finland and CEE, Business Premises and Partnership Properties. Where we see decreasing order book is in Russia as well as in Infra, and there are explanations for those ones as well. As I mentioned earlier, we have been more selective in tendering of projects. Also in some alliances we are in the design phase at the moment, so the amount of the projects in millions is very small compared to the full project. In Russia, actually two topics. Well, as we have announced earlier that we are leaving from some areas and that is progressing, so it means that there is less operations in those areas.
In Q3, we didn't have any startups in our Russian operations. In the adjusted operating profit side, EUR 80 million compared to last year's EUR 60 million. If we look at the year-to-date figures, they are 69 compared to 29. The track has been improving this year. What is also good to mention is that all the segments, all the business lines were delivering positive adjusted operating profit for the third quarter. If you look at the deviations compared to last year and for this year in Housing Finland and Housing Russia, solid performance over there. Although there were lower number of completions in Finland than last year. In Business Premises, there we see operational performance stabilizing.
In Infrastructure, we have made some margin reductions in certain old projects, so it has a negative impact over there. Partnership Properties more or less for the quarter cyclicality. In others, there is somehow more eliminations than last year, and we end up to EUR 18 million over there. Operating cash flow - EUR 23 million. Last year, - EUR 9 million. Pretty much on the same level than last year. Even our startups during this Q3 was higher than last year. If we look at for the first nine months operating cash flow, we have generated more than EUR 160 million on that side. Investments for the plots as well as for the associated companies has continued also in Q3 this year.
Net interest-bearing debt, as we mentioned, in Q2 that we are boosting the startups. It can be seen over here as well as in the capital employed side. In the maturity structure of interest-bearing debt, that has been restructured quite heavily during this year. As you remember, in the beginning of the year, we had two bonds and then hybrid bond over there. We have also renegotiated our bilateral loans, a number of those ones during this year. To the metrics equity ratio as well as gearing, both of those have improved during the last one year. The debt-to-adjusted EBITDA ratio as well as interest cover ratio are also reflecting above our performance. Now I pass back to Mark, please.
Thank you, Ilkka. Let's go to the market outlook. All in all, the Q4 market outlook is very stable, very similar than before. In the housing markets, no changes, they remain on a good level. On real estate market, the only change is that the Finnish real estate market is improving, especially on the private side and on the investor side, which is of course, hopefully I can say after the COVID-19 or in this phase showing that the market is getting better on that area. On the Infrastructure market, the weak Baltic market continues. That's the only notable change on that area.
The big question in the construction and the industry has been the material cost inflation, which is in place, as you can see. As you well know that the cost indexes, the costs have been increasing, especially in timber and in steel structures. We have our mitigations in place. We have had procurement practices using indexing, using our purchasing power as a large customer to the providers long-term contracts as well, and then pricing and contractual practices like our dynamic pricing in Russia and in the CEE countries in Housing as well. What it comes to our forecast for 2020 is that we see that this material cost inflation will not have a material impact for our results, as it hasn't had so far.
This assumption is based on our knowledge and understanding on the market that the material cost inflation will level off. However, it's good to realize that if the cost inflation continues, then it will certainly have an impact to both YIT and the whole construction industry as well. Clearly it is our aim to move this cost to the end user material cost increases to the end user prices and therefore mitigate the impact to the company. If we are looking at the number of apartment completions that we had on a low level, as you can see from this slide, during Q3. They are now expected to peak during Q4 in Finland and in the CEE countries. We are really peaking off.
Again, the same will be next year as well. We'll have a very high peak of completions during Q4 2022. On this picture, on the green circle, it's good to remember that these are our own development projects. In addition, we have apartments under construction for investors in Finland and CEE for more than 2,000 apartments and then more than 4,000 apartments in Russia as well. Just to explain the kind of differences between the different quarters and good expectations for Q4 in that area. Our guidance for this year 2021 remains the same, t hat we expect our group adjusted operating profit to be higher than last year.
The impact in Housing Finland and CEE will come from the high level of completions that we are expecting. In Housing Russia, we expect a solid underlying performance to continue as well as it has been throughout the year. In Business Premises, we expect to stabilize further the business. Actually, as we have this old project that we are finalizing and doing the final fixes, it is our expectations that we are able to close those projects during this year. That is our expectation in Business Premises. In Infrastructure, like I mentioned earlier, our review and the turnaround on the segment started about one year later.
The impact of certain low-performing projects will have an impact on our result this year and continue for a while next year as well. Again, I want to highlight that we have a very solid, good underlying healthy business, especially in Finland, which we saw during Q3 that the overall result was positive despite of the certain old low-performing projects. In Partnership Properties, the portfolio development is expected to continue. Of course, our position in the Mall of Tripla valuation has an impact to the result of Partnership Properties. Again, looking at the number of visitors in Mall of Tripla, it is clearly increasing as the pandemic restrictions ease.
It hasn't had yet an impact on YIT's result, but if it have, it will only... We expect it only to be positive. To summarize our management agenda for the second half of this year, as we have communicated before, w e continue the actions to stabilize our performance. We have now three consecutive quarters with a stable performance, and I'm very proud of our organization, both in those areas that we have high performance, but on those ones where we have challenges and we are doing all the needed fixing. We will implement our new operating model. As I told, we have finalized the work, we have concluded the statutory negotiations, and we'll do all the implementation so that we have a new operating model and organization in place from 1st of January next year.
We are in a process to finalize the last steps of our new strategy, which will be launched then prior to the Capital Markets Day that will be on 23rd of November as well. Last but definitely not least, we'll take proactive actions in health and safety to improve further our culture in health and safety. As part of the new strategy, we are developing our sustainability roadmap. Again, we are, as part of the strategy, going to tell that a bit more during the launch of the strategy. As I have mentioned a couple of days ago, we have our Capital Markets Day on the 23rd of November, and we'll have a webcast in the afternoon starting from 1:00 P.M.
You're all welcome to join that, or Tommi can tell a bit more, if you want, about the Capital Markets Day.
Yes, indeed. Capital Markets Day will be hosted on the 23rd of November, and then the webcast information will be available on the website closer to the event. At this point, I think we are now ready for the questions. Operator, please go ahead.
Thank you. If you do wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. There will be a brief pause while questions are being registered. Our first question comes from Anssi Kiviniemi with SEB. Please go ahead.
Hi, guys. It's Anssi from SEB. Thanks for taking my questions. I have essentially three themes, and I will take them one by one. First of all, starting with the Housing business. When we look at the Q3 result, was it better than you expected? Meaning that, the completions that time for Q3, were those higher than you originally assumed? On underlying profitability, was the performance better? What should we think about the kind of relatively strong figures on a seasonally very, very low quarter?
Yes, thank you. Yes, they were better than we expected. It was both on the earlier completions, but it was the favorable mix as well, and the sales prices, as we have dynamic pricing in CEE countries and in Russia as well. That was a positive result compared to the expectations.
Okay, thanks. When we look at the mix and when we look at the kind of your pricing assumptions going forward, should we expect the good performance also continue or is there something kind of one-off type of element in the Q3 resulting especially in Housing Finland and CEE?
No, there is nothing one-off. So if we are looking at the pipeline and the completions that we're expecting. Actually last year we had a kind of one-off a bit of a investor sale, which was a bit lower than before if we compare that to last year's result. Their similar level of performance is expected to continue in Finland and CEE and in Russia.
Okay, thanks. On Infra, you highlighted that there were project margin reductions. Could you elaborate a little bit more on how much it impacted Q3 result? Are we talking about a couple of million EUR or are we talking about EUR 10 million? Or kind of what's roughly the magnitude of the impact?
Well, we are not opening the details, but I would say that we really had a strong underlying performance, which is telling that again the healthy core is producing good profit. We're not opening the details on those.
Okay, thanks. On construction inflation, I appreciate that you kind of indicate that there will not be any larger impacts in 2021. What should we think about 2022? I understand that there is an expectation, so perhaps the inflation level involved. If we would assume that the inflation of prices, costs remain at the current level, kind of what is the magnitude of the impact for your result? Are we talking about single millions or are we talking about double digit figures? Any indication would be very, very helpful, I think, for all of us.
Well, again, if they remain on the current level and looking at our project portfolio where we have a significant amount of projects in our self-developed projects where we can impact on the pricing as well, so we can move that to the end user pricing. It's new projects in new contracts. Well, we will do the same as well. If it would be increasing, if I start from that, then I would expect the demand to go down, both in apartments, in housing, but in construction projects as well. It's too immature to calculate the impact next year.
Of course, we are doing the planning based on the current level when we are talking about our targets and budget for this year. Again, based on our experience this year, we have been able to mitigate it, and the tools are in place again for next year. It's premature to open any numbers at this stage.
Okay. That's all for me. Thank you very much.
The next question comes from Simen Mortensen with DNB Markets. Please go ahead.
Thank you for taking my questions. I've had two of the same questions actually, but I have a few other ones as well. When I look into housing, the housing data in Finland, I see the plot reserves quarter-on-quarter have fallen 18% in terms of number of square meters in the plot reserve in terms of the lease. Can you please elaborate on a bit on that? Is that. It was a huge deviation quarter-on-quarter. I just wondered what it was.
I can comment on that one. Actually there was a change in the calculation method. We basically changed the way how we calculate the plot reserve in Finland to match the group-wide way to do it. Thereby it's a sort of mathematical way. Before, that plot reserve number used to include those plots which were sort of in the development phase, and I'm not sure of the hard figure, but now it's matching the group-wide way of doing it. It's a mathematical thing.
Okay. Another thing is building cost inflation. We have all the rises in timber. We have seen it in steel. In concrete. In the rest of the Nordics we have seen issues also there. In Sweden you have I don't know how familiar you are with Cementa, which has lost their operating license in Sweden. There's the risk of rationing cement in Norway and Norcem.
Also HeidelbergCement has stated price increases of 25%-30% for cement from 2022. How are you seeing cement prices developing in the markets you're active in? Because what we see in the rest of the Nordics is that the price of cement is significantly escalating as well. Inflation doesn't have been that much yet in the markets, but what are you seeing? Is that also a risk? How do you mitigate the risk to supply of cement going forward?
Yeah. If we're looking at the concrete elements prices in the markets we are active in and using them, which is majority in Finland, but of course Russia and CEE. There has been some increase, but not significant in that area. It is more the question of high availability, like, precast concrete structures where we are again, big buyer, and we have large framework contracts, and we have been able to use that for our benefit. The only thing that I would highlight is the challenge regarding Cementa in Sweden, which some of you might know, and their challenges have been discussed with our organization in Sweden as well as the concrete providers in Sweden.
The Swedes are still positive that they will solve this challenge that they have created in the country. If something would happen to Cementa, so then of course, the availability of cement and concrete would be seen also in the surrounding countries.
Just in terms of the cost inflation we have seen so far, we talk about try to separate when you do construction for a third party and in terms of when you do your own developments in housing, for instance. How much, for instance, do you expect price per square meter to go up, based on the building inflation we have seen so far for producing housing units, for instance, in Finland? H ow will that eventually impact profitability in future margins, for development in Finland, as you can see? Please, first, the effects of the rising cost in terms of price or cost per square meter of doing residential development, and how do you see that one impacting your margins eventually in housing or potentially?
Well, firstly, as the housing market is good and our plot reserve is in good places, there's an overall price increases of price per square meter as well. Again, therefore, this is a combination of overall kind of price increases and impact on the materials as well. It's not something that we will open as part. Of course, it is our target to keep the same profitability moving forward than before.
You don't wanna say how much the disinflation we have seen so far will mean in terms of building costs.
No, we are no-
-sites.
Those kind of details, the key thing is the profitability levels that we are targeting.
Thank you. In terms of the CMD, are you willing to give us a bit of a highlight what you're revising, the financial targets, geographies, segments, or could you give us something to go on? Just wondering if you have any small ideas. Give us a small leak of what you're planning to say.
I know it would be tempting from my side because you can guess that we're quite far in the strategy work and we are finalizing the story. Of course, you have to wait for the Capital Market Day for the story. Even if you are-
Yeah.
It's only a few weeks.
I had to ask. I'll compensate another meeting then. Thank you.
Thank you.
As a reminder, if you do wish to ask a question, please press 01 on your telephone keypad. Our next question comes from Olli Koponen with Inderes. Please go ahead.
Yes. Hello. It's Olli Koponen from Inderes. I have a few questions left. First on the housing in Russia. There were zero housing starts in the quarter. Is there any kinda specific reason for this, or was this just kind of a normal fluctuation in the starts?
Yes. We have this year evaluated our risk position in all the geographies and wanted to reduce our risks in Russia. Therefore, we are overall aiming for lower volumes in Russia to move forward. We have a strong plot reserve and a good project pipeline. We have over 4,000 apartments under construction. The Q3 was just a question of kind of a difference between quarters. The overall level we are planning to take a bit down to reduce our risks.
Is there any kind of area where you see more risk than other area?
No, it's the overall market structure and the model of using the escrow accounts and all of that where we just wanted to take the risk a bit down.
Okay, fair enough. One more question just to clarify on the Infra segment. At the start of this year you informed about the sale of the wind park in Lehtirova. You said that the deal would close during 2022. Any new info on that when the deal is going to close?
The situation is still the same, so we expect it to be closed during this year, and the impact, as you well know, will be around EUR 40 million. Again, if it wouldn't, that would be the biggest swing effect for our result. The project is progressing well, so the expectation from our side is still the same that we would close it during this year.
Okay. I think that's all for me. Thanks.
Thank you.
Our next question comes from Svante Krokfors with Nordea. Please go ahead.
Yes, good morning. Svante from Nordea. I have one question left regarding your explicitly mentioned in the Q4 market outlook slide that the real estate market, investor market is picking up in Finland. Should we have a positive read for your large co-ownership projects development on that comment? Is the investor interest increasing also from your perspective on future projects or are investors still on the sidelines?
Yeah. You are reading it right. Both in the several smaller ones that we have ongoing, but some of the bigger ones that we have on our pipeline have been progressing well during Q3.
Okay. Thank you. That's all from me.
Thank you.
We have a follow-up question from Anssi Kiviniemi with SEB. Please go ahead.
Yeah. Hi, guys. It's Anssi once again. I have a follow-up on Olli's question on Russia and your answer. I mean, your comment was that you're aiming to take the risks a little bit down, but kind of starting several apartments, it's more than little. Is there something happening in the market that perhaps you see that there's a real potential risk of something happening? Kind of, is there a real reason behind this move or kind of how should we read the situation?
No, there's nothing in the market. The market remains good at nothing happening in that sense. It is the question of, as I mentioned, the model in the market where we have a significant amount of money in the escrow amounts and again, we want to take that down a bit. It's a more general issue de-risking in our position in Russia.
Yeah. If I give an example is that before the escrow accounts became compulsory, actually, we were able to collect all the money from the customers as a prepayment. Now, the prepayments are going to the escrow accounts, and if nothing else has changed, the amount of money which is at the moment in the escrow accounts is EUR 100 million. Compared to the old world, we have EUR 100 million more debt compared to the old life as well as the capital employed. That's the reason why we are decreasing the risk.
Okay. Has the Russian ruble move any way affected the decision? A follow-up question on that, has the Russian ruble move impacted the market in Russia in any way?
No, that has had no reason for us to do this. Again, for the demand there, it has had no impact in the market.
Okay. That's all from me. Thank you.
Thanks.
There are no further questions. I hand back the word to our speakers.
Thank you very much, and thank you everyone for the active discussions. Again, I would like to remind that our CMD will be organized on November 23rd. Thank you and goodbye.