Okay, I think we can start. Hi everyone, and welcome to YIT's analyst call preceding the silent period of our fourth quarter of 2024 results. My name is Essi Nikitin, and I am heading the Investor Relations at YIT. Together with me, I have our CFO, Tuomas Mäkipeska, on the line. We will start with the recap to recent developments in the company, and after that, we will have time for questions. As a reminder, this call will be recorded, and the recording will be published on our website after the call. At this point, I will hand over to Tuomas.
Yes. Thank you, Essi, and hello, everybody. We will be covering a couple of topics here in the call, starting with our strategy and relating back to the just-held Capital Markets Day. Then we will go through the market updates of each segment, starting with the residential businesses and then moving on to the contracting segments. Then finally, we will have a short recap on the financial situation and cash flow. Actually, at the end of the call, we will be also covering a bit into more details of the joint ventures that we have in the Residential CEE business. So that is basically the topics that we will be covering here. If I start with the strategy, as you all know, YIT published a new strategy in November in accordance with our Capital Markets Day.
The benefits of the transformation program that will be completed now in 2024, set really the basis for the new strategy period. In a nutshell, the new strategy will enhance our resilience, enabling us to navigate the industry cycles successfully. We will focus on strengthening our core, improving productivity, and optimizing the capital allocation. We aim for targeted growth, and our priorities include capital efficiency and operational excellence. We also published new financial targets for the company to assess the success of the strategy. The targets are adjusted operating profit margin of at least 7%, return on capital employed of at least 15%, and net sales growth of at least 5% with a compound annual growth rate based on this year. I am confident about us reaching the financial target set for the strategy period.
Over the two past years, we have completed our transformation program ahead of schedule, and now the new financial targets set will drive the progress. Initially, we will reinforce our core and achieve capital efficiency, then accelerate growth with productivity gains. We also commit to our four non-financial targets to enhance work safety and customer and employee experience. I look forward to achieving these ambitious targets together with the entire YIT team. In accordance with the strategy announcement, we also announced a change in our segment structure. To really enhance focus and transparency and to accelerate the speed of strategy execution in the residential operations, the housing segment will be divided into two separate operating segments and renamed to Residential Finland and Residential CEE. Following the division into two segments, we will also have, as announced, some changes in the management.
The search for leader of both residential segments is ongoing, and until permanent segment heads have been recruited, Heikki Vuorenmaa, our CEO, will take the interim lead of the Residential Finland, and I will take the interim lead of the Residential CEE segment. I want to take the opportunity to thank Antti Inkilä for his significant contribution to YIT's residential business and a long career in YIT, and also wish him all the best for the future. The business premises segment will also be renamed to better illustrate the nature of the business, and from 1st of January 2025 onwards, YIT will have four operating segments: Residential Finland, Residential CEE, Building Construction, and Infrastructure. That's basically about the strategy. Now moving on to our businesses, and I will start with the Residential CEE business.
In our new strategy, we plan to achieve significant growth in the Residential CEE business. The financial targets for the strategy period are to achieve at least 15% annual growth, at least 15% adjusted operating profit margin, and at least 25% of return on capital employed. The residential sales have continued on a good path in the Central Eastern European countries and Baltics, and altogether, the business is progressing according to plan. Our capital employed remains under control, and we see a significant potential for further capital release through increased production and increasing sales over time. The number of starts in Baltics and CEE countries is well in line with sales to maintain a healthy balance between demand and supply.
We announced in November that as we continue to grow in the CEE countries in line with the strategy, YIT is expanding its operations in the Czech Republic to the second-largest city in the country, Brno. We have explored this possibility for a long time, and now we have a great opportunity to expand YIT's business there. The project will be implemented through a co-partnership model in which YIT and our long-term partner, RSJ Investments, each own 50% of a joint venture. The business model of the project allows the parties to execute the project in a capital-efficient way with limited equity contribution. Located right next to the city center of Brno, the project is an area plot in which approximately 750 apartments will be built.
The construction of the first apartment building is planned to start in spring next year, and the last project in the area is expected to be completed by summer 2031. The estimated market value of the apartments is over EUR 200 million. YIT uses joint ventures in Residential CEE project development to split the development and sales risk and allow for a capital-efficient operating model. The joint ventures are also a versatile partnership where the competencies of both parties are combined and utilized. We have received some questions from the market on the basic logic behind the joint venture structures. Based on that, we have now prepared a short presentation to share with you in this call, and I'll come back to the topic at the end of my intro. That's about the Residential CEE.
If you look at the residential business in Finland, in our new strategy in Residential Finland segment is to continue to seek operational efficiencies and build readiness to capture market share when market recovery in the Finnish housing market starts. The financial targets for the strategy period are to gain market share, achieve at least 10% adjusted operating profit margin, and at least 20% return on capital employed. The financial targets set for the strategy period include an assumption of the Finnish residential market recovering to a historical average level during the period. The residential market in Finland has now seen some positive developments in terms of reservations, ongoing negotiations, and completed transactions, although the overall market has still remained on a low level.
The rapid decline of the market interest rates has been seen to impact positively the demand for mortgages and also the activity, mainly in the secondary housing market. While the absolute numbers are still modest in our Finnish residential business, the trend and the market sentiment are somewhat positive. Sales renovations are gradually increasing, and we are pleased with the level of pre-marketing reservations in few projects, which is a signal, of course, of trust from consumers towards YIT and its products. Consequently, we have started a few new self-developed residential projects in the last quarter of this year. At the end of October, we announced that YIT had started a construction of a self-developed residential apartment building in Vaasa, and the new homes are scheduled for completion by the end of 2025.
Early this month, we also announced another start of self-developed residential apartment building in Tampere, and construction for these apartments began in November, and the new homes will be completed in December 2025. Despite these new starts that we have now initiated, it is good to note that the extremely low amount of new starts this year will limit our capabilities to generate profit in this segment next year. We see the apartment stock we have in Finland as an asset for the following quarters, and as completions of consumer units will be at a historically low level for quite some time ahead. The portfolio continues to be well-balanced and located in attractive areas in major growth cities in Finland.
With the population growth continuing in all the major cities this year, we can say with a reasonable confidence that we are going to see supply shortages during the next year. If the sales continue at the pace we have now seen in the past few quarters, the stock of our apartments will be sold before the end of next year. If we then shift focus to our contracting segments, Infrastructure and Building Construction, as the segment will be renamed starting from 1st of January. During the new strategy period, growth in the Infrastructure segment will be mainly driven by energy and industrial construction, rail infrastructure, and defense sector. Target is to achieve at least 5% annual growth, at least 6% adjusted operating profit margin, and to continuously operate with negative capital employed.
The overall performance has continued to improve in the Infrastructure, as we commented already in Q3, and the segment has significantly increased its profitability at achieving a rolling 12 months adjusted operating profit margin of over 5% for the third quarter. In October, we were extremely pleased to announce that YIT was chosen as an alliance partner for the first phase Pirkkala-Linnainmaa Tramway implementation. The construction has started and will be completed in August 2028. The value of the first phase order for YIT is approximately EUR 150 million, which will be recorded in the order book of the last quarter this year. We are, of course, pleased that the good cooperation in the development phase of the project and the strong expertise of us and our partners have now led to the construction phase.
In November, we announced that YIT was selected as a partner for the development phase of the Helsinki Urban Development and Tramway Programme Alliance. The projects included in the program are the Western Helsinki tramway, the West Harbour Light Rail, and the Viikki-Malmi Light Rail, as well as the related investments. The maximum investment estimate specified by the client for the implementation phase is approximately EUR 1.2 billion. We are excited to bring our strong capabilities and experience to the use of the program alliance in cooperation with our partners. All in all, our order book is strong and the Infrastructure segment is in good place to seek for growth and further improve operational efficiencies. As discussed earlier, our business premises segment will be renamed to Building Construction from the beginning of 2025.
In the strategy period, the segment will target growing industry sector investments, growing its own capabilities in building technology, and focusing on growth in the CEE countries. The target is to achieve at least 2% annual growth, at least 6% adjusted operating profit margin, and to continuously operate with negative capital employed. The underlying operational performance of the segment is expected to improve during this year, and the work continues to strengthen the segment's profitability. Our plan is relatively simple. To reach negative capital employed with excellent order book through operational efficiencies and to reach profitability that will clearly exceed the minimum threshold set for the segment. While operational efficiencies and order book are more in our own hands, a lighter balance sheet will be connected to the successful timing of divestments, which requires increasing activity in the retail transaction market.
In October, we announced that YIT and the City of Helsinki had agreed on the construction of the Melkinlaituri elementary school and daycare centre using a life cycle model in Jätkäsaari, Helsinki. YIT is responsible for the project's design, implementation, and 20-year service period, which also encompasses responsibility for the property's optimal energy consumption. The building will be owned by City of Helsinki, and the total value of the contract for YIT is approximately EUR 44 million. This project will be recorded in the order book once the project's building permit has gained legal force. In November, we announced that YIT and Senate Properties have signed a contract on the renovation and alteration of the K2 city block, which is located in the city center of Helsinki and houses government activities.
The scope of the project is about 15,000 gross sq m, in addition to which earthworks and blasting will be performed as a part of the contract. The value of the contract to YIT is approximately EUR 40 million, and it will be recorded in the order book for the fourth quarter. Last, but definitely not least, yesterday we were happy to announce that YIT signed a project management contract with Hitachi Energy for the construction of a new production and technology center in Vikby industrial area in Mustasaari in Finland. The value of the construction contract for YIT is approximately EUR 105 million, which will be recorded in the order book of the last quarter of the year. We are delighted that we were chosen as partner for this project that advances green energy transition and supports the journey towards a carbon neutral energy future.
The project is in line with YIT's strategy, also supporting the core technologies that are key to Finland's electricity supply security, promoting the growth of Finland's renewable energy production. All in all, the market is active in both of the contracting segments, and there are multiple large projects in tendering phase still. A few words about the cash flow development. Operating cash flow continued on the right track and was slightly positive in Q3. For the last 12 months, cash flow was EUR 63 million positive , and measures to improve the networking capital efficiency have yielded results. As we have stated in our guidance for this year, the operating cash flow after investments is expected to be positive. Maintaining positive cash flow has been a key focus for us, and that we have delivered on a stellar manner.
In our residential business, the sale of apartments from inventory will release capital in the upcoming quarters. In the CEE countries, the formed joint ventures to develop large area projects together with RSJ Investments will allow us to reach higher volumes profitably, tying less capital. In infra, we now operate with negative capital employed, demonstrating solid performance in capital release measures. In business premises, we are also on a positive trend. To conclude, we are on track in achieving the expected results for this year. Our stable financial position enables us to focus on improving the financial performance of the company and to optimize timing of certain capital release measures to maximize shareholder value. That concludes the intro so far.
As I mentioned before opening the call for question, let's take a short deep dive into our joint venture structure operating model in the Residential CEE operations. We have here also with me, Petri Iljin, who is the Senior Vice President of Group Accounting and Reporting with me here to provide you also some insights on the accounting procedures around the joint venture. We will be jointly presenting or giving you a short presentation on the joint venture that we use in CEE countries. First of all, I think it's clear that the usage of capital and more especially the capital efficiency now going forward is very much in the core of our strategy. As we stated already in the Capital Markets Day, we will be releasing capital from our balance sheet by divesting some of the assets.
But even more importantly, continue to conduct our core businesses by more efficient use of capital. The joint ventures are one example of using the capital more efficiently. This is very much in line with our strategy. Then if we have a look at the basic logic in the joint venture. First of all, we use the joint ventures to develop, produce, and sell residential projects jointly with co-investors. We use the joint ventures to split the development and/or sales risk, and allow, as mentioned, for more capital efficient operating model. In the model, co-investors and debt financiers provide capital, and further, the model releases capital to YIT through the project and plot sales at establishment. Altogether, as we have stated already earlier, YIT's associated companies and joint ventures enable currently YIT to construct over 2,000 new homes in the CEE countries.
The basic process in the joint ventures goes so that the joint venture buys the project concept and the plot either from YIT or from a third party. The project is contracted by YIT or a third-party contractor. Then eventually, the joint venture targets to sell the apartments during the construction period or soon after the completion. That is the basic process in using the joint ventures. We have a couple of examples here that you can see that we have actually already performed or formed the joint venture. For example, the second phase of the Mārpagalmi project in Riga, in Latvia. We began already last year, and the completion is scheduled for the next spring.
Then we have here in the middle, we have a project called Mlynárka in Bratislava, Slovakia, which is a large area project, and the first phase of that project is planned to begin at the end of next year in Q4. It is a long area project, and it is projected to take around 10 years to complete. Then the last example here is regarding the expansion to Brno. As mentioned, the joint venture is formed, and then the plot has been acquired to the joint venture. The expected start of construction is going to take place during the spring next year.
Altogether, the whole project is expected to be completed by summer 2031. This gives you an idea of the magnitude and the kind of a time span of these large area projects, where we typically use joint ventures as structure. Really to kind of use capital efficiently and share risk. That is basically in a big picture regarding the joint ventures. Now I would be handing over to you, Petri, to go through a bit about the accounting perspectives on that matter as well.
Okay. Thank you, Tuomas, and good afternoon. Purpose is to have brief overview of consolidation of joint ventures and associated companies focusing on project development joint ventures. Firstly, let's start with the short summary how entities are consolidated to YIT group figures. We have mainly three types of entities in our consolidation. These are subsidiaries where YIT hold control over the entity, joint ventures where YIT has joint control with one or several co-investors. Third, associated companies where YIT has significant influence over the investee. It's good to keep in mind that the IFRS is based on holistic assessment of power over the investee. Thus, the percentage of ownership does not directly define the consolidation, as the power may arise from different sources. There are two type of consolidation method for these companies.
Subsidiaries are consolidated using line-by-line consolidation, whereas joint ventures and associated companies are consolidated using equity method. In equity method, YIT consolidates to its balance sheet its share in investee's equity and possible goodwill if the entity is acquired. The investment is presented in one line item named Investments in Associated Companies and Joint Ventures. Correspondingly, the investee's net result is consolidated to YIT's profit and loss in line item named Share of Results of Associate Companies and Joint Ventures. All internal transactions between these entities are eliminated, of course, taking into account YIT's shareholding when it comes to joint ventures and associated companies. Okay. If we move on to next. In this picture, we can see how project development joint ventures and related main transactions are presented in YIT's profit and loss.
Firstly, there is four typical phases in project development joint ventures, which we can see at the lower part of the slide. First, establishment of entity. Second, the development phase, which may include, among others, permitting. Third, construction phase, and the fourth, exiting phase, when remaining completed unsold apartments are sold. There are three main profit stream to YIT. First, net result from the JV, which is consolidated throughout the entire period of ownership. It's good to keep in mind that also in project development joint ventures, the revenue from self-developed apartments are recognized when the project is completed and the apartment sold. The second profit stream is possible plot or project sales to joint venture. These sales are typically done in connection to establishment of JV. YIT recognizes revenue from these sales at a point in time at the establishment phase.
The internal revenue and margin related to these transactions are eliminated. The elimination is released when the apartments are sold from the JV after completion. In third profit stream, possible construction services provided by YIT are recognized over time during the construction period. In the same way as in plot sales to JV, internal revenue and margin are eliminated, and the eliminations are released in connection to apartment sales after completion of the project. I hope this short overview of consolidation and presentation of project development joint ventures clarified the topic. So back to you, Essi and Tuomas.
Thank you very much, Petri. This was to increase transparency and to explain the logic or the reasoning behind the usage of joint ventures and also a bit of the accounting perspective, so that you can give a clear understanding how this works in our balance sheet and P&L. Thank you very much, Petri, for your part of the presentation as well.
Thank you, Tuomas and Petri. We are now ready for the questions. If you have a question, please use the raise hand function. The first question comes from Svante. Please go ahead.
Yes. Thank you, Essi, and thank you, Tuomas, for the presentation. Going straight to the JV presentation that you had. Could you tell us a bit about the balance sheet side of the JVs also. What kind of financing is there? How much debt is used? What kind of debt is it? Do you also make shareholder loans? Could you please elaborate a bit on that?
Yeah. Thanks, Svante, for the question. First of all, about the financing. It is typical that those who invest in such structures want to use a non-recourse debt financing in the structure. The ratio between debt and equity varies depending, of course, on the project and the availability of the finance. The leverage in joint ventures is on the typical level that is used in real estate sector. That is about the financing of these structures. Then about the commitments also, YIT's commitments. First of all, our commitments are related to our YIT services to the joint ventures, and those are according to market practices. Often, as mentioned, we own 50% of the joint ventures and then the investors have joint control over the investee, as Petri here mentioned as well.
Normally, YIT is liable for its investment in the JV, and the project financing itself is on a non-recourse basis.
Okay. Thank you for that clarification. You mentioned when talking about Residential Finland, you mentioned that obviously we will have low level of completions in Finland next year. Could you repeat what you mentioned regarding the profitability? I think you said that reaching profitability for Residential Finland will be difficult in 2025.
I did not mention reaching profitability targets or anything about that. I just wanted to point out that, as you all know, we have had a very limited number of starts this year. That has an impact on the profits next year.
Yes, but you clearly also at least hope that you could be able to dispose of the completed unsold apartments also during 2025 or-
Yes
at the current rate reach zero inventory by the end of 2025.
Yes, definitely. As mentioned, with the pace now that we have been selling the apartments in Finland during the last couple of quarters, with that pace, not an increased pace, but with that same pace, we would be having basically sold all of the inventory at the end of next year. That's basically the situation, and that's the same situation that we have been communicating earlier as well. Definitely the work continues on selling the apartments from the inventory. Then, as mentioned, we've had now a couple of starts this fourth quarter. These kind of starts that we have now performed, these will be completed at the end of next year as well.
Thanks. Last question regarding consumer apartments in Finland. What is the actual process when discussing with consumers who want to buy an apartment? What kind of discounts are you talking about? Obviously, it varies case by case, but could you give a picture of what the process looks like in reality?
Well, of course, the process itself is a case-by-case negotiation with consumers. That's a pretty normal course of action. Anyway, I would like to highlight here that as we have mentioned several times, we haven't seen that much of price elasticity of demand in the market so far. That's why we have launched several campaigns to boost the sales. Those campaigns have been actually improving the sales at the time they have been performed. Also when looking at the market in general, we have seen some public discounts, direct discounts given in the market. Despite of that, not increasing volumes in terms of sales. We see still the market in similar kind that there's pretty low elasticity of demand regarding pricing. There we again refer back to the campaigns that we have used.
But also on top of that, of course, you are right that we are negotiating with consumers one by one.
Thank you. Could you remind us what kind of campaigns you have currently ongoing? You had where you could rent an apartment for up to two years, and then you had also the interest rate cap campaign, but what is ongoing currently?
Yeah. We had the interest rate cap related campaign earlier this year. Currently, we have the rent-to-buy campaign still ongoing. On top of that, also a home change service where YIT pays the customer sales commission for the old home and then the moving costs. So that is to support the transaction to happen at the moment. So two campaigns now running.
Okay, thank you. That is all from me.
Yes. Then we have a question from Emil.
Yeah. Hi. Thanks for taking my questions. One question maybe on the comparison period. So 2023 Q4. On Residential, is there some one-offs or something we should take into account when comparing this year's Q4 to last year?
In this kind of a market situation we have, the comparison back to the last year's figures, that's one reference point as well. Now in each of the quarters this and last year, we have done some bundle deals. That's something which has, of course, an impact on the quarterly revenues and profits. Then not that much in Finland, but in CEE countries also, the kind of completions and the occupancy permit and the commissioning process, as we have communicated, they have a significant impact if moved from quarter to quarter. Those are the larger kind of one-offs that has a quarterly impact on the result. But in the big picture, it's all relevant from timing perspective.
Okay. But last year, you showed that in Baltic and CEE, the adjusted EBIT was EUR 30 million, which was quite high. That was kind of a timing type of thing related-
That was
to construction completions or something.
You are right. It was actually last year, Q2, we had a larger commissioning that was postponed from the Q2 to Q3. Sorry, from Q3 to Q4.
Yes.
Yes.
Okay. Thank you. Just a question on the Residential Finland market. Are you seeing any increasing interest from investors towards your apartments? What is the market like?
Yeah. Thanks. Thanks, Emil. We have seen, I would say, more interest from the private investor side towards our individual apartments. Therefore, we have discussions ongoing or have had during the quarter as well regarding so-called bundle deals, which is, of course, nowadays pretty normal course of business for us. Anyway, so there is a positive change that there has been quite a lot of interest in the private investor side. But then going back to the professional investor deals, in that sector, no major increase in interest.
Okay. Thank you, Tuomas.
Thanks.
Yes, we have a question from Anssi. Please, go ahead.
Yes, thanks. One question from me, and it is about the housing segment EBIT in 2025. If I look at your last 12-month operating profit in this whole segment, it was like, was it EUR 20 million? Now if I look at your order book, it was down by 23% year-over-year in Q3, and units under construction was down by 42%. So how should we think about this EBIT level going into the next year? Are there some kind of elements that you could actually improve your EBIT from this run rate, or is it just reasonable to assume that it will come down?
Well, you are pointing out the components around the EBIT. All we can say now is that if we look at the number of starts this year, that has an impact, of course, on the profits next year. As mentioned, of course, the market demand for our products in the inventory has also an impact, of course, on the profits. That is, of course, pretty much related to the market development.
I would say that there are a lot of uncertainty in the market still, but we see some positive signs in the market with the lowering interest rates, the consumer confidence a bit increasing, and so on. Those are kind of the two things in focus. To sell the apartments from the inventory to support the profits and then, of course, the starts that we have now initiated during the Q4 will have a positive impact then at the end of next year.
Okay. Got it. Thanks.
A nd then a question from Mikael.
Yeah, hi. Could you give us some update on your capital release programs? Do you have those certain bigger assets for sale? What's the situation there right now?
Yes. Thank you, Mikael. I would say that we continue the capital release. We have been working a lot on the topics, and there are several streams, as mentioned. We have been improving the net working capital efficiency. Anyway, your question was more towards the larger divestments, and it's worth probably talk openly about the Tripla. Regarding Tripla divestment process, no updates on that at this point. This is something which we are looking carefully and looking at the market and monitoring the market. Is there a demand for an asset like this and so on. So no major news around the capital release so far.
What about these a bit smaller commercial projects what you have in Espoo and in the Baltics? Any progress there?
Yes, you're right. So we have two office buildings, one in Vilnius and one in Espoo. We are continuously looking at the situation and renting out the spaces. So that's what we have been focusing on, and of course, looking at the opportunities to divest those as the timing is optimal or right. That's all we can comment on those at this point.
Any comment on occupancy rate in those projects?
Unfortunately, not really something that we can disclose here.
Okay, good. Thanks.
Thank you. Do we have more questions? Seems that there are no further questions, so thank you all for the great discussions.
There is one from.
Oh, excellent.
One person. One to go ahead.
This is just a detailed question about, have you announced when you will publish the new division numbers?
We haven't announced an exact date on that. We will be doing or kind of reporting those well ahead of Q1 next year reporting. That's the normal procedure, but no exact dates have been announced yet.
Thank you.
Excellent. If there are no more questions, I thank you all for the discussions. We will publish the financial statements bulletin on 7th of February. Wish you all happy holidays and all the best for the next year. Thank you.
Thank you very much.
Thank you.